<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 September 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 28,493,667 shares as of November 10, 1999
Exhibit Index appears on page 14 of 15 sequentially numbered pages.
<PAGE> 2
FORM 10-Q
QUARTERLY REPORT
Quarter Ended September 30, 1999
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 September 30, 1999 3
and December 31, 1998
B. Condensed Consolidated Statements of Earnings for the three-
month and nine-month periods ended September 30, 1999 and 1998 4
C. Condensed Consolidated Statements of Comprehensive Earnings
for the three-month and nine-month periods ended September 30, 1999
and 1998 5
D. Condensed Consolidated Statements of Cash Flows for the nine-month 6
periods ended September 30, 1999 and 1998
E. Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 12
Part II: OTHER INFORMATION
Item 1. Legal Proceedings 14
Items 2, 3, 4 and 5. of Part II have been omitted because they are
not applicable with respect to the current reporting period. --
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIDELITY NATIONAL FINANCIAL, INC.
(Registrant)
By: /s/ Alan L. Stinson
------------------------------
Alan L. Stinson
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) Date: November 11, 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>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair value ................ $ 339,730 $330,068
Equity securities, at fair value .................................. 33,259 50,191
Other long-term investments, at cost, which approximates fair value 42,353 40,278
Short-term investments, at cost, which approximates fair value .... 71,496 94,122
Investments in real estate and partnerships, net .................. 3,815 4,673
----------- --------
Total investments ............................................. 490,653 519,332
Cash and cash equivalents .............................................. 46,209 42,492
Leases and residual interests in securitizations ....................... 128,394 93,507
Trade receivables, net ................................................. 69,186 75,940
Notes receivable, net .................................................. 18,060 10,761
Prepaid expenses and other assets ...................................... 112,270 111,471
Title plants ........................................................... 59,666 58,932
Property and equipment, net ............................................ 51,685 46,070
Deferred tax asset ..................................................... 23,927 10,965
----------- --------
$ 1,000,050 $969,470
=========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities .......................... $ 121,942 $123,357
Notes payable ..................................................... 190,295 214,624
Reserve for claim losses .......................................... 239,254 224,534
Income taxes payable .............................................. 1,556 8,683
----------- --------
553,047 571,198
Minority interests ................................................ 803 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, 39,213,197 as of September 30, 1999 and
35,540,036 as of December 31, 1998 .............................. 4 3
Additional paid-in capital ........................................ 246,945 173,888
Retained earnings ................................................. 321,759 265,567
----------- --------
568,708 439,458
Accumulated other comprehensive earnings (loss) ................... (5,860) 11,657
Less treasury stock, 10,676,602 shares as of September 30, 1999 and
6,645,487 shares as of December 31, 1998, at cost ............... 116,648 54,375
----------- --------
446,200 396,740
----------- --------
$ 1,000,050 $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 Nine months ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- ---------- ---------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Title insurance premiums ................... $236,895 $ 238,207 $ 726,869 $642,726
Escrow fees ................................ 29,865 33,915 96,873 92,850
Other fees and revenue ..................... 69,116 50,866 200,441 149,089
Interest and investment income, including
realized gains (losses) .................. 5,961 6,428 19,747 28,405
-------- ---------- ---------- --------
341,837 329,416 1,043,930 913,070
-------- ---------- ---------- --------
EXPENSES:
Personnel costs ............................ 96,831 102,464 311,137 284,031
Other operating expenses ................... 85,930 62,373 248,359 177,634
Agent commissions .......................... 109,638 101,003 325,235 268,148
Provision for claim losses ................. 14,864 14,626 45,194 41,383
Interest expense ........................... 4,358 2,740 10,047 9,414
-------- ---------- ---------- --------
311,621 283,206 939,972 780,610
-------- ---------- ---------- --------
Earnings before income taxes .................. 30,216 46,210 103,958 132,460
Income tax expense ............................ 11,609 19,409 41,843 55,540
-------- ---------- ---------- --------
Net earnings ........................... $ 18,607 $ 26,801 $ 62,115 $ 76,920
======== ========== ========== ========
Basic net earnings ......................... $ 18,607 $ 26,801 $ 62,115 $ 76,920
======== ========== ========== ========
