<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1999
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, Suite 300, Irvine, California 92614
(Address of principal executive offices) (Zip Code)
(949) 622-4333
(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 30,456,895 shares as of August 6, 1999
Exhibit Index appears on page 13 of 13 sequentially numbered pages.
<PAGE> 2
FORM 10-Q
QUARTERLY REPORT
Quarter Ended June 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I: FINANCIAL INFORMATION Page Number
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
A. Condensed Consolidated Balance Sheets as of June 30, 1999 3
and December 31, 1998
B. Condensed Consolidated Statements of Earnings for the three- 4
month and six-month periods ended June 30, 1999 and 1998
(Restated)
C. Condensed Consolidated Statements of Comprehensive Earnings 5
for the three-month and six-month periods ended June 30, 1999
and 1998 (Restated)
D. Condensed Consolidated Statements of Cash Flows for the six-month 6
periods ended June 30, 1999 and 1998 (Restated)
E. Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk 12
Part II: OTHER INFORMATION
Item 1. Legal Proceedings 13
Items 2, 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/ Alan L. Stinson
-----------------------------------
Alan L. Stinson
Executive Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer) Date: August 6, 1999
2
<PAGE> 3
Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair value ................... $331,752 $330,068
Equity securities, at fair value ..................................... 45,329 50,191
Other long-term investments, at cost, which approximates fair value .. 41,378 40,278
Short-term investments, at cost, which approximates fair value ....... 56,159 85,305
Investments in real estate and partnerships, net ..................... 3,712 4,673
-------- --------
Total investments ............................................... 478,330 510,515
Cash and cash equivalents .................................................. 55,846 51,309
Leases and residual interests in securitizations ........................... 126,202 93,507
Trade receivables, net ..................................................... 77,787 75,940
Notes receivable, net ...................................................... 16,844 10,761
Prepaid expenses and other assets .......................................... 111,925 111,471
Title plants ............................................................... 60,039 58,932
Property and equipment, net ................................................ 50,973 46,070
Deferred tax asset ......................................................... 19,300 10,965
-------- --------
$997,246 $969,470
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities ............................. $116,645 $123,357
Notes payable ........................................................ 178,395 214,624
Reserve for claim losses ............................................. 233,576 224,534
Income taxes payable ................................................. 2,832 8,683
-------- --------
531,448 571,198
Minority interests ................................................... 1,439 1,532
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 1999 and 1998; issued, 39,189,429 as of June 30, 1999 and
35,540,036 as of December 31, 1998 ................................. 4 3
Additional paid-in capital ........................................... 246,705 173,888
Retained earnings .................................................... 305,010 265,567
-------- --------
551,719 439,458
Accumulated other comprehensive earnings ............................. 827 11,657
Less treasury stock, 8,756,002 shares as of June 30, 1999 and
6,645,487 shares as of December 31, 1998, at cost .................. 88,187 54,375
-------- --------
464,359 396,740
-------- --------
$997,246 $969,470
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------- -------- -------- --------
1999 1998 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
(Restated) (Restated)
REVENUE:
<S> <C> <C> <C> <C>
Title insurance premiums ................... $248,100 $222,223 $489,974 $404,519
Escrow fees ................................ 34,213 32,624 67,008 58,935
Other fees and revenue ..................... 67,661 51,638 131,325 98,223
Interest and investment income, including
realized gains (losses) .................. 7,845 14,956 13,786 21,977
-------- -------- -------- --------
357,819 321,441 702,093 583,654
-------- -------- -------- --------
EXPENSES:
Personnel costs ............................ 105,761 97,056 214,306 181,567
Other operating expenses ................... 85,263 58,235 162,429 114,650
Agent commissions .......................... 108,605 91,732 215,597 167,756
Provision for claim losses ................. 15,099 13,418 30,330 26,757
Interest expense ........................... 2,853 3,549 5,689 6,674
-------- -------- -------- --------
317,581 263,990 628,351 497,404
-------- -------- -------- --------
Earnings before income taxes .................. 40,238 57,451 73,742 86,250
Income tax expense ............................ 16,497 24,012 30,234 36,131
-------- -------- -------- --------
Net earnings .......................... $ 23,741 $ 33,439 $ 43,508 $ 50,119
======== ======== ======== ========
Basic net earnings ......................... $ 23,741 $ 33,439 $ 43,508 $ 50,119
======== ======== ======== ========
Basic earnings per share ................... $ .78 $ 1.21 $ 1.42 $ 1.84
======== ======== ======== ========
Weighted average shares outstanding, basic
basis .................................... 30,423 27,661 30,594 27,281
======== ======== ======== ========
Diluted net earnings ....................... $ 23,741 $ 34,038 $ 43,771 $ 51,342
