<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1998
Commission File Number 1-9396
FIDELITY NATIONAL FINANCIAL, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
Delaware 86-0498599
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
17911 Von Karman Avenue, Irvine, California 92614
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(714) 622-5000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES ( X ) NO ( )
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
$.0001 par value Common Stock 22,953,388 shares as of May 13, 1998
Exhibit Index appears on page 13 of 14 sequentially numbered pages.
1
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FORM 10-Q
QUARTERLY REPORT
Quarter Ended March 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I: FINANCIAL INFORMATION Page Number
- ----------------------------- -----------
<S> <C>
Item 1. Condensed Consolidated Financial Statements
A. Condensed Consolidated Balance Sheets as of 3
March 31, 1998 and December 31, 1997
B. Condensed Consolidated Statements of Earnings 4
for the three-month periods ended
March 31, 1998 and 1997
C. Condensed Consolidated Statements of 5
Comprehensive Operations
D. Condensed Consolidated Statements of Cash Flows 6
for the three-month periods ended
March 31, 1998 and 1997
E. Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Part II: OTHER INFORMATION
Items 1.-3. and 5 of Part II have been omitted because they are not
applicable with respect to the current reporting period.
Item 4. Submission of Matter to Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIDELITY NATIONAL FINANCIAL, INC.
---------------------------------
(Registrant)
By: /s/ Allen D. Meadows
------------------------------------------
Allen D. Meadows
Executive Vice President and
Chief Financial Officer Date: May 13, 1998
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Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------- --------
(Unaudited)
(Restated)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair value..................... $217,026 $217,001
Equity securities, at fair value....................................... 72,722 70,418
Other long-term investments, at cost, which approximates fair value.... 16,964 16,464
Short-term investments, at cost, which approximates fair value......... 20,925 17,793
Investments in real estate and partnerships, net....................... 5,172 5,201
-------- --------
Total investments.................................................... 332,809 326,877
Cash and cash equivalents (including restricted cash of $3,266 as of
March 31, 1998 and $3,358 as of December 31, 1997)....................... 44,407 59,855
Leases and lease securitization residual interest.......................... 74,252 53,782
Trade receivables, net..................................................... 63,802 52,650
Notes receivable, net...................................................... 8,270 8,898
Prepaid expenses and other assets.......................................... 87,738 86,789
Title plants............................................................... 51,723 51,756
Property and equipment, net................................................ 39,300 38,985
-------- --------
$702,301 $679,592
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities............................... $ 68,710 $ 72,424
Notes payable.......................................................... 158,688 155,795
Reserve for claim losses............................................... 190,744 190,747
Deferred income taxes ................................................. 14,676 13,422
Income taxes payable................................................... 17,207 11,760
--------- --------
450,025 444,148
Minority interest...................................................... 3,569 3,614
Stockholders' equity:
Preferred stock, $.0001 par value; authorized, 3,000,000 shares;
issued and outstanding, none.......................................... -- --
Common stock, $.0001 par value; authorized, 50,000,000 shares
in 1998 and 1997; issued, 28,862,455 as of March 31, 1998 and
28,367,439 as of December 31, 1997.................................... 3 3
Additional paid-in capital............................................. 136,724 133,482
Retained earnings...................................................... 144,108 130,298
-------- --------
280,835 263,783
Accumulated other comprehensive income................................. 22,247 22,422
Less treasury stock, 6,041,352 shares as of March 31, 1998 and
as of December 31, 1997, at cost...................................... 54,375 54,375
-------- --------
248,707 228,046
-------- --------
$702,301 $679,592
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
3
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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1998 1997
--------- --------
(Unaudited)
(Restated)
<S> <C> <C>
REVENUE:
Title insurance premiums....................................... $ 160,914 $110,914
Escrow fees.................................................... 24,960 16,550
Other fees and revenue......................................... 44,190 22,114
Interest and investment income, including realized
gains (losses)............................................... 6,618 6,095
--------- --------
236,682 155,673
--------- --------
EXPENSES:
Personnel costs................................................ 76,668 55,406
Other operating expenses....................................... 50,789 40,158
Agent commissions.............................................. 66,837 44,061
Provision for claim losses..................................... 12,579 7,066
Interest expense............................................... 3,014 2,952
--------- --------
209,887 149,643
--------- --------
Earnings before income taxes................................... 26,795 6,030
Income tax expense ............................................ 11,388 2,453
--------- --------
Net earnings ................................................ $ 15,407 $ 3,577
========= ========
Basic net earnings............................................. $ 15,407 $ 3,577
========= ========
Basic earnings per share....................................... $ 0.69 $ .20
========= ========
Weighted average shares outstanding, basic basis............... 22,485 17,928
========= ========
Diluted net earnings........................................... $ 16,031 $ 4,385
========= ========
Diluted earnings per share..................................... $ .58 $ .19
========= ========
Weighted average shares outstanding, diluted basis............. 27,655 23,412
========= ========
Cash dividends per share....................................... $ .07 $ .06
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1998 1997
------- ------
(Unaudited)
<S> <C> <C>
Net earnings..................................................... $15,407 $3,577
Other comprehensive income:
Unrealized gains (losses) on investments, net (1).............. 944 (2,065)
Less: Reclassification adjustments for gains
included in net income (2)................................... (1,119) (935)
------- ------
Other comprehensive loss......................................... (175) (3,010)
------- ------
Comprehensive income............................................. $15,232 $ 567
======= ======
</TABLE>
- ----------
(1) Net of income tax benefit of $698 and $1,434 in 1998 and 1997,
respectively.
