<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------------------
FORM 8-K
CURRENT REPORT
-----------------------------------------------
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 24, 1998
FIDELITY NATIONAL FINANCIAL, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 1-9396 86-0498599
- ---------------------------- ----------- -------------------
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
17911 Von Karman Avenue, Irvine, California 92614
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (949) 622-5000
--------------
Not Applicable
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
ITEM 5. OTHER EVENTS
MERGER WITH GRANITE FINANCIAL, INC.
Effective February 26, 1998, Fidelity National Financial, Inc. (the
"Company"), consummated the merger of its wholly-owned acquisition subsidiary
with and into Granite Financial, Inc., which performs specialty finance
functions such as originating, funding, purchasing, selling, securitizing and
servicing equipment leases for a broad range of businesses. Each share of
Granite's Common Stock was converted into .702 of a share of the Company's
Common Stock. Approximately 4.5 million shares of the Company's Common Stock
were issued in connection with the merger in exchange for the outstanding shares
of Granite Common Stock.
The merger is accounted for as a pooling-of-interests and, accordingly,
the accompanying supplemental financial statements have been retroactively
restated as of and for each of the years in the two-year period ended
December 31, 1997 to include the results of Granite.
<TABLE>
<CAPTION>
INDEX TO RESTATED FINANCIAL STATEMENTS Page
----
<S> <C>
Independent Auditors' Report ................................................................... F-1
Restated Consolidated Balance Sheets as of December 31, 1997 and 1996 .......................... F-2
Restated Consolidated Statements of Earnings for each of the years in the two-year period
ended December 31, 1997 and Consolidated Statement of Earnings for the year ended
December 31, 1995 ............................................................................ F-3
Restated Consolidated Statements of Stockholders' Equity for each of the years in the
two-year period ended December 31, 1997 and Consolidated Statement of Stockholders'
Equity for the year ended December 31, 1995 .................................................. F-4
Restated Consolidated Statements of Cash Flows for each of the years in the two-year period
ended December 31, 1997 and Consolidated Statement of Cash Flows for the year ended
December 31, 1995 ............................................................................ F-5
Notes to Restated Consolidated Financial Statements and Consolidated Financial Statements ...... F-6
Schedule I - Condensed Financial Information of Registrant (Restated) .......................... F-45
Schedule II - Valuation and Qualifying Accounts (Restated) ..................................... F-50
</TABLE>
2
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits.
Exhibit Number
<TABLE>
<S> <C>
23.1 Consent of KPMG Peat Marwick LLP with respect to the Restated Consolidated Financial
Statements of Fidelity National Financial, Inc.
27.1 Restated Financial Data Schedule -- for the year ended December 31, 1997
27.2 Restated Financial Data Schedule -- for the year ended December 31, 1996
27.3 Restated Financial Data Schedule -- for the quarter ended March 31, 1997
27.4 Restated Financial Data Schedule -- for the quarter ended June 30, 1997
27.5 Restated Financial Data Schedule -- for the quarter ended September 30, 1997
27.6 Restated Financial Data Schedule -- for the quarter ended March 31, 1996
27.7 Restated Financial Data Schedule -- for the quarter ended June 30, 1996
27.8 Restated Financial Data Schedule -- for the quarter ended September 30, 1996
</TABLE>
3
<PAGE> 4
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 hereunto duly authorized.
FIDELITY NATIONAL FINANCIAL, INC.
Date: June 24, 1998 By: /s/ ALLEN D. MEADOWS
-----------------------------------------
Name: Allen D. Meadows
Title: Executive Vice President and
Chief Financial Officer
<PAGE> 5
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Fidelity National Financial, Inc.:
We have audited the Consolidated Balance Sheets of Fidelity National
Financial, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
related Consolidated Statements of Earnings, Stockholders' Equity and Cash Flows
for each of the years in the three-year period ended December 31, 1997. These
Consolidated Financial Statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these Consolidated
Financial Statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the Consolidated Financial Statements referred to above
present fairly, in all material respects, the consolidated financial position of
Fidelity National Financial, Inc. and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997 in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
June 19, 1998
F-1
<PAGE> 6
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
-------- --------
(Restated) (Restated)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair value ............................ $217,001 166,329
Equity securities, at fair value .............................................. 70,418 42,338
Other long-term investments, at cost, which approximates fair value ........... 16,464 6,782
Short-term investments, at cost, which approximates fair value ................ 17,793 873
Investments in real estate and partnerships, net .............................. 5,201 11,352
-------- --------
Total investments ........................................................... 326,877 227,674
Cash and cash equivalents (including restricted cash of $3,358 as of
December 31, 1997) ............................................................ 59,855 72,364
Leases and lease securitization residual interests ............................. 53,782 29,034
Trade receivables (less allowance of $5,153 in 1997 and $6,822 in 1996) ....... 52,650 54,355
Notes receivable, net (including $1,346 in 1997 and $1,996 in 1996 with
affiliated parties) ........................................................... 8,898 11,317
Prepaid expenses and other assets .............................................. 86,789 56,749
Title plants ................................................................... 51,756 50,701
Property and equipment, net .................................................... 38,985 39,230
Income taxes receivable ........................................................ -- 7,589
-------- --------
$679,592 $549,013
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities ...................................... $ 72,424 $ 56,287
Notes payable ................................................................. 155,795 171,525
Reserve for claim losses ...................................................... 190,747 187,245
Deferred income taxes ......................................................... 15,060 8,234
Income taxes payable .......................................................... 10,122 --
-------- --------
444,148 423,291
Minority interests ............................................................ 3,614 1,287
Stockholders' equity:
Preferred stock, $.0001 par value; authorized, 3,000,000 shares;
issued and outstanding, none ................................................ -- --
Common stock, $.0001 par value; authorized, 50,000,000 shares
in 1997 and 1996; issued, 28,367,439 in 1997 and 23,968,913 in 1996 ......... 3 2
Additional paid-in capital .................................................... 132,729 74,265
Retained earnings ............................................................. 131,051 92,209
-------- --------
263,783 166,476
Net unrealized gains on investments ........................................... 22,422 12,334
Less treasury stock, 6,041,352 shares in 1997 and 1996, at cost ............... 54,375 54,375
-------- --------
231,830 124,435
Commitments and contingencies .................................................
Subsequent events .............................................................
-------- --------
$679,592 $549,013
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE> 7
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
---------- ---------- ----------
(Restated) (Restated)
<S> <C> <C> <C>
REVENUE:
Title insurance premiums ........................................... $533,220 $475,961 $285,552
Escrow fees ........................................................ 81,241 66,927 49,723
Other fees and revenue ............................................. 115,164 81,797 56,954
Interest and investment income, including realized gains (losses) .. 33,556 17,692 17,616
-------- -------- --------
763,181 642,377 409,845
-------- -------- --------
EXPENSES:
Personnel costs .................................................... 243,319 212,647 165,514
Other operating expenses ........................................... 166,898 155,218 123,888
Agent commissions .................................................. 223,797 187,901 82,713
Provision for claim losses ......................................... 38,661 33,302 19,031
Interest expense ................................................... 11,654 10,936 9,239
-------- -------- --------
684,329 600,004 400,385
-------- -------- --------
Earnings before income taxes and extraordinary item ................ 78,852 42,373 9,460
Income tax expense ................................................. 34,055 16,846 1,828
-------- -------- --------
Earnings before extraordinary item .............................. 44,797 25,527 7,632
Extraordinary item - loss on early retirement of debt,
net of applicable income tax benefit of
$1,180 in 1997 and $437 in 1995 ................................. (1,700) -- (813)
-------- -------- --------
Net earnings .................................................... $ 43,097 $ 25,527 $ 6,819
======== ======== ========
Basic net earnings ................................................. $ 43,097 $ 25,527 $ 6,819
======== ======== ========
Basic earnings per share before extraordinary item ................. $ 2.32 $ 1.53 $ .50
Extraordinary item - loss on early retirement of debt,
net of applicable income tax benefit, basic basis ............... (0.09) -- (.05)
-------- -------- --------
Basic net earnings per share ....................................... $ 2.23 $ 1.53 $ .45
======== ======== ========
Weighted average shares outstanding, basic basis ................... 19,272 16,647 15,131
======== ======== ========
Diluted net earnings ............................................... $ 46,239 $ 28,723 $ 6,819
======== ======== ========
Diluted net earnings per share before extraordinary item ........... $ 1.92 $ 1.30 $ .49
Extraordinary item - loss on early retirement of debt,
net of applicable income tax benefit, diluted basis ............. (0.07) -- (.05)
-------- -------- --------
Diluted net earnings per share ..................................... $ 1.85 $ 1.30 $ .44
======== ======== ========
Weighted average shares, diluted basis ............................. 24,948 22,106 15,694
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 8
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 ....................... 20,845 $ 2 $ 56,659 $ 66,668
Exercise of stock options ................... 204 -- 1,439 --
Net unrealized gains on investments ......... -- -- -- --
Purchase of treasury stock .................. -- -- -- --
ACS Systems, Inc. purchase price
adjustment ................................ 53 -- -- --
Cash dividends .............................. -- -- -- (3,214)
Net earnings ................................ -- -- -- 6,819
---------- ---------- ---------- ----------
Balance, December 31, 1995 ....................... 21,102 2 58,098 70,273
---------- ---------- ---------- ----------
Exercise of stock options ................... 61 -- 440 --
Net unrealized gains on investments ........ -- -- -- --
Acquisitions ................................ 191 -- 2,733 --
Incorporation of Granite Financial, Inc. .... 1,404 -- 2,260 --
Issuance of common stock pursuant to
Granite Financial, Inc. initial public
offering, net of offering costs ........... 1,211 -- 10,734 --
Cash dividends .............................. -- -- -- (3,591)
Net earnings ................................ -- -- -- 25,527
---------- ---------- ---------- ----------
Balance, December 31, 1996 (Restated) ............ 23,969 2 74,265 92,209
---------- ---------- ---------- ----------
Exercise of stock options ................... 146 -- 1,423 --
Net unrealized gains on investments ......... -- -- -- --
Acquisitions ................................ 1,260 -- 12,450 --
LYONs retirement and conversion ............. 1,323 -- 27,351 --
Nations Title Inc. purchase price
adjustment ................................ (26) -- (749) --
Issuance of common stock pursuant to
Granite Financial, Inc. secondary
public offering, net of offering costs .... 1,695 1 17,989 --
Cash dividends .............................. -- -- -- (4,255)
Net earnings ................................ -- -- -- 43,097
---------- ---------- ---------- ----------
Balance, December 31, 1997 (Restated) ............ 28,367 $ 3 $ 132,729 $ 131,051
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
NET TREASURY STOCK
UNREALIZED ---------------------------
GAINS (LOSSES) SHARES AMOUNT
-------------- ---------- ----------
<S> <C> <C> <C>
Balance, December 31, 1994 ....................... $ (8,914) 4,396 $ (40,461)
Exercise of stock options ................... -- -- --
Net unrealized gains on investments ......... 14,780 -- --
Purchase of treasury stock .................. -- 1,859 (15,831)
ACS Systems, Inc. purchase price
adjustment ................................ -- -- --
Cash dividends .............................. -- -- --
Net earnings ................................ -- -- --
---------- ---------- ----------
Balance, December 31, 1995 ....................... 5,866 6,255 (56,292)
---------- ---------- ----------
Exercise of stock options ................... -- -- --
Net unrealized gains on investments ........ 6,468 -- --
Acquisitions ................................ -- (214) 1,917
Incorporation of Granite Financial, Inc. .... -- -- --
Issuance of common stock pursuant to
Granite Financial, Inc. initial public
offering, net of offering costs ........... -- -- --
Cash dividends .............................. -- -- --
Net earnings ................................ -- -- --
---------- ---------- ----------
Balance, December 31, 1996 (Restated) ............ 12,334 6,041 (54,375)
---------- ---------- ----------
Exercise of stock options ................... -- -- --
Net unrealized gains on investments ......... 10,088 -- --
Acquisitions ................................ -- -- --
LYONs retirement and conversion ............. -- -- --
Nations Title Inc. purchase price
adjustment ................................ -- -- --
Issuance of common stock pursuant to
Granite Financial, Inc. secondary
public offering, net of offering costs .... -- -- --
Cash dividends .............................. -- -- --
Net earnings ................................ -- -- --
---------- ---------- ----------
Balance, December 31, 1997 (Restated) ............ $ 22,422 6,041 $ (54,375)
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 9
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
---------- ---------- ----------
(Restated) (Restated)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ................................................................ $ 43,097 $ 25,527 $ 6,819
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Extraordinary item: loss on early retirement of LYONs .................... 2,090 -- --
Depreciation and amortization ............................................ 16,090 13,198 13,410
Net increase (decrease) in reserve for claim losses ...................... 3,382 (4,020) (7,212)
Amortization of LYONs original issue discount and other
debt issuance costs .................................................... 5,939 5,295 4,916
Provision for losses on real estate and notes
receivable ............................................................. 2,714 999 783
Equity in (gains) losses of unconsolidated partnerships .................. (488) 520 (72)
Gain on sales of investments ............................................. (10,534) (3,713) (5,023)
(Gain) loss on sale of real estate and other assets ...................... (6,454) 1,088 (190)
Changes in assets and liabilities, net of effects from acquisitions:
Net increase in lease and lease securitization residual interest ......... (22,540) -- --
Net (increase) decrease in trade receivables ............................. 2,757 (7,030) (11,306)
Net increase in prepaid expenses and other assets ........................ (17,738) (14,520) (6,268)
Net increase (decrease) in accounts payable and
accrued liabilities .................................................... 11,000 1,393 (4,797)
Net increase in income taxes ............................................. 18,481 4,046 7,673
---------- ---------- ----------
Net cash provided by (used in) operating activities ................... 47,796 22,783 (1,267)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investment securities:
Held to maturity (principally maturities of securities) ................. -- -- 2,310
Available for sale ....................................................... 272,766 182,512 214,524
Proceeds from sales of other assets ......................................... 15,756 3,700 3,442
Proceeds from sales of real estate .......................................... 6,407 917 --
Collections of notes receivable ............................................. 13,024 18,654 3,035
Additions to title plants ................................................... (830) (1,011) (1,719)
Additions to property and equipment ......................................... (20,855) (14,667) (9,655)
Additions to notes receivable ............................................... (3,415) (8,470) (5,980)
Purchases of investment securities:
Held to maturity ......................................................... -- -- (1,941)
Available for sale ....................................................... (350,503) (183,788) (151,305)
Leases assigned to lender ................................................... -- (24,793) --
Investments in real estate and partnerships ................................. (1,048) -- (100)
Sale of subsidiary, net of cash ............................................. 5,934 -- --
Acquisitions of businesses, net of cash acquired ............................ (10,866) (10,138) (11,363)
---------- ---------- ----------
Net cash provided by (used in) investing activities .................. (73,630) (37,084) 41,248
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings .................................................................. 20,338 53,671 48,285
Debt service payments ....................................................... (23,238) (24,693) (59,150)
Extraordinary items:
Early retirement of LYONs ................................................. 790 -- --
Early retirement of debt .................................................. -- -- 1,250
Dividends paid .............................................................. (3,979) (3,477) (3,232)
Stock offering proceeds, net ................................................ 17,990 10,832 --
Exercise of stock options ................................................... 1,424 440 1,439
Issuance (purchase) of treasury stock, net .................................. -- 1,917 (15,831)
---------- ---------- ----------
Net cash provided by (used in) financing activities .................. 13,325 38,690 (27,239)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ........................ (12,509) 24,389 12,742
Cash and cash equivalents at beginning of year .............................. 72,364 47,975 34,689
Cash acquired in connection with Granite Financial, Inc. .................... -- 544 --
---------- ---------- ----------
Cash and cash equivalents at end of year .................................... $ 59,855 $ 72,364 $ 47,431
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 10
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1997
(RESTATED) AND 1996 (RESTATED) AND THE YEAR ENDED DECEMBER 31, 1995
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following describes the significant accounting policies of Fidelity
National Financial, Inc. ("Fidelity Financial") and its subsidiaries
(collectively, the "Company") which have been followed in preparing the
accompanying Consolidated Financial Statements.
