<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A No. 2
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NO. 1-9396
FIDELITY NATIONAL FINANCIAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 86-0498599
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
<TABLE>
<S> <C> <C>
17911 VON KARMAN AVENUE, SUITE 300 92614 (949) 622-4333
IRVINE, CALIFORNIA (ZIP CODE) (REGISTRANT'S TELEPHONE NUMBER,
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) INCLUDING AREA CODE)
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
COMMON STOCK, $.0001 PAR VALUE NEW YORK STOCK EXCHANGE
LIQUID YIELD OPTION NOTES, DUE 2009, NEW YORK STOCK EXCHANGE
ZERO COUPON, CONVERTIBLE SUBORDINATED
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [X]
As of March 25, 1999, 32,414,000 shares of Common Stock ($.0001 par value)
were outstanding, and the aggregate market value of the shares of the Common
Stock held by non-affiliates of the registrant was $433,580,000. The aggregate
market value was computed with reference to the closing price on the New York
Stock Exchange on such date.
LOCATION OF EXHIBIT INDEX: The index to exhibits is contained in Part IV
herein on page number 76.
The information in Part III hereof is incorporated herein by reference to
the Registrant's Proxy Statement on Schedule 14A for the fiscal year ended
December 31, 1998, to be filed within 120 days after the close of the fiscal
year that is the subject of this Report.
================================================================================
<PAGE> 2
INTRODUCTORY STATEMENT
We are filing this Amendment No. 2 to our Annual Report on Form 10-K
for the year ended December 31, 1998 to include segment disclosures in response
to comments received from the Securities and Exchange Commission regarding our
Registration Statement on Form S-3 (Registration No. 333-65837). Please refer
to Note R of Notes to our Consolidated Financial Statements as of and for the
years ended December 31, 1998, 1997 (Restated) and 1996 (Restated) filed
herewith.
<PAGE> 3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Independent Auditors' Report................................ 32
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... 33
Consolidated Statements of Earnings for the years ended
December 31, 1998, 1997 and 1996.......................... 34
Consolidated Statements of Comprehensive Earnings for the
years ended December 31, 1998, 1997 and 1996.............. 35
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996.............. 36
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... 37
Notes to Consolidated Financial Statements.................. 38
</TABLE>
31
<PAGE> 4
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Fidelity National Financial, Inc.:
We have audited the Consolidated Balance Sheets of Fidelity National
Financial, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
related Consolidated Statements of Earnings, Comprehensive Earnings,
Stockholders' Equity and Cash Flows for each of the years in the three-year
period ended December 31, 1998. These Consolidated Financial Statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these Consolidated Financial Statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the Consolidated Financial Statements referred to above
present fairly, in all material respects, the consolidated financial position of
Fidelity National Financial, Inc. and subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
KPMG LLP
Los Angeles, California
February 17, 1999, except as to
Note Q to the Consolidated Financial Statements,
which is as of March 25, 1999
32
<PAGE> 5
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
-------- ----------
(RESTATED)
<S> <C> <C>
Investments:
Fixed maturities available for sale, at fair value........ $330,068 $239,818
Equity securities, at fair value.......................... 50,191 77,553
Other long-term investments, at cost, which approximates
fair value............................................. 40,278 18,008
Short-term investments, at cost, which approximates fair
value.................................................. 85,305 17,793
Investments in real estate and partnerships, net.......... 4,673 5,201
-------- --------
Total investments...................................... 510,515 358,373
Cash and cash equivalents................................... 51,309 72,887
Leases and residual interests in securitizations............ 93,507 53,782
Trade receivables (less allowance of $6,733 in 1998 and
$5,153 in 1997)........................................... 75,940 53,454
Notes receivable, net (including $1,798 in 1998 and $1,421
in 1997
with affiliated parties).................................. 10,761 10,163
Prepaid expenses and other assets........................... 111,471 96,352
Title plants................................................ 58,932 57,971
Property and equipment, net................................. 46,070 44,713
Deferred tax asset.......................................... 10,965 --
-------- --------
$969,470 $747,695
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities.................. $123,357 $ 78,023
Notes payable............................................. 214,624 163,015
Reserve for claim losses.................................. 224,534 201,674
Deferred income taxes..................................... -- 16,510
Income taxes payable...................................... 8,683 10,809
-------- --------
571,198 470,031
Minority interests........................................ 1,532 3,614
Stockholders' equity:
Preferred stock, $.0001 par value; authorized, 3,000,000
shares;
issued and outstanding, none........................... -- --
Common stock, $.0001 par value; authorized, 50,000,000
shares
in 1998 and 1997; issued, 35,540,036 in 1998 and
33,362,204 in 1997..................................... 3 3
Additional paid-in capital................................ 173,888 137,569
Retained earnings......................................... 265,567 167,222
-------- --------
439,458 304,794
Accumulated other comprehensive earnings.................. 11,657 23,631
Less treasury stock, 6,645,487 shares in 1998 and 1997, at
cost................................................... 54,375 54,375
-------- --------
396,740 274,050
Commitments and contingencies.............................
Subsequent events.........................................
-------- --------
$969,470 $747,695
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
33
<PAGE> 6
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(RESTATED) (RESTATED)
<S> <C> <C> <C>
REVENUE:
Title insurance premiums.................................. $ 910,278 $616,074 $552,799
Escrow fees............................................... 130,299 86,033 71,122
Other fees and revenue.................................... 208,301 125,146 91,647
Interest and investment income, including realized gains
(losses)............................................... 39,587 35,806 19,227
---------- -------- --------
1,288,465 863,059 734,795
---------- -------- --------
EXPENSES:
Personnel costs........................................... 394,284 273,221 240,232
Other operating expenses.................................. 257,080 189,226 176,524
Agent commissions......................................... 385,649 261,182 221,948
Provision for claim losses................................ 59,294 41,558 36,275
Interest expense.......................................... 17,024 12,269 11,590
---------- -------- --------
1,113,331 777,456 686,569
---------- -------- --------
Earnings before income taxes and extraordinary item....... 175,134 85,603 48,226
Income tax expense........................................ 69,442 36,595 18,985
---------- -------- --------
Earnings before extraordinary item..................... 105,692 49,008 29,241
Extraordinary item -- loss on early retirement of debt,
net of applicable income tax benefit of $1,180......... -- (1,700) --
---------- -------- --------
Net earnings........................................... $ 105,692 $ 47,308 $ 29,241
========== ======== ========
Basic net earnings........................................ $ 105,692 $ 47,308 $ 29,241
========== ======== ========
Basic earnings per share before extraordinary item........ $ 3.79 $ 2.10 $ 1.43
Extraordinary item -- loss on early retirement of debt,
net of applicable income tax benefit, basic basis...... -- (0.07) --
---------- -------- --------
Basic net earnings per share.............................. $ 3.79 $ 2.03 $ 1.43
========== ======== ========
Weighted average shares outstanding, basic basis.......... 27,921 23,355 20,426
========== ======== ========
Diluted net earnings...................................... $ 108,155 $ 50,450 $ 32,437
========== ======== ========
Diluted net earnings per share before extraordinary
item................................................... $ 3.23 $ 1.76 $ 1.23
Extraordinary item -- loss on early retirement of debt,
net of applicable income tax benefit, diluted basis.... -- (0.06) --
---------- -------- --------
Diluted net earnings per share............................ $ 3.23 $ 1.70 $ 1.23
========== ======== ========
Weighted average shares, diluted basis.................... 33,474 29,599 26,431
========== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
34
<PAGE> 7
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- ---------- ----------
<S> <C> <C> <C>
Net earnings............................................... $105,692 $47,308 $29,241
-------- ------- -------
Other comprehensive earnings (loss):
Unrealized gains (losses) on investments, net(1)......... (1,608) 20,333 7,798
Reclassification adjustments for gains included in net
earnings(2)........................................... (10,366) (9,632) (1,501)
-------- ------- -------
Other comprehensive earnings (loss)........................ (11,974) 10,701 6,297
-------- ------- -------
Comprehensive earnings..................................... $ 93,718 $58,009 $35,538
======== ======= =======
</TABLE>
- ---------------
(1) Net of income tax expense (benefit) of ($1,059), $15,214, and $5,070 for
1998, 1997 and 1996, respectively.
(2) Net of income tax expense of $6,824, $7,207, and $975 for 1998, 1997 and
1996, respectively.
See Notes to Consolidated Financial Statements.