(2) Net of income tax expense of $828 and $632 in 1998 and 1997,
respectively.
See Notes to Condensed Consolidated Financial Statements.
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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1998 1997
-------- --------
(Unaudited)
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net earnings ................................................... $ 15,407 $ 3,577
Reconciliation of net earnings to net cash used in
operating activities:
Depreciation and amortization ............................ 4,162 3,478
Net increase (decrease) in reserve for claim losses ...... (3) 1,211
Net increase in provision for possible losses other than
claims ................................................. 129 462
Gain on sales of assets .................................. (1,947) (1,567)
Equity in gains of unconsolidated partnerships ........... (45) (63)
Amortization of LYONs original issue discount ............ 1,076 1,374
Change in assets and liabilities, net of effects from
acquisition of subsidiaries:
Net increase in leases and lease securitization residual
interest ................................................ (20,470) (5,095)
Net (increase) decrease in trade receivables ............. (11,152) 1,440
Net increase in prepaid expenses and other assets ........ (1,940) (6,388)
Net decrease in accounts payable and accrued liabilities . (4,995) (9,763)
Net decrease in income taxes ............................. 6,780 1,967
-------- --------
Net cash used in operating activities ............................ (12,998) (9,367)
-------- --------
Cash flows from investing activities:
Proceeds from sales of property and equipment .................. -- 258
Proceeds from sale of real estate .............................. -- 4,320
Proceeds from sales and maturities of investments .............. 42,144 67,584
Collections of notes receivable ................................ 1,108 4,872
(Additions to) deletions of title plants ....................... 33 (398)
Additions to property and equipment ............................ 3,326 (6,879)
Additions to investments ....................................... (45,652) (71,843)
Additions to notes receivable .................................. (609) (1,152)
Acquisitions of businesses, net of cash acquired ............... -- (411)
-------- --------
Net cash used in investing activities ............................ (6,302) (3,649)
-------- --------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
(continued)
6
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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1998 1997
-------- --------
(Unaudited)
(Restated)
<S> <C> <C>
Cash flows from financing activities:
Borrowings ................................... $ 6,992 $ 2,072
Debt service payments ........................ (3,705) (5,953)
Dividends paid ............................... (1,275) (982)
Stock options exercised ...................... 1,840 --
-------- --------
Net cash used in financing activities .......... 3,852 (4,863)
-------- --------
Net decrease in cash and cash equivalents ...... (15,448) (17,879)
Cash and cash equivalents at beginning of period 59,855 72,365
-------- --------
Cash and cash equivalents at end of period ..... $ 44,407 $ 54,486
======== ========
Supplemental cash flow information:
Income taxes paid ............................ $ 5,050 $ 489
======== ========
Interest paid ................................ $ 2,028 $ 1,566
======== ========
Noncash investing and financing activities:
Dividends declared and unpaid ................ $ 1,597 $ 983
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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Notes to Condensed Consolidated Financial Statements
Note A - Basis of Financial Statements
- --------------------------------------
The financial information included in this report includes the accounts of
Fidelity National Financial, Inc. and its subsidiaries (collectively, the
"Company") and has been prepared in accordance with generally accepted
accounting principles and the instructions to Form 10-Q and Article 10 of
Regulation S-X. All adjustments, consisting of normal recurring accruals
considered necessary for a fair presentation, have been included. This report
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, Granite Financial, Inc.'s Annual Report on
Form 10-KSB for the fiscal year ended June 30, 1997 and Granite Financial,
Inc.'s quarterly reports on Form 10-QSB for the quarterly periods ended
September 30, 1997 and December 31, 1997. See Note B.