On November 17, 1997, Fidelity National Financial, Inc. signed an Agreement
and Plan of Merger to merge a newly-formed subsidiary of the Company into
Granite Financial, Inc. Granite, located in Golden, Colorado, is a 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. This transaction closed on
February 26, 1998. This transaction has been accounted for as a
pooling-of-interests.
The Consolidated Balance Sheets as of December 31, 1997 and 1996 and the
related Consolidated Statements of Earnings, Stockholders' Equity and Cash Flows
for each of the years in the two-year period ended December 31, 1997 and the
related Notes to Consolidated Financial Statements, have been restated to
reflect the inclusion of Granite Financial, Inc. ("Granite"). See Note L.
Description of business
Fidelity National Financial, Inc., through its principal subsidiaries is one
of the nation's leading real estate service companies, providing title insurance
and performing other title-related services such as escrow, collection and trust
activities, real estate information and technology services, trustee sales
guarantees, credit reporting, attorney services, flood certification, real
estate tax services, reconveyances, recordings, foreclosure publishing and
posting services and exchange intermediary services. Fidelity has also
positioned itself as a specialty finance company through the recent acquisition
of Granite Financial, Inc. Granite is a leasing company engaged in originating,
funding, purchasing, selling, securitizing and servicing equipment leases for a
broad range of businesses.
The Company's principal subsidiaries consist of Fidelity National Title
Insurance Company ("Fidelity Title"), which, in turn, is the parent company of
Fidelity National Title Insurance Company of Tennessee ("Fidelity Tennessee"),
and was the parent company of Fidelity National Title Insurance Company of
California ("Fidelity California"), which was merged into Fidelity Title as of
August 7, 1997, and was the parent company of Nations Title Insurance Company
("Nations Title"), which was merged into Fidelity Title as of December 29, 1997;
Fidelity National Title Insurance Company of New York ("Fidelity New York"),
which, in turn, is the parent company of Nations Title Insurance of New York
Inc. ("Nations New York") and National Title Insurance of New York Inc.
("National"); Fidelity National Title Insurance Company of Pennsylvania
("Fidelity Pennsylvania"), which was merged into Fidelity New York as of April
11, 1997, which in turn, was the parent company of American Title Insurance
Company ("ATIC"), which was merged into Fidelity Pennsylvania as of November 21,
1996; (collectively, the "Insurance Subsidiaries"); its wholly-owned
underwritten title companies (collectively, the "UTCs"); its network of
wholly-owned title-related ancillary service companies known as Fidelity
National Lender Express Network ("FLEXNet") and Granite Financial, Inc.
Nations Title Insurance Company, Nations Title Insurance of New York Inc.
and National Title Insurance of New York Inc. were acquired, along with Nations
Title Inc. ("NTI," collectively, "Nations Title Inc.") in a transaction which
closed on April 1, 1996. Certain of the ancillary service companies were
acquired in separate transactions during 1997. See Note B.
F-6
<PAGE> 11
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Principles of consolidation and basis of presentation
The accompanying Consolidated Financial Statements include the accounts of
the Company and its wholly-owned and majority-owned subsidiaries. All material
intercompany profits, transactions and balances have been eliminated. The
Company's investments in non-majority-owned partnerships and subsidiaries are
accounted for on the equity method.
On February 26, 1998, the Company, in exchange for approximately 4.5 million
shares of Company common stock, acquired the common stock of Granite Financial,
Inc. and subsidiaries. The transaction has been accounted for as a pooling-
of-interests. Prior to 1996, neither the financial results nor the financial
position of Granite were material to the Company's Consolidated Financial
Statements. Accordingly, the Consolidated Balance Sheets as of December 31, 1997
and 1996 and the related Consolidated Statements of Earnings, Stockholders'
Equity and Cash Flows for each of the years in the two-year period ended
December 31, 1997 and the related Notes to Consolidated Financial Statements,
have been restated to reflect the inclusion of Granite. See Notes B and L.
The results of operations of Fidelity and Granite separately and the
combined amounts presented in the Consolidated Financial Statements are
summarized below:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Revenue:
Fidelity ................................. $746,712 $636,913
Granite .................................. 16,469 5,464
-------- --------
Combined ................................. $763,181 $642,377
======== ========
Earnings:
Fidelity ................................. $ 39,771 $ 24,337
Granite .................................. 3,326 1,190
-------- --------
Combined ................................. $ 43,097 $ 25,527
======== ========
</TABLE>
Effective as of October 1, 1997, the Company acquired Bron Research, Inc.
("BRON"), a flood certification company headquartered in Austin, Texas. The
purchase price paid by the Company for the acquisition was $9.85 million, paid
in 523,272 shares of Company common stock. BRON now operates as Fidelity
National Flood, Inc. This transaction has been accounted for as a
pooling-of-interests. BRON's financial position and results of operations as of
and for the year ended December 31, 1997 are included in the Consolidated
Financial Statements. Prior to 1997, BRON's financial position and results of
operations were insignificant, and as such, the 1996 and 1995 Consolidated
Financial Statements have not been restated to reflect the inclusion of BRON.
See Note B.
Cash and cash equivalents
For purposes of reporting cash flows, highly liquid instruments purchased
with original maturities of three months or less are considered cash
equivalents. The carrying amounts reported in the Consolidated Balance Sheets
for these instruments approximate their fair value.
Restricted Cash
Granite sold a pool of leases to a grantor trust which required all lease
payments received to be deposited in restricted accounts and the distribution of
funds to be controlled by the trustee. Granite also sold pools of leases
F-7
<PAGE> 12
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
which required a portion of the proceeds from the sales to be held in a separate
restricted account to cover any defaults of the leases sold. Restricted cash at
December 31, 1997 is required as a condition to these sales.
Investments
Fixed maturity securities are purchased to support the investment strategies
of the Company, which are developed based on many factors including rate of
return, maturity, credit risk, tax considerations and regulatory requirements.
Fixed maturity securities which may be sold prior to maturity to support the
Company's investment strategies are carried at fair value and are classified as
available for sale as of the balance sheet dates. Fair values for fixed maturity
securities are principally a function of current interest rates and are based on
quoted market prices.
Equity securities are considered to be available for sale and carried at
fair value as of the balance sheet dates. Fair values are based on quoted market
prices.
Other long-term investments, which consist of a limited partnership
investment in an investment fund, as well as certain other debt instruments and
equity investments, are carried at cost, which approximates fair value.
Short-term investments, which consist primarily of securities purchased
under agreements to resell, commercial paper and money market instruments, which
have an original maturity of one year or less, are carried at amortized cost,
which approximates fair value.
Investments in real estate and partnerships are generally held for
investment purposes and are carried at cost in the absence of any other than
temporary impairment in value. Investments in real estate which are held for
sale, including real estate acquired through foreclosure of properties in
satisfaction of commercial and real estate loans, are carried at the lower of
cost or fair value less estimated costs to sell.
Realized gains and losses on the sale of investments are determined on the
basis of the cost of the specific investments sold and are credited or charged
to income on a trade date basis. Unrealized gains or losses on bonds and common
stocks which are classified as available for sale, net of applicable deferred
income taxes (benefits), are excluded from income and credited or charged
directly to a separate component of stockholders' equity. The carrying value for
investments considered available for sale is reduced to estimated realizable
value if the decline in fair value is deemed other than temporary. Such
reductions are recognized as realized losses.
Leases and Lease Securitization Residual Interests
Leases and lease securitization residual interests includes direct financing
leases, direct financing leases assigned to lender and securitization residual
interests. See Note D.
Direct Financing Leases
Granite has entered into various lease agreements which, in accordance with
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards No. 13, "Accounting for Leases," meet the criteria of capitalization
and are accounted for as direct financing leases. Under this method, the amount
by which gross lease rentals exceed the cost of the related assets, less the
estimated recoverable residual value at the expiration of the lease, is
recognized as income from direct financing leases over the life of the lease
using the interest method. Any permanent reduction in the estimated residual
equipment value of leased property is charged to operations in the period it
occurs. See Note D.
F-8
<PAGE> 13
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Sales of Leases
Gains or losses resulting from sales or securitizations of leases are
recognized in the accompanying Consolidated Statements of Earnings at the date
of settlement and are based on the difference between the selling price of the
sales or securitizations and the carrying value of the related leases sold.
Nonrefundable fees and direct costs associated with the origination of leases
("Lease Acquisition Costs") are deferred and recognized when the leases are
sold.
On January 1, 1997, the Company adopted Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards No. 125 (SFAS 125),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." Under SFAS 125, a transfer of financial assets in which
control is surrendered is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in the exchange. Liabilities and derivatives incurred or obtained by
the transfer of financial assets are required to be measured at fair value, if
practicable. Also, servicing assets and other retained interests in the
transferred assets must be measured by allocating the previous carrying value
between the asset sold and the interest retained, if any, based on their
relative fair values at the date of transfer.
SFAS 125 also requires an assessment of interest-only strips, loans, other
receivables and retained interests in securitizations ("Securitization Residual
Interests"). If these assets can be contractually prepaid or otherwise settled
such that the holder would not recover substantially all of its recorded
investment, the asset will be measured like trading securities. The Company
adopted SFAS 125 on January 1, 1997.
Direct Financing Leases Assigned to Lender
As SFAS 125 prohibits early application, prior to January 1, 1997, direct
financing leases sold prior to that date as part of a securitization to a
special-purpose entity that issued debt securities were accounted for as
collateralized borrowings. The securitized leases are reflected in the
Consolidated Balance Sheets. See Note D.
Securitization Residual Interests
Securitization residual interests represent the excess cash flow resulting
from the difference between lease payments related to leases transferred
pursuant to the provisions of SFAS 125, net of defaults, and the payment of
principal and interest to investors in lease backed notes or certificates and
servicing, backup servicing, trustee fees and other securitization expenses.
Income from the securitization residual interests is recognized over the life of
the securitized leases using the interest method. See Note D.
Allowance for Credit Losses
Granite is required to estimate the amount of leases expected to result in
default and to estimate the amount of loss that will be incurred under each
default. Granite currently provides allowances for these losses based on the
historical performance of the leases. The actual losses incurred could differ
materially from the amounts that Granite has estimated in preparing the
historical financial statements.
F-9
<PAGE> 14
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Lease Acquisition Costs and Broker Commissions
Lease acquisition costs consist of broker bonuses and commissions paid upon
the origination of the lease contracts. The costs are included in direct
financing leases and are amortized to expense over the life of the related lease
contracts on the interest method.
Trade receivables
The carrying amounts reported in the Consolidated Balance Sheets for trade
receivables approximate their fair value.
Fair value of financial instruments
The fair values of financial instruments presented in the applicable notes
to the Company's Consolidated Financial Statements are estimates of the fair
values at a specific point in time using available market information and
appropriate valuation methodologies. These estimates are subjective in nature
and involve uncertainties and significant judgment in the interpretation of
current market data. Therefore, the fair values presented are not necessarily
indicative of amounts the Company could realize or settle currently. The Company
does not necessarily intend to dispose of or liquidate such instruments prior to
maturity. See Notes C, D, E and H.
Title plants
Title plants are recorded at the cost incurred to construct or obtain and
organize historical title information to the point it can be used to perform
title searches. Costs incurred to maintain, update and operate title plants are
expensed as incurred. Title plants are not amortized as they are considered to
have an indefinite life if maintained. Sales of title plants are reported at the
amount received net of the adjusted costs of the title plant sold. Sales of
title plant copies are reported at the amount received. No cost is allocated to
the sale of copies of title plants unless the value of the title plant is
diminished.
Property and equipment
Property and equipment are recorded at cost, less depreciation. Depreciation
is computed primarily using the straight-line method based on the estimated
useful lives of the related assets which range from three to thirty years.
Leasehold improvements are amortized on a straight-line basis over the lesser of
the term of the applicable lease or the estimated useful lives of such assets.
Cost in excess of net assets acquired and other intangible assets
Intangible assets include cost in excess of net assets acquired capitalized
software costs, capitalized licensing costs and capitalized debt offering costs
and are amortized on a straight line basis over three to forty years. Intangible
assets at December 31, 1997 consist of cost in excess of net assets acquired of
$38,776,000 less accumulated amortization of $2,541,000, capitalized licensing
costs of $2,500,000 less accumulated amortization of $159,000, capitalized
software of $12,326,000 less accumulated amortization of $4,636,000 and
capitalized debt offering costs of $6,883,000 less accumulated amortization of
$3,625,000. At December 31, 1996, intangible assets consist of cost in excess of
net assets acquired of $8,349,000 less accumulated amortization of $1,733,000,
capitalized licensing costs of $3,937,000 less accumulated amortization of
$98,000, capitalized software of $11,720,000 less accumulated amortization of
$2,740,000 and capitalized debt offering costs of $5,968,000 less accumulated
amortization of $2,042,000.
F-10
<PAGE> 15
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Impairment of intangible assets is monitored on a continual basis, and is
assessed based on an analysis of the cash flows generated by the underlying
assets. No impairment of intangible assets has been noted.
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("Statement 109"), "Accounting for Income
Taxes." Statement 109 provides that deferred tax assets and liabilities be
recognized for temporary differences between the financial reporting basis and
the tax basis of the Company's assets and liabilities and expected benefits of
utilizing net operating loss and credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The impact on deferred taxes of changes in tax rates and
laws, if any, are applied to the years during which temporary differences are
expected to be settled and reflected in the financial statements in the period
enacted.
Reserve for claim losses
The Company's reserve for claim losses includes known claims as well as
losses the Company expects to incur, net of recoupments. Each known claim is
reserved for on the basis of a review by the Company as to the estimated amount
of the claim and the costs required to settle the claim. Reserves for claims
which are incurred but not reported are provided for at the time premium revenue
is recognized based on historical loss experience and other factors, including
industry averages, claim loss history, current legal environment, geographic
considerations and type of policy written. Major claims (greater than $500,000)
are evaluated and amounts greater than $500,000 are reserved for as they become
known because the unique circumstances surrounding most major claims make it
inherently impractical to predict the incidence and amount of such claims. The
occurrence of a significant major claim in any given period could have a
material adverse effect on the Company's financial condition and results of
operations for such period. Escrow losses are expensed when they become known
and are included in other operating expenses. See Note J.
If a loss is related to a policy issued by an independent agent, the Company
may proceed against the independent agent pursuant to the terms of the agency
agreement. In any event, the Company may proceed against third parties who are
responsible for any loss under the title insurance policy under rights of
subrogation.
Reinsurance
In the ordinary course of business, the Company reinsures certain risks with
other insurers for the purpose of limiting its maximum loss exposure and also
assumes reinsurance for certain risks of other insurers for the purpose of
earning additional revenue. The Company cedes or assumes a portion of certain
policy liabilities under agent fidelity, excess of loss and case-by-case
reinsurance agreements. Reinsurance agreements provide that in the event of a
loss (including costs, attorneys' fees and expenses) exceeding the retained
amounts, the reinsurer is liable for the excess amount assumed. However, the
ceding company remains primarily liable in the event the reinsurer does not meet
its contractual obligations. Reinsurance activity is not considered significant.
Title, escrow, other fees and revenue and agent commissions
Title insurance premiums, escrow fees and other fees and revenue are
recognized as revenue at the time of closing of the related transaction. Title
insurance commissions earned by the Company's agents are recognized as an
expense concurrently with premium recognition. Other fees and revenue includes
revenue derived from Granite's operations, as well as non-title related revenue
from other subsidiaries and other title-related revenue not included in title
insurance premiums or escrow fees.