Basic earnings per share ................... $ .62 $ .94 $ 2.05 $ 2.78
======== ========== ========== ========
Weighted average shares outstanding, basic
basis .................................... 29,861 28,382 30,353 27,653
======== ========== ========== ========
Diluted net earnings ....................... $ 18,607 $ 27,461 $ 62,378 $ 78,803
======== ========== ========== ========
Diluted earnings per share ................. $ .60 $ .81 $ 1.95 $ 2.36
======== ========== ========== ========
Weighted average shares outstanding, diluted
basis .................................... 31,169 33,727 32,037 33,347
======== ========== ========== ========
Cash dividends per share ................... $ .07 $ .06 $ .21 $ .19
======== ========== ========== ========
</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 Nine months ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net earnings ............................. $ 18,607 $ 26,801 $ 62,115 $ 76,920
Other comprehensive earnings (loss):
Unrealized losses on investments,
net (1) ............................. (7,379) (11,680) (17,378) (5,391)
Reclassification adjustments for (gains)
losses included in net earnings (2) .. 692 (1,139) (139) (7,930)
-------- -------- -------- --------
Other comprehensive loss ................. (6,687) (12,819) (17,517) (13,321)
-------- -------- -------- --------
Comprehensive earnings ................... $ 11,920 $ 13,982 $ 44,598 $ 63,599
======== ======== ======== ========
</TABLE>
(1) Net of income tax expense (benefit) of ($4,600) and ($8,458), and
($11,682) and ($3,888) for the three-month and nine-month periods ended
September 30, 1999 and 1998, respectively.
(2) Net of income tax expense (benefit) of ($431) and $825, and $93 and
$5,787 for the three-month and nine-month periods ended September 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>
Nine months ended
September 30,
-----------------------
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings ............................................................... $ 62,115 $ 76,920
Reconciliation of net earnings to net cash provided by operating activities:
Depreciation and amortization .......................................... 21,425 15,268
Net increase in reserve for claim losses ............................... 19,031 13,937
Net increase in provision for possible losses other than claims ........ 89 288
Gain on sales of assets ................................................ (232) (13,717)
Equity in gains of unconsolidated partnerships ......................... (729) (86)
Amortization of LYONs original issue discount .......................... 552 3,337
Change in assets and liabilities, net of effects from acquisition of
subsidiaries:
Net increase in leases and lease securitization residual interest ...... (34,887) (27,131)
Net (increase) decrease in trade receivables ........................... 6,751 (12,812)
Net increase in prepaid expenses and other assets ...................... (9,246) (15,518)
Net increase (decrease) in accounts payable and accrued liabilities .... (1,788) 21,912
Net increase (decrease) in income taxes ................................ (9,631) 10,621
--------- ---------
Net cash provided by operating activities ....................................... 53,450 73,019
--------- ---------
Cash flows from investing activities:
Proceeds from sales of property and equipment .............................. -- 6,968
Proceeds from sale of title plant .......................................... 1,100 405
Proceeds from sale of real estate .......................................... 946 --
Proceeds from sales and maturities of investments .......................... 339,396 162,949
Collections of notes receivable ............................................ 2,116 3,598
Additions to title plants .................................................. (1,799) (678)
Additions to property and equipment ........................................ (19,233) (16,483)
Additions to investments ................................................... (345,710) (223,641)
Additions to notes receivable .............................................. (9,670) (6,899)
Additions to real estate and joint ventures ................................ (285) --
Sale of a subsidiary, net of cash .......................................... 2,468 --
Acquisitions of businesses, net of cash acquired ........................... -- (198)
--------- ---------
Net cash used in investing activities ........................................... (30,671) (73,979)
--------- ---------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 7
(Continued)
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Borrowings .................................... $ 66,262 $ 17,607
Debt service payments ......................... (19,284) (20,325)
Dividends paid ................................ (6,539) (4,494)
Purchase of treasury stock .................... (62,273) --
Stock options exercised ....................... 2,772 6,898
-------- --------
Net cash used in financing activities .............. (19,062) (314)
-------- --------
Net increase (decrease) in cash and cash equivalents 3,717 (1,274)
Cash and cash equivalents at beginning of period ... 42,492 54,975
-------- --------