35
<PAGE> 8
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED TREASURY STOCK
--------------- PAID-IN RETAINED COMPREHENSIVE -----------------------
SHARES AMOUNT CAPITAL EARNINGS EARNINGS SHARES AMOUNT
------ ------ ---------- -------- ------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 (Restated).... 25,302 $2 $ 62,413 $100,164 $ 6,633 6,880 $(56,292)
Exercise of stock options.............. 118 -- 720 -- -- -- --
Common stock awards.................... 11 -- 135 --
Other comprehensive earnings --
unrealized gain on investments...... -- -- -- -- 6,297 -- --
Acquisitions........................... 210 -- 2,733 -- -- (235) 1,917
Incorporation of Granite Financial,
Inc................................. 1,544 -- 2,260 -- -- -- --
Issuance of common stock pursuant to
Granite Financial, Inc. initial
public offering, net of offering
costs............................... 1,331 1 10,734 -- -- -- --
Cash dividends......................... -- -- -- (4,313) -- -- --
Net earnings........................... -- -- -- 29,241 -- -- --
------ -- -------- -------- -------- ----- --------
Balance, December 31, 1996 (Restated).... 28,516 3 78,995 125,092 12,930 6,645 (54,375)
------ -- -------- -------- -------- ----- --------
Exercise of stock options.............. 161 -- 1,424 -- -- -- --
Common stock awards.................... 6 -- 109 --
Other comprehensive earnings --
unrealized gain on investments...... -- -- -- -- 10,701 -- --
Acquisitions........................... 1,386 -- 12,450 -- -- -- --
Retirement and conversion of LYONs..... 1,455 -- 27,351 -- -- -- --
Nations Title Inc. purchase price
adjustment.......................... (29) -- (749) -- -- -- --
Issuance of common stock pursuant to
Granite Financial, Inc. secondary
public offering, net of offering
costs............................... 1,867 -- 17,989 -- -- -- --
Cash dividends......................... -- -- -- (5,178) -- -- --
Net earnings........................... -- -- -- 47,308 -- -- --
------ -- -------- -------- -------- ----- --------
Balance, December 31, 1997 (Restated).... 33,362 3 137,569 167,222 23,631 6,645 (54,375)
------ -- -------- -------- -------- ----- --------
Exercise of stock options.............. 1,583 -- 22,868 -- -- -- --
Other comprehensive loss -- unrealized
loss on investments................. -- -- -- -- (11,974) -- --
Acquisitions........................... 133 -- 4,250 -- -- -- --
Conversion of LYONs.................... 462 -- 9,201 -- -- -- --
Cash dividends......................... -- -- -- (7,347) -- -- --
Net earnings........................... -- -- -- 105,692 -- -- --
------ -- -------- -------- -------- ----- --------
Balance, December 31, 1998............... 35,540 $3 $173,888 $265,567 $ 11,657 6,645 $(54,375)
====== == ======== ======== ======== ===== ========
</TABLE>
See Notes to Consolidated Financial Statements.
36
<PAGE> 9
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
--------- ---------- ----------
(RESTATED) (RESTATED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 105,692 $ 47,308 $ 29,241
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Extraordinary item: loss on early retirement of
LYONs............................................... -- 2,880 --
Depreciation and amortization........................ 21,373 18,175 15,255
Net increase (decrease) in reserve for claim
losses.............................................. 22,860 5,028 (1,852)
Amortization of LYONs original issue discount and
other debt issuance costs........................... 4,432 5,939 5,295
Provision for losses on real estate and notes
receivable.......................................... 582 2,714 999
Equity in (gains) losses of unconsolidated
partnerships........................................ (4,361) (488) 520
Gain on sales of investments......................... (19,679) (10,801) (3,828)
(Gain) loss on sale of real estate and other
assets.............................................. 2,489 (6,038) 1,352
Changes in assets and liabilities, net of effects from
acquisitions:
Net increase in lease and lease securitization
residual interest................................... (39,725) (22,540) --
Net (increase) decrease in trade receivables......... (22,486) 2,177 (7,369)
Net increase in prepaid expenses and other assets.... (17,703) (17,601) (14,400)
Net increase in accounts payable and accrued
liabilities......................................... 39,568 12,336 2,553
Net increase (decrease) in income taxes.............. (21,280) 19,820 2,092
--------- --------- ---------
Net cash provided by operating activities......... 71,762 58,909 29,858
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investment securities available for sale.... 179,668 263,179 188,375
Proceeds from sales of other assets....................... 6,848 17,673 3,731
Proceeds from sales of real estate........................ -- 6,407 917
Collections of notes receivable........................... 9,372 14,094 18,934
Additions to title plants................................. (1,480) (1,792) (777)
Additions to property and equipment....................... (22,393) (23,174) (16,197)
Additions to notes receivable............................. (11,717) (3,868) (9,403)
Purchases of investment securities available for sale..... (324,540) (344,709) (194,560)
Leases assigned to lender................................. -- -- (24,793)
Investments in real estate and partnerships............... -- (1,048) --
Sale of subsidiary, net of cash........................... -- 5,934 --
Acquisitions of businesses, net of cash acquired.......... (1,036) (10,866) (10,138)
--------- --------- ---------
Net cash used in investing activities............. (165,278) (78,170) (43,911)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings................................................ 84,287 21,570 53,705
Debt service payments..................................... (28,877) (25,241) (26,793)
Dividends paid............................................ (6,340) (4,703) (3,738)
Stock offering proceeds, net.............................. -- 17,990 10,832
Exercise of stock options................................. 22,868 1,424 720
Issuance of treasury stock, net........................... -- -- 1,917
--------- --------- ---------
Net cash provided by financing activities......... 71,938 11,040 36,643
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents...... (21,578) (8,221) 22,590
Cash and cash equivalents at beginning of year............ 72,887 81,108 58,518
--------- --------- ---------
Cash and cash equivalents at end of year.................. $ 51,309 $ 72,887 $ 81,108
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
37
<PAGE> 10
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following describes the significant accounting policies of Fidelity
National Financial, Inc. ("Fidelity Financial") and its subsidiaries
(collectively, the "Company") which have been followed in preparing the
accompanying Consolidated Financial Statements.
Description of business
Fidelity National Financial, Inc., through its principal subsidiaries
(collectively, the "Company"), is one of the largest national underwriters
engaged in the business of issuing title insurance policies and performing other
real estate related services such as escrow, collection and trust activities,
real estate information and technology services, trustee sale guarantees, credit
reporting, attorney services, flood certification, tax monitoring, home warranty
insurance, reconveyances, recordings, foreclosure publishing and posting
services and exchange intermediary services in connection with real estate
transactions. Title insurance services are provided through the Company's direct
operations and otherwise through independent title insurance agents who issue
title policies on behalf of the underwriting subsidiaries. Title insurance is
generally accepted as the most efficient means of determining title to, and the
priority of interests in, real estate in nearly all parts of the United States.
Today, virtually all real property mortgage lenders require their borrowers to
obtain a title insurance policy at the time a mortgage loan is made or to allow
the sale of loans in the secondary market.
The Company's principal subsidiaries consist of Fidelity National Title
Insurance Company ("Fidelity Title"), Fidelity National Title Insurance Company
of New York ("Fidelity New York"), Alamo Title Insurance ("Alamo Title");
(collectively, the "Insurance Subsidiaries"); its wholly-owned underwritten
title companies (collectively, the "UTCs"); and its network of wholly-owned
title-related ancillary service companies known as Fidelity National Lender
Express Network ("FLEXNet"). The Company also originates, funds, purchases,
sells, securitizes and services equipment leases for a broad range of businesses
through its wholly-owned subsidiary Granite Financial, Inc.
Fidelity Title was the parent company of Fidelity National Title Insurance
Company of Tennessee ("Fidelity Tennessee"), Fidelity National Title Insurance
Company of California ("Fidelity California") and Nations Title Insurance
Company ("Nations Title"). Fidelity Tennessee, Fidelity California and Nations
Title were merged into Fidelity Title on December 31, 1998, August 7, 1997 and
December 29, 1997, respectively. Fidelity New York is the parent company of
Nations Title Insurance of New York Inc. ("Nations New York") and National Title
Insurance of New York Inc. ("National"). Fidelity National Title Insurance
Company of Pennsylvania ("Fidelity Pennsylvania") was merged into Fidelity New
York as of April 11, 1997, which in turn, was the parent company of American
Title Insurance Company ("ATIC"), which was merged into Fidelity Pennsylvania as
of November 21, 1996.
Nations Title Insurance Company, Nations Title Insurance of New York Inc.
and National Title Insurance of New York Inc. were acquired, along with Nations
Title Inc. ("NTI," collectively, "Nations Title Inc."), in a transaction which
closed on April 1, 1996. Certain of the ancillary service companies were
acquired in separate transactions during 1996 and 1997. Granite Financial, Inc.
and subsidiaries ("Granite") was acquired in a transaction which closed on
February 26, 1998. Alamo Title was acquired in connection with the Company's
acquisition of Alamo Title Holding Company and subsidiaries ("Alamo") in a
transaction which closed August 20, 1998.
Principles of consolidation and basis of presentation
The accompanying Consolidated Financial Statements include the accounts of
the Company and its wholly-owned and majority-owned subsidiaries. All material
intercompany profits, transactions and balances
38
<PAGE> 11
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
have been eliminated. The Company's investments in non-majority-owned
partnerships and subsidiaries are accounted for on the equity method.
On February 26, 1998, the Company, in exchange for approximately 5.0
million shares of Company common stock plus cash in lieu of fractional shares,
acquired the common stock of Granite Financial, Inc. and subsidiaries. Fidelity
National Financial, Inc. common stock, as reported by the New York Stock
Exchange, closed at $26.08 on February 26, 1998. The transaction has been
accounted for as a pooling-of-interests. Accordingly, the Consolidated Balance
Sheet as of December 31, 1997 and the related Consolidated Statements of
Earnings, Stockholders' Equity and Cash Flows for each of the years in the
two-year period ended December 31, 1997 and the related Notes to Consolidated
Financial Statements, have been restated to reflect the inclusion of Granite.