======== ======== ======== ========
Diluted earnings per share ................. $ .75 $ 1.02 $ 1.35 $ 1.55
======== ======== ======== ========
Weighted average shares outstanding, diluted
basis .................................... 31,788 33,396 32,502 33,028
======== ======== ======== ========
Cash dividends per share ................... $ .07 $ .06 $ .14 $ .13
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
(Restated) (Restated)
<S> <C> <C> <C> <C>
Net earnings .............................. $ 23,741 $ 33,439 $ 43,508 $ 50,119
Other comprehensive earnings (loss):
Unrealized gains (losses) on investments,
net (1) .............................. (4,023) 6,054 (10,031) 7,717
Reclassification adjustments for gains
included in net earnings (2) .......... (1,194) (5,942) (799) (7,099)
-------- -------- -------- --------
Other comprehensive earnings (loss) ....... (5,217) 112 (10,830) 618
-------- -------- -------- --------
Comprehensive earnings .................... $ 18,524 $ 33,551 $ 32,678 $ 50,737
======== ======== ======== ========
</TABLE>
(1) Net of income tax expense (benefit) of ($2,796) and $4,352 and ($6,971) and
$5,566 for the three-month and six-month periods ended June 30, 1999 and
1998, respectively.
(2) Net of income tax expense of $830 and $4,272, and $556 and $5,119 for the
three-month and six-month periods ended June 30, 1999 and 1998,
respectively.
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
--------- ---------
1999 1998
--------- ---------
(Unaudited)
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net earnings ..................................................................... $ 43,508 $ 50,119
Reconciliation of net earnings to net cash provided by operating activities:
Depreciation and amortization ............................................... 12,716 9,576
Net increase in reserve for claim losses .................................... 13,353 5,245
Net increase in provision for possible losses other than claims ............. 282 292
Gain on sales of assets ..................................................... (1,355) (12,218)
Equity in (gains) losses of unconsolidated partnerships ..................... (93) 713
Amortization of LYONs original issue discount ............................... 485 2,030
Change in assets and liabilities, net of effects from acquisition of subsidiaries:
Net increase in leases and lease securitization residual interest ........... (32,695) (19,756)
Net increase in trade receivables ........................................... (1,850) (9,789)
Net increase in prepaid expenses and other assets ........................... (6,049) (8,352)
Net increase (decrease) in accounts payable and accrued liabilities ......... (7,328) 11,086
Net increase (decrease) in income taxes ..................................... (7,250) 16,133
--------- ---------
Net cash provided by operating activities .............................................. 13,724 45,079
--------- ---------
Cash flows from investing activities:
Proceeds from sales of property and equipment .................................... -- 3,344
Proceeds from sale of real estate ................................................ 946 --
Proceeds from sales and maturities of investments ................................ 211,869 94,278
Collections of notes receivable .................................................. 1,787 2,123
Additions to title plants ........................................................ (1,247) (57)
Additions to property and equipment .............................................. (13,105) (11,024)
Additions to investments ......................................................... (202,836) (107,583)
Additions to notes receivable .................................................... (8,475) (7,664)
Sale of a subsidiary, net of cash ................................................ 2,468 --
Acquisitions of businesses, net of cash acquired ................................. -- 3,817
--------- ---------
Net cash used in investing activities .................................................. (8,593) (22,766)
--------- ---------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
(Continued)
6
<PAGE> 7
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
-------- --------
1999 1998
-------- --------
(Unaudited)
(Restated)
<S> <C> <C>
Cash flows from financing activities:
Borrowings ............................... $ 42,152 $ 5,379
Debt service payments .................... (7,074) (12,624)
Dividends paid ........................... (4,392) (3,662)
Purchase of treasury stock ............... (33,812) --
Stock options exercised .................. 2,532 5,892
-------- --------
Net cash used in financing activities .......... (594) (5,015)
-------- --------
Net increase in cash and cash equivalents ...... 4,537 17,298
Cash and cash equivalents at beginning of period 51,309 72,887
-------- --------
Cash and cash equivalents at end of period ..... $ 55,846 $ 90,185
======== ========
Supplemental cash flow information:
Income taxes paid ........................ $ 35,878 $ 18,951
======== ========
Interest paid ............................ $ 9,232 $ 4,684
======== ========
Noncash investing and financing activities:
Dividends declared and unpaid ............ $ 2,147 $ 1,622
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE> 8
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. The Condensed Consolidated Financial Statements for both the
1999 and 1998 periods reflect the impact of the 1998 acquisitions of Granite
Financial, Inc. and Alamo Title Holding Company, which have been accounted for
as poolings-of-interests. 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, 1998.