Note B - Acquisitions
- ---------------------
On November 17, 1997, Fidelity National Financial, Inc. signed an Agreement and
Plan of Merger ("Merger Agreement") to merge a newly-formed subsidiary of the
Company into Granite Financial, Inc. ("Granite"). Granite, located in Golden,
Colorado, is a rapidly expanding specialty finance company engaged in the
business of originating, funding, purchasing, selling, securitizing and
servicing equipment leases for a broad range of businesses located throughout
the United States.
Under the original terms of the definitive agreement (as adjusted for the
Company's recent 10% stock dividend), each share of Granite common stock would
be converted into the right to receive .771 shares of Company common stock
without interest, together with cash in lieu of any fractional share. The
exchange ratio was collared between $20.75 and $25.94. The adjustment factor was
designed to insure that the average market value of the shares of Company common
stock to be issued to the stockholders of Granite is neither less than $16.00
nor more than $20.00 per share of Granite common stock. The market value was
determined based on the average closing price of Company common stock during the
20 day trading period ending on the third business day prior to the date of the
shareholder meetings held to approve the transaction. Below $20.75 Fidelity
could make up the difference in additional shares of its common stock at its
option and above $25.94 Granite shareholders would have the exchange ratio
reduced pro rata. Such average closing price was determined to be $28.48,
resulting in an adjusted exchange ratio of .702 shares of Company common stock
for each share of Granite common stock. The merger has been treated as a
reorganization pursuant to Section 368(a)(1) of the Internal Revenue Code of
1986, as amended, and accounted for as a "pooling-of-interests" for accounting
purposes.
The shareholders of Granite approved the merger, and the Company shareholders
approved the issuance of shares in connection with the merger, at special
shareholders' meetings on Tuesday, February 24, 1998. The merger was completed
Thursday, February 26, 1998. Under the terms of the definitive agreement,
shareholders of Granite Financial, Inc. common stock receive .702 shares of
Fidelity National Financial, Inc. common stock for each share of Granite
Financial, Inc. common stock, with fractional shares to be paid in cash,
resulting in the issuance of approximately 4.5 million shares of Fidelity
National Financial, Inc. common stock. Fidelity National Financial, Inc. common
stock, as reported by the New York Stock Exchange, closed at $28.69 on February
26, 1998. The Condensed Consolidated Financial Statements include Granite's
financial position as of March 31, 1998 and December 31, 1997, and the results
of Granite's operations for the three month periods ended March 31, 1998 and
1997.
On March 18, 1998, the Company announced that it had entered into an agreement
to sell National Title Insurance of New York Inc. ("National") to American Title
Company ("ATC"), subject to regulatory approval and certain other conditions.
The purchase price is structured at a premium to book value. National was
acquired in April 1996, as part of the Nations Title Inc. acquisition and has
not been actively underwriting policies since the transaction closed. American
Title Company is an underwritten title company which was formerly a wholly-owned
subsidiary of the Company. Effective July 1, 1997, 60% of ATC was sold to
certain members of ATC management. The Company will continue to own 40% of ATC,
and ultimately National, following the transaction.
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.
8
<PAGE> 9
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.
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 last of the stockholders' meetings held to approve the transaction (the
"Average Stock Price"). Below $28.75 the Company may make up the difference in
additional shares at its option and above $35.00 the exchange ratio would be
adjusted to a number equal to $28.00 plus fifty percent of the amount by which
the Average Stock Price exceeds $35.00 divided by the Average Stock Price. It is
intended that the merger be treated as a reorganization pursuant to Section
368(a)(1) of the Internal Revenue Code and be accounted for as a
"pooling-of-interests."
On May 7, 1998, the Company announced that it has entered into an agreement and
plan of merger to merge Alamo Title Holding Company with a newly formed
subsidiary of Fidelity National Financial, Inc. Alamo Title Holding Company is
the parent of Alamo Title Insurance, SWT Holdings, Inc., Alamo Title Company of
Tarrant County, Inc., Alamo Title of Travis County, Inc. and Alamo Title of
Guadalupe County, Inc. The merger 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."