Cash and cash equivalents at end of period ......... $ 46,209 $ 53,701
======== ========
Supplemental cash flow information:
Income taxes paid ............................. $ 48,920 $ 43,033
======== ========
Interest paid ................................. $ 14,606 $ 6,142
======== ========
Noncash investing and financing activities:
Dividends declared and unpaid ................. $ 1,858 $ 1,820
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE> 8
Notes to Condensed Consolidated Financial Statements
Note A - Basis of Financial Statements
- --------------------------------------
The financial information included in this report includes the accounts of
Fidelity National Financial, Inc. and its subsidiaries (collectively, the
"Company") and has been prepared in accordance with generally accepted
accounting principles and the instructions to Form 10-Q and Article 10 of
Regulation S-X. 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 September 30, 1999, the Company's Board of Directors declared a cash dividend
of $.07 per share, payable on October 27, 1999, to stockholders of record on
October 13, 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 permitted the Company to purchase up to 4.0 million shares. On
September 13, 1999, the Company announced that its Board of Directors had
approved a second increase of 2.0 million shares, bringing the total number of
shares of outstanding Company common stock authorized for purchase to 6.0
million. Through November 10, 1999, the Company has purchased 4.1 million shares
at an average purchase price of $15.43 per share totaling $63.0 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 stockholder 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 November 10, 1999, loans had been made
in the amount of $7.25 million to purchase 483,825 shares of Company common
stock at an average purchase price of $15.41 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,
8
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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 approximately $1.2 million 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 nine-month period ended
September 30, 1999.
Note F - Acquisition of Chicago Title Corporation
- -------------------------------------------------
On August 1, 1999, the Company announced that it had signed an Agreement and
Plan of Merger ("Agreement") to purchase Chicago Title Corporation ("Chicago
Title", NYSE: CTZ), headquartered in Chicago, Illinois, for approximately $1.13
billion, or $52.00 per share of Chicago Title common stock, using approximately
equal amounts of cash and Company common stock, subject to certain adjustments
based on the average price of Company common stock, as defined in the Agreement.
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
Agreement has been approved by the boards of both companies, and was amended on
October 13, 1999. 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
- ---------------------
Fluctuations in interest rates, offset by high consumer confidence and strength
in the overall economy resulted in an increase in total third quarter 1999
revenue of $12.4 million, or 3.8%, to $341.8 million compared to $329.4 million
of total revenue for the third quarter of 1998. Similarly, total revenue for the
nine-month period ended September 30, 1999 increased $130.9 million, or 14.3%,
to $1.04 billion from $913.1 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 Nine months ended
September 30, September 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 ............. $ 99,524 42.0% $111,249 46.7% $319,166 43.9% $306,248 47.6%
Title premiums from agency
operations ............. 137,371 58.0 126,958 53.3 407,703 56.1 336,478 52.4
-------- ----- -------- ----- -------- ----- -------- -----
Total ........... $236,895 100.0% $238,207 100.0% $726,869 100.0% $642,726 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
Economic conditions have shifted the mix of the Company's core title and escrow
businesses from a refinance driven market to a more traditional resale and new
home sale market. The continuing increase in fee per file that has occurred as a
result of this transition has enabled the Company to maintain its premium volume
quarter over quarter, while reporting an increase in the nine months ended
September 30, 1999 compared to the comparable 1998 period, even though order
counts have declined. Title premiums were essentially flat quarter over quarter,
at $236.9 million and $238.2 million for the three-month periods ended September
30, 1999 and 1998, respectively. Title premiums for the first nine months of
1999 increased $84.1 million, or 13.1%, compared to the 1998 period. 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.
9
<PAGE> 10
Escrow fees for the third quarter of 1999 decreased $4.0 million, or 11.9%, to
$29.9 million from $33.9 million in the third quarter of 1998. For the nine
months ended September 30, 1999, escrow fees were $96.9 million, an increase of
$4.0 million, or 4.3%, from escrow fees of $92.9 million in the first nine
months of 1998. This growth in escrow fees is generally consistent with the
trends in the Company's direct operations and has been further impacted by the
Company's continuing efforts to expand its escrow presence in Southern
California.