The Company acquired the common stock of Alamo Title Holding Company and
subsidiaries on August 20, 1998, in exchange for approximately 2.2 million
shares of Company common stock plus cash in lieu of fractional shares. Fidelity
National Financial, Inc. common stock, as reported by the New York Stock
Exchange, closed at $33.13 on August 20, 1998. The transaction has been
accounted for as a pooling-of-interests. Accordingly, the Consolidated Balance
Sheet as of December 31, 1997 and the related Consolidated Statements of
Earnings, Stockholders' Equity and Cash Flows for each of the years in the
two-year period ended December 31, 1997 and the related Notes to Consolidated
Financial Statements, have been restated to reflect the inclusion of Alamo.
The results of operations of Fidelity, Granite and Alamo separately and the
combined amounts presented in the Consolidated Financial Statements for the two
years prior to the consummation of the poolings-of-interests are summarized
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Revenue:
Fidelity.......................................... $746,712 $636,913
Granite........................................... 16,469 5,464
Alamo............................................. 99,878 92,418
-------- --------
Combined.......................................... $863,059 $734,795
======== ========
Earnings:
Fidelity Earnings before extraordinary item....... $ 41,471 $ 24,337
Extraordinary item.............................. (1,700) --
-------- --------
Earnings after extraordinary item............... 39,771 24,337
Granite........................................... 3,326 1,190
Alamo............................................. 4,211 3,714
-------- --------
Combined.......................................... $ 47,308 $ 29,241
======== ========
</TABLE>
Effective as of October 1, 1997, the Company acquired Bron Research, Inc.
("BRON"), a flood certification company headquartered in Austin, Texas. The
purchase price paid by the Company for the acquisition was $9.85 million, paid
in 575,599 shares of Company common stock. BRON now operates as Fidelity
National Flood, Inc. This transaction has been accounted for as a
pooling-of-interests. Prior to 1997, BRON's financial position and results of
operations were insignificant, and as such, the 1996 Consolidated Statement of
Earnings and Related Notes to Consolidated Financial Statements have not been
restated to reflect the inclusion of BRON.
39
<PAGE> 12
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
There have been no adjustments to the total net assets or stockholders'
equity of the combining companies as a result of the poolings-of-interests.
Certain reclassifications have been made to conform the financial statements of
the combining companies to the Consolidated Financial Statements of the Company.
Granite previously reported its results of operations based on a fiscal
year ended June 30. Granite's fiscal year has been converted to a calendar year
in order to conform to that of the Company.
Cash and cash equivalents
For purposes of reporting cash flows, highly liquid instruments purchased
with original maturities of three months or less are considered cash
equivalents. The carrying amounts reported in the Consolidated Balance Sheets
for these instruments approximate their fair value.
Investments
Fixed maturity securities are purchased to support the investment
strategies of the Company, which are developed based on many factors including
rate of return, maturity, credit risk, tax considerations and regulatory
requirements. Fixed maturity securities which may be sold prior to maturity to
support the Company's investment strategies are carried at fair value and are
classified as available for sale as of the balance sheet dates. Fair values for
fixed maturity securities are principally a function of current interest rates
and are based on quoted market prices.
Equity securities are considered to be available for sale and carried at
fair value as of the balance sheet dates. Fair values are based on quoted market
prices.
Other long-term investments, which consist of a limited partnership
investment in an investment fund, as well as certain other debt instruments and
equity investments, are carried at cost or on the equity method, as appropriate,
which approximates fair value.
Short-term investments, which consist primarily of securities purchased
under agreements to resell, commercial paper and money market instruments, which
have an original maturity of one year or less, are carried at amortized cost,
which approximates fair value.
Investments in real estate and partnerships are generally held for
investment purposes and are carried at cost in the absence of any other than
temporary impairment in value. Investments in real estate which are held for
sale, including real estate acquired through foreclosure of properties in
satisfaction of commercial and real estate loans, are carried at the lower of
cost or fair value less estimated costs to sell.
Realized gains and losses on the sale of investments are determined on the
basis of the cost of the specific investments sold and are credited or charged
to income on a trade date basis. Unrealized gains or losses on bonds and common
stocks which are classified as available for sale, net of applicable deferred
income taxes (benefits), are excluded from income and credited or charged
directly to a separate component of stockholders' equity. If any unrealized
losses on bond or common stocks are deemed other than temporary, such unrealized
losses are recognized as realized losses.
Leases and Residual Interests in Securitizations
Leases and residual interests in securitizations includes direct financing
leases, direct financing leases assigned to lender and residual interests in
securitizations. See Note D.
40
<PAGE> 13
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
Direct Financing Leases
Granite has entered into various lease agreements which, in accordance with
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards No. 13, "Accounting for Leases," meet the criteria of capitalization
and are accounted for as direct financing leases. Under this method, the amount
by which gross lease rentals exceed the cost of the related assets, less the
estimated recoverable residual value at the expiration of the lease, is
recognized as income from direct financing leases over the life of the lease
using the interest method. Any permanent reduction in the estimated residual
equipment value of leased property is charged to operations in the period it
occurs. See Note D.
Sales of Leases
Gains or losses resulting from sales of leases are recognized in the
accompanying Consolidated Statements of Earnings at the date of sale and are
based on the difference between the selling price of the sales and the carrying
value of the related leases sold. Nonrefundable fees and direct costs associated
with the origination of leases are deferred and recognized when the leases are
sold.
On January 1, 1997, the Company adopted Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
("SFAS 125"). Under SFAS 125, a transfer of financial assets in which control is
surrendered is accounted for as a sale to the extent that consideration other
than beneficial interests in the transferred assets is received in the exchange.
Liabilities and derivatives incurred or obtained by the transfer of financial
assets are required to be measured at fair value, if practicable. Also,
servicing assets and other retained interests in the transferred assets must be
measured by allocating the previous carrying value between the asset sold and
the interest retained, if any, based on their relative fair values at the date
of transfer.
Direct Financing Leases Assigned to Lender
SFAS 125 prohibits early application. Prior to January 1, 1997, direct
financing leases sold prior to that date as part of a securitization to a
special-purpose entity that issued debt securities were accounted for as
collateralized borrowings. The leases collateralizing the debt are recorded as
direct financing leases assigned to lender. The leases and related debt are
reflected in the Consolidated Balance Sheets. See Notes D and H.
Residual Interests in Securitizations
Residual interests in securitizations ("Residuals") of lease receivables in
trust are recorded as a result of the sale of lease receivables through
securitization. The securitizations are generally structured as follows: First,
the Company sells a portfolio of lease receivables to a special purpose entity
("SPE") which has been established for the limited purpose of buying and
reselling the Company's lease receivables. Next, the SPE transfers the same
lease receivables to a Trust (the "Trust"), and the Trust in turn issues
interest-bearing asset-backed securities (the "Bonds and Certificates")
generally in an amount equal to the aggregate initial principal balance of the
lease receivables, multiplied by an advance rate. The Company typically sells
these lease receivables at face value and with limited recourse relating to
defaulted loans, prepayments and certain representations and warranties provided
by the Company to the Trust. One or more investors purchase these Bonds and
Certificates and the proceeds from the sale of the Bonds and Certificates are
used as consideration to purchase the lease receivables from the Company.
At the closing of each securitization which is accounted for as a sale the
Company removes from its balance sheet the lease receivables held for sale and
adds to its balance sheet (i) the cash received and (ii) the allocated cost of
the Residuals which consists of (a) cash collateral account and (b) net excess
cash flows.
41
<PAGE> 14
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
The excess of the cash received by the Company over the allocated cost of the
lease receivables sold less transaction costs, equals the net gain on sale
recorded by the Company.
The Company allocates its basis in the lease receivables between the
portion of the lease receivables sold (the Bonds and Certificates) and the
portion retained (the Residuals) based on the relative fair values of those
portions on the date of the sale.
The Company may recognize unrealized gains or losses through stockholders'
equity attributable to the change in the fair value of the Residuals, which are
recorded at estimated fair value and accounted for as available for sale
securities. The Company is not aware of an active market for the purchase or
sale of Residuals at this time. Accordingly, the Company estimates the fair
value of the Residuals by calculating the present value of the estimated
expected future excess cash flows received by the Company after being released
by the Trust (cash out method) using a discount rate of 12%, which management
believes is commensurate with the risks involved.
The Company is entitled to the cash flows from the Residuals that represent
collections on the lease receivables in excess of the amounts required to pay
the Bonds and Certificate principal and interest, the base servicing fees and
certain other fees such as trustee and custodial fees. At the end of each
collection period, the aggregate cash collections from the lease receivables are
allocated first to the servicing fees and certain other fees such as trustee and
custodial fees for the period, then to the Bond and Certificate holders for
interest at the pass-through rate on the Bonds and Certificates plus principal
as defined in the Trust and Security Agreements. If the amount of cash required
for the above allocations exceeds the amount collected during the collection
period, the shortfall is drawn from the Cash Collateral Account. If the cash
collected during the period exceeds the amount necessary for the above
allocations, and there is no shortfall in the related Cash Collateral Account,
the excess is released to the Company. If the Cash Collateral Account balance is
not at the required credit enhancement level, the excess cash collected is used
to build the cash collateral account until the credit enhancement level is
achieved. The specified credit enhancement levels are defined in the applicable
Trust and Security Agreement which are expressed generally as a percentage of
either the original or current collateral principal balance.