Note C - Dividends
- ------------------
On March 19, 1998, the Company's Board of Directors declared a cash dividend of
$.07 per share, payable on May 1, 1998, to stockholders of record on April 10,
1998.
Note D - 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 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 Company adopted SFAS 130 effective
March 31, 1998. This new standard only requires additional information in the
financial statements and does not affect the Company's financial position or
results of operations.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Continued strength in the overall economy, stability in mortgage interest rates,
a thriving real estate market and recent acquisitions made by the Company
resulted in an increase in total first quarter 1998 revenue of $81.0 million, or
52.0%, to $236.7 million compared to $155.7 million total revenue for the first
quarter of 1997.
Factors That May Affect Operating Results
- -----------------------------------------
The statements contained in this report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1993 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.
The reader should consult the risk factors listed from time to time in the
Company's reports on Forms 10-Q, 10-K and filings under the Securities Act of
1933, as amended.
Results of Operations
- ---------------------
The following table presents information regarding the components of title
premiums (dollars in thousands):
<TABLE>
<CAPTION>
March 31,
----------------------------------------
1998 % of Total 1997 % of Total
---- ---------- ---- ----------
<S> <C> <C> <C> <C>
Title premiums from direct operations $ 78,102 48.5% $ 54,575 49.2%
Title premiums from agency operations 82,812 51.5% 56,339 50.8%
-------- ----- -------- -----
Total title premiums $160,914 100.0% $110,914 100.0%
======== ===== ======== =====
</TABLE>
The increase in total title premiums of $50.0 million, or 45.1%, is consistent
with the current market environment, as title orders and requests for
title-related services have continued to react favorably to existing conditions.
The Company has experienced significant premium growth in both its direct and
agency operations, although in 1998 approximately $12.2 million of title
insurance premium has shifted from direct to agency due to the sale of 60% of
American Title Company ("ATC") to its management in July, 1997.
Escrow fees have increased $8.4 million, or 50.8%, in the first quarter of 1998
to $25.0 million compared to $16.6 million in the comparable 1997 period. This
growth is consistent with the trends indicated in the Company's direct
operations and has been further enhanced by the continuing recovery in West
Coast real estate.
The $22.1 million, or 100.0%, increase in other fees and revenue from $22.1
million in 1997 to $44.2 million in 1998 reflects the contributions made by the
Company's ancillary business units and Granite Financial, Inc. The Company has
made a concerted effort to develop its ancillary service segments with the
acquisitions of flood certification, credit and attorney service companies which
closed in the second half of 1997. Additionally, the acquisition of Granite
Financial, Inc. is the first step in the Company's plan to diversify itself as a
specialty finance company.
Interest and investment income increased 8.2% to $6.6 million in the first
quarter of 1998 from $6.1 million in the first quarter of 1997. The increase in
interest and investment income earned during the 1998 period is primarily due to
an increase in invested assets and an improvement in net realized gains compared
to the same period in 1997. Net realized gains were $1.9 million in the first
quarter of 1998 as compared to net realized gains of $1.6 million in the
corresponding 1997 period.
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The Company's operating expenses consist primarily of personnel costs and other
operating expenses which are incurred as orders are received and processed.
Title insurance premiums and certain other fees are recognized as income at the
time the underlying transaction closes. As a result, revenue lags approximately
60-90 days behind expenses and therefore gross margins may fluctuate.
Personnel costs include both base salaries and commissions paid to employees and
are the most significant operating expense incurred by the Company. These costs
generally fluctuate with the level of orders opened and closed and with the mix
of revenue. Personnel costs, as a percentage of total revenue, have decreased to
32.4% for the three-month period ended March 31, 1998 from 35.6% for the
corresponding period in 1997. The Company has taken significant measures to
maintain personnel costs at levels consistent with revenues. The Company
continues to monitor the prevailing market conditions and will attempt to adjust
personnel costs in accordance with activity.
Included in 1998 personnel costs are approximately $6.7 million of costs related
to acquisitions made in 1997. Adjusting for the acquisitions, personnel costs
represent 29.6% of total revenue. This reflects a continued emphasis on expense
control and an increase in productivity from our automation and electronic
commerce.