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 FNF Capital, Inc., formerly known as
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 gross margins are not as great as those of the
Company's core title and real estate businesses. Other fees and revenue during
the third quarter of 1999 totaled $69.1 million compared to $50.9 million in the
third quarter of 1998, representing an increase of $18.2 million, or 35.9%.
Other fees and revenue totaled $200.4 million for the nine-month period ended
September 30, 1999, an increase of $51.4 million, or 34.4%, from other fees and
revenue of $149.1 million for the 1998 period.
Interest and investment income decreased 7.3% to $6.0 million in the third
quarter of 1999 from $6.4 million in the third quarter of 1998. The decrease in
interest and investment income earned during the 1999 quarter is primarily due
to an increase in invested assets and related interest and dividend income,
offset by net realized losses in 1999 compared to net realized gains for the
same period in 1998. Net realized losses totaled $1.1 million in the third
quarter of 1999 compared to net realized gains of $1.5 million in the third
quarter of 1998. Net investment income for the nine-month period ended September
30, 1999 totaled $19.7 million compared to $18.7 million in the comparable 1998
period, after excluding the non-recurring gain described below, a decrease of
5.6%. The increase in the nine months ended September 30, 1999 over the same
period in 1998 is primarily the result of an increase in invested assets and
related income offset by a decrease in net realized gains. Total net realized
gains for the nine-month periods ended September 30, 1999 and 1998 were $232,000
and $13.7 million, respectively. Included in net realized gains for 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.
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. The changes in the market environment, mix of business between direct
and agency operations and the contributions from our various business units have
impacted margins and net earnings. The Company has taken steps to maintain
expense levels consistent with revenues; however, a short time lag does exist in
reducing variable costs and certain fixed costs are incurred regardless of
revenue levels.
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,
decreased to 28.3% for the three-month period ended September 30, 1999 compared
to 31.1% for the corresponding period in 1998. For the nine-month periods ended
September 30, 1999 and 1998, personnel expenses as a percentage of total revenue
were 29.8% and 31.1%, respectively. 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 $96.8
million and $102.5 million for the quarters ended September 30, 1999 and 1998,
respectively, and $311.1 million and $284.0 million for the nine-month periods
ended September 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 25.1% in the third quarter of 1999
from 18.9% in the third quarter of 1998. Other operating expenses as a
percentage of total revenue increased to 23.8% for the nine-month period
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<PAGE> 11
ended September 30, 1999 compared to 19.5% for the 1998 period. The fluctuations
in the three-month and nine-month periods can be attributed to expenses related
to the Company's non-title operations, primarily Micro General Corporation, and
approximately $4.7 million of non-recurring expenses. 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 $85.9 million in the third quarter of 1999 compared to $62.4 million in
the third quarter of 1998. For the nine-month periods ended September 30, 1999
and 1998, other operating expenses totaled $248.4 million and $177.6 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 79.8% of agent policy premiums in the third quarter of 1999 compared to
79.6% of agent policy premiums in the third quarter of 1998. Agent commissions
for the nine-month periods ended September 30, 1999 and 1998 were 79.8% and
79.7%, respectively. Agent commissions and the resulting percentage of agency
premiums retained by the Company vary according to regional differences in real
estate closing practices and state regulations.
The provision for claim losses includes known claims and an estimate of
anticipated title 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 nine-month periods ended September 30, 1999 and 1998, the Company
recorded a provision for claim losses of 6.5% and 7.0% of title insurance
premiums, respectively, 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 6.3% and 6.1% in the third quarter of
1999 and 1998, respectively, and 6.2% and 6.4%, for the nine months ended
September 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 Company's Liquid Yield Option Notes. Interest
expense of "non-LYONs" debt totaled $4.4 million and $1.6 million for the
three-month periods ended September 30, 1999 and 1998, respectively. The LYONs
related component of interest expense was zero for the third quarter of 1999 and
$1.1 million for the third quarter of 1998. Interest expense of "non-LYONs" debt
totaled $9.6 million and $6.2 million for the nine-month periods ended September
30, 1999 and 1998, respectively. The LYONs related component of interest expense
amounted to $445,000 for the first nine-months of 1999 and $3.2 million for the
first nine months of 1998. The decrease in LYONs related interest is
attributable to the redemption of the LYONs in February 1999. 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 nine-month periods ended September
30, 1999 and 1998, as a percentage of earnings before income taxes was 38.4% and
42.0%; and 40.2% 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 and 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
11
<PAGE> 12
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 service 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.