F-11
<PAGE> 16
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Share and per share restatement
On December 13, 1995, the Company declared a 10% stock dividend, to
shareholders of record on January 15, 1996, distributed February 2, 1996. The
par value of the additional shares of common stock issued in connection with the
stock dividend was credited to common stock and a like amount charged to
retained earnings as of December 31, 1995. Fractional shares were paid in cash.
On December 11, 1996, the Company declared a 10% stock dividend, to
shareholders of record on December 23, 1996, distributed January 7, 1997. The
par value of the additional shares of Common Stock issued in connection with the
stock dividend was credited to common stock and a like amount charged to
retained earnings as of December 31, 1996. Fractional shares were paid in cash.
On December 17, 1997, the Company declared a 10% stock dividend, to
shareholders of record on December 29, 1997, distributed January 14, 1998. The
par value of the additional shares of common stock issued in connection with the
stock dividend was credited to common stock and a like amount charged to
retained earnings as of December 31, 1997. Fractional shares were paid in cash.
All data with respect to earnings per share, dividends per share and share
information, including price per share where applicable, in the Consolidated
Financial Statements and Notes thereto have been retroactively adjusted to
reflect all stock dividends and splits. Additionally, all data impacted has been
restated to reflect the acquisitions of Granite and BRON. See Note L.
Earnings per share
Basic earnings per share is computed by dividing net earnings available to
common shareholders by the weighted average number of common shares outstanding
during the period. Dilutive earnings per share is calculated by dividing net
earnings available to common shareholders plus the impact of assumed conversions
of dilutive potential securities. The Company has granted certain options and
warrants which have been treated as common share equivalents for purposes of
calculating diluted earnings per share. The Liquid Yield Option Notes ("LYONs")
are considered other dilutive securities for purposes of calculating diluted
earnings per share to the extent that they are not antidilutive.
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"), effective for fiscal years ending after December 15, 1997. SFAS 128
introduces and requires the presentation of "basic" earnings per share which
represents net earnings divided by the weighted average shares outstanding
excluding all common stock equivalents. Dual presentation of "diluted" earnings
per share, reflecting the dilutive effects of all common stock equivalents, is
also required. The diluted presentation is similar to the former presentation of
fully diluted earnings per share. All per share data have been restated to
reflect the impact of SFAS 128. The adoption of SFAS 128 did not have a material
impact on the Consolidated Financial Statements of the Company.
F-12
<PAGE> 17
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table sets forth the calculation of basic and diluted earnings
per share for each of the years in the three-year period ended December 31,
1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Basic earnings per share calculation
Earnings before extraordinary loss ....................... $ 44,797 $ 25,527 $ 7,632
Extraordinary loss, net of applicable income tax
benefit of $1,180 in 1997 and $437 in 1995 ............. (1,700) -- (813)
-------- -------- --------
Net earnings ............................................. $ 43,097 $ 25,527 $ 6,819
======== ======== ========
Weighted average shares .............................. 19,272 16,647 15,131
======== ======== ========
Basic earnings per share
Earnings before extraordinary loss ....................... $ 2.32 $ 1.53 $ 0.50
Extraordinary loss ....................................... (0.09) -- (0.05)
-------- -------- --------
Net earnings ............................................. $ 2.23 $ 1.53 $ 0.45
======== ======== ========
Diluted earnings per share calculation
Earnings before extraordinary loss ....................... $ 44,797 $ 25,527 $ 7,632
Plus: Impact of assumed conversion of LYONs .............. 3,142 3,196 --(1)
-------- -------- --------
Earnings before extraordinary loss plus
assumed conversion ..................................... 47,939 28,723 7,632
Extraordinary loss, net of applicable income tax
benefit of $1,180 in 1997 and $437 in 1995 ............. (1,700) -- (813)
-------- -------- --------
Net earnings plus assumed conversions .................... $ 46,239 $ 28,723 $ 6,819
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Weighted average shares .................................. 19,272 16,647 15,131
Plus: Incremental shares from assumed conversions
LYONs ................................................ 4,553 4,793 --(1)
Options .............................................. 1,123 666 563
-------- -------- --------
Dilutive potential shares ................................ 24,948 22,106 15,694
======== ======== ========
Diluted earnings per share
Earnings before extraordinary loss plus
assumed conversions .................................... $ 1.92 $ 1.30 $ 0.49
Extraordinary loss ....................................... (0.07) -- (0.05)
-------- -------- --------
Net earnings ............................................. $ 1.85 $ 1.30 $ 0.44
======== ======== ========
</TABLE>
- ----------
(1) As the conversion of the Liquid Yield Option Notes ("LYONs") had an
antidilutive effect in 1995, the assumed conversion is not considered in the
diluted earnings per share calculation. Assumed conversion of the LYONs
would result in additional net earnings of $3,245,000 and 4,793,000
additional dilutive potential shares.
F-13
<PAGE> 18
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Management estimates
The preparation of these Consolidated Financial Statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the Consolidated Financial Statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Certain reclassifications
Certain reclassifications have been made in the 1996 and 1995 Consolidated
Financial Statements to conform to the classifications used in 1997.
B. ACQUISITIONS
On April 1, 1996, the Company completed its acquisition of Nations Title
Inc. from Nations Holding Group for a purchase price of $19.3 million plus
212,960 shares, $2.1 million, of the Company's common stock, subject to certain
adjustments. This transaction has been accounted for as a purchase. During 1997,
the Nations Title Inc. purchase price was reduced $749,000, pursuant to certain
terms and conditions contained in the acquisition agreement. The purchase price
adjustment resulted in Nations Holding Group returning 26,499 shares of common
stock to the Company. The returned shares were subsequently cancelled.
The assets acquired and liabilities assumed in the Nations Title Inc.
acquisition were as follows (dollars in thousands):
<TABLE>
<S> <C>
Assets acquired at fair value.............................. $ 74,177
Liabilities assumed at fair value.......................... (52,777)
--------
Total purchase price................................... $ 21,400
========
</TABLE>
On April 4, 1996, the Company purchased 17% of the outstanding common stock
of National Alliance Marketing Group, Inc. ("National Alliance"), a California
corporation, for $566,667; together with a warrant to acquire an additional 14%
of National Alliance common stock. In addition, the Company loaned $1,200,000 to
National Alliance at closing at a rate of prime plus one percent. Subsequently,
the Company agreed to increase the credit facility from $1,200,000 to
$1,700,000. In consideration for the increase in the credit facility National
Alliance agreed to increase the warrant shares which the Company could purchase.
If the entire $1,700,000 was borrowed, the Company could purchase an additional
34% of the outstanding shares of National Alliance. After receiving approval of
the transaction from the California Department of Insurance, the transaction
closed on July 12, 1996. National Alliance is the parent company of Alliance
Home Warranty 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.
F-14
<PAGE> 19
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the National Alliance acquisition were as follows
(dollars in thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value..................... $3,200
Cost in excess of net assets acquired...................... 3,150
Liabilities assumed at fair value.......................... (1,809)
Minority interest.......................................... (2,224)
------
Total purchase price................................... $2,317
======
</TABLE>
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. operates as a
majority-owned subsidiary of the Company and is now known as Fidelity National
Tax Service, Inc. ("Fidelity National Tax"). This transaction has been accounted
for as a purchase. The CRM results of operations were not material to the 1996
Consolidated Financial Statements.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the Fidelity National Tax acquisition were as follows
(dollars in thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value..................... $2,073
Cost in excess of net assets acquired...................... 2,590
Liabilities assumed at fair value.......................... (263)
Minority interest.......................................... (880)
------
Total purchase price................................... $3,520
======
</TABLE>
On March 31, 1997, Granite acquired the assets and liabilities of Global
Finance & Leasing, Inc. ("Global"), a micro-ticket leasing company, for a
purchase price of $2.3 million in cash. The acquisition agreement provides for
additional contingent consideration of $916,000 based on the collection of
certain receivables. Granite believes the collection of these receivables is
remote. Therefore, no liability has been recorded in the Company's Consolidated
Financial Statements. This transaction has been accounted for as a purchase.
The assets and liabilities acquired are as follows (dollars in thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value..................... $4,253
Cost in excess of net assets acquired...................... 2,589
Liabilities assumed at fair value.......................... (4,508)
------
Total purchase price................................... $2,334
======
</TABLE>
On June 20, 1997, Granite acquired certain assets and liabilities of SFR
Funding, Inc. a small ticket equipment leasing company, for cash of $300,000 and
a note payable of $250,000. Neither the financial position nor results of
operations were significant to the Company or Granite since acquisition. This
transaction has been accounted for as a purchase.
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.
F-15
<PAGE> 20
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the First Title Corporation acquisition were as follows
(dollars in thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value..................... $1,294
Cost in excess of net assets acquired...................... 4,033
Liabilities assumed at fair value.......................... (627)
------
Total purchase price................................... $4,700
======
</TABLE>
On September 18, 1997, the Company acquired the common stock of Ifland
Credit Services ("ICS"), a credit reporting company headquartered in Lexington,
Kentucky, for a purchase price of $3.75 million. ICS has been merged with Credit
Reports, Inc. ("CRI") and Classified Credit Data, Inc. ("CCD") in order to form
Fidelity National Credit Services. The purchase price was payable 80% in common
stock of the Company (170,155 shares or $3.0 million) and 20% cash ($750,000).
This transaction has been accounted for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the Ifland Credit Services acquisition were as follows
(dollars in thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value..................... $ 618
Cost in excess of net assets acquired...................... 3,517
Liabilities assumed at fair value.......................... (385)
------
Total purchase price................................... $3,750
======
</TABLE>
On October 9, 1997, the Company acquired the common stock of Credit Reports,
Inc. a credit reporting company headquartered in Scottsdale, Arizona, with
operations in California, Colorado, Nevada and Oregon. CRI has been merged with
ICS and CCD in order to form Fidelity National Credit Services. The purchase
price for CRI was $200,000, subject to certain purchase price adjustments based
on the combined equity of CRI and Express Network, Inc., its affiliate, payable
in 11,455 shares of Company common stock. This transaction has been accounted
for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the Credit Reports, Inc. acquisition were as follows
(dollars in thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value..................... $2,559
Cost in excess of net assets acquired...................... 139
Liabilities assumed at fair value.......................... (2,498)
------
Total purchase price................................... $ 200
======
</TABLE>
Also on October 9, 1997, the Company acquired the common stock of Express
Network, Inc. ("ENI"), a provider of attorney services such as courier,
messenger, courthouse filing, process serving, investigation and reprographics.
ENI provides services to legal firms in Los Angeles, Orange County, San Diego,
Riverside and San Francisco, California. The purchase price for ENI was $10.55
million; subject to certain purchase price adjustments based on the combined
equity of ENI and CRI, its affiliate, payable in 50% common stock of the Company
(302,158 shares or $5.275 million) and 50% cash (approximately $5.275 million).
Approximately $2.8 million of the cash portion of the purchase price will be
paid in equal installments over a four-year period. This transaction has been
accounted for as a purchase.
F-16
<PAGE> 21
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the Express Network, Inc. acquisition were as follows
(dollars in thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value..................... $ 3,018
Cost in excess of net assets acquired...................... 9,640
Liabilities assumed at fair value.......................... (2,108)
-------
Total purchase price................................... $10,550
=======
</TABLE>
On October 21, 1997, the Company acquired 100% of the common stock of
Classified Credit Data, Inc., a credit reporting company headquartered in Orange
County, California, for a purchase price of $300,000, which was paid in cash.
CCD was merged with ICS and CRI in order to form Fidelity National Credit
Services. This transaction has been accounted for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the Classified Credit Data acquisition were as follows
(dollars in thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value..................... $ 385
Cost in excess of net assets acquired...................... 386
Liabilities assumed at fair value.......................... (471)
------
Total purchase price................................... $ 300
======
</TABLE>
On December 30, 1997, Granite completed the acquisition of 84% of the common
stock of North Pacific Funding, Inc. dba C&W Leasing and its wholly-owned
subsidiary CKC Corporation dba US Funding (collectively, "C&W Leasing"). The
purchase price for this transaction was $5.1 million, in the form of notes
payable to the former stockholders. This transaction has been accounted for as a
purchase. The remaining 16% of the common stock of C&W Leasing was purchased on
January 5, 1998 for additional consideration of $.9 million in promissory notes
payable.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the C&W Leasing acquisition were as follows (dollars in
thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value..................... $1,003
Cost in excess of net assets acquired...................... 5,821
Liabilities assumed at fair value.......................... (1,724)
------
Total purchase price................................... $5,100
======
</TABLE>
F-17
<PAGE> 22
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Selected unaudited pro forma combined results of operations for the years
ended December 31, 1997, 1996 and 1995, assuming the Nations Title Inc. and
Fidelity National Tax acquisitions occurred on January 1, 1997, 1996 and 1995,
and assuming the National Alliance, Global, SFR Funding, Inc., First Title, ICS,
CRI, ENI, CCD and C&W Leasing acquisitions occurred on January 1, 1997 and 1996,
are presented as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
-------- --------- -------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Total revenue........................ $805,047 $732,642 $588,759
Basic earnings before
extraordinary item.................. $ 45,219 $ 23,910 $ 7,395
Basic net earnings................... 43,519 23,910 6,582
Basic earnings per share............. $ 2.65 $ 1.51 $ .42
Diluted earnings before
extraordinary item.................. $ 48,361 $ 27,106 $ 7,395
Diluted net earnings................. 46,661 27,106 6,582
Diluted earnings per share........... $ 2.12 $ 1.28 $ .41
</TABLE>
C. INVESTMENTS
The carrying amounts and fair values of the Company's fixed maturity
securities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------------
GROSS GROSS
CARRYING AMORTIZED UNREALIZED UNREALIZED FAIR
AMOUNT COST GAINS LOSSES VALUE
-------- -------- ----------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Fixed maturity investments (available for sale):
U.S. government and agencies ...................... $ 36,869 $ 36,537 $ 373 $ (41) $ 36,869
States and political subdivisions ................. 122,164 119,626 2,545 (7) 122,164
Corporate securities .............................. 52,810 52,308 532 (30) 52,810
Mortgage-backed securities ........................ 5,158 5,118 60 (20) 5,158
-------- -------- -------- -------- --------
$217,001 $213,589 $ 3,510 $ (98) $217,001
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------------------
GROSS GROSS
CARRYING AMORTIZED UNREALIZED UNREALIZED FAIR
AMOUNT COST GAINS LOSSES VALUE
-------- -------- ----------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Fixed maturity investments (available for sale):
U.S. government and agencies ...................... $ 87,765 $ 88,376 $ 106 $ (717) $ 87,765
States and political subdivisions ................. 16,534 16,282 270 (18) 16,534
Corporate securities .............................. 46,354 47,058 241 (945) 46,354
Mortgage-backed securities ........................ 15,676 15,896 86 (306) 15,676
-------- -------- ------- --------- --------
$166,329 $167,612 $ 703 $ (1,986) $166,329
======== ======== ======= ========= ========
</TABLE>
The change in unrealized gains (losses) on fixed maturities for the years
ended December 31, 1997, 1996, and 1995 was $4,695,000, $(3,255,000) and
$13,025,000, respectively.
F-18
<PAGE> 23
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The amortized cost and estimated fair value of fixed maturity securities,
which are classified as available for sale at December 31, 1997, by contractual
maturity, are shown as follows. Expected maturities may differ from contractual
maturities because certain borrowers have the right to call or prepay
obligations with or without call or prepayment penalties:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------
AMORTIZED % FAIR %
MATURITY COST OF TOTAL VALUE OF TOTAL
--------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One year or less ........................... $ 5,180 2.4% $ 5,188 2.4%
After one year through five years .......... 120,134 56.2 121,780 56.1
After five years through ten years ......... 76,760 35.9 78,346 36.1
After ten years ............................ 11,515 5.5 11,687 5.4
-------- -------- -------- --------
$213,589 100.0% $217,001 100.0%
======== ======== ======== ========
Subject to call .................................. $ 17,640 8.3% $ 18,159 8.4%
</TABLE>
Fixed maturity securities valued at approximately $18,881,000 and
$17,670,000 were on deposit with various governmental authorities at December
31, 1997 and 1996, respectively, as required by law.