The implicit interest rate on the lease receivables is relatively high in
comparison to the pass through rate on the Bonds and Certificates. In
determining the value of the Residuals described above, the Company estimates
the future rates of prepayments, delinquencies, defaults and default loss
severity as they impact the amount and timing of the estimated cash flows. The
Company has used a zero prepayment estimate because the lease contracts
generally require the lessee to pay all or a majority of the lease payments due
under the remaining lease term. The Company estimates the timing of the receipt
of such prepayments in its estimate of cash flows. The Company's loss estimate
is 1.5% to 2.0% of the gross lease payment, which is based on historical loss
data for comparable leases and the specific characteristics of the leases
originated by the Company. The Company's prepayment and default estimates
resulted in a weighted average life of the pool of leases of between
approximately 1.5 and 2.0 years.
In future periods, the Company may increase the estimated fair value of the
Residuals if the actual performance of the lease receivables is higher than the
original estimate. If the actual performance of the lease receivables is lower
than the original estimate, then an adjustment to the carrying value of the
Residuals may be required if the estimated fair value of the Residuals is less
than its carrying value.
The Bond and Certificate holders and their securitization trusts have no
recourse to the Company's other assets for failure of lessees to pay when due.
The Company's Residuals are subordinate to the Bonds and Certificates until the
Bond and Certificate holders are fully paid.
42
<PAGE> 15
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
Allowance for Losses on Leases
The Company establishes an allowance for losses to provide for expected
losses in the Company's existing portfolio of leases and leases transferred on a
recourse basis. The allowance for losses is based on the Company's historical
and expected loss experience, industry knowledge and other economic factors. The
ultimate obligation for defaults and delinquencies related to leases transferred
on a recourse basis is measured and recorded at the time of transfer.
Leases are collateralized by the equipment under lease, and lessees
generally are required to personally guarantee lease payments. The Company's
risk of loss is partially mitigated by recovering collateral and enforcing
guarantees. However, the resale value of leased equipment generally declines at
a rate greater than the principal of the lease. As a result, full recovery on
defaulted leases is not usually possible.
Lease Acquisition Costs and Broker Commissions
Lease acquisition costs consist of broker bonuses and commissions paid upon
the origination of the lease contracts. The costs are included in direct
financing leases and are amortized to expense over the life of the related lease
contracts on the interest method.
Trade receivables
The carrying values reported in the Consolidated Balance Sheets for trade
receivables approximate their fair value.
Fair value of financial instruments
The fair values of financial instruments presented in the applicable notes
to the Company's Consolidated Financial Statements are estimates of the fair
values at a specific point in time using available market information and
appropriate valuation methodologies. These estimates are subjective in nature
and involve uncertainties and significant judgment in the interpretation of
current market data. Therefore, the fair values presented are not necessarily
indicative of amounts the Company could realize or settle currently. The Company
does not necessarily intend to dispose of or liquidate such instruments prior to
maturity. See Notes C, D, E and H.
Title plants
Title plants are recorded at the cost incurred to construct or obtain and
organize historical title information to the point it can be used to perform
title searches. Costs incurred to maintain, update and operate title plants are
expensed as incurred. Title plants are not amortized as they are considered to
have an indefinite life if maintained. Sales of title plants are reported at the
amount received net of the adjusted costs of the title plant sold. Sales of
title plant copies are reported at the amount received. No cost is allocated to
the sale of copies of title plants unless the carrying value of the title plant
is diminished or impaired.
Property and equipment
Property and equipment are recorded at cost, less depreciation.
Depreciation is computed primarily using the straight-line method based on the
estimated useful lives of the related assets which range from three to thirty
years. Leasehold improvements are amortized on a straight-line basis over the
lesser of the term of the applicable lease or the estimated useful lives of such
assets.
43
<PAGE> 16
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
Cost in excess of net assets acquired and other intangible assets
Intangible assets include cost in excess of net assets acquired,
capitalized software costs, capitalized licensing costs and capitalized debt
offering costs and are amortized on a straight line basis over three to forty
years. Intangible assets at December 31, 1998 consist of cost in excess of net
assets acquired of $60,830,000 less accumulated amortization of $6,916,000,
capitalized licensing costs of $2,500,000 less accumulated amortization of
$221,000, capitalized software of $13,515,000 less accumulated amortization of
$7,085,000 and capitalized debt offering costs of $4,536,000 less accumulated
amortization of $2,500,000. At December 31, 1997, intangible assets consist of
cost in excess of net assets acquired of $48,026,000 less accumulated
amortization of $4,608,000, capitalized licensing costs of $2,500,000 less
accumulated amortization of $159,000, capitalized software of $12,326,000 less
accumulated amortization of $4,636,000 and capitalized debt offering costs of
$6,883,000 less accumulated amortization of $3,625,000.
Impairment of intangible assets is monitored on a continual basis, and is
assessed based on an analysis of the cash flows generated by the underlying
assets. No impairment of intangible assets has been noted.
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 provides that deferred tax assets and liabilities be recognized
for temporary differences between the financial reporting basis and the tax
basis of the Company's assets and liabilities and expected benefits of utilizing
net operating loss and credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The impact on deferred taxes of changes in tax rates and laws, if any,
are applied to the years during which temporary differences are expected to be
settled and reflected in the financial statements in the period enacted.
Reserve for claim losses
The Company's reserve for claim losses includes known claims as well as
losses the Company expects to incur, net of recoupments. Each known claim is
reserved for on the basis of a review by the Company as to the estimated amount
of the claim and the costs required to settle the claim. Reserves for claims
which are incurred but not reported are provided for at the time premium revenue
is recognized based on historical loss experience and other factors, including
industry averages, claim loss history, current legal environment, geographic
considerations and type of policy written. The occurrence of a significant major
claim (those greater than $500,000) in any given period could have a material
adverse effect on the Company's financial condition and results of operations
for such period. See Note J.
If a loss is related to a policy issued by an independent agent, the
Company may proceed against the independent agent pursuant to the terms of the
agency agreement. In any event, the Company may proceed against third parties
who are responsible for any loss under the title insurance policy under rights
of subrogation.
The Company also accrues reserves for losses arising from the escrow,
closing and disbursement functions due to fraud or operational error based on
historical experience.
Reinsurance
In the ordinary course of business, the Company reinsures certain risks
with other insurers for the purpose of limiting its maximum loss exposure and
also assumes reinsurance for certain risks of other insurers for the purpose of
earning additional revenue. The Company cedes or assumes a portion of certain
policy liabilities
44
<PAGE> 17
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
under agent fidelity, excess of loss and case-by-case reinsurance agreements.
Reinsurance agreements provide that in the event of a loss (including costs,
attorneys' fees and expenses) exceeding the retained amounts, the reinsurer is
liable for the excess amount assumed. However, the ceding company remains
primarily liable in the event the reinsurer does not meet its contractual
obligations. Reinsurance activity is not considered significant.
Title premiums, escrow fees, other fees and revenue and agent commissions
Title insurance premiums, escrow fees and certain other fees and revenue
are recognized as revenue at the time of closing of the related transaction as
the earnings process is considered complete. Certain other fees and revenue are
recognized over the period the related services are provided. Title insurance
commissions earned by the Company's agents are recognized as an expense
concurrently with premium recognition. Other fees and revenue includes revenue
derived from Granite's operations, as well as non-title related revenue from
other subsidiaries and other title-related revenue not included in title
insurance premiums or escrow fees.
Share and per share restatement
On December 11, 1996, the Company declared a 10% stock dividend to
shareholders of record on December 23, 1996, distributed January 7, 1997. The
Company declared a 10% stock dividend on December 17, 1997 to shareholders of
record on December 29, 1997, distributed January 14, 1998. On December 13, 1998,
the Company declared a 10% stock dividend to shareholders of record on December
28, 1998, distributed January 12, 1999. The par value of the additional shares
of common stock issued in connection with the stock dividends was credited to
common stock and a like amount charged to retained earnings as of December 31,
1998, 1997 and 1996, respectively. Fractional shares were paid in cash.
All data with respect to earnings per share, dividends per share and share
information, including price per share where applicable, in the Consolidated
Financial Statements and Notes thereto have been retroactively adjusted to
reflect all stock dividends and splits. Additionally, all data impacted has been
restated to reflect the acquisitions of Granite, Alamo and BRON.
Earnings per share
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"),
effective for fiscal years ending after December 15, 1997. The Company
retroactively adopted SFAS 128 in 1997.
Basic earnings per share is computed by dividing net earnings available to
common shareholders by the weighted average number of common shares outstanding
during the period. Dilutive earnings per share is calculated by dividing net
earnings available to common shareholders plus the impact of assumed conversions
of dilutive potential securities. The Company has granted certain options and
warrants which have been treated as common share equivalents for purposes of
calculating diluted earnings per share. The Liquid Yield Option Notes ("LYONs")
are considered other dilutive securities for purposes of calculating diluted
earnings per share to the extent that they are not antidilutive.