Certain reclassifications have been made in the 1998 Condensed Consolidated
Financial Statements to conform to classifications used in 1999.
Note B - Redemption of Liquid Yield Option Notes Outstanding
On January 13, 1999, the Company announced that it was going to redeem, pursuant
to the terms of the indenture, its outstanding Liquid Yield Option Notes
("LYONs") due 2009 for $581.25 per $1,000 maturity value on February 15, 1999.
Additionally, the LYONs holders had the right to convert the outstanding LYONs
to 28.077 shares of Company common stock per $1,000 maturity value of LYONS at
any time. Through February 15, 1999, $123,681,000 maturity value of LYONs had
converted to 3,473,000 shares of common stock, resulting in an addition of
approximately $70 million to stockholders' equity while reducing outstanding
notes payable by a like amount. The remaining $432,000 of maturity value was
redeemed for cash of approximately $251,000.
Note C - Dividends
On June 14, 1999, the Company's Board of Directors declared a cash dividend of
$.07 per share, payable on July 22, 1999, to stockholders of record on July 9,
1999.
Note D - Stock Purchase Plan and Employee Stock Purchase Loan Plan
On March 17, 1999, the Company's Board of Directors approved an increase to the
number of shares of outstanding Company common stock authorized for purchase
under the Company's previously announced purchase program. The additional
authorization will permit the Company to purchase up to 4.0 million shares.
Through August 6, 1999, the Company has purchased 2.1 million shares at an
average purchase price of $16.01 per share totaling $33.8 million. Purchases may
be made from time to time by the Company in the open market or in block
purchases or in privately negotiated transactions depending on market conditions
and other factors.
Also on March 17, 1999, the Company's Board of Directors approved the adoption
of the Fidelity National Financial, Inc. Employee Stock Purchase Loan Plan
("Loan Plan") and the Non-Employee Director Stock Purchase Loan Program ("Loan
Program"). The purpose of the Loan Plan and Loan Program is to provide key
employees and directors with further incentive to maximize shareholder value.
The Company offered an aggregate of $8,650,000 in loans. Loan Plan and Loan
Program funds must be used to make private or open market purchases of Company
common stock through a broker-dealer designated by the Company. All loans are
full recourse and unsecured, and will have a five-year term. Interest will
accrue on the loans at a rate of 5% per annum due at maturity. Loans may be
prepaid any time without penalty. Through August 6, 1999, loans had been made in
the amount of $6.5 million to purchase 431,707 shares of Company common stock at
an average purchase price of $15.08 per share.
Note E - Sale of National Title Insurance of New York, Inc.
On March 18, 1998, the Company announced that it had entered into an agreement
to sell National Title Insurance of New York Inc. ("National") to American Title
Company, a wholly-owned subsidiary of American National Financial, Inc.
("ANFI"), for $3.25 million, subject to regulatory approval and certain other
conditions. The purchase price was structured at a premium to book value. The
Company currently holds a 29.4% interest in ANFI. National was acquired in April
1996, as part of the Nations Title Inc. acquisition, and has not been actively
underwriting policies since that time. This transaction received regulatory
approval on May 27, 1999 and closed on June 10, 1999. The Company recognized a
gain of $1,161,000, prior to applicable income taxes, in connection with the
sale of National. This gain has been reflected in the Condensed Consolidated
Statements of Earnings for the three- and six-month periods ended June 30, 1999.