Equity securities at December 31, 1997 and 1996 consist of investments in
various industry groups as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1997 1996
---------------------- ----------------------
FAIR FAIR
COST VALUE COST VALUE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Banks, trust and insurance companies ............. $ 50 $ 50 $ 800 $ 863
Industrial, miscellaneous and all other .......... 35,826 70,368 19,349 41,475
-------- -------- -------- --------
$ 35,876 $ 70,418 $ 20,149 $ 42,338
======== ======== ======== ========
</TABLE>
The carrying value of the Company's investment in equity securities is fair
value. As of December 31, 1997, gross unrealized gains and gross unrealized
losses on equity securities were $36,774,000 and $2,232,000, respectively. Gross
unrealized gains and gross unrealized losses on equity securities were
$22,912,000 and $723,000, respectively, as of December 31, 1996.
Included in equity securities at December 31, 1997 and 1996, is an
investment in a certain equity security, CKE Restaurants, Inc., with a cost
basis of $3,366,000 and a fair value of $31,404,000 at December 31, 1997 and a
cost basis of $3,366,000 and a fair value of $17,892,000 at December 31, 1996.
The change in unrealized gains on equity securities for the years ended
December 31, 1997, 1996 and 1995 was $12,353,000, $15,245,000 and $9,369,000,
respectively.
F-19
<PAGE> 24
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Interest and investment income, including realized gains (losses), consists
of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents ............. $ 1,103 $ 1,666 $ 1,571
Fixed maturity securities ............. 10,098 9,431 8,254
Equity securities ..................... 11,664 4,823 5,091
Short-term investments ................ 1,891 165 155
Notes receivable ...................... 2,369 2,675 2,355
Other ................................. 6,431 (1,068) 190
-------- -------- --------
$ 33,556 $ 17,692 $ 17,616
======== ======== ========
</TABLE>
Net realized gains included in interest and investment income amounted to
$16,988,000, $2,625,000 and $5,213,000 for the years ended December 31, 1997,
1996 and 1995, respectively. Included in net realized gains for the year ended
December 31, 1997, are net realized gains from the sales of investments of
approximately $10,500,000, a net realized gain from the sale of the Company's
former home office building of approximately $4,300,000, and net realized gains
on the sale of 60% of American Title Company, a former wholly-owned underwritten
title company subsidiary, and the sale of FNF Ventures, Inc., a small business
investment company subsidiary of approximately $1,300,000 and $800,000,
respectively. All amounts are before applicable income taxes.
During the years ended December 31, 1997, 1996 and 1995, gross realized
gains on sales of fixed maturity securities considered available for sale were
$735,000, $452,000 and $1,700,000, respectively; and gross realized losses were
$429,000, $714,000 and $1,331,000, respectively. Gross proceeds from the sale of
fixed maturity securities considered available for sale amounted to
$137,019,000, $93,108,000 and $188,902,000, during the years ended December 31,
1997, 1996 and 1995, respectively.
During the years ended December 31, 1997, 1996 and 1995, gross realized
gains on sales of equity securities considered available for sale were
$12,658,000, $5,937,000 and $5,111,000, respectively; and gross realized losses
were $2,430,000, $1,962,000 and $457,000, respectively. Gross proceeds from the
sale of equity securities amounted to $135,747,000, $89,404,000 and $25,622,000
during the years ended December 31, 1997, 1996 and 1995, respectively.
F-20
<PAGE> 25
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
D. LEASES AND LEASE SECURITIZATION RESIDUAL INTERESTS
Direct Financing Leases
Granite's direct financing leases at December 31, 1997 and 1996 consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------
DIRECT
FINANCING
DIRECT LEASES
FINANCING ASSIGNED TO
LEASES LENDER
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Minimum lease payments receivable .......................... $ 25,832 $ 13,525
Estimated residual values of leased property ............... 3,480 709
Lease acquisition costs and broker commissions ............. 2,194 215
Unearned income ............................................ (9,451) (2,232)
Reserve for credit losses .................................. (2,440) (200)
Security deposits .......................................... (275) (115)
-------- --------
$ 19,340 $ 11,902
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------
DIRECT
FINANCING
DIRECT LEASES
FINANCING ASSIGNED TO
LEASES LENDER
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Minimum lease payments receivable .......................... $ 9,965 $ 24,668
Estimated residual values of leased property ............... 311 849
Lease acquisition costs and broker commissions ............. 1,282 594
Unearned income ............................................ (2,616) (5,131)
Reserve for credit losses .................................. (459) 104
Security deposits .......................................... (233) (300)
-------- --------
$ 8,250 $ 20,784
======== ========
</TABLE>
Scheduled collections of minimum lease payments receivable are as follows:
<TABLE>
<CAPTION>
DIRECT
FINANCING
DIRECT LEASES
FINANCING ASSIGNED TO
LEASES LENDER
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Year Ending December 31,
1998...................................................... $ 6,201 $ 6,451
1999...................................................... 6,264 4,087
2000...................................................... 5,670 2,618
2001...................................................... 4,564 290
2002...................................................... 3,027 79
Thereafter................................................ 106 --
---------- ---------
$ 25,832 $ 13,525
========== ==========
</TABLE>
F-21
<PAGE> 26
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The carrying value of the direct financing leases at December 31, 1997 and
1996 approximated fair value because of the short-term period that these leases
are held before sale or securitization. The fair value of the direct financing
leases assigned to lender at December 31, 1997 approximated the carrying value
because the interest rate on the related Class A Term Note approximates current
market rates.
Asset Securitization
Securitization residual interests at December 31, 1997 consists of the
following (dollars in thousands):
<TABLE>
<S> <C>
Future remaining cash flows......................... $ 29,855
Estimated losses.................................... (2,809)
--------
Future remaining cash flows, net
of estimated losses............................... 27,046
Unearned income..................................... (4,506)
--------
$ 22,540
========
</TABLE>
Granite funds leases with the intention of selling the leases to investors
or securitizing the leases through lease-backed securities. As of December 31,
1997, Granite has completed four securitizations which provide for aggregate
funding in the amount of approximately $264,000,000. In each securitization,
Granite transfers leases to a wholly-owned, bankruptcy remote special purpose
subsidiary established for the limited purpose of purchasing Granite's leases.
The subsidiary then sells the leases to a grantor trust, which in turn sells
lease-backed notes or certificates to institutional investors. Proceeds from the
sale of lease-backed notes or certificates are used by the trust to purchase
leases from the subsidiary, which uses such proceeds to purchase the leases from
Granite. The securitization may also be completed by the subsidiary without the
use of a trust, in which case the subsidiary issues the lease-backed security
directly to the investor. The lease-backed securities are promissory notes or
equity certificates which are generally collateralized by, or represent an
undivided interest in, the leases, the leased equipment and certain collateral
accounts. Payments due under the lease-backed securities issued in each of
Granite's securitizations through December 31, 1997 have been insured by a
financial guaranty policy which provides an unconditional guarantee of Class A
note payments in the case of defaults or prepayments on the lease assets.
In April 1996, Granite's wholly-owned subsidiary, GF Funding I, issued
$21,689,000 of 6.33% Class A Lease-Backed Term Notes due November 20, 2001 (the
"Lease-Backed Notes") in a private placement. The Lease-Backed Notes are
collateralized by (i) payments to be made under leases contributed by Granite
Financial, LLC (See Note L.) to GF Funding I, (ii) all of GF Funding I's rights
and interest in the leased equipment, (iii) a cash collateral account (which
generally does not increase the overall level of credit enhancement, but rather
accommodates changes that may occur from time to time in the form of credit
enhancement from excess implicit principal balance of lease receivables to cash)
and (iv) a financial guaranty insurance policy. Under the terms of the insurance
policy, the monthly payments of interest and final payment of principal and
maturity are unconditionally guaranteed. As this securitization was completed
through the issuance of a debt security prior to the adoption of SFAS 125, the
transaction is accounted for as a collateralized borrowing. Accordingly, the
underlying lease assets, recorded as direct financing leases assigned to lender,
and the related limited recourse note payable are reflected in the Company's
Consolidated Balance Sheets. The underlying assets are comprised of Granite's
investment in direct financing leases of $11,902,000 and $20,784,000 as of
December 31, 1997 and 1996, respectively. The related limited recourse note
payable was $11,719,000 and $17,800,000 as of December 31, 1997 and 1996,
respectively.
In November 1996, GF Funding II was formed to establish Granite's second
securitization facility. The facility provides for the issuance of up to $65
million in aggregate principal amount of Class A Lease-Backed Certificates due
June 20, 2003 (the 1996 Certificates) in a private placement. For purposes of
computing
F-22
<PAGE> 27
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
interest, the 1996 Certificates are issued in two tranches, consisting of the
Floating Rate Tranche and the Fixed Rate Tranche. The principal amount of the
Floating Rate Tranche will generally convert to the Fixed Rate Tranche on a
quarterly basis. The Floating Rate Tranche bears interest at an annual rate
equal to the LIBOR Rate, as adjusted from time to time, plus .50%. The Fixed
Rate Tranche bears interest at an annual rate equal to the Treasury Rate, as
adjusted from time to time, plus .70%. The annual interest rate on each tranche
is subject to a maximum annual rate of 10.0%. The 1996 Certificates represent an
undivided interest in a trust estate created by GF Funding II comprised of (i)
payments to be made under leases contributed to GF Funding II, (ii) all of GF
Funding II's rights and interests in the leased equipment, (iii) a cash
collateral account and (iv) a financial guaranty insurance policy. The initial
funding under the securitization facility was approximately $7,200,000. Granite
is required to sell a minimum of $1,500,000 in leases to the securitization
facility per month. As this securitization was completed through the issuance of
equity certificates and Granite and GF Funding II have surrendered control over
the future cash flows from these lease assets for the benefit of the holders of
the certificates, the transfer of the lease assets is accounted for as a sale.
Accordingly, the portion of the underlying lease assets sold were removed from
the Consolidated Balance Sheet and the resulting net sales of leases are
reflected in the Consolidated Statements of Earnings. The net sales of leases
represent the difference between the gross proceeds from the certificate holders
and Granite's net investment in the portion of the lease assets sold. Granite
has recorded gains from the sales of leases with respect to this securitization
of $5,656,000 and $864,000, respectively, during the years ended December 31,
1997 and 1996. Included in the Consolidated Balance Sheet is the allocated
portion of Granite's net investment in the lease assets which represents the
securitization residual interest retained in the lease assets. The allocation
between the cost of leases sold and the securitization residual interest
retained is based on their relative fair values on the date of sale. The
securitization residual interest for this securitization was $14,502,000 at
December 31, 1997.
In March 1997, GF Funding III was formed to established Granite's third
securitization facility. The facility provides for the issuance of up to
$27,500,000 in the aggregate principal amount of 6.82% Class A Lease-Backed
Certificates due December 20, 2002 (the "1997 Certificates") in a private
placement. The 1997 Certificates represent an undivided interest in a trust
estate created by GF Funding III comprised of (i) payments to be made under
leases contributed to GF Funding III, (ii) all of GF Funding III's rights and
interests in the leased equipment, (iii) a cash collateral account, a
capitalized interest account, a prefunding account and a collection account and
(iv) a financial guaranty insurance policy. As this securitization was completed
through the issuance of equity certificates and Granite and GF Funding III have
surrendered control over the future cash flows from these lease assets for the
benefit of the holders of the certificates, the transfer of the lease assets is
accounted for as a sale. Accordingly, the portion of the underlying lease assets
sold were removed from the Consolidated Balance Sheet and the resulting net
sales of leases are reflected in the Consolidated Statements of Earnings. The
net sales of leases represent the difference between the gross proceeds from the
certificate holders and Granite's net investment in the portion of the lease
assets sold. Granite has recorded gains from the sales of leases with respect to
this securitization of $1,670,000 during the year ended December 31, 1997.
Included in the Consolidated Balance Sheet is the allocated portion of Granite's
net investment in the lease assets which represents the securitization residual
interest retained in the lease assets. The allocation between the cost of leases
sold and the securitization residual interest retained is based on their
relative fair values on the date of sale. The securitization residual interest
for this securitization was $4,195,000 at December 31, 1997.
The source of repayment for the Lease-Backed Notes and 1996 and 1997
Certificates is the stream of payments to be made on the equipment leases
included in the corresponding pool of transferred leases. The value of the
securitization residual interest of the collateral enhancement leases in the
pool will be realized by Granite on a monthly basis once all principal and
interest due under the Lease-Backed Notes or Certificates and associated
expenses are paid. The collateral enhancement leases are not a separate and
distinct pool of individual leases, but rather are part of the undifferentiated
pool of leases.
F-23
<PAGE> 28
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In December 1997, GF Funding IV was formed to establish Granite's fourth
securitization facility. The facility provides for the issuance of up to $150
million in aggregate principal amount of Class A Lease-Backed Certificates due
September 2004 (the "GFIV Certificates") in a private placement. For purposes of
computing interest, the GFIV Certificates are issued in two tranches, consisting
of the Floating Rate Tranche and the Fixed Rate Tranche. The principal amount of
the Floating Rate Tranche will generally convert to the Fixed Rate Tranche on a
quarterly basis. The Floating Rate Tranche bears interest at an annual rate
equal to the LIBOR Rate, as adjusted from time to time, plus .50%. The Fixed
Rate Tranche bears interest at an annual rate equal to the Treasury Rate, as
adjusted from time to time, plus .35%. The GFIV Certificates represent an
undivided interest in a trust estate created by GF Funding IV comprised of (i)
payments to be made under leases contributed to GF Funding IV, (ii) all of GF
Funding IV's rights and interests in the leased equipment and (iii) a financial
guaranty insurance policy. The initial funding under the securitization facility
was approximately $14,300,000. Granite is required to sell a minimum of
$10,000,000 in leases to the securitization facility per quarter. As this
securitization was completed through the issuance of equity certificates and
Granite and GF Funding IV have surrendered control over the future cash flows
from these lease assets for the benefit of the holders of the GFIV Certificates,
the transfer of the lease assets is accounted for as a sale. Accordingly, the
portion of the underlying lease assets sold were removed from the Consolidated
Balance Sheet and the resulting net sales of leases are reflected in the
Consolidated Statements of Earnings. The net sales of leases represent the
difference between the gross proceeds from the certificate holders and Granite's
net investment in the portion of the lease assets sold. Granite has recorded
gains from the sales of leases with respect to this securitization of $1,418,000
during the year ended December 31, 1997. Included in the Consolidated Balance
Sheet is the allocated portion of Granite's net investment in the lease assets
which represents the securitization residual interest retained in the lease
assets. The allocation between the cost of leases sold and the securitization
residual interest retained is based on their relative fair values on the date of
sale. The securitization residual interest for this securitization was
$3,843,000 at December 31, 1997.
Subsequent to December 31, 1997, GF Funding V was formed to establish
Granite's fifth securitization facility. The facility provides for the issuance
of up to $65 million in aggregate principal amount of Class A Lease-Backed
Certificates due April 2005 (the "GFV Certificates") in a private placement. For
purposes of computing interest the GFV Certificates are issued in Fixed Rate
Tranches which bear interest at an annual rate equal to the Treasury Rate, as
adjusted from time to time, plus 1.20%. The Certificates represent an undivided
interest in a trust estate created by GF Funding V comprised of (i) payments to
be made under leases contributed to GF Funding V and (ii) all of GF Funding V's
rights and interests in the leased equipment. The initial funding under the
securitization facility was approximately $18,400,000 in March 1998. Granite is
required to sell a minimum of $15,000,000 in leases to the securitization
facility per quarter. As this securitization was completed through the issuance
of equity certificates and Granite and GF Funding V have surrendered control
over the future cash flows from these lease assets for the benefit of the
holders of the Certificates, the transfer of the lease assets will be accounted
for as a sale.