Other operating expenses consist primarily of facilities expenses, title plant
maintenance, premium taxes (which insurance underwriters are required to pay on
title premiums in lieu of franchise and other state taxes), escrow losses,
courier services, computer services, professional services, general insurance,
trade and notes receivable allowances and depreciation. Other operating expenses
decreased as a percentage of total revenue to 21.5% in the first quarter of 1998
from 25.8% in the first quarter of 1997. The Company previously implemented and
remains committed to aggressive cost control programs which will help maintain
operating expense levels consistent with the levels of revenue production;
however, certain fixed costs are incurred regardless of revenue levels,
resulting in period over period fluctuations.
Similarly adjusted for the impact of acquisitions of $7.6 million and a one-time
$4.0 million charge related to the Granite acquisition, other operating expenses
represent 16.6% of total revenue.
Agent commissions represent the portion of policy premiums retained by agents
pursuant to the terms of their respective agency contracts. Agent commissions
were 80.7% of agent policy premiums in the first quarter of 1998 compared to
78.2% of agent policy premiums in the first quarter of 1997. Agent commissions
and the resulting percentage of agency premiums retained by the Company vary
according to regional differences in real estate closing practices and state
regulations. The 1998 increase in agent commissions as a percentage of agency
premiums over 1997 resulted in a decrease in the percentage of agency premiums
retained by the Company. This decrease in retained agency premium can be
attributed to the fact that the average commissions paid to ATC exceeds those
paid to other agents. The combination of higher agency commission rates and the
significant agency revenue generated has resulted in higher overall commissions
in 1998.
The provision for claim losses includes an estimate of anticipated title claims
and major claims. The estimate of anticipated title claims is accrued as a
percentage of title premium revenue based on the Company's historical loss
experience and other relevant factors. The Company monitors its claims
experience on a continual basis and adjusts the provision for claim losses
accordingly. Based on recently completed loss development studies, the Company
believes that as a result of its underwriting and claims handling practices it
will maintain the trend of favorable claim loss experience. The Company has
provided for claim losses at 7.0% of title insurance premiums prior to the
impact of major claim expense, recoupments, and premium rates and loss
experience in the state of Texas. Premiums are generally higher in Texas for
similar coverage than in other states, while loss experience is comparable. As a
result, losses as a percentage of premiums are lower. Application of these
factors resulted in a net provision for claim losses as a percentage of premiums
of 7.8% and 6.4% for the three-month periods ended March 31, 1998 and 1997,
respectively, the increase being attributable to major claim expense incurred
during the first quarter of 1998.
Interest expense is incurred by the Company in financing its capital asset
purchases, lease originations and certain acquisitions. Interest expense
consists of interest related to the Company's outstanding debt and the
amortization of original issue discount and debt issuance costs related to the
Liquid Yield Option Notes ("LYONs"). Interest expense of "non-LYONs" debt
totaled $1.9 million and $1.6 million for the three-month periods ended March
31, 1998 and 1997, respectively. The LYONs related component of interest expense
amounted to $1.1 million for the first quarter of 1998 and $1.4 million for the
first quarter of 1997. The decrease in LYONs related interest is attributable to
the retirement of $45.0 million maturity value of LYONs in October, 1997 and
conversions. The increase in interest expense is
11
<PAGE> 12
primarily due to the increase in outstanding notes payable at March 31, 1998
compared to March 31, 1997 related to the financing of Granite's increased
funding volume.
Income tax expense for the three-month periods ended March 31, 1998 and 1997, as
a percentage of earnings before income taxes was 42.5% and 40.7%, respectively.
The fluctuations in income tax expense as a percentage of earnings before income
taxes are attributable to the Company's estimate of ultimate income tax
liability and the characteristics of net income, i.e., operating income versus
investment income.
Liquidity and Capital Resources
- -------------------------------
The Company's cash requirements include debt service, operating expenses, lease
fundings, lease securitizations, acquisitions, taxes and dividends on its common
stock. The Company believes that all anticipated cash requirements for current
operations will be met from internally generated funds, through cash received
from subsidiaries, cash generated by investment securities and bank borrowings
through existing credit facilities.
Two of the significant sources of the Company's funds are dividends and
distributions from its subsidiaries. As a holding company, the Company receives
cash from its subsidiaries in the form of dividends and as reimbursement for
operating and other administrative expenses it incurs. The reimbursements are
executed within the guidelines of various management agreements among the
Company and its subsidiaries. Fluctuations in operating cash flows are primarily
the result of increases or decreases in revenue. The Company's insurance
subsidiaries and underwritten title companies ("UTCs") collect premiums and pay
claims and operating expenses. The insurance subsidiaries also have cash flow
sources derived from investment income, repayments of principal and proceeds
from sales and maturities of investments and dividends from subsidiaries.