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 November 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 alleging irregularities and violations of title and
escrow practices. One of these suits was filed by the Attorney
General of the State of California on behalf of the California
Controller and the California Department of Insurance against
the entire title and escrow industry in California. The other
three were filed by private law firms in Federal Court in San
Francisco 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 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.58.2 Second amendment, dated as of September 30,
1999, to the Credit Agreement dated as of
August 1, 1998, by and among Fidelity
National Financial, Inc., Sanwa Bank
California as the Agent and the Lenders from
time to time party thereto.
10.60 Agreement and Plan of Merger, dated as of
August 1, 1999, by and between Fidelity
National Financial, Inc. and Chicago Title
Corporation and amended as of October 13,
1999, incorporated by reference from Form
S-4, Registration No. 333-89163.
11 Computation of Basic and Diluted Earnings
Per Share
27 Financial Data Schedule
(b) Reports on Form 8-K:
Report on Form 8-K, dated August 1, 1999, related to
the execution of an Agreement and Plan of Merger to
acquire Chicago Title Corporation.
13
<PAGE> 1
EXHIBIT 10.58.2
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (the "Amendment") is made and
dated as of the 29th day of October, 1999, by and among SANWA BANK CALIFORNIA,
("Sanwa"), in its capacity as agent for the Lenders party to the Credit
Agreement referred to below (the "Agent"), the Lenders from time to time party
thereto, and FIDELITY NATIONAL FINANCIAL, INC., a Delaware corporation (the
"Company").
RECITALS
A. Pursuant to that certain Credit Agreement dated as of August 1,
1998, by and among the Agent, the Lenders and the Company (as amended from time
to time, the "Credit Agreement"), the Lenders agreed to extend credit to the
Company on the terms and subject to the conditions set forth therein.
Capitalized terms used but not otherwise defined herein are used with the
meanings given such terms in the Credit Agreement.
B. The Company, the Agent and the Lenders desire to modify the Credit
Agreement in certain respects as set forth more particularly below.
NOW, THEREFORE, in consideration of the foregoing Recitals and for
other valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1. Increase in Aggregate Credit Limit. To reflect the agreement of the
parties hereto to increase the Aggregate Credit Limit, effective as of the date
of this Amendment, the definition of the term "Aggregate Credit Limit" set forth
in the Glossary is hereby amended to read in its entirety as follows:
"'Aggregate Credit Limit' shall mean $150,000,000.00, as such
amount may be increased or decreased by written agreement of the Agent,
the Company and one hundred percent (100%) of the Lenders."
2. Addition of New Lender; Increase in Maximum Commitment. The parties
hereto hereby acknowledge and agree that from and after the date of this
Amendment: (a) Bank of America, N.A. ("BofA") will be a Lender under the Credit
Agreement with all the rights and benefits and with all the obligations of the
existing Lenders thereunder, and (b) Sanwa's Maximum Commitment shall be
increased to $30,000,000. Each of BofA and Sanwa hereby agrees to purchase on
the date of this Amendment and to accept the assignment and transfer of a
portion of the Obligations held by the Existing Lenders consistent with the
Commitment Schedule attached hereto as Exhibit A.