Sale of Leases
Granite entered into agreements with certain financial institutions to sell,
on an ongoing basis, certain leases either on a recourse or non-recourse basis.
The purchase price of the leases is determined on a transaction by transaction
basis. Revenue is recognized on the date of sale based upon the present value of
the payments to be received under the lease. Granite retains servicing of all
leases under the agreements. During the years ended December 31, 1997 and 1996,
the net sales of leases under these agreements were $1,559,000 and $1,483,000,
respectively.
Included in the net sales of leases above are sales of leases to Heartland
Bank of $618,000 and $1,419,000 during the years ended December 31, 1997 and
1996. Heartland Bank purchased an equity interest in Granite in January 1996.
The costs and related sales amounts are included in the accompanying
Consolidated Statements of
F-24
<PAGE> 29
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Earnings. With respect to the leases sold to Heartland Bank, there is recourse
to Granite for the amount of the equipment residual guarantees of approximately
$874,000 and a reserve account balance of approximately $488,000 (included in
restricted cash) at December 31, 1997.
E. NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage notes, secured by various deeds of trust, installments due monthly
including interest at rates ranging from 7.0%
to 10%, due through 2022 ......................................................... $ 426 $ 512
Promissory notes, secured by various assets and unsecured,
installments due monthly including interest at rates ranging
from 7.4% to 13%, due through 2008 ............................................... 8,876 11,463
Promissory note due from the Company's Chief Executive Officer,
secured by a deed of trust, in monthly installments including
interest at 9.5%, paid in November 1997 .......................................... -- 471
Officer and employee secured and unsecured notes receivable at rates
ranging from 7.0% to 10.0%, due through 2004 ..................................... 1,346 1,525
-------- --------
10,648 13,971
Allowance for doubtful receivables ................................................. (1,750) (2,654)
-------- --------
$ 8,898 $ 11,317
======== ========
</TABLE>
The allowance for doubtful receivables is primarily related to promissory
notes at December 31, 1997 and 1996. Interest income is not recognized on the
Company's non-performing notes receivable.
The carrying amounts and estimated fair values of the Company's notes
receivable were as follows at December 31, 1997 and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1997 1996
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage notes ................... $ 426 $ 426 $ 412 $ 412
Other promissory notes ........... 7,365 7,365 8,909 8,909
Affiliated notes ................. 1,107 1,107 1,996 1,996
-------- -------- -------- --------
$ 8,898 $ 8,898 $ 11,317 $ 11,317
======== ======== ======== ========
</TABLE>
The fair values of significant notes receivable are established using
discounted cash flow analyses based on current market interest rates and
comparison of rates being received to interest rates currently being offered for
similar loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations. All other notes
receivable are not significant individually or in the aggregate, or are current
and at market rates, and their carrying value approximates fair value.
In September 1991, Manchester Development Corporation ("Manchester"), a
wholly-owned subsidiary, sold certain real estate investments and operating
properties to Folco Development Corporation ("Folco"), of which the Company's
Chief Executive Officer and spouse are sole shareholders, at the assets' net
book value of $2,211,000. This transaction resulted in a note receivable from
Folco to Manchester of approximately
F-25
<PAGE> 30
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
$1,492,000 secured by subordinated deeds of trust on the 11 office buildings
included in the sale to Folco. In connection with the sale, the existing leases
of space by the Company were amended thereby increasing rental rates
approximately 20%. The terms of the agreement between Manchester and Folco
provide that each of the subordinated deeds of trust will be released and
reconveyed upon payment to Manchester of 15% of the net sales proceeds from the
sale of the property encumbered by the subordinated deeds of trust. The note was
paid on November 10, 1997. At December 31, 1996, the balance outstanding on the
note approximated $471,000 and one property remained unsold.
F. INVESTMENTS IN REAL ESTATE AND PARTNERSHIPS
At December 31, 1997 and 1996, the Company had financial interests ranging
from 22% to 50% in three real estate partnerships which were accounted for under
the equity method. These partnerships are involved in the ownership and
management of commercial office buildings, retail facilities and have acquired
specific parcels of real property for investment purposes. The Company, through
Manchester Development Corporation ("Manchester"), a wholly-owned subsidiary,
had a general partnership interest in one of the three real estate partnerships
at December 31, 1997 and 1996.
Two of these partnerships, representing raw land investments, also have
officers and directors of the Company as partners with ownership interests that
are based on cash contributions. These two partnerships require that all of the
partners, including the Company, make pro-rata capital contributions should the
partnerships require additional funds to pay liabilities.
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 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 have 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.
Summarized combined financial information of the unconsolidated partnerships
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total assets, primarily land, development and
improvement costs .............................................. $ 3,922 $ 3,960 $ 14,096
Total liabilities, primarily notes and mortgages payable .......... 819 841 12,664
-------- -------- --------
Partners' equity .................................................. $ 3,103 $ 3,119 $ 1,432
======== ======== ========
Revenue ........................................................... $ 47 $ 378 $ 1,568
======== ======== ========
Net income (loss) ................................................. $ 22 $ (73) $ (515)
======== ======== ========
</TABLE>
At December 31, 1997 and 1996, the Company had a 92.5% and a 76.3% interest
in real estate partnerships which are consolidated with the Company.
F-26
<PAGE> 31
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Manchester is presently a partner with Sussex Holdings, Ltd. (an affiliate
of Folco) in Folco Mission Valley Partners Limited Partnership, a California
limited partnership. Manchester owns a 22% limited partnership interest and
Sussex Holdings, Ltd. owns a 78% general partnership interest. Fidelity Title is
the sole tenant in the building and received an approximate 30% decrease in its
annual rental rate based upon its lease with Folco Mission Valley.
Investments in real estate and partnerships consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Investments in real estate:
Land ......................................................... $ 4,291 $ 7,476
Commercial buildings, net of accumulated depreciation
of $67 and $2,925 .......................................... 663 6,537
Investments in unconsolidated partnerships ....................... 1,714 1,806
-------- --------
6,668 15,819
Valuation allowance .............................................. (1,467) (4,467)
-------- --------
$ 5,201 $ 11,352
======== ========
</TABLE>
During 1997, the Company sold an investment in real estate at a purchase
price that approximated book value.
G. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land ....................................................... $ 4,863 $ 4,370
Buildings .................................................. 7,148 14,700
Leasehold improvements ..................................... 11,427 9,452
Furniture, fixtures and equipment .......................... 88,493 72,069
--------- ---------
111,931 100,591
Accumulated depreciation and amortization .................. (72,946) (61,361)
--------- ---------
$ 38,985 $ 39,230
========= =========
</TABLE>
H. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Credit agreement, secured by common stock of certain Insurance Subsidiaries,
with principal due quarterly and interest due monthly at LIBOR rate plus 2.0%
(7.63% at December 31, 1997), due September 2001, paid subsequent
to year end ........................................................................... $ 15,250 $ 18,250
</TABLE>
F-27
<PAGE> 32
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
H. NOTES PAYABLE, CONTINUED
Notes payable consist of the following (continued):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Bank revolving credit facility, secured by common stock of certain Insurance
Subsidiaries, with interest due quarterly at LIBOR plus 2.0% (7.63% at
December 31, 1997), principal due quarterly beginning April 1998, due
September 2001, unused portion of $8 million at December 31, 1997 and 1996,
paid subsequent to year end ............................................................ 5,000 5,000
Equipment line of credit, secured by equipment, with interest due
monthly at Prime rate plus 1.00% (9.50% at December 31, 1997), principal, due
May 1998, unused portion of $3,970 and $414 at
December 31, 1997 and 1996 ............................................................. 4,030 5,586
Bank revolving line of credit, secured by security interest in
certain leases and the underlying equipment, interest due monthly at Prime
plus .625% (9.125% at December 31, 1997), unused portion of $33,200 million at
December 31, 1997, subsequent to year end line of credit increased to $46,000
million and maturity date extended to August 1998 ...................................... 2,784 --
Bank line of credit, unsecured, interest due monthly at Bank's
Reference Rate plus .75% (9.25% at December 31, 1997), due
June 1998, no unused portion at December 31, 1997 ...................................... 3,000 --
Bank line of credit, secured by interest in certain leases and underlying
equipment, interest due monthly at Bank's Reference Rate plus 1.0% (9.25% at
December 31, 1996), unused portion of $1,098 at December 31, 1996, repaid May 1997 ..... -- 3,902
Bank promissory note, secured by equipment, with principal and interest
due monthly at LIBOR plus 1.77%, paid in September 1997 ................................ -- 2,760
Bank promissory note, secured by equipment, with principal and interest
due monthly at LIBOR plus 1.77% (7.40% at December 31, 1997),
due October 1998 ....................................................................... 2,134 4,787
Bank promissory note, secured by equipment, with principal and interest
due monthly at LIBOR plus 2.10% (7.73% at December 31, 1997),
due June 1999 .......................................................................... 2,052 3,282
Bank promissory note, secured by equipment, with principal and interest
at 30 day commercial paper rate plus 2.44% (8.02% at December 31,
1997), due September 2000 .............................................................. 5,000 7,031
Bank promissory note, secured by equipment, with principal and interest
due monthly at LIBOR plus 1.84% (7.47% at December 31, 1997), due
May 2001 ............................................................................... 4,042 --
Bank promissory note, secured by equipment, with principal and interest
due monthly at LIBOR plus 1.84% (7.47% at December 31, 1997), due
September 2001 ......................................................................... 5,784 --
Promissory note, guaranteed by United States Small Business Administration,
with interest only at 7.59% due monthly and principal due at maturity,
September 2006, liability assumed by purchaser when subsidiary
sold in October 1997 ................................................................... -- 3,000
Promissory note, secured by real estate, with principal and interest due
monthly at 9.875%, due April 1998 ...................................................... 1,693 1,723
Note payable to bank, secured by stock of certain subsidiaries, principal and
interest due monthly at LIBOR plus 3.50% (9.468% at December 31, 1997), due
within 30 days of change in control or April 1998. Subsequent to December 31,
1997, maturity date extended to August 1998 ............................................ 8,000 --
</TABLE>
F-28
<PAGE> 33
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
H. NOTES PAYABLE, CONTINUED
Notes payable consist of the following (continued):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Note payable secured by certain leases and a security interest in underlying
equipment, principal and interest due monthly at 9.80%, due January 2000,
unused portion of $2,362 and
$2,099 at December 31, 1997 and 1996 ................................................... 638 901
Note payable to bank, secured by all tangible and intangible property
of a certain subsidiary, principal and interest due monthly
at 8.72%, due May 1999 ................................................................. 1,292 --
Promissory notes, unsecured, interest due quarterly at 8.00%, principal
due at various dates through July 1999 ................................................. 5,100 --
Liquid Yield Option Notes, zero coupon, convertible subordinated notes
due 2009 with interest at 5.5% ......................................................... 76,635 97,013
Other promissory notes with various interest rates and maturities ........................ 1,642 490
-------- --------
$144,076 $153,725
======== ========
</TABLE>
Principal maturities, including accretion of original issue discount, are as
follows (dollars in thousands):
<TABLE>
<S> <C>
1998..................................................... $ 33,488
1999..................................................... 14,148
2000..................................................... 12,293
2001..................................................... 6,491
2002..................................................... 937
Thereafter............................................... 140,657
--------
$208,014
========
</TABLE>
The Company's credit agreement, dated as of September 21, 1995, included a
$22 million term loan and a $13 million revolving credit facility, is and was
collateralized by the common stock of certain Insurance Subsidiaries. This
credit facility was terminated and paid subsequent to year end with the proceeds
from a new credit facility. Additionally, the Company must comply with certain
affirmative and negative covenants related to its debt agreements which require,
among other things, that the Company maintain certain financial ratios related
to liquidity, net worth, capitalization, investments, restricted payments and
certain dividend restrictions.
The Company entered into an interest rate swap agreement concurrent with the
funding of the credit agreement, dated as of September 21, 1995, which is
principally used by the Company in the management of interest rate exposure. The
interest rate swap agreement is accounted for on the accrual basis. Income and
expense are recorded in the same category as that arising from the related debt.
Amounts to be paid or received under interest rate swap agreements are
recognized as interest income or expense in the period in which they accrue. The
interest rate swap agreement has not had a material impact on the Consolidated
Financial Statements. See Note O.
In February 1994, the Company issued zero coupon, convertible subordinated
Liquid Yield Options Notes due February 2009 ("LYONs") at an interest rate of
5.5% with a principal amount at maturity of $235,750,000. Net proceeds to the
Company were approximately $101,000,000. The proceeds were used for investment
and general corporate purposes, including the repurchase of treasury shares.
On October 17, 1997, the Company in a private transaction, purchased $45
million aggregate principal amount at maturity of its outstanding Liquid Yield
Option Notes due 2009 from Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") for an aggregate purchase price of $27.2 million (or $605 per
$1,000
F-29
<PAGE> 34
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
principal amount at maturity of LYONs). The purchase price was paid in the form
of 1,267,619 shares, $26.4 million, of the Company's common stock (the "Exchange
Shares"). The Company also paid Merrill Lynch, the excess of a base price of
$21.48 per Exchange Share over the actual sales price (less $0.05 per share in
commissions) realized by Merrill Lynch for sales of up to 552,619 Exchange
Shares. The Company also paid Merrill Lynch, for each day, an amount in cash to
be determined by multiplying the Net Carry Amount (number of Exchange Shares
multiplied by $21.48) by the Applicable Rate (LIBOR plus 2.50%). The Company's
payment obligations were subject to reduction for dividends on Exchange Shares
received by Merrill Lynch during the period. The Company paid the foregoing
amounts to Merrill Lynch in cash of approximately $790,000 on November 7, 1997.
The purchase of the LYONs increased stockholders' equity by approximately $24.7
million while reducing outstanding debt by approximately $24.3 million.
Additionally, an extraordinary loss due to the early retirement of debt of
approximately $1.7 million, net of applicable income taxes, was recorded in the
fourth quarter of 1997. The maturity value of LYONs outstanding at December 31,
1997 is approximately $140.6 million.
The carrying amounts and estimated fair values of the Company's notes
payable were as follows at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1997 1996
-------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Short-term borrowings........................... $ 18,981 $ 18,981 $ 9,612 $ 9,612
Long-term borrowings, variable rate............. 39,263 39,263 41,110 41,110
Long-term borrowings, fixed rate................ 85,832 120,952 103,003 94,115
--------- -------- -------- --------
$ 144,076 $179,196 $153,725 $144,837
========= ======== ======== ========
</TABLE>
Short-term borrowings approximate their fair value. The fair value of the
Company's fixed rate and variable rate notes payable is estimated using
discounted cash flow analyses based on current market interest rates and
comparison of interest rates being paid to the Company's current incremental
borrowing rates for similar types of borrowing arrangements. The LYON's fair
value is calculated based on quoted market prices.
Also included in Notes Payable in the Consolidated Balance Sheets as of
December 31, 1997 and 1996 is the Class A Lease-Backed Term Note due 2001. See
Note D. The amount due related to the Class A Lease-Backed Term Note was
$11,719,000 and $17,800,000 at December 31, 1997 and 1996, respectively. The
carrying amount of the Class A Lease-Backed Note approximates fair value at
December 31, 1997 and 1996 due to the fact that the interest rate paid on the
Class A Lease-Backed Note approximates market rates.
I. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current ................. $ 31,217 $ 7,886 $ (2,729)
Deferred ................ 1,658 8,960 4,120
-------- -------- --------
$ 32,875 $ 16,846 $ 1,391
======== ======== ========
</TABLE>
F-30
<PAGE> 35
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Total income tax expense (benefit) for the years ended December 31, 1997,
1996 and 1995 was allocated as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income from continuing operations ...... $ 34,055 $ 16,846 $ 1,828
Extraordinary gain (loss) .............. (1,180) -- (437)
-------- -------- --------
$ 32,875 $ 16,846 $ 1,391
======== ======== ========
</TABLE>
Deferred income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Provision for claim losses in excess
of statutory amounts ........................ $ 2,142 $ 5,108 $ 4,890
Employee benefit accruals .................... (3,758) (1,847) 81
(Excess) deficit book over tax bad
debt expense ................................ 2,298 304 (535)
Other acquisition accruals ................... 1,660 1,862 610
Statutory unearned premium reserve ........... 1,313 3,624 303
Accelerated depreciation ..................... (384) (1,046) --
Investments in partnerships .................. (68) (434) --
Investments in real estate ................... (624) 128 --
Lease accounting ............................. 2,994 608 --
Net operating loss carryovers ................ (1,101) -- --
Section 338 (h)(10) gain deferral ............ (1,711) (153) (504)
Other ........................................ (1,103) 806 (725)
-------- -------- --------
$ 1,658 $ 8,960 $ 4,120
======== ======== ========
</TABLE>
The effective tax rate differs from the statutory income tax rate as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Statutory income tax rate .................. 35.0% 35.0% 34.0%
Tax exempt interest income ................. (1.6) (.8) (23.3)
Non-deductible expenses .................... 6.2 2.0 6.5
State taxes, net of Federal deduction ...... 3.6 2.7 --
Other ...................................... .1 .9 (.3)
------ ------ ------
43.3% 39.8% 16.9%
====== ====== ======
</TABLE>
F-31
<PAGE> 36
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The deferred tax assets and liabilities at December 31, 1997 consist of the
following:
<TABLE>
<CAPTION>
DEFERRED DEFERRED TAX
TAX ASSETS LIABILITIES
---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Provision for claim losses in excess of statutory amounts .......... $ 47,072 $ --
Employee benefit accruals .......................................... 8,175 --
Excess book over tax provision for bad debts ....................... 4,217 --
Other assets ....................................................... 2,165 --
Statutory unearned premium reserve ................................. -- 48,783
Accelerated depreciation ........................................... -- 148
Investment securities .............................................. -- 15,532
Investments in partnerships ........................................ -- 392
Investments in real estate ......................................... -- 154
Section 338 (h)(10) gain deferral .................................. -- 2,046
Other acquisition accruals ......................................... -- 5,509
Other liabilities .................................................. -- 2,012
Lease accounting ................................................... -- 3,214
Net operating loss available for carryovers ........................ 1,812 --
-------- --------
63,441 77,790
Less: valuation allowance .......................................... 711 --
-------- --------
Total deferred taxes ............................................... $ 62,730 $ 77,790
======== ========
</TABLE>
The deferred tax assets and liabilities at December 31, 1996 consist of the
following:
<TABLE>
<CAPTION>
DEFERRED DEFERRED TAX
TAX ASSETS LIABILITIES
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Provision for claim losses in excess of statutory amounts ........... $ 49,215 $ --
Employee benefit accruals ........................................... 4,756 --
Excess book over tax provision for bad debts ........................ 5,758 --
Other assets ........................................................ 1,803 --
Statutory unearned premium reserve .................................. -- 47,470
Accelerated depreciation ............................................ -- 543
Investment securities ............................................... -- 8,503
Investments in partnerships ......................................... -- 460
Investments in real estate .......................................... -- 778
Section 338 (h)(10) gain deferral ................................... -- 3,758
Other acquisition accruals .......................................... -- 3,266
Other liabilities ................................................... -- 4,380
Lease accounting .................................................... -- 608
Net operating loss available for carryover .......................... 711 --
-------- --------
62,243 69,766
Less: valuation allowance ........................................... 711 --
-------- --------
Total deferred taxes ................................................ $ 61,532 $ 69,766
======== ========
</TABLE>
Based upon the Company's current and historical pre-tax earnings, management
believes it is more likely than not that the Company will realize the benefit of
its existing deferred tax assets, net of the recorded valuation allowance.
Management believes the existing net deductible temporary differences will
reverse during periods in which the Company generates net taxable income.
However, there can be no assurance that the Company will generate any earnings
or any specific level of continuing earnings in future years. Certain tax
planning or other
F-32
<PAGE> 37
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
strategies could be implemented, if necessary, to supplement income from
operations to fully realize recorded tax benefits.
The Company's 1990 through 1994 Federal income tax returns are currently under
examination by the Internal Revenue Service. Based on information currently
available, management does not believe the outcome of these examinations will
have a material impact on the financial condition or results of operations of
the Company.
J.SUMMARY OF RESERVE FOR CLAIM LOSSES
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
========== ========== ==========
</TABLE>
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.
K. COMMITMENTS AND CONTINGENCIES
The Company's title insurance underwriting subsidiaries are, in the ordinary
course of business, subject to claims made under, and from time-to-time are
named as defendants in legal proceedings relating to, policies of insurance they
have issued or other services performed on behalf of insured policyholders and
other customers. The Company believes that the reserves reflected in its
Consolidated Financial Statements are adequate to pay losses and loss adjustment
expenses which may result from such claims and proceedings; however, such
estimates may be more or less than the amount ultimately paid when the claims
are settled.
Effective January 1996, the Company extended the term of an employment
agreement with its Chief Executive Officer for an additional period of five
years through March 31, 2001. Under this extension, he is to receive a minimum
annual base salary and an annual bonus based on the Company's performance. In
addition, the Board of Directors may grant the Chief Executive Officer an annual
merit bonus in cash or common stock based on his individual performance during
each year of the extension.
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
F-33
<PAGE> 38
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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............................................. $22,881
1999............................................. 16,928
2000............................................. 11,885
2001............................................. 8,675
2002............................................. 5,257
Thereafter....................................... 6,622
-------
Total future minimum operating lease payments.... $72,248
=======
</TABLE>
Rent expense incurred under operating leases during the years ended December
31, 1997, 1996 and 1995 was $25,020,000, $23,474,000 and $21,388,000,
respectively. Included in rent expense for 1997, 1996 and 1995 is $523,000 paid
to related parties.
L. 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
(1997), Fidelity New York (1997), Nations New York (1997) and National (1997).
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.
F-34
<PAGE> 39
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Department of Insurance of the State of California (Department) is
currently conducting an examination of Fidelity Title for the four-year period
ended December 31, 1997. The Department has not issued a draft examination
report, however, they have discussed certain issues with the Company regarding
proposed reductions to Fidelity Title's surplus as regards policyholders that
have not yet been resolved. These issues involve the interpretation of certain
sections of the insurance regulations and circumstances which have evolved as a
result of the redomestication of Fidelity Title from Arizona to California and
the merger of Fidelity California and Nations into Fidelity Title. The
California insurance regulations differ from those of Arizona (Fidelity Title's
former state of domicile) and, as a result, the treatment of certain items has
been discussed. During the redomestication and merger process, neither the
Company nor the Department contemplated these differences and the resulting
financial statement impact of these issues. The Company is in the process of
coordinating with the legal division of the Department to resolve these issues
and expects a favorable outcome will be reached. If all of the issues are
resolved pursuant to the Company's current plan of action, the decrease in
statutory surplus would be approximately $4.5 million.
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 Fidelity Title 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.
F-35
<PAGE> 40
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 of Insurance of dividend payments by
FNTC and FNCAL greater than 30% of earnings before income taxes through 1998.
Granite Financial, LLC (the "LLC") was organized in Colorado on February 21,
1995. LLC was principally engaged in the business of originating and selling
lease contracts. In June 1996, Granite Financial, Inc. was incorporated.
Concurrently with the consummation of the public offering (see below), Granite
exchanged 2,000,000 shares of its common stock for all of the outstanding
membership interests of the LLC, as a result of which Granite was the sole
member of the LLC. Contemporaneously, Granite caused the LLC to be liquidated
and the assets of the LLC were distributed to Granite as the sole member. For
purposes of the Company's Consolidated Financial Statements, it is assumed that
Granite was incorporated on January 1, 1996. The impact of this assumption on
the Company's Consolidated Financial Statements is immaterial.
In October 1996, Granite completed a public offering of 1,211,000 shares of
common stock at $10.67 per share. The proceeds of the offering were
approximately $10,734,000, net of offering costs of $2,187,000. Additionally,
Granite issued warrants to the underwriter to purchase 105,300 shares at $14.96.
In July 1997, Granite completed a second public offering of 1,474,000 shares
of common stock at $11.75 per share. Additionally, Granite granted to the
underwriters a 30-day option to purchase up to an additional 221,000 shares of
common stock to cover over-allotments. The option was exercised by the
underwriters within the 30- day option period. The proceeds of the offering were
approximately $17,990,000, net of offering costs of $1,926,000. Granite also
issued warrants to the underwriters to purchase 105,300 shares of common stock
exercisable at $14.69 per share.
M. EMPLOYEE BENEFIT PLANS
Employee benefits include an employee stock purchase plan, three stock
option plans and a 401(k) plan.
In 1987, stockholders approved the adoption of an Employee Stock Purchase
Plan ("ESPP"). Under the terms of the ESPP and subsequent amendments, there are
7,986,000 shares of the Company's common stock available for purchase at current
market prices by Company employees who meet certain vesting requirements.
Pursuant to the ESPP, Company employees may contribute an amount between 5% and
15% of their base salary and certain commissions. The Company contributes
varying amounts as specified in the ESPP. During the years ended December 31,
1997, 1996 and 1995, 321,449, 338,047 and 315,901 shares, respectively, were
purchased and allocated to employees, based upon their contributions, at an
average price of $15.10, $12.45 and $9.77 per share, respectively. The Company
contributed $1.7 million or the equivalent of 111,582 shares for the year ended
December 31, 1997, $1.2 million or the equivalent of 97,471 shares for the year
ended December 31, 1996 and $1.4 million or the equivalent of 143,559 shares for
the year ended December 31, 1995 in accordance with the employer's matching
contribution. A total of 6,524,409 shares have been purchased by both the ESPP
and employees since the adoption of the ESPP.
In 1987, stockholders also approved the adoption of a Stock Option Plan
("1987 Option Plan"). Under the terms of the 1987 Option Plan, the Company may
grant stock options to certain key employees and non-employee directors or
officers. The number of shares issuable under the 1987 Option Plan is 1,647,113
shares of common stock at not less than fair market value on the date of grant.
Employees are eligible to receive incentive stock options or non-qualified stock
options and non-employee directors are eligible to receive non-qualified stock
options. Options available to directors or officers may not exceed one-half of
the aggregate
F-36
<PAGE> 41
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
number of shares available for grant. All options granted become exercisable at
the discretion of the Board of Directors and expire five to eleven years from
the date of grant. Options that lapse or are cancelled prior to exercise are
added to the shares authorized for future grants. The 1987 Option Plan expired
December 31, 1997.
In 1992, the stockholders approved the adoption of the 1991 Stock Option
Plan ("1991 Option Plan"). Under the terms of the 1991 Option Plan, options may
be granted to officers and key employees of the Company or any or all of its
present or future subsidiaries. The number of shares reserved for issuance under
the 1991 Option Plan and subsequent amendments is 2,362,525 shares of Common
Stock, which may be newly issued or treasury shares. The per share option price
is determined at the date of grant. The option price may be less than the fair
market value of the common stock at the date of grant to reflect the application
of the optionee's deferred bonus, if applicable. Options granted under the 1991
Option Plan shall be exercisable in such installments and for such periods as
may be fixed at the time of grant, but in no event shall any stock options
extend for a period in excess of 12 years from the date of grant.
In 1994, the stockholders approved the adoption of the 1993 Stock Plan
("1993 Plan"). Under the terms of the 1993 Plan, options may be granted to
officers, key employees and non-employee directors of the Company. The number of
shares of Common Stock reserved for issuance under the 1993 Plan is 998,250. The
per share option price is determined at the date of grant provided that the
price for incentive stock options shall not be less than 100% of their market
value or award stock shares. The 1993 Plan also contains an automatic grant of
non-qualified stock options to non-employee directors at an exercise price equal
to 100% of fair value at date of grant, and the right to exercise such options
shall vest equally over three years. Stock options granted under the 1993 plan
are exercisable subject to the terms and conditions set by the Board of
Directors, however, options shall be exercisable no earlier than six months nor
later than ten years following the grant date.
In June 1996, Granite adopted a Stock Option Plan ("Granite Plan") allowing
for the issuance of qualified and non-qualified stock options to purchase an
aggregate of 315,900 shares of common stock to directors, officers, employees,
agents and consultants of Granite. The Granite Plan is administered by the Board
of Directors. The Granite Plan provides that qualified stock options be granted
at an exercise price equal to fair market value of the common shares of Granite
on the date of the grant, and must be at least 110% of fair market value when
granted to a 10% or more shareholder. The term of all qualified stock options
granted under the Granite Plan may not exceed ten years, except the term of
qualified stock options granted to a 10% or more shareholder which may not
exceed five years. The Granite Plan provides that non-qualified stock options be
granted at an exercise price not less than 85% of the fair market value of the
common shares of Granite on the date of grant. The term of all non-qualified
stock options granted under The Granite Plan may not exceed ten years, except
the term of non-qualified stock options granted to a 10% or more shareholder
which may not exceed five years. In April 1997, the Granite Plan was amended and
restated in order to make certain technical modifications thereto and was
further amended in June 1997 to increase the shares of common stock reserved for
issuance to 631,800.