8
<PAGE> 9
Note F - Subsequent Event
On August 1, 1999, the Company announced that it had signed a definitive
agreement to purchase Chicago Title Corporation ("Chicago Title", NYSE: CTZ),
headquartered in Chicago, Illinois, for approximately $1.2 billion, or $52.00
per share of Chicago Title common stock, using approximately equal amounts of
cash and Company common stock. The allocation between cash and stock will be
adjusted so Chicago Title stockholders will receive more than 50% of the
outstanding stock of the new company. The price is payable in shares of Company
common stock or, upon election by Chicago Title stockholders, in cash, subject
to proration as may be necessary to achieve the allocation between cash and
stock described above. The definitive agreement has been approved by the boards
of both companies. The transaction is subject to approval by the stockholders of
Chicago Title and the Company, requisite regulatory authorities and other
customary conditions and is expected to be completed in the first quarter of
2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Factors That May Affect Operating Results
The statements contained in this report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.
The reader should consult the risk factors listed from time to time in the
Company's reports on Forms 10-Q, 10-K and filings under the Securities Act of
1933, as amended.
Results of Operations
Relative stability in mortgage interest rates, a thriving real estate market and
continued strength in the overall economy resulted in an increase in total
second quarter 1999 revenue of $36.4 million, or 11.3%, to $357.8 million
compared to $321.4 million total revenue for the second quarter of 1998.
Similarly, total revenue for the six-month period ended June 30, 1999 increased
$118.4 million, or 20.3%, to $702.1 million from $583.6 million for the
comparable 1998 period.
The following table presents information regarding the components of title
premiums (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------------------------- -----------------------------------------
% of % of % of % of
1999 Total 1998 Total 1999 Total 1998 Total
-------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Title premiums from direct
Operations $111,683 45.0% $105,954 47.7% $219,642 44.8% $193,881 47.9%
Title premiums from agency
Operations 136,417 55.0% 116,269 52.3% 270,332 55.2% 210,638 52.1%
-------- ----- -------- ----- -------- ----- -------- -----
Total $248,100 100.0% $222,223 100.0% $489,974 100.0% $404,519 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
Title orders and requests for title-related services have continued to react
favorably to existing market conditions. The increases in title premiums of
$25.9 million, or 11.6%, and $85.5 million, or 21.1%, for the three-month and
six-month periods ended June 30, 1999, respectively, are consistent with the
current real estate market environment. Refinance business has declined,
however, the resale and new home sale markets remains strong. Fee per file is
higher for resale transactions than it is for refinance transactions. The trend
in the mix of business between direct and agency operations reflects the impact
of the lag of approximately three to six months in agent remittances compared to
the immediate recognition of title insurance premiums generated by direct
operations and fluctuations in title premiums by region.
Escrow fees for the second quarter of 1999 increased $1.6 million, or 4.9%, to
$34.2 million from $32.6 million in the second quarter of 1998. For the six
months ended June 30, 1999, escrow fees were $67.0 million, an increase of $8.1
million, or 13.7%, from escrow fees of $58.9 million in the first six months of
1998. This growth in escrow fees is generally consistent with the trends in the
Company's direct operations and has been further enhanced by the Company's
continuing efforts to expand its escrow presence in Southern California.
9
<PAGE> 10
The increase in other fees and revenue reflects the continuing increase in the
contribution made by the Company's real estate related ancillary service
businesses, the revenue generated by Granite Financial, Inc., our equipment
leasing subsidiary, and the increased revenue of Micro General Corporation, a
majority-owned information technology and telecommunication services subsidiary.
The majority of the increase in other fees and revenue can be attributed to the
growth of Micro General Corporation. Micro General Corporation's margins are not
as great as those of the Company's core title and real estate businesses. Other
fees and revenue during the second quarter of 1999 totaled $67.7 million
compared to $51.6 million in the second quarter of 1998, representing an
increase of $16.0 million, or 31.0%. Other fees and revenue totaled $131.3
million for the six-month period ended June 30, 1999, an increase of $33.1
million, or 33.7%, from other fees and revenue of $98.2 million for the 1998
period.