Positive cash flow from the insurance subsidiaries is invested primarily in
short-term investments and medium-term bonds. Short-term investments held by the
Company's Insurance Subsidiaries provide liquidity for projected claims and
operating expenses. The insurance subsidiaries are restricted by state
regulations in their ability to pay dividends and make distributions. Each state
of domicile regulates the extent to which the Company's title underwriters can
pay dividends or make other distributions to the Company. The UTCs are also
regulated by insurance regulatory or banking authorities. The Company's
ancillary service and finance subsidiaries collect revenue and pay operating
expenses; however, they are not regulated by insurance regulatory or banking
authorities. Positive cash flow from the UTCs, ancillary service and finance
subsidiaries is invested primarily in cash and cash equivalents.
The short- and long-term liquidity requirements of the Company, insurance
subsidiaries, UTCs, ancillary service and finance subsidiaries are monitored
regularly to match cash inflows with cash requirements. The Company, insurance
subsidiaries, UTCs, ancillary service and finance subsidiaries forecast their
daily cash needs and periodically review their short- and long-term projected
sources and uses of funds, as well as the asset, liability, investment and cash
flow assumptions underlying these projections.
12
<PAGE> 13
Part II: OTHER INFORMATION
Item 4. Submission of matter to Vote of Securities Holders
On February 24, 1998, the Company held a special meeting of
shareholders pursuant to a Notice and Proxy dated January 16,
1998. At the meeting, shareholders approved the issuance of
Fidelity National Financial, Inc. common stock pursuant to the
merger of Granite Acquisition Corp., a wholly-owned subsidiary of
Fidelity National Financial, Inc., with and into Granite
Financial, Inc. (16,315,690 for, 17,990 against and 53,446
withheld.)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11 Computation of Primary and Fully Diluted Earnings Per
Share
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K:
Current Report on Form 8-K, dated February 26, 1998 relating to
the completion of the merger of Granite Acquisition Corp., a
wholly-owned subsidiary of Fidelity National Financial, Inc.,
with and into Granite Financial, Inc.
13
<PAGE> 14
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
Exhibit 11 Computation of Primary and Fully Diluted Earnings Per Share
Exhibit 27 Financial Data Schedule
14
<PAGE> 1
EXHIBIT 11
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
COMPUTATION OF PRIMARY AND FULLY DILUTED
EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1998(1) 1997(1)
------- -------
<S> <C> <C>
Net earnings, basic basis........................................ $15,407 $3,577
Plus: Impact of assumed conversion of the LYONs,
net of applicable income taxes............................. 624 808
------- ------
Diluted earnings................................................. $16,031 $4,385
======= ======
Weighted average shares outstanding during the
period, basic basis............................................ 22,485 17,928
Plus: Common stock equivalent shares assumed
from conversion of options................................. 1,590 692
Common stock equivalent shares assumed
from conversion of LYON.................................... 3,580 4,792
------- ------
Weighted average shares outstanding during the
period, diluted basis.......................................... 27,655 23,412
======= ======
Basic earnings per share......................................... $ .69 $ .20
======= ======
Diluted earnings per share....................................... $ .58 $ .19
======= ======
</TABLE>
- ----------
(1) Earnings and weighted average shares outstanding for both 1998 and 1997
include the full period results and impact of Fidelity and Granite
combined, as the merger has been accounted for as a pooling-of-interests.
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 217,026
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 72,722
<MORTGAGE> 0
<REAL-ESTATE> 5,172
<TOTAL-INVEST> 332,809
<CASH> 44,407
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 702,301
<POLICY-LOSSES> 190,744
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 158,688
0
0
<COMMON> 3
<OTHER-SE> 248,704
<TOTAL-LIABILITY-AND-EQUITY> 702,301
160,914
<INVESTMENT-INCOME> 4,671
<INVESTMENT-GAINS> 1,947
<OTHER-INCOME> 69,150
<BENEFITS> 12,579
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 197,308
<INCOME-PRETAX> 26,795
<INCOME-TAX> 11,388
<INCOME-CONTINUING> 15,407
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,407
<EPS-PRIMARY> .69
<EPS-DILUTED> .58
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