F-37
<PAGE> 42
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following table sets forth activity in the 1987 and 1991 Stock Option
Plans, the 1993 Stock Plan and the Granite Plan from December 31, 1994 through
December 31, 1997:
<TABLE>
<CAPTION>
1987 STOCK OPTION PLAN 1991 STOCK OPTION PLAN
---------------------------------------- --------------------------
NON-
INCENTIVE QUALIFIED EXERCISE EXERCISE
OPTIONS OPTIONS PRICE SHARES PRICE(1)
---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31, 1994 ............ 4,386 545,835 $1.14-11.46 1,454,374 $ .59-7.45
Granted in 1995 ..................... 9,858 465,850 7.61-9.77 63,030 3.42-3.68
Exercised in 1995 ................... (2,194) -- -- (237,661) 4.66-7.45
Expired or cancelled in 1995 ........ -- -- -- -- --
---------- ---------- ----------- ---------- -----------
Outstanding at December 31, 1995 ............ 12,050 1,011,685 $1.14-11.46 1,279,743 $ .59-7.45
Granted in 1996 ..................... -- 323,675 10.54 104,699 5.91-6.20
Exercised in 1996 ................... -- -- -- (61,287) .66-7.45
Expired or cancelled in 1996 ........ -- (69,878) 7.61-11.46 (33,576) 3.68-7.45
---------- ---------- ----------- ---------- -----------
Outstanding at December 31, 1996 ............ 12,050 1,265,482 $1.14-11.46 1,289,579 $ .59-7.29
Granted in 1997 ..................... -- 589,600 6.93-18.24 182,881 6.93-11.48
Exercised in 1997 ................... -- (69,575) 9.77-10.54 (52,657) .59-7.29
Expired or cancelled in 1997 ........ -- -- -- -- --
---------- ---------- ----------- ---------- -----------
Outstanding at December 31, 1997 ............ 12,050 1,785,507 $1.14-18.24 1,419,803 $ .59-11.48
========== ========== =========== ========== ===========
Exercisable at December 31, 1997 ............ 12,050 1,206,907 $1.14-18.24 1,400,984 $ .59-7.29
========== ========== =========== ========== ===========
Exercisable through......................... June 2005 Sept. 2007 May 2008
</TABLE>
<TABLE>
<CAPTION>
1993 STOCK PLAN GRANITE PLAN
--------------------------- ---------------------------
EXERCISE EXERCISE
SHARES PRICE SHARES(2) PRICE
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1994 ............ 69,878 $10.43-11.15 -- --
Granted in 1995 ..................... 97,162 7.51-8.17 -- --
Exercised in 1995 ................... -- -- -- --
Expired or cancelled in 1995 ........ (6,655) 10.42-11.15 -- --
---------- ------------ ---------- ------------
Outstanding at December 31, 1995 ............ 160,385 $7.51-11.16 -- --
Granted in 1996 ..................... 52,659 10.66-11.16 283,962 $8.48-13.64
Exercised in 1996 ................... -- -- -- --
Expired or cancelled in 1996 ........ -- -- -- --
---------- ------------ ---------- ------------
Outstanding at December 31, 1996 ............ 213,044 $7.51-11.16 283,962 $8.48-13.64
Granted in 1997 ..................... 27,500 12.65 208,846 12.82-14.89
Exercised in 1997 ................... (22,410) 11.16 (1,404) 11.40
Expired or cancelled in 1997 ........ -- -- (8,774) 8.48-13.53
---------- ------------ ---------- ------------
Outstanding at December 31, 1997 ............ 218,134 $7.51-12.65 482,630 $8.48-14.89
========== ============ ========== ============
Exercisable at December 31, 1997 ............ 208,008 $7.51-12.65 482,630 $8.48-14.89
========== ============ ========== ============
Exercisable through.......................... April 2008 July 2008
</TABLE>
- ---------------
(1) This variable plan allows for exercise prices with a fixed discount from the
quoted market price. 63,030 options were granted in 1995 at an exercise
price of $7.70 to key employees of the Company who applied deferred bonuses
expensed in 1994 amounting to $236,773 to the exercise price, reducing it to
$3.95 if exercised within the first year of the grant. The exercise price of
these options decreases approximately 6.0% per year through 2000 and $.16
per share from 2001 through 2006, at which time the exercise price will be
$1.61. 104,699 options were granted in 1996 at an exercise price of $10.33
to key employees of the Company who applied deferred bonuses expensed in
1995 amounting to $432,640 to the exercise price, reducing it to $6.20 if
exercised within the first year of the grant. The exercise price of these
options decreases approximately 5.0% per year through 2001 and $.18 per
share from 2002 through 2007, at which time the exercise price will be
$3.64. In 1997, 182,881 options were granted at an exercise price of $11.48
to key employees of the company who applied deferred bonuses expensed in
1996 amounting to $875,730 to the exercise price, reducing it to $6.93 if
exercised within the first year of the grant. The exercise price of these
options decreases approximately 7% per year through 2002 and $.20 per share
from 2003 through 2008, at which time the exercise price will be $4.11.
(2) Includes warrants granted to underwriters in conjunction with Granite public
offerings.
F-38
<PAGE> 43
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("Opinion 25") and related
Interpretations in accounting for its employee stock options. As discussed
below, in management's opinion, the alternative fair value accounting provided
for under Statement of Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("Statement 123") requires use of option valuation models that
were not developed for use in valuing employee stock options. Under Opinion 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of the grant, no compensation
expense is recognized.
Pro forma information regarding net earnings and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions. The risk free interest rates used in the calculation is the rate on
the date the options were granted. The risk free interest rate used for options
granted during 1997, 1996 and 1995 were 6.0%, 6.5% and 6.9%, respectively. A
volatility factor for the expected market price of the common stock of 50% was
used for options granted in 1997, 1996 and 1995. The expected dividend yield
used for 1997, 1996 and 1995 was 1.0%, 2.0% and 2.0%, respectively. A weighted
average expected life of seven years was used in all years as the Company has
little history of options being exercised.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that do not have vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the value of an estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purpose of pro forma disclosures, the estimated fair value of the
options is amortized into expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C>
Pro forma basic net earnings ............. $ 39,845 $ 22,620 $ 5,290
Pro forma diluted net earnings ........... $ 42,984 $ 25,816 $ 5,290
Pro forma earnings per share
Basic ........................... $ 2.07 $ 1.36 $ .35
Diluted ......................... 1.72 1.17 .34
</TABLE>
F-39
<PAGE> 44
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Stock options outstanding
beginning of year ......................... 3,064,117 $ 7.75 2,463,863 $ 6.93 2,074,473 $ 6.57
Stock options granted ...................... 1,008,827 11.11 764,995 10.26 635,900 7.26
Stock options exercised .................... (146,046) 8.63 (61,287) 4.26 (239,855) 4.67
Stock options cancelled .................... (8,774) 12.51 (103,454) 9.01 (6,655) 10.78
---------- -------- ---------- -------- ---------- --------
Stock options outstanding, end of year ..... 3,918,124 $ 8.61 3,064,117 $ 7.75 2,463,863 $ 6.93
Exercisable at end of year ................. 3,310,579 -- 2,676,304 -- 1,942,557 --
Weighted-average fair value of options
granted during the year ................... -- $ 11.64 -- $ 12.12 -- $ 8.19
</TABLE>
The weighted average remaining contractual life of the options outstanding at
December 31, 1997 is 7.8 years.
The following table sets forth options outstanding and exercisable by price
range as of December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AS OF 12/31/97 CONTRACTUAL LIFE PRICE AS OF 12/31/97 PRICE
- ----------------- -------------- ---------------- --------- -------------- --------
<S> <C> <C> <C> <C> <C>
$0.5260 - 2.7580 460,508 5.65 $ 1.5954 460,508 $ 1.5954
3.1550 - 6.0480 394,755 9.00 5.6044 394,756 5.6044
6.2550 - 7.2680 595,334 8.20 7.0288 547,916 7.0482
7.5130 - 7.6270 439,230 7.34 7.6116 437,012 7.6121
8.0770 - 10.4250 483,511 7.49 9.6783 481,171 9.6841
10.5370 - 11.0230 489,280 8.61 10.7096 324,280 10.5501
11.1450 - 11.4770 660,969 7.40 11.4494 303,469 11.4168
11.9300 - 14.9570 356,037 10.24 14.2610 350,467 14.3290
15.9660 - 15.9660 5,500 9.58 15.9660 -- --
18.2390 - 18.2390 33,000 9.71 18.2390 11,000 18.2390
- ------------------ --------- ----- -------- --------- --------
$0.5260 - $18.2390 3,918,124 7.79 $ 8.6070 3,310,579 $ 8.2980
</TABLE>
The Company also offers the Fidelity National Financial, Inc. 401(k) Profit
Sharing Plan, a qualified voluntary contributory savings plan, available to
substantially all employees. Eligible employees may contribute up to 15% of
their pretax annual compensation, up to the amount allowed pursuant to the
Internal Revenue Code. The Company may elect to make matching contributions. The
Company has historically not made matching contributions.
F-40
<PAGE> 45
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
N. SUPPLEMENTARY CASH FLOW INFORMATION
The following supplemental cash flow information is provided with respect to
interest and tax payments, as well as certain non-cash investing and financing
activities.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash paid (refunded) during the year:
Interest .............................................. $ 6,331 $ 6,233 $ 4,568
======== ======== ========
Income taxes .......................................... $ 16,125 $ 14,334 $ (3,147)
======== ======== ========
Non-cash investing and financing activities:
Dividends declared and unpaid ......................... $ 1,254 $ 975 $ 860
======== ======== ========
Acquisition of Nations Title Inc. ..................... $ -- $ 2,130 $ --
======== ======== ========
Acquisition of Fidelity National Tax .................. $ -- $ 2,520 $ --
======== ======== ========
Acquisition of National Alliance Marketing
Group, Inc. ......................................... $ 2,317 $ -- $ --
======== ======== ========
Acquisition of First Title Corporation ................ $ 3,760 $ -- $ --
======== ======== ========
Acquisition of Ifland Credit Services ................. $ 2,985 $ -- $ --
======== ======== ========
Acquisition of Bron Research, Inc. .................... $ 9,850 $ -- $ --
======== ======== ========
Acquisition of Credit Reports, Inc. ................... $ 200 $ -- $ --
======== ======== ========
Acquisition of Express Network, Inc. .................. $ 5,275 $ -- $ --
======== ======== ========
Retirement of LYONs ................................... $ 25,512 $ -- $ --
======== ======== ========
Conversion of LYONs ................................... $ 888 $ -- $ --
======== ======== ========
</TABLE>
O. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF RISK
During 1997, the Company generated 38.0% and 11.3% of its title insurance
premiums in California and New York, respectively. The Company generated a
significant amount of title insurance premiums in California and Texas, 38.5%
and 8.9% in 1996, and 43.6% and 10.1% in 1995, respectively.
Granite's leases are originated through a network of approximately 73
independent lease originators located throughout the United States. Transactions
generated by a single independent lease originator accounted for approximately
8.9% and 17.9% of the Company's leases funded during the years ended December
31, 1997 and 1996, respectively. Transactions generated by the Company's ten
largest independent lease originators accounted for approximately 53.9% and
59.5% of leases funded during the years ended December 31, 1997 and 1996.
Granite approved contingent fundings of approximately $73,200,000 and
$23,800,000 in leases at December 31, 1997 and 1996, respectively.
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash equivalents, short-term investments,
trade receivables, notes receivable and financial instruments used in hedging
activities.
The Company places its cash equivalents and short-term investments with high
credit quality financial institutions and, by policy, limits the amount of
credit exposure with any one financial institution. Investments in commercial
paper of industrial firms and financial institutions are rated A1, P1 or better.
F-41
<PAGE> 46
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Concentrations of credit risk with respect to trade receivables are limited
because a large number of geographically diverse customers make up the Company's
customer base, thus spreading the trade receivables credit risk. The Company
controls credit risk through monitoring procedures.
Concentrations of credit risk with respect to notes receivable are limited
because a number of diverse entities make up the Company's notes receivable
base, thus spreading the credit risk. The Company controls credit risk through
credit approvals, credit limits and monitoring procedures. The Company performs
in-depth credit evaluations for all notes and requires guarantees and/or
collateral, if deemed necessary.
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.
P. SUBSEQUENT EVENTS
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.
On March 19, 1998, the Company's Board of Directors declared a cash dividend
of $.07 per share which was 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.
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
shareholders of Matrix and approval of the issuance of Company common stock in
connection with the merger by the shareholders of the Company.
F-42
<PAGE> 47
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 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 Matrix 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 is subject to regulatory approvals and the
approval of the Alamo Title Holding Company shareholders.
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."
On May 15, 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 is 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.
On June 17, 1998, the Company's Board of Directors declared a cash dividend
of $.07 per share which will be payable on July 24, 1998 to stockholders of
record as of July 13, 1998.
Q. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS 130 requires all items that are
necessary to be recognized under accounting standards as components of
comprehensive income to be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS 130 does not
require a specific format for that financial statement, but requires that an
enterprise display an amount representing total comprehensive income for the
period covered by that financial statement. SFAS 130 requires an enterprise to
(a) classify items of other
F-43
<PAGE> 48
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS 130 is effective for fiscal years beginning after
December 15, 1997. The adoption of SFAS 130 did not have a material impact on
the Company's financial reporting.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for public business enterprises to
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes FASB Statement
No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
SFAS 131 requires, among other items, that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
segment assets, information about the revenues derived from the enterprise's
products or services and major customers. SFAS 131 also requires that the
enterprise report descriptive information about the way that the operating
segments were determined and the products and services provided by the operating
segments. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. SFAS 131 need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. Management has not determined whether the adoption of SFAS 131
will have a material impact on the Company's financial reporting.
F-44
<PAGE> 49
SCHEDULE I
FIDELITY NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(Restated) (Restated)
<S> <C> <C>
ASSETS
Cash........................................................ $ -- $ 2,922
Investment securities available for sale, at fair value..... 46,811 31,569
Trade receivables, net...................................... 20 20
Notes receivable, net....................................... 2,500 4,535
Investment in subsidiaries.................................. 315,579 230,067
Investments in real estate and partnerships, net............ 1,435 1,435
Income taxes receivable..................................... -- 7,589
Prepaid expenses and other assets........................... 4,290 6,083
-------- --------
$370,635 $284,220
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities.................. $ 7,466 $ 2,935
Notes payable............................................. 96,885 120,263
Accounts payable to subsidiaries.......................... 9,272 28,353
Deferred income taxes..................................... 15,060 8,234
Income taxes payable...................................... 10,122 --
-------- --------
138,805 159,785
-------- --------
Stockholders' Equity:
Preferred stock, $.0001 par value; authorized 3,000,000
shares; issued and outstanding, none................... -- --
Common stock, $.0001 par value; authorized, 50,000,000
shares in 1997 and 1996; issued 28,367,439 in 1997 and
23,968,913 in 1996..................................... 3 2
Additional paid-in capital................................ 132,729 74,265
Retained earnings......................................... 131,051 92,209
-------- --------
263,783 166,476
Net unrealized gains on investments....................... 22,422 12,334
Less treasury stock, 6,041,352 shares in 1997 and 1996, at
cost................................................... 54,375 54,375
-------- --------
231,830 124,435
Commitments and contingencies.............................
Subsequent events.........................................
-------- --------
$370,635 $284,220
======== ========
</TABLE>
See Notes to Financial Statements.
(Schedule continued on following page.)
F-45
<PAGE> 50
SCHEDULE I
(Continued)
FIDELITY NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- ------- -------
(Restated) (Restated)
<S> <C> <C> <C>
REVENUE:
Other fees and revenue.................................... $ 13 $ 1,617 $ 583
Interest and investment income............................ 1,868 227 2,563
-------- ------- -------
1,881 1,844 3,146
-------- ------- -------
EXPENSES:
Other operating expenses.................................. 9,645 2,288 204
Interest expense.......................................... 7,163 7,177 8,427
-------- ------- -------
16,808 9,465 8,631
-------- ------- -------
Losses before income tax benefit, equity in earnings of
subsidiaries and extraordinary item....................... (14,927) (7,621) (5,485)
Income tax benefit.......................................... 6,493 3,048 899
-------- ------- -------
Losses before equity in earnings of subsidiaries and
extraordinary item........................................ (8,434) (4,573) (4,586)
Equity in earnings of subsidiaries.......................... 53,231 30,100 12,218
-------- ------- -------
Earnings before extraordinary item.......................... 44,797 25,527 7,632
Extraordinary item -- loss on early retirement of debt, net
of applicable income tax benefit of $1,180 in 1997 and
$437 in 1995.............................................. (1,700) -- (813)
-------- ------- -------
Net earnings................................................ $ 43,097 $25,527 $ 6,819
======== ======= =======
Basic net earnings.......................................... $ 43,097 $25,527 $ 6,819
======== ======= =======
Basic earnings per share before extraordinary item.......... $ 2.32 $ 1.53 $ .50
Extraordinary item -- loss on early retirement of debt, net
of applicable income tax benefit.......................... (.09) -- (.05)
-------- ------- -------
Basic net earnings per share................................ $ 2.23 $ 1.53 $ .45
======== ======= =======
Weighted average shares outstanding, basic basis............ 19,272 16,647 15,131
======== ======= =======
Diluted net earnings........................................ $ 46,239 $28,723 $ 6,819
======== ======= =======
Diluted net earnings per share before extraordinary item.... $ 1.92 $ 1.30 $ .49
Extraordinary item -- loss on early retirement of debt, net
of applicable income tax benefit.......................... (.07) -- (.05)
-------- ------- -------
Diluted net earnings per share.............................. $ 1.85 $ 1.30 $ .44
======== ======= =======
Weighted average shares, diluted basis...................... 24,948 22,106 15,694
======== ======= =======
Retained earnings, beginning of year........................ $ 92,209 $70,273 $66,668
Dividends declared........................................ (4,255) (3,591) (3,214)
Net earnings.............................................. 43,097 25,527 6,819
-------- ------- -------
Retained earnings, end of year.............................. $131,051 $92,209 $70,273
======== ======= =======
</TABLE>
See Notes to Financial Statements.