Interest and investment income decreased 47.5% to $7.8 million in the second
quarter of 1999 from $15.0 million in the second quarter of 1998. The decrease
in interest and investment income earned during the 1999 quarter is primarily
due to an increase in invested assets offset by reduced net realized gains in
1999 compared to net realized gains for the same period in 1998. Included in net
realized gains for the second quarter of 1998 is a non-recurring gain resulting
from the sale of the Company's investment in Data Tree Corporation in the amount
of $9.7 million, before applicable income taxes. Excluding the Data Tree
Corporation gain, net realized gains totaled $503,000 in the second quarter of
1998 compared to $2.0 million in the second quarter of 1999. Net investment
income for the six-month period ended June 30, 1999 totaled $13.8 million
compared to $12.3 million in the comparable 1998 period, after excluding the
gain mentioned above, an increase of 12.2%. The increase in the six months ended
June 30, 1999 over the same period in 1998 is primarily the result of an
increase in invested assets offset by a decrease in net realized gains. Total
net realized gains for the six month periods ended June 30, 1999 and 1998 were
$1.4 million and $12.2 million, respectively.
The Company's operating expenses consist primarily of personnel costs, other
operating expenses and agent commissions which are incurred as orders are
received and processed. Title insurance premiums, escrow fees and other fees and
revenue are generally recognized as income at the time the underlying
transaction closes. Certain other fees and revenue are recognized over the
period the related services are provided. 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 one of the most significant operating expenses 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, were
essentially flat at 29.6% for the three-month period ended June 30, 1999
compared to 30.2% for the corresponding period in 1998. For the six-month
periods ended June 30, 1999 and 1998, personnel expenses as a percentage of
total revenue were 30.5% and 31.1%, respectively, remaining comparable period
over period. 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. Personnel costs totaled $105.8 million and $97.1
million for the quarters ended June 30, 1999 and 1998, respectively, and $214.3
million and $181.6 million for the six-month periods ended June 30, 1999 and
1998, respectively.
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
increased as a percentage of total revenue to 23.8% in the second quarter of
1999 from 18.1% in the second quarter of 1998. Other operating expenses as a
percentage of total revenue increased to 23.1% for the six-month period ended
June 30, 1999 compared to 19.6% for the 1998 period. The fluctuations in the
three- and six-month periods can be attributed to expenses related to the
Company's non-title operations, primarily Micro General Corporation. 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. Other operating
expenses totaled $85.3 million in the second quarter of 1999 compared to $58.2
million in the second quarter of 1998. For the six-month periods ended June 30,
1999 and 1998, other operating expenses totaled $162.4 million and $114.7
million, respectively.
Agent commissions represent the portion of policy premiums retained by agents
pursuant to the terms of their respective agency contracts. Agent commissions
were 79.6% of agent policy premiums in the second quarter of 1999 compared to
78.9% of agent policy premiums in the second quarter of 1998. Agent commissions
for the six-month periods ended June 30, 1999 and 1998 were 79.8% and 79.6%,
respectively. Agent commissions and the resulting percentage of agency
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<PAGE> 11
premiums retained by the Company vary according to regional differences in real
estate closing practices and state regulations.
The provision for claim losses includes an estimate of anticipated title claims
and major claims. The estimate of anticipated title claims is accrued as a
percentage of title premium revenue based on the Company's historical loss
experience and other relevant factors. The Company monitors its claims
experience on a continual basis and adjusts the provision for claim losses
accordingly. Based on Company loss development studies, the Company believes
that as a result of its underwriting and claims handling practices, as well as
the prevailing market conditions of prior years, the Company will maintain the
trend of favorable claim loss experience. Based on this information, in the
quarters and six-month periods ended June 30, 1999 and 1998, the Company
recorded a provision for claim losses of 6.5% and 7.0% of title insurance
premiums, respectively, prior to major claim expense, net of recoupments and
prior to the impact of premium rates and Company loss experience in the state of
Texas. Premiums in Texas are all-inclusive and include a closing fee in addition
to a risk-related premium, which differs from similar coverage in other states,
while loss experience is comparable. As a result, the provision for claim losses
in Texas is much lower than in states that do not have all-inclusive premiums.