45
<PAGE> 18
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
The following table sets forth the calculation of basic and diluted
earnings per share for each of the years in the three-year period ended December
31, 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Basic earnings per share calculation:
Earnings before extraordinary loss................. $105,692 $49,008 $29,241
Extraordinary loss, net of applicable income tax
benefit of $1,180............................... -- (1,700) --
-------- ------- -------
Net earnings....................................... $105,692 $47,308 $29,241
======== ======= =======
Weighted average shares.................... 27,921 23,355 20,426
======== ======= =======
Basic earnings per share
Earnings before extraordinary loss................. $ 3.79 $ 2.10 $ 1.43
Extraordinary loss................................. -- (.07) --
-------- ------- -------
Net earnings....................................... $ 3.79 $ 2.03 $ 1.43
======== ======= =======
Diluted earnings per share calculation:
Earnings before extraordinary loss................. $105,692 $49,008 $29,241
Plus: Impact of assumed conversion of LYONs........ 2,463 3,142 3,196
-------- ------- -------
Earnings before extraordinary loss plus assumed
conversion...................................... 108,155 52,150 32,437
Extraordinary loss, net of applicable income tax
benefit of $1,180............................... -- (1,700) --
-------- ------- -------
Net earnings plus assumed conversions.............. $108,155 $50,450 $32,437
======== ======= =======
Weighted average shares............................ 27,921 23,355 20,426
Plus: Incremental shares from assumed conversions
LYONs...................................... 3,694 5,008 5,272
Options.................................... 1,859 1,236 733
-------- ------- -------
Dilutive potential shares.......................... 33,474 29,599 26,431
======== ======= =======
Diluted earnings per share
Earnings before extraordinary loss plus assumed
conversions..................................... $ 3.23 $ 1.76 $ 1.23
Extraordinary loss................................. -- (0.06) --
-------- ------- -------
Net earnings....................................... $ 3.23 $ 1.70 $ 1.23
======== ======= =======
</TABLE>
Management estimates
The preparation of these Consolidated Financial Statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the Consolidated Financial Statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
46
<PAGE> 19
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
Certain reclassifications
Certain reclassifications have been made in the 1997 and 1996 Consolidated
Financial Statements to conform to the classifications used in 1998.
B. ACQUISITIONS
On April 4, 1996, the Company purchased 17% of the outstanding common stock
of National Alliance Marketing Group, Inc. ("National Alliance"), a California
corporation, for $567,000; together with a warrant to acquire an additional 14%
of National Alliance common stock. In addition, the Company loaned $1,200,000 to
National Alliance at closing at a rate of Prime plus one percent. Subsequently,
the Company agreed to increase the credit facility from $1,200,000 to
$1,700,000. In consideration for the increase in the credit facility National
Alliance agreed to increase the warrant shares which the Company could purchase.
If the entire $1,700,000 was borrowed the Company could purchase an additional
34% of the outstanding shares of National Alliance. After receiving approval of
the transaction from the California Department of Insurance, the transaction
closed on July 12, 1996. National Alliance is the parent company of Alliance
Home Warranty Company ("Alliance"), a California insurance company. Alliance
sells home warranty plans to buyers of resale homes, primarily in the Central
and Southern California markets. A home warranty contract generally promises the
repair or replacement of major operating systems and built-in appliances inside
a home for a period of one year. On July 3, 1997, the Company converted the
outstanding note balance in conjunction with the exercise of the warrants and
then owned 51% of the outstanding common stock of National Alliance. The
outstanding balance of the note receivable due from National Alliance at
conversion was approximately $1.6 million. On August 14, 1998, the Company
acquired the outstanding minority interest in National Alliance, 49%, for a
purchase price of $3,320,000. The Company now owns 100% of National Alliance,
which is now known as Fidelity National Home Warranty. Prior to the conversion
of the convertible note in July 1997, the Company accounted for its investment
in National Alliance on the equity method. Since that time the Company has
accounted for National Alliance as a purchase and has consolidated its interest
in National Alliance's financial position and results of operations with those
of the Company.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the National Alliance acquisition were as follows
(dollars in thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value..................... $ 4,467
Cost in excess of net assets acquired...................... 4,553
Liabilities assumed at fair value.......................... (3,383)
-------
Total purchase price............................. $ 5,637
=======
</TABLE>
Alamo acquired substantially all of the assets of Southwest Land Title
Company of Angleton effective January 31, 1997 for $1.1 million cash, and
created a new corporation, Alamo Title Company of Brazoria, Inc. ("Brazoria")
into which the acquired assets were placed. This transaction has been accounted
for as a purchase.
The assets acquired, including cost in excess of assets acquired, in the
Brazoria acquisition were as follows (dollars in thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value...................... $ 850
Cost in excess of net assets acquired....................... 250
------
Total purchase price.............................. $1,100
======
</TABLE>
On March 31, 1997, Granite acquired the assets and liabilities of Global
Finance & Leasing, Inc. ("Global"), a micro-ticket leasing company, for a
purchase price of $2.3 million in cash. The acquisition
47
<PAGE> 20
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
agreement provides for additional contingent consideration of $916,000 based on
the collection of certain receivables. Granite believes the collection of these
receivables is remote. Therefore, no liability has been recorded in the
Company's Consolidated Financial Statements. This transaction has been accounted
for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the Global acquisition were as follows (dollars in
thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value..................... $ 3,545
Cost in excess of net assets acquired...................... 3,297
Liabilities assumed at fair value.......................... (4,508)
-------
Total purchase price............................. $ 2,334
=======
</TABLE>
On June 20, 1997, Granite acquired certain assets and liabilities of SFR
Funding, Inc. ("SFR"), a small ticket equipment leasing company, for cash of
$300,000, a note payable of $250,000 and the assumption of certain liabilities.
The SFR transaction resulted in cost in excess of net assets acquired of
$681,000. Neither the financial position nor the results of operations of SFR
have been significant to the Company or Granite since acquisition. This
transaction has been accounted for as a purchase.
On August 22, 1997, the Company acquired the common stock of First Title
Corporation ("First Title"), a title company with fourteen offices throughout
the southeastern United States. First Title has been merged into a subsidiary of
the Company. First Title was acquired for $4.7 million; payable in 80% common
stock of the Company (278,738 shares or $3.8 million) and 20% cash
(approximately $900,000). This transaction has been accounted for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the First Title Corporation acquisition were as follows
(dollars in thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value...................... $1,294
Cost in excess of net assets acquired....................... 4,033
Liabilities assumed at fair value........................... (627)
------
Total purchase price.............................. $4,700
======
</TABLE>
On September 18, 1997, the Company acquired the common stock of Ifland
Credit Services ("ICS"), a credit reporting company headquartered in Lexington,
Kentucky, for a purchase price of $3.75 million. ICS has been merged with Credit
Reports, Inc. ("CRI") and Classified Credit Data, Inc. ("CCD") in order to form
Fidelity National Credit Services. The purchase price was payable 80% in common
stock of the Company (187,170 shares or $3.0 million) and 20% cash ($750,000).
This transaction has been accounted for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the Ifland Credit Services acquisition were as follows
(dollars in thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value...................... $ 618
Cost in excess of net assets acquired....................... 3,517
Liabilities assumed at fair value........................... (385)
------
Total purchase price.............................. $3,750
======
</TABLE>
On October 9, 1997, the Company acquired the common stock of Credit
Reports, Inc., a credit reporting company headquartered in Scottsdale, Arizona,
with operations in California, Colorado, Nevada and Oregon.
48
<PAGE> 21
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
CRI has been merged with ICS and CCD in order to form Fidelity National Credit
Services. The purchase price for CRI was $200,000, subject to certain purchase
price adjustments based on the combined equity of CRI and Express Network, Inc.,
its affiliate, payable in 12,601 shares of Company common stock. This
transaction has been accounted for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the Credit Reports, Inc. acquisition were as follows
(dollars in thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value..................... $ 2,559
Cost in excess of net assets acquired...................... 139
Liabilities assumed at fair value.......................... (2,498)
-------
Total purchase price............................. $ 200
=======
</TABLE>
Also on October 9, 1997, the Company acquired the common stock of Express
Network, Inc. ("ENI"), a provider of attorney services such as courier,
messenger, courthouse filing, process serving, investigation and reprographics.
ENI provides services to legal firms in Los Angeles, Orange County, San Diego,
Riverside and San Francisco, California. The purchase price for ENI was $10.55
million; subject to certain purchase price adjustments based on the combined
equity of ENI and CRI, its affiliate, payable in 50% common stock of the Company
(332,374 shares or $5.275 million) and 50% cash (approximately $5.275 million).
Approximately $2.8 million of the cash portion of the purchase price will be
paid in equal installments over a four-year period. This transaction has been
accounted for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the Express Network, Inc. acquisition were as follows
(dollars in thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value..................... $ 3,018
Cost in excess of net assets acquired...................... 9,640
Liabilities assumed at fair value.......................... (2,108)
-------
Total purchase price............................. $10,550
=======
</TABLE>
On October 21, 1997, the Company acquired 100% of the common stock of
Classified Credit Data, Inc., a credit reporting company headquartered in Orange
County, California, for a purchase price of $300,000, which was paid in cash.