(Schedule continued on following page.)
F-46
<PAGE> 51
SCHEDULE I
(Continued)
FIDELITY NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(Restated) (Restated)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................. $ 43,097 $ 25,527 $ 6,819
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Extraordinary item: Loss on early retirement of
LYONs............................................... 2,090 -- --
Depreciation and amortization......................... -- 90 98
Amortization of LYONs original issue discount and
issuance costs...................................... 5,939 5,295 4,916
Provision for losses on notes receivable.............. 195 240 (80)
Net equity in earnings of subsidiaries................ (53,231) (30,100) (12,218)
(Gain) loss on sale of investments.................... (746) 1,625 (639)
Net increase (decrease) in income taxes............... 17,431 3,417 7,673
Net (increase) decrease in prepaid expenses and other
assets.............................................. (99) (1,470) 4,397
Net increase (decrease) in accounts payable and
accrued liabilities................................. 3,552 (1,380) (2,584)
-------- -------- --------
Net cash provided by operating activities........ 18,228 3,244 8,382
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments....................... 7,491 8,699 25,112
Purchase of investments.................................. (12,217) (8,814) (7,471)
Additions to notes receivable............................ -- (4,350) --
Collections on notes receivable.......................... 1,590 393 106
Additions to investment in subsidiaries.................. (7,055) (10,699) (7,034)
Investment in real estate and partnerships, net.......... -- -- (53)
-------- -------- --------
Net cash provided by (used in) investing
activities..................................... (10,191) (14,771) 10,660
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings............................................... -- 5,000 33,772
Debt service payments.................................... (3,000) (3,000) (46,814)
Extraordinary items:
Early retirement of LYON's............................ 790 -- --
Early retirement of debt.............................. -- -- 1,250
Dividends paid........................................... (3,979) (3,477) (3,232)
Issuance (acquisition) of treasury stock, net............ -- 1,917 (15,831)
Exercise of stock options................................ 1,412 440 1,439
Net borrowings from (payments to) subsidiaries........... (6,182) 13,325 10,618
-------- -------- --------
Net cash provided by (used in) financing
activities..................................... (10,959) 14,205 (18,798)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... (2,922) 2,678 244
Cash and cash equivalents at beginning of year............. 2,922 244 --
-------- -------- --------
Cash and cash equivalents at end of year................... $ -- $ 2,922 $ 244
======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
(Schedule continued on following page.)
F-47
<PAGE> 52
SCHEDULE I
(Continued)
FIDELITY NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1997 (RESTATED)
AND 1996 (RESTATED) AND THE YEAR ENDED DECEMBER 31, 1995.
A. Fidelity National Financial, Inc. (the "Company") transacts substantially
all of its business through its subsidiaries. The Parent Company Financial
Statements should be read in connection with the aforementioned Consolidated
Financial Statements and Notes thereto included elsewhere herein.
On November 17, 1997, Fidelity National Financial, Inc. signed an Agreement
and Plan of Merger to merge a newly-formed subsidiary of the Company into
Granite Financial, Inc. Granite, located in Golden, Colorado, is a specialty
finance company engaged in the business of originating, funding, purchasing,
selling, securitizing and servicing equipment leaess for a broad range of
businesses located throughout the United States. This transaction closed on
February 26, 1998. This transaction has been accounted for as a
pooling-of-interests.
The Consolidated Balance Sheets as of December 31, 1997 and 1996 and the
related Consolidated Statements of Earnings, Stockholders' Equity and Cash
Flows for each of the years in the two-year period ended December 31, 1997
and the related Notes to Consolidated Financial Statements, have been
restated to reflect the inclusion of Granite Financial, Inc. ("Granite").
See Note L.
B. Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Credit agreement, secured by common stock of certain
Insurance Subsidiaries, with principal due quarterly
and interest due monthly at LIBOR rate plus 2.0%
(7.63% at December 31, 1997), due September 2001, paid
subsequent to year end.................................... $15,250 $ 18,250
Bank revolving credit facility, secured by common stock of
certain Insurance Subsidiaries, with interest due
quarterly at LIBOR rate plus 2.0% (7.63% at December 31,
1997) principal due quarterly beginning April 1998, due
September 2001, unused portion of $8 million at December
31, 1997 and 1996, paid subsequent to year end............ 5,000 5,000
Liquid Yield Option Notes, zero coupon, convertible
subordinated notes due 2009 with interest at 5.5%......... 76,635 97,013
------- --------
$96,885 $120,263
======= ========
</TABLE>
Principal maturities, including accretion of original issue discount, are
as follows (dollars in thousands):
<TABLE>
<S> <C>
1998...................................................... $ 3,563
1999...................................................... 5,250
2000...................................................... 5,500
2001...................................................... 5,000
2002...................................................... 938
Thereafter................................................ 140,572
--------
$160,823
========
</TABLE>
F-48
<PAGE> 53
SCHEDULE I
(Continued)
FIDELITY NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
C. SUPPLEMENTARY CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash paid (refunded) during the year:
Interest.................................................. $ 1,931 $ 1,953 $ 3,126
======= ======= =======
Income taxes.............................................. $16,125 $14,334 $(3,147)
======= ======= =======
Non-cash investing and financing activities:
Dividends declared and unpaid............................. $ 1,254 $ 975 $ 860
======= ======= =======
Acquisition of Nations Title Inc.......................... $ -- $ 2,130 $ --
======= ======= =======
Acquisition of Fidelity National Tax...................... $ -- $ 2,520 $ --
======= ======= =======
Acquisition of National Alliance Marketing Group, Inc..... $ 2,317 $ -- $ --
======= ======= =======
Acquisition of First Title Corporation.................... $ 3,760 $ -- $ --
======= ======= =======
Acquisition of Ifland Credit Services..................... $ 2,985 $ -- $ --
======= ======= =======
Acquisition of Bron Research, Inc......................... $ 9,850 $ -- $ --
======= ======= =======
Acquisition of Credit Reports, Inc........................ $ 200 $ -- $ --
======= ======= =======
Acquisition of Express Network, Inc....................... $ 5,275 $ -- $ --
======= ======= =======
Retirement of LYONs....................................... $25,512 $ -- $ --
======= ======= =======
Conversion of LYONs....................................... $ 888 $ -- $ --
======= ======= =======
</TABLE>
F-49
<PAGE> 54
SCHEDULE II
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1997 (RESTATED), 1996 (RESTATED) AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------- ---------- ----------------------- ---------- ---------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND OTHER DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) (DESCRIBE) OF PERIOD
----------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Reserve for claim losses.............. $187,245 $38,661 $ 124(1) $35,283(2) $190,747
Allowance on:
Leases and lease securitization
residual interests............... 355 2,114 3,130(1) 2,959(3) 2,640
Trade receivables.................. 6,822 1,920 204(1) 3,793(3) 5,153
Notes receivable................... 2,654 270 (153)(1) 1,021(3) 1,750
Real estate allowance................. 4,467 330 -- 3,330(4) 1,467
Amortization of cost in excess of net
assets acquired and other
intangible assets.................. 6,613 4,348 -- -- 10,961
Year ended December 31, 1996:
Reserve for claim losses.............. $146,094 $33,302 $45,171 $37,322(2) $187,245
Allowance on:
Leases and lease securitization
residual interests............... 20 224 660(1) 549(3) 355
Trade Receivables.................. 3,471 2,644 3,091(1) 2,384(3) 6,822
Notes Receivable................... 2,941 775 153(1) 1,215(3) 2,654
Real estate allowance................. 3,467 -- 1,000(1) -- 4,467
Amortization of cost in excess of net
assets acquired and other
intangible assets.................. 4,020 2,593 -- -- 6,613
Year ended December 31, 1995:
Reserve for claim losses.............. $153,306 $19,031 $ -- $26,243(2) $146,094
Allowance on:
Trade receivables.................. 2,029 1,701 -- 259(3) 3,471
Notes receivable................... 2,783 612 -- 454(3) 2,941
Real estate allowance................. 3,296 171 -- -- 3,467
Amortization of cost in excess of net
assets acquired and other
intangible assets.................. 1,503 2,485 -- -- 3,988
</TABLE>
- ---------------
(1) Represents net reserve for claim losses and other allowances assumed from
sales and acquisitions during the year.
(2) Represents payments of claim losses, net of recoupments.
(3) Represents uncollectible accounts written off, change in reserve due to
reevaluation of specific items and change in reserve due to sale of certain
assets.
(4) Represents reduction in the reserve balance due to the sale of a real estate
property.
F-50
<PAGE> 55
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<C> <S>
23.1 Consent of KPMG Peat Marwick LLP with respect to the Restated Consolidated Financial
Statements of Fidelity National Financial, Inc.
27.1 Restated Financial Data Schedule -- for the year ended December 31, 1997
27.2 Restated Financial Data Schedule -- for the year ended December 31, 1996
27.3 Restated Financial Data Schedule -- for the quarter ended March 31, 1997
27.4 Restated Financial Data Schedule -- for the quarter ended June 30, 1997
27.5 Restated Financial Data Schedule -- for the quarter ended September 30, 1997
27.6 Restated Financial Data Schedule -- for the quarter ended March 31, 1996
27.7 Restated Financial Data Schedule -- for the quarter ended June 30, 1996
27.8 Restated Financial Data Schedule -- for the quarter ended September 30, 1996
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES
The Board of Directors
Fidelity National Financial, Inc.:
The audits referred to in our report dated June 19, 1998, included the
related financial statement schedules as of December 31, 1997 and 1996, and for
each of the years in the three-year period ended December 31, 1997. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
We consent to the use of our reports included herein.
KPMG PEAT MARWICK LLP
Los Angeles, California
June 24, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 217,001
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 70,418
<MORTGAGE> 0
<REAL-ESTATE> 5,201
<TOTAL-INVEST> 326,277
<CASH> 59,855
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 679,592
<POLICY-LOSSES> 190,747
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 155,795
0
0
<COMMON> 3
<OTHER-SE> 231,827
<TOTAL-LIABILITY-AND-EQUITY> 679,592
533,220
<INVESTMENT-INCOME> 16,568
<INVESTMENT-GAINS> 16,988
<OTHER-INCOME> 196,405
<BENEFITS> 38,661
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 645,668
<INCOME-PRETAX> 78,852
<INCOME-TAX> 34,055
<INCOME-CONTINUING> 44,797
<DISCONTINUED> 0
<EXTRAORDINARY> (1,700)
<CHANGES> 0
<NET-INCOME> 43,097
<EPS-PRIMARY> 2.23
<EPS-DILUTED> 1.85
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 166,329
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 43,578
<MORTGAGE> 0
<REAL-ESTATE> 11,352
<TOTAL-INVEST> 227,674
<CASH> 72,364
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 549,013
<POLICY-LOSSES> 187,245
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 171,525
0
0
<COMMON> 2
<OTHER-SE> 124,433
<TOTAL-LIABILITY-AND-EQUITY> 549,013
475,961
<INVESTMENT-INCOME> 15,067
<INVESTMENT-GAINS> 2,625
<OTHER-INCOME> 148,724
<BENEFITS> 33,302
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 566,702
<INCOME-PRETAX> 42,373
<INCOME-TAX> 16,846
<INCOME-CONTINUING> 25,527
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,527
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.30
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 159,800
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 48,695
<MORTGAGE> 0
<REAL-ESTATE> 7,081
<TOTAL-INVEST> 224,027
<CASH> 54,486
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 542,050
<POLICY-LOSSES> 188,456
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 175,159
0
0
<COMMON> 2
<OTHER-SE> 124,024
<TOTAL-LIABILITY-AND-EQUITY> 0
110,914
<INVESTMENT-INCOME> 4,528
<INVESTMENT-GAINS> 1,567
<OTHER-INCOME> 38,664
<BENEFITS> 7,066
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 142,577
<INCOME-PRETAX> 6,030
<INCOME-TAX> 2,453
<INCOME-CONTINUING> 3,577
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,577
<EPS-PRIMARY> .20
<EPS-DILUTED> .19
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 167,616
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 59,014
<MORTGAGE> 0
<REAL-ESTATE> 7,767
<TOTAL-INVEST> 244,678
<CASH> 65,127
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 567,897
<POLICY-LOSSES> 188,351
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 175,823
0
0
<COMMON> 2
<OTHER-SE> 139,545
<TOTAL-LIABILITY-AND-EQUITY> 567,897
240,372
<INVESTMENT-INCOME> 7,944
<INVESTMENT-GAINS> 3,893
<OTHER-INCOME> 85,778
<BENEFITS> 16,060
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 299,663
<INCOME-PRETAX> 22,264
<INCOME-TAX> 8,871
<INCOME-CONTINUING> 13,393
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,393
<EPS-PRIMARY> .75
<EPS-DILUTED> .63
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 174,008
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 84,438
<MORTGAGE> 0
<REAL-ESTATE> 7,175
<TOTAL-INVEST> 289,759
<CASH> 85,907
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 640,076
<POLICY-LOSSES> 188,333
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 174,178
0
0
<COMMON> 3
<OTHER-SE> 188,118
<TOTAL-LIABILITY-AND-EQUITY> 640,076
381,432
<INVESTMENT-INCOME> 11,431
<INVESTMENT-GAINS> 14,342
<OTHER-INCOME> 132,400
<BENEFITS> 26,041
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 462,636
<INCOME-PRETAX> 50,928
<INCOME-TAX> 20,815
<INCOME-CONTINUING> 30,113
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,113
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.28
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 123,338
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 41,867
<MORTGAGE> 0
<REAL-ESTATE> 8,457
<TOTAL-INVEST> 179,014
<CASH> 45,119
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 414,152
<POLICY-LOSSES> 145,450
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 141,192
0
0
<COMMON> 2
<OTHER-SE> 82,046
<TOTAL-LIABILITY-AND-EQUITY> 414,152
89,823
<INVESTMENT-INCOME> 2,958
<INVESTMENT-GAINS> 1,156
<OTHER-INCOME> 32,823
<BENEFITS> 6,241
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 112,229
<INCOME-PRETAX> 8,290
<INCOME-TAX> 3,151
<INCOME-CONTINUING> 5,139
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,139
<EPS-PRIMARY> .32
<EPS-DILUTED> .28
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 162,076
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 34,195
<MORTGAGE> 0
<REAL-ESTATE> 13,289
<TOTAL-INVEST> 213,703
<CASH> 53,823
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 512,828
<POLICY-LOSSES> 189,979
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 172,035
0
0
<COMMON> 2
<OTHER-SE> 92,793
<TOTAL-LIABILITY-AND-EQUITY> 512,828
219,786
<INVESTMENT-INCOME> 6,227
<INVESTMENT-GAINS> 2,000
<OTHER-INCOME> 71,722
<BENEFITS> 15,775
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 263,514
<INCOME-PRETAX> 20,446
<INCOME-TAX> 8,109
<INCOME-CONTINUING> 12,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,337
<EPS-PRIMARY> .75
<EPS-DILUTED> .68
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 168,381
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 39,159
<MORTGAGE> 0
<REAL-ESTATE> 13,168
<TOTAL-INVEST> 225,057
<CASH> 56,015
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 523,978
<POLICY-LOSSES> 188,914
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 174,587
2
0
<COMMON> 0
<OTHER-SE> 102,132
<TOTAL-LIABILITY-AND-EQUITY> 523,978
346,543
<INVESTMENT-INCOME> 9,324
<INVESTMENT-GAINS> 2,600
<OTHER-INCOME> 109,472
<BENEFITS> 25,048
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 411,305
<INCOME-PRETAX> 31,586
<INCOME-TAX> 12,607
<INCOME-CONTINUING> 18,979
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,979
<EPS-PRIMARY> 1.16
<EPS-DILUTED> .97
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