These factors resulted in a net provision for claim losses of 6.1% and 6.0% in
the second quarter of 1999 and 1998, respectively, and 6.2% and 6.6%, for the
six months ended June 30, 1999 and 1998, respectively.
Interest expense is incurred by the Company primarily in financing its capital
asset purchases, lease originations and certain other general corporate
purposes. 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. Interest expense of
"non-LYONs" debt totaled $2.9 million and $2.5 million for the three-month
periods ended June 30, 1999 and 1998, respectively. The LYONs related component
of interest expense was zero for the second quarter of 1999 and $1.0 million for
the second quarter of 1998. Interest expense of "non-LYONs" debt totaled $5.2
million and $4.6 million for the six-month periods ended June 30, 1999 and 1998,
respectively. The LYONs related component of interest expense amounted to
$445,000 for the first six-months of 1999 and $2.1 million for the first six
months of 1998. The decrease in LYONs related interest is attributable to the
redemption of the LYONs in February 1999 and previous conversions. The period
over period fluctuations in interest related to "non-LYONs" debt can be
attributed to an increase in outstanding notes payable and rising interest
rates.
Income tax expense for the three-month and six-month periods ended June 30, 1999
and 1998, as a percentage of earnings before income taxes was 41.0% and 41.8%;
and 41.0% and 41.9%, respectively. The fluctuation in income tax expense as a
percentage of earnings before income taxes is 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, 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, cash received from subsidiaries,
cash generated by investment securities and bank borrowings through existing
credit facilities.
Two 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 and/or banking authorities. The Company's ancillary
services and leasing subsidiaries collect revenue and pay operating expenses;
however, they are not generally regulated by insurance or banking regulatory
authorities. Positive cash flow from the UTCs, ancillary services and leasing
subsidiaries is invested primarily in cash and cash equivalents.
11
<PAGE> 12
The short-term and long-term liquidity requirements of the Company, insurance
subsidiaries, UTCs, ancillary services and leasing subsidiaries are monitored
regularly to match cash inflows with cash requirements. The Company and its
subsidiaries forecast their daily cash needs and periodically review their
short-term and long-term projected sources and uses of funds, as well as the
asset, liability, investment and cash flow assumptions underlying these
projections.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company does not believe there have been any material changes in the market
risks since December 31, 1998, which would impact the fair value of certain
assets and liabilities included in the Condensed Consolidated Balance Sheets.
Year 2000 Issues
Information technology is an integral part of the Company's business. The
Company also recognizes the critical nature of and the technological challenges
associated with the Year 2000 issue. The Year 2000 issue ("Y2K") results from
computer programs and computer hardware that utilize only two digits to identify
a year in the date field, rather than four digits. If such programs or hardware
are not modified or upgraded information systems could fail, lock up, or in
general fail to perform according to normal expectations. The Company has
implemented a program and committed both personnel and other resources to
determine the extent of potential Y2K issues. The scope of the Y2K program
includes a review of the systems used in our title plants, title policy
processing, escrow production, claims processing, real estate related services,
financial management, human resources, payroll and infrastructure. In addition
to a review of internal systems, the Company has initiated formal communications
with third parties with which it does business in order to determine whether or
not they are Y2K compliant and the extent to which the Company may be vulnerable
to third parties' failure to become Y2K compliant. The Company continues the
process of identifying Y2K compliant issues in its systems, equipment and
processes. The Company is making changes to such systems, updating or replacing
such equipment, and modifying such processes to make them Y2K compliant.
The Company has developed a four phase program to become Y2K compliant. Phase I
is "Plan Preparation and Identification of the Problem." This is a continuing
phase. Phase II is "Plan Execution and Remediation." Phase III is "Testing."
Phase IV is "Maintaining Y2K Compliance." The Company was substantially Y2K
compliant as of July 1999. The status of the Y2K compliance program is monitored
by senior management of the Company and by the Audit Committee of the Company's
Board of Directors. The costs of the Y2K related efforts incurred to date have
not been material, and the estimate of remaining costs to be incurred is not
considered to be material. These estimates may be subject to change due to the
complexities of estimating the cost of modifying applications to become Y2K
compliant and the difficulties in assessing third parties', including various
local governments upon which the Company relies upon to provide title-related
data, ability to become Y2K compliant.