3. Increase in Permitted Advances and Investments. To reflect the
agreement of the parties hereto to permit the Company to make more advances and
investments to FNF
<PAGE> 2
Capital, Inc. (formerly Fidelity National Leasing, Inc. and Granite Financial,
Inc.), effective as of the Second Amendment Effective Date (as defined in
Paragraph 8 below), subparagraph 9(g)(3) of the Credit Agreement is hereby
amended to read in its entirety as follows:
"(3) Advances to and investments by the Company in FNF
Capital, Inc. (formerly Fidelity National Leasing, Inc. and Granite
Financial, Inc.) from and after December 31, 1997 in an outstanding
aggregate dollar amount which when taken with the aggregate dollar
amount of outstanding guaranties and other contingent liabilities of
the Company for Indebtedness of FNF Capital, Inc. to non-Affiliates
incurred or assumed from and after December 31, 1997 does not exceed
$75,000,000.00;"
4. Increase in Minimum Statutory Surplus. To reflect the agreement of
the parties hereto to increase the minimum aggregate Statutory Surplus that the
Company has to maintain on any date, effective as of the Second Amendment
Effective Date, Paragraph 9(o) of the Credit Agreement is hereby amended to read
in its entirety as follows:
"9(o) Minimum Statutory Surplus. Permit any date the aggregate
Statutory Surplus of FNNEW and FNTIC to be less than $95,000,000.00."
5. Commercial Paper Issuer Concentration. To reflect the agreement of
the parties hereto to increase the commercial paper issuer concentration for the
Company's investments, effective as of the Second Amendment Effective Date,
subparagraph (d) of the definition of the term "Primary Quality Investments" set
forth in the Glossary is hereby amended to read in its entirety as follows:
"(d) Commercial paper issued by obligors rated at least
investment grade by Standard and Poor's Corporation (or bearing an
equivalent rating of another nationally recognized rating agency) with
a maturity not to exceed ninety (90) days and in an aggregate amount
not to exceed $10,000,000.00 per issuing institution."
6. Waiver. The Company has recently entered into an agreement to
acquire Chicago Title Company (the "Proposed Acquisition"). As a result of the
Proposed Acquisition, the Company has been out of compliance with the negative
covenant regarding acquisitions set forth in Paragraph 9(d) of the Credit
Agreement, resulting in an Event of Default under Paragraph 10(c) of the Credit
Agreement (the "Existing Default"). The Lenders signatory below hereby waive the
Existing Default on a one-time basis as of the Second Amendment Effective Date.
The Company hereby acknowledges and agrees that nothing contained herein shall
constitute any agreement by the Lenders to waive any Event of Default under the
Credit Agreement other than that waived pursuant to this Paragraph 6.
2
<PAGE> 3
7. Reaffirmation of Loan Documents. The Company hereby affirms and
agrees that (a) the execution and delivery by the Company of and the performance
of its obligations under this Amendment shall not in any way amend, impair,
invalidate or otherwise affect any of the obligations of the Company or the
rights of the Lenders under the Loan Documents or any other document or
instrument made or given by the Company in connection therewith, (b) the term
"Obligations" as used in the Loan Documents includes, without limitation, the
Obligations of the Company under the Credit Agreement as amended hereby and (c)
the Loan Documents remain in full force and effect.
8. Second Amendment Effective Date. This Amendment shall be effective
as of September 30, 1999 (the "Second Amendment Effective Date") on the earliest
date that there has been delivered to the Agent:
(a) A copy of this Amendment, duly executed by each party hereto;
(b) Such corporate resolutions, incumbency certificates and other
authorizing documentation as the Agent may reasonably request; and
(c) An amendment fee for the account of each Lender (other than
BofA) equal to 0.075% multiplied by such Lender's Maximum Commitment as of the
date immediately prior to the date of this Amendment.
9. Representations and Warranties. The Company hereby represents and
warrants to the Agent and the Lenders as follows:
(a) The Company has the corporate power and authority and the
legal right to execute, deliver and perform this Amendment and has taken all
necessary corporate action to authorize the execution, delivery and performance
of this Amendment. This Amendment has been duly executed and delivered on behalf
of the Company and constitutes the legal, valid and binding obligations of the
Company enforceable against the Company in accordance with its terms.
(b) At and as of the date of execution hereof and at and as of
the effective date of this Amendment and both prior to and after giving effect
hereto: (i) the representations and warranties of the Company contained in the
Credit Agreement and the other Loan Documents are accurate and complete in all
respects, and (ii) there has not occurred an Event of Default (other than the
Existing Default) or Potential Default.
10. No Other Amendment. Except as expressly amended hereby, the Loan
Documents shall remain in full force and effect as written and amended to date.
11. Counterparts. This Amendment may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
agreement.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first above written.