CCD was merged with ICS and CRI in order to form Fidelity National Credit
Services. This transaction has been accounted for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the Classified Credit Data acquisition were as follows
(dollars in thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value...................... $ 385
Cost in excess of net assets acquired....................... 386
Liabilities assumed at fair value........................... (471)
-----
Total purchase price.............................. $ 300
=====
</TABLE>
On December 30, 1997, Granite completed the acquisition of 84% of the
common stock of North Pacific Funding, Inc. dba C&W Leasing and its wholly-owned
subsidiary CKC Corporation dba US Funding (collectively, "C&W Leasing"). The
purchase price for this transaction was $5.1 million, in the form of notes
payable to the former stockholders. This transaction has been accounted for as a
purchase. The remaining 16% of the common stock of C&W Leasing was purchased on
January 5, 1998 for additional consideration of $900,000 in promissory notes
payable.
49
<PAGE> 22
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the C&W Leasing acquisition were as follows (dollars in
thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value..................... $ 1,003
Cost in excess of net assets acquired...................... 5,821
Liabilities assumed at fair value.......................... (1,724)
-------
Total purchase price............................. $ 5,100
=======
</TABLE>
The Company completed the sale of its wholly-owned subsidiary ACS Systems,
Inc. ("ACS") to Micro General Corporation (OTCBB:MGEN) ("Micro General") for 4.6
million shares of Micro General common stock, valued at $1,297,000, on May 14,
1998. ACS provides small to medium size businesses within the real estate
industry with software, systems integration and communication services including
telecommunications hardware, long distance reselling, computer hardware and
system software reselling, consulting services, technical services, internet
services, electronic commerce and title and escrow software applications. ACS
will continue to provide the above listed services to the Company at preferred
customer rates. The Company currently owns 70.6% of Micro General Corporation.
This transaction has been accounted for as a reverse merger of Micro General
into the Company.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the Micro General acquisition were as follows (dollars in
thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value..................... $ 1,484
Cost in excess of net assets acquired...................... 5,161
Liabilities assumed at fair value.......................... (4,812)
Minority interest.......................................... (536)
-------
Total purchase price............................. $ 1,297
=======
</TABLE>
Additionally, on November 17, 1998, Micro General acquired LDExchange.com,
Inc. ("LDX"), for a purchase price of $3.1 million, payable $1.1 million in cash
and $2.0 million in Micro General common stock (1,000,000 shares). LDX is a
facilities based, wholesale carrier providing international telecommunication
services.
The assets acquired, including cost in excess of net assets acquired, and
liabilities assumed in the LDX acquisition were as follows (dollars in
thousands):
<TABLE>
<S> <C>
Tangible assets acquired at fair value..................... $ 2,325
Cost in excess of net assets acquired...................... 2,739
Liabilities assumed at fair value.......................... (1,964)
-------
Total purchase price............................. $ 3,100
=======
</TABLE>
Effective September 1, 1998, the Company acquired 100% of Lexington Capital
Corporation ("Lexington"), a financial services company specializing in
financing national and regional franchisee accounts, for a purchase price of
$3.5 million, payable in $3.0 million in cash and $500,000 in restricted common
stock of the Company (15,129 shares). The acquisition of Lexington resulted in
$3,500,000 of cost in excess of net assets acquired. Neither the financial
position or the results of operations of Lexington have been material to the
Company since acquisition. This transaction has been accounted for as a
purchase.
Selected unaudited pro forma combined results of operations for the years
ended December 31, 1998, 1997 and 1996, assuming the National Alliance (51%),
Brazoria, Global, SFR, First Title, ICS, CRI, ENI, CCD and C&W Leasing
acquisitions occurred on January 1, 1997 and 1996, and assuming the Micro
General,
50
<PAGE> 23
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
LDX, National Alliance (49%) and Lexington acquisitions occurred January 1, 1998
and 1997, are presented as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Total revenue..................................... $1,315,624 $908,244 $826,060
Basic earnings before extraordinary item.......... 106,055 49,558 27,699
Basic net earnings................................ 106,055 47,858 27,699
Basic earnings per share.......................... 3.80 2.00 1.30
Diluted earnings before extraordinary item........ 108,518 52,700 30,895
Diluted net earnings.............................. 108,518 51,000 30,895
Diluted earnings per share........................ 3.24 1.69 1.13
</TABLE>
C. INVESTMENTS
The carrying amounts and fair values of the Company's fixed maturity
securities at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------
GROSS GROSS
CARRYING AMORTIZED UNREALIZED UNREALIZED FAIR
VALUE COST GAINS LOSSES VALUE
-------- --------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Fixed maturity investments (available for
sale):
U.S. government and agencies.............. $ 50,699 $ 49,949 $ 932 $(182) $ 50,699
States and political subdivisions......... 188,703 183,299 5,405 (1) 188,703
Corporate securities...................... 86,027 85,179 1,491 (643) 86,027
Foreign government bonds.................. 75 75 -- -- 75
Mortgage-backed securities................ 4,564 4,449 115 -- 4,564
-------- -------- ------ ----- --------
$330,068 $322,951 $7,943 $(826) $330,068
======== ======== ====== ===== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------
GROSS GROSS
CARRYING AMORTIZED UNREALIZED UNREALIZED FAIR
VALUE COST GAINS LOSSES VALUE
-------- --------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Fixed maturity investments (available for
sale):
U.S. government and agencies.............. $ 39,106 $ 38,720 $ 429 $ (43) $ 39,106
States and political subdivisions......... 142,655 139,635 3,028 (8) 142,655
Corporate securities...................... 52,810 52,308 532 (30) 52,810
Foreign government bonds.................. 89 90 -- (1) 89
Mortgage-backed securities................ 5,158 5,118 60 (20) 5,158
-------- -------- ------ ----- --------
$239,818 $235,871 $4,049 $(102) $239,818
======== ======== ====== ===== ========
</TABLE>
The change in unrealized gains (losses) on fixed maturities for the years
ended December 31, 1998, 1997, and 1996 was $3,170,000, $5,263,000 and
($3,482,000), respectively.
The amortized cost and estimated fair value of fixed maturity securities,
which are classified as available for sale at December 31, 1998, by contractual
maturity, are shown as follows. Expected maturities may differ
51
<PAGE> 24
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
from contractual maturities because certain borrowers have the right to call or
prepay obligations with or without call or prepayment penalties:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------
AMORTIZED % FAIR %
COST OF TOTAL VALUE OF TOTAL
--------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Maturity
One year or less......................... $ 5,836 1.8% $ 5,696 1.7%
After one year through five years........ 132,377 41.0 134,866 40.9
After five years through ten years....... 158,156 49.0 162,528 49.2
After ten years.......................... 26,582 8.2 26,978 8.2
-------- ----- -------- -----
$322,951 100.0% $330,068 100.0%
======== ===== ======== =====
Subject to call............................ $ 47,491 14.7% $ 48,600 14.7%
</TABLE>
Fixed maturity securities valued at approximately $18,041,000 and
$19,125,000 were on deposit with various governmental authorities at December
31, 1998 and 1997, respectively, as required by law.
Equity securities at December 31, 1998 and 1997 consist of investments in
various industry groups as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1998 1997
------------------ ------------------
FAIR FAIR
COST VALUE COST VALUE
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Banks, trust and insurance companies........ $ 1,874 $ 1,949 $ 517 $ 950
Industrial, miscellaneous and all other..... 35,878 48,242 41,154 76,603
------- ------- ------- -------
$37,752 $50,191 $41,671 $77,553
======= ======= ======= =======
</TABLE>
The carrying value of the Company's investment in equity securities is fair
value. As of December 31, 1998, gross unrealized gains and gross unrealized
losses on equity securities were $22,464,000 and $10,025,000, respectively.
Gross unrealized gains and gross unrealized losses on equity securities were
$38,464,000 and $2,582,000, respectively, as of December 31, 1997.
The change in unrealized gains and losses on equity securities for the
years ended December 31, 1998, 1997 and 1996 was ($23,443,000), $12,756,000 and
$15,214,000, respectively.
Included in equity securities is an investment in a certain equity
security, CKE Restaurants, Inc., with a cost basis of $2,341,000 and a fair
value of $18,462,000 at December 31, 1998 and a cost basis of $3,366,000 and a
fair value of $31,404,000 at December 31, 1997.
On July 22, 1997, the Company purchased 1,000,000 shares of common stock of
GB Foods Corporation, now known as Santa Barbara Restaurant Group ("SBRG"),
which represented approximately 15.5% of the outstanding common stock of SBRG
for a purchase price of $5.0 million. Additionally, the Company purchased
warrants to acquire an additional 3,500,000 shares of SBRG at various prices
ranging from $5.00 -- $7.50 for a purchase price of $800,000; 1,500,000 warrants
exercisable at $5.00 per share, 1,000,000 warrants exercisable at $7.00 per
share and 1,000,000 warrants exercisable at $7.50 per share. In conjunction with
the common stock purchase, the Company gained control of three seats on the SBRG
Board of Directors. During 1998, the Company exercised 1,000,000 of the $5.00
warrants in conjunction with an acquisition by SBRG in order to provide SBRG
additional capital. In addition, on December 31, 1998, the Company exchanged
certain investments in restaurant common stocks with a combined value of $9.45
million for an additional
52
<PAGE> 25
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
2,478,000 shares of SBRG. The Company now owns approximately 31.1% of SBRG. The
Company's investment in SBRG is accounted for under the equity method.