Management of the Company believes that its electronic data processing and
information systems will be Y2K compliant; however, there can be no assurance
all of the Company's systems will be Y2K compliant, or the costs to be Y2K
compliant will not exceed management's current expectations, or that the failure
of such systems to be Y2K compliant will not have a material adverse effect on
the Company's business. The Company believes that functions currently performed
with the assistance of electronic data processing equipment could be performed
manually or outsourced if certain systems were determined not to be Y2K
compliant on or after January 1, 2000.
The Company has substantially completed a contingency plan in the event that any
systems are not Y2K compliant.
This entire section, "Year 2000 Issues", is hereby designated a "Year 2000
Readiness Disclosure", as defined in the Year 2000 Information and Readiness
Disclosure Act.
12
<PAGE> 13
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been named as a defendant in four class
action lawsuits against the entire title and escrow
industry in California alleging various irregularities and
violations of title and escrow practices. One suit was
filed by the Attorney General of the State of California on
behalf of the California Controller and the California
Department of Insurance, and the other three were filed by
private law firms in Federal Courts in San Francisco and
San Diego and the State Court in Los Angeles. As a result
of extensive meetings and discussions between the Company
and the Attorney General of the State of California, the
Attorney General has issued a letter stating that it does
not expect to serve Fidelity National Financial, Inc. with
a formal complaint. The Attorney General and the Company
have expressed with confidence that the issues regarding
the Company are likely to be resolved without litigation.
The Company also anticipates that a resolution of the
action filed by the California Attorney General in the
State Court will serve as a basis for the resolution of the
other lawsuits filed. The Company does not believe that any
resolution will have a material impact on its financial
position or on its results of operations.
Item 4. Submission of Matter to Vote of Securities Holders
On June 14, 1999, the Company held its Annual Meeting of
Stockholders pursuant to a Notice and Proxy Statement dated
May 10, 1999. At the meeting, stockholders elected William
P. Foley, II (25,809,953 for and 230,605 withheld) and
Frank P. Willey (25,806,077 for and 234,481 withheld) as
Directors recommended by management.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11 Computation of Basic and Diluted Earnings Per
Share
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K:
None
13
<PAGE> 1
EXHIBIT 11
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------- -----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings, basic basis .................... $23,741 $33,439 $43,508 $50,119
Plus: Impact of assumed conversion of the
LYONs, net of applicable incomes
taxes .................................. -- 599 263 1,223
------- ------- ------- -------
Diluted earnings ............................. $23,741 $34,038 $43,771 $51,342
======= ======= ======= =======
Weighted average shares outstanding during
the period, basic basis .................... 30,423 27,661 30,594 27,281
Plus: Common stock equivalent shares assumed
from conversion of options ............. 1,365 1,897 1,196 1,858
Common stock equivalent shares assumed
from conversion of LYONs ............... -- 3,838 712 3,889
------- ------- ------- -------
Weighted average shares outstanding during
the period, diluted basis .................. 31,788 33,396 32,502 33,028
======= ======= ======= =======
Basic earnings per share ..................... $ .78 $ 1.21 $ 1.42 $ 1.84
======= ======= ======= =======
Diluted earnings per share ................... $ .75 $ 1.02 $ 1.35 $ 1.55
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 331,752
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 45,329
<MORTGAGE> 0
<REAL-ESTATE> 3,712
<TOTAL-INVEST> 478,330
<CASH> 55,846
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 997,246
<POLICY-LOSSES> 233,576
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 178,395
0
0
<COMMON> 4
<OTHER-SE> 464,355
<TOTAL-LIABILITY-AND-EQUITY> 997,246
489,974
<INVESTMENT-INCOME> 12,431
<INVESTMENT-GAINS> 1,355
<OTHER-INCOME> 198,333
<BENEFITS> 30,330
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 598,021
<INCOME-PRETAX> 73,742
<INCOME-TAX> 30,234
<INCOME-CONTINUING> 43,508
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,508
<EPS-BASIC> 1.42
<EPS-DILUTED> 1.35
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