FIDELITY NATIONAL FINANCIAL, INC.,
a Delaware corporation
By: /s/ Alan L. Stinson
Name: Alan L. Stinson
Title: Executive Vice President
and Chief Financial Officer
SANWA BANK CALIFORNIA,
as Agent and as a Lender
By: /s/ Steven L. Skelton
Name: Steven L. Skelton
Title: Vice President & Manager
COMERICA BANK - CALIFORNIA,
as a Lender
By: /s/ Mario DePascuale
Name: Mario DePasquale
Title: Assistant Vice President
FIRST BANK & TRUST, as a Lender
By: K. P. Balkrishna
Name: K.P. (Bala) Balkrishna
Title: Executive Vice President
Commercial Banking
SUN TRUST BANK, CENTRAL
FLORIDA, N.A., as a Lender
By: /s/ W. David Wisdom
Name: W. David Wisdom
Title: Vice President
4
<PAGE> 5
THE SUMITOMO BANK, LIMITED,
LOS ANGELES BRACH, as a Lender
By: /s/ Al Galluzzo
Name: Al Galluzzo
Title: Senior Vice President
WELLS FARGO BANK, N.A.,
as a Lender
By: /s/ David B. Hollingsworth
Name: David B. Hollingsworth
Title: Vice President
By: /s/ Mark Haberecht
Name: Mark Haberecht
Title: Assistant Vice President
BANK OF AMERICA, N.A., as a Lender
By: /s/ Elizabeth W. F. Bishop
Name: Elizabeth W. F. Bishop
Title: Vice President
5
<PAGE> 6
EXHIBIT A
COMMITMENT SCHEDULE
(AS OF OCTOBER 29, 1999)
<TABLE>
<CAPTION>
LENDER MAXIMUM COMMITMENT PERCENTAGE SHARE
- ------ ------------------ ----------------
<S> <C> <C>
Sanwa Bank California $ 30,000,000 20.000000000%
First Bank & Trust 20,000,000 13.333333333%
Comerica Bank-California 20,000,000 13.333333333%
The Sumitomo Bank, Limited 15,000,000 10.000000000%
Wells Fargo Bank, N.A. 11,000,000 7.333333334%
Sun Trust Bank, Central Florida, N.A. 11,000,000 7.333333334%
Bank of America, N.A. 43,000,000 28.666666666%
------------ -------------
Aggregate Credit Limit $150,000,000 100.000000000%
</TABLE>
6
<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 Nine months ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings, basic basis ................... $18,607 $26,801 $62,115 $76,920
Plus: Impact of assumed conversion of the
LYONs, net of applicable incomes
taxes ................................ -- 660 263 1,883
------- ------- ------- -------
Diluted earnings ............................ $18,607 $27,461 $62,378 $78,803
======= ======= ======= =======
Weighted average shares outstanding during
the period, basic basis ................... 29,861 28,382 30,353 27,653
Plus: Common stock equivalent shares assumed
from conversion of options ........... 1,308 1,819 1,212 1,928
Common stock equivalent shares assumed
from conversion of LYONs ............. -- 3,526 472 3,766
------- ------- ------- -------
Weighted average shares outstanding during
the period, diluted basis ................. 31,169 33,727 32,037 33,347
======= ======= ======= =======
Basic earnings per share .................... $ .62 $ .94 $ 2.05 $ 2.78
======= ======= ======= =======
Diluted earnings per share .................. $ .60 $ .81 $ 1.95 $ 2.36
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 339,730
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 33,259
<MORTGAGE> 0
<REAL-ESTATE> 3,815
<TOTAL-INVEST> 490,653
<CASH> 46,209
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 1,000,050
<POLICY-LOSSES> 239,254
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 190,295
0
0
<COMMON> 4
<OTHER-SE> 446,196
<TOTAL-LIABILITY-AND-EQUITY> 0
726,869
<INVESTMENT-INCOME> 19,515
<INVESTMENT-GAINS> 232
<OTHER-INCOME> 297,314
<BENEFITS> 45,194
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 894,778
<INCOME-PRETAX> 103,958
<INCOME-TAX> 41,843
<INCOME-CONTINUING> 62,115
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,115
<EPS-BASIC> 2.05
<EPS-DILUTED> 1.95
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