Effective July 1, 1997, the Company sold a majority interest (60%) of its
subsidiary American Title Company ("ATC"), an underwritten title company, to
certain members of ATC's management. ATC functions as an exclusive agent of the
Company. The sale price of the 60% interest was $6.0 million resulting in a
realized gain of approximately $1.3 million before applicable income taxes. As a
result of a tax free reorganization of American National Financial, Inc.
("ANFI"), the parent company of ATC and its subsidiaries, in November 1998, the
Company's interest in ATC was converted to an ownership interest of
approximately 43% of ANFI. Subsequent to ANFI's initial public offering in
February 1999, the Company's ownership interest in ANFI became approximately
31.5%. The Company's investment in ANFI is accounted for under the equity
method.
Interest and investment income, including realized gains (losses), consists
of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents..................... $ 2,798 $ 1,370 $ 1,967
Fixed maturity securities..................... 13,014 11,256 10,384
Equity securities............................. 22,867 12,062 5,094
Short-term investments........................ 1,483 1,891 165
Notes receivable.............................. 1,913 2,486 2,801
Other......................................... (2,488) 6,741 (1,184)
------- ------- -------
$39,587 $35,806 $19,227
======= ======= =======
</TABLE>
Net realized gains included in interest and investment income amounted to
$17,190,000, $16,839,000 and $2,476,000 for the years ended December 31, 1998,
1997 and 1996, respectively. 1998 net realized gains include a gain of
approximately $9,700,000 related to the conversion of the Company's investment
in Data Tree Corporation common stock to common stock of First American
Financial Corporation. Included in net realized gains for the year ended
December 31, 1997, are net realized gains from the sales of investments of
approximately $10,500,000, a net realized gain from the sale of the Company's
former home office building of approximately $4,300,000, and net realized gains
on the sale of 60% of American Title Company, a former wholly-owned underwritten
title company subsidiary, and the sale of FNF Ventures, Inc., a small business
investment company subsidiary of approximately $1,300,000 and $800,000,
respectively. All amounts are before applicable income taxes.
During the years ended December 31, 1998, 1997 and 1996, gross realized
gains on sales of fixed maturity securities considered available for sale were
$700,000, $798,000 and $453,000, respectively; and gross realized losses were
$268,000, $468,000 and $719,000, respectively. Gross proceeds from the sale of
fixed maturity securities considered available for sale amounted to $71,114,000,
$143,085,000 and $94,214,000, during the years ended December 31, 1998, 1997 and
1996, respectively.
During the years ended December 31, 1998, 1997 and 1996, gross realized
gains on sales of equity securities considered available for sale were
$32,603,000, $12,986,000 and $6,186,000, respectively; and gross realized losses
were $10,999,000, $2,515,000 and $2,091,000, respectively. Gross proceeds from
the sale of equity securities amounted to $108,554,000, $120,094,000 and
$94,161,000 during the years ended December 31, 1998, 1997 and 1996,
respectively.
53
<PAGE> 26
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
D. LEASES AND RESIDUAL INTERESTS IN SECURITIZATIONS
Direct Financing Leases
Granite's direct financing leases at December 31, 1998 and 1997 consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------
DIRECT
FINANCING
DIRECT LEASES
FINANCING ASSIGNED TO
LEASES LENDER
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Minimum lease payments receivable....................... $ 57,501 $ 6,398
Estimated residual values of leased property............ 5,424 518
Lease acquisition costs and broker commissions.......... 3,046 45
Unearned income......................................... (16,300) (818)
Allowance for credit losses............................. (10,221) (261)
Security deposits....................................... (393) (64)
-------- -------
$ 39,057 $ 5,818
======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------
DIRECT
FINANCING
DIRECT LEASES
FINANCING ASSIGNED TO
LEASES LENDER
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Minimum lease payments receivable....................... $ 25,832 $13,525
Estimated residual values of leased property............ 3,480 709
Lease acquisition costs and broker commissions.......... 2,194 215
Unearned income......................................... (9,451) (2,232)
Allowance for credit losses............................. (2,440) (200)
Security deposits....................................... (275) (115)
-------- -------
$ 19,340 $11,902
======== =======
</TABLE>
Scheduled collections of minimum lease payments receivable are as follows:
<TABLE>
<CAPTION>
DIRECT
FINANCING
DIRECT LEASES
FINANCING ASSIGNED TO
LEASES LENDER
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Year Ending December 31,
1999.................................................. $ 15,782 $ 3,659
2000.................................................. 14,212 2,371
2001.................................................. 12,048 284
2002.................................................. 8,677 80
2003.................................................. 5,150 4
Thereafter............................................ 1,632 --
-------- -------
$ 57,501 $ 6,398
======== =======
</TABLE>
At December 31, 1998, the weighted average implicit rate of interest is
approximately 13.0%.
54
<PAGE> 27
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
The carrying value of the direct financing leases at December 31, 1998 and
1997 approximated fair value because of the short-term period that these leases
are held before sale or securitization or, in certain cases, because the
interest rate approximates current market rates. The fair value of the direct
financing leases assigned to lender at December 31, 1998 and 1997 approximated
the carrying value because the interest rate on the related Class A Term Note
approximates current market rates.
Asset Securitization
The Company has completed six securitization facilities that provide for
aggregate funding limits of approximately $354,000,000. Two of the
securitization facilities, GF Funding IV and GF Funding V, are revolving
facilities.
In April 1996, the Company's wholly-owned subsidiary, GF Funding I, issued
$21,689,000 of 6.33% Class A Lease-Backed Term Note ("GFI Note") due November
20, 2001 in a private placement. The GFI Note is collateralized by (i) payments
to be made under leases contributed by Granite Financial, LLC to GF Funding I,
(ii) all of GF Funding I's rights and interest in the leased equipment, (iii) a
cash collateral account (which generally does not increase the overall level of
credit enhancement, but rather accommodates changes that may occur from time to
time in the form of credit enhancement from excess implicit principal balance of
lease receivables to cash) and (iv) a financial guaranty insurance policy. Under
the terms of the insurance policy, the monthly payments of interest and final
payment of principal and maturity are unconditionally guaranteed. As this
securitization was completed through the issuance of a debt security prior to
the adoption of SFAS 125, the transaction is accounted for as a collateralized
borrowing. Accordingly, the underlying lease assets, recorded as direct
financing leases assigned to lender, and the related limited recourse note
payable are reflected in the consolidated balance sheet. The underlying assets
are comprised of the Company's net investment in the leases of $5,818,000 and
$11,902,000 as of December 31, 1998 and 1997, respectively. The related limited
recourse note payable was $5,930,000 and $11,719,000 as of December 31, 1998 and
1997, respectively. See Note H.
In November 1996, GF Funding II was formed to establish the Company's
second securitization facility. The facility provided for the issuance of up to
$65 million in aggregate principal amount of Class A Lease-Backed Certificates
due June 20, 2003 (the "1996 Certificates") in a private placement. For purposes
of computing interest, the 1996 Certificates are issued in two tranches,
consisting of the Floating Rate Tranche and the Fixed Rate Tranche. The
principal amount of the Floating Rate Tranche will generally convert to the
Fixed Rate Tranche on a quarterly basis. The Floating Rate Tranche bears
interest at an annual rate equal to the LIBOR Rate, as adjusted from time to
time, plus .50%. The Fixed Rate Tranche bears interest at an annual rate equal
to the Treasury Rate, as adjusted form time to time, plus .70%. The annual
interest rate on each tranche is subject to a maximum annual rate of 10%. The
1996 Certificates represent an undivided interest in a trust estate created by
GF Funding II comprised of (i) payments to be made under leases contributed to
GF Funding II, (ii) all of GF Funding II's right and interest in the leased
equipment, (iii) a cash collateral account and (iv) a financial guaranty
insurance policy. The securitization was fully funded in December 1997. The
Company has recorded gains from the sales of leases with respect to this
securitization of $5,656,000 and $864,000, respectively, during the years ended
December 31, 1997 and 1996.
In March 1997, GF Funding III was formed to establish the Company's third
securitization facility. The facility provides for the issuance of up to
$27,500,000 in the aggregate principal amount of 6.82% Class A Lease-Backed
Certificates due December 20, 2002 (the "1997 Certificates") in a private
placement. The 1997 Certificates represent an undivided interest in a trust
estate created by GF Funding III comprised of (i) payments to be made under
leases contributed to GF Funding III, (ii) all of GF Funding III's right and
interest in the leased equipment, (iii) a cash collateral account, a capitalized
interest account, a prefunding account and a collection account and (iv) a
financial guaranty insurance policy. This securitization was fully
55
<PAGE> 28
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
funded in June 1997. The Company has recorded gains from the sales of leases
with respect to this securitization of $1,670,000 during the year ended December
31, 1997.
In December 1997, GF Funding IV was formed to establish the Company's
fourth securitization facility. The facility provides for the issuance of up to
$150 million in aggregate principal amount of Class A Lease-Backed Certificates
due September 2004 (the "GFIV Certificates") in a private placement. For
purposes of computing interest, the GFIV Certificates are issued in two
tranches, consisting of the Floating Rate Tranche and the Fixed Rate Tranche.
The principal amount of the Floating Rate Tranche will generally convert to the
Fixed Rate Tranche on a quarterly basis. The Floating Rate Tranche bears
interest at an annual rate equal to the LIBOR Rate, as adjusted from time to
time, plus .50%. The Fixed Rate Tranche bears interest at an annual rate equal
to the Treasury Rate, as adjusted from time to time, plus .35%. The GFIV
Certificates represent an undivided interest in a trust estate created by GF
Funding IV comprised of (i) payments to be made under leases contributed to GF
Funding IV, (ii) all of GF Funding IV's rights and interests in the lease
equipment and (iii) a financial guaranty insurance policy. The Company is
required to sell a minimum of $10,000,000 in leases to the securitization
facility per quarter. The Company has recorded gains from the sales of leases
with respect to this securitization of $6,456,000 and $1,418,000 during the
years ended December 31, 1998 and 1997, respectively.
In March 1998, GF Funding V was formed to establish the Company's fifth
securitization facility. The facility provides for the issuance of up to $65
million in aggregate principal amount of Class A Lease-Backed Certificates due
April 2005 (the "GFV Certificates") in a private placement. For purposes of
computing interest, the GFV Certificates are issued in Fixed Rate Tranches which
bear interest at an annual rate equal to the Treasury Rate, as adjusted form
time to time, plus 1.20%. The GFV Certificates represent an undivided interest
in a trust estate created by GF Funding V comprised of (i) payments to be made
under leases contributed to GF Funding V and (ii) all of GF V's rights and
interest in the leased equipment. The Company is required to sell a minimum of
$15,000,000 in leases to the securitization facility per quarter. The Company
has recorded gains from the sales of leases with respect to this securitization
of $2,817,000 during the year ended December 31, 1998.
In October 1998, GF Funding VI was formed to establish the Company's sixth
securitization facility. The facility provides for the issuance of $30.3 million
in Lease-Backed Certificates (the "GFVI Certificates"). The GFVI Certificates
represent an undivided interest in a trust estate created by GFVI which is
comprised of (i) all rights, title and interest in the subordinated interest in
GF Funding I, GF Funding II, GF Funding III, GF Funding IV and GF Funding V, and
the related purchase agreements, (ii) a cash collection account and (iii) a cash
reserve account. The issuance of the GFVI Class A and Class B Certificates is
accounted for as a collateralized borrowing. Accordingly, the subordinated
interest, recorded as a residual interest in securitization, and the related
Class A and B are reflected in the Company's Consolidated Balance Sheet. The
outstanding Class A and B Certificates were $16,006,000 at December 31, 1998.
The amounts due related to the Lease-Backed Notes and Certificates
approximate fair value at December 31, 1998 and 1997 due to the fact that the
interest rate paid on the Lease-Backed Notes and Certificates approximates
market rates.
Sale of Leases
The Company entered into agreements with certain financial institutions to
sell, on an ongoing basis, certain leases either on a recourse or non-recourse
basis. The purchase price of the leases is determined on a transaction by
transaction basis. A gain on sale is recognized on the date of sale based upon
the present value of the payments to be received under the lease. The Company
retains servicing of all leases under the agreements. During the years ended
December 31, 1998, 1997 and 1996, the Company recognized a net gain on sale of
leases of $857,000, $1,559,000 and $1,483,000, respectively.
56
<PAGE> 29
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
Servicing Asset
The Company has not established any servicing asset or liability, although
the Company retained the servicing rights on the leases securitized because
management has determined that revenues from contractually specified servicing
fees and ancillary services are just adequate to compensate the Company for its
servicing responsibilities
E. NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage notes, secured by various deeds of trust,
installments due monthly including interest at rates
ranging from 7.0% to 10.0%, due through 2022........... $ 1,316 $ 426
Promissory notes, secured by various assets and
unsecured, installments due monthly including interest
at rates ranging from 6.0% to 13.0%, due through
2014................................................... 9,711 10,074
Officer and employee secured and unsecured notes
receivable at rates ranging from 7.0% to 10.0%, due
through 2004........................................... 1,798 1,421
------- -------
12,825 11,921
Allowance for doubtful receivables....................... (2,064) (1,758)
------- -------
$10,761 $10,163
======= =======
</TABLE>
The allowance for doubtful receivables is primarily related to certain
promissory notes at December 31, 1998 and 1997. Interest income is not
recognized on the Company's non-performing notes receivable. There were no
non-performing notes receivable at December 31, 1998.
The carrying value and estimated fair values of the Company's notes
receivable were as follows at December 31, 1998 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1998 1997
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage notes.............................. $ 1,199 $ 1,199 $ 426 $ 426
Other promissory notes...................... 7,999 7,999 8,563 8,563
Affiliated notes............................ 1,563 1,563 1,174 1,174
------- ------- ------- -------
$10,761 $10,761 $10,163 $10,163
======= ======= ======= =======
</TABLE>
The fair values of significant notes receivable are established using
discounted cash flow analyses based on current market interest rates and
comparison of rates being received to interest rates currently being offered for
similar loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations. All other notes
receivable are not significant individually or in the aggregate, or are current
and at market rates, and their carrying value approximates fair value.
57
<PAGE> 30
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
F. INVESTMENTS IN REAL ESTATE AND PARTNERSHIPS
At December 31, 1998 and 1997, the Company had financial interests ranging
from 22% to 50% in three real estate partnerships which were accounted for under
the equity method. These partnerships are involved in the ownership and
management of commercial office buildings, retail facilities and have acquired
specific parcels of real property for investment purposes. The Company, through
Manchester Development Corporation ("Manchester"), a wholly-owned subsidiary,
had a general partnership interest in one of the three real estate partnerships
at December 31, 1998 and 1997.
Two of these partnerships, representing raw land investments, also have
officers and directors of the Company as partners with ownership interests that
are based on cash contributions. These two partnerships require that all of the
partners, including the Company, make pro-rata capital contributions should the
partnerships require additional funds to pay liabilities. The carrying value of
the Company's interests in these partnerships totalled $1,214,000 and $1,208,000
at December 31, 1998 and 1997, respectively.
Summarized combined financial information of the unconsolidated
partnerships is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total assets, primarily land, development and improvement
costs.................................................. $4,127 $3,922 $3,960
Total liabilities, primarily notes and mortgages
payable................................................ 6 819 841
------ ------ ------
Partners' equity......................................... $4,121 $3,103 $3,119
====== ====== ======
Revenue.................................................. $1,094 $ 47 $ 378
====== ====== ======
Net income (loss)........................................ $ 205 $ 22 $ (73)
====== ====== ======
</TABLE>
At December 31, 1998, the Company had a 92.5% interest in a real estate
partnership which is consolidated with the Company. At December 31, 1997, the
Company had a 92.5% and 76.3% interest in real estate partnerships consolidated
with the Company.
Manchester is also presently a partner with Sussex Holdings, Ltd. (an
affiliate of Folco) in Folco Mission Valley Partners Limited Partnership, a
California limited partnership. Manchester owns a 22% limited partnership
interest and Sussex Holdings, Ltd. owns a 78% general partnership interest.
Fidelity Title is the sole tenant in the building and received an approximate
30% decrease in its annual rental rate based upon its lease with Folco Mission
Valley. Manchester's carrying value of this partnership interest was $224,000
and $3,000 at December 31, 1998 and 1997, respectively.
58
<PAGE> 31
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
Investments in real estate and partnerships consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Investments in real estate:
Land..................................................... $4,337 $4,337
Commercial buildings, net of accumulated depreciation of
$18 and $67........................................... 653 664
Investments in unconsolidated partnerships................. 1,435 1,714
------ ------
6,425 6,715
Valuation allowance........................................ (1,752) (1,514)
------ ------
$4,673 $5,201
====== ======
</TABLE>
During 1997 and 1996, the Company sold investments in real estate to third
parties at an aggregate purchase price of $6.4 million and $917,000,
respectively, which approximated the carrying value of the investments sold.
There were no sales in 1998.
G. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land................................................... $ 1,724 $ 4,897
Buildings.............................................. 3,754 7,230
Leasehold improvements................................. 14,596 12,729
Furniture, fixtures and equipment...................... 121,272 102,517
-------- --------
141,346 127,373
Accumulated depreciation and amortization.............. (95,276) (82,660)
-------- --------
$ 46,070 $ 44,713
======== ========
</TABLE>
H. NOTES PAYABLE
Notes payable consist of the following (dollars in descriptions in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Bank revolving credit facility secured by common stock of
certain Insurance Subsidiaries and a certain UTC, interest
due monthly at LIBOR plus 1.15% (6.21% at December 31,
1998), unused portion of $53,698 at December 31, 1998, due
September 2001............................................ $ 46,302 $ --
Bank revolving line of credit, warehouse line, secured by
security interest in certain leases and the underlying
equipment, interest due monthly at LIBOR plus 1.75% (6.81%
at December 31, 1998), unused portion of $27,700 at
December 31, 1998, due March 2000......................... 7,300 --
Bank revolving credit facility, unsecured, interest due
monthly at LIBOR plus 1.15% (6.21% at December 31, 1998),
no unused portion at December 31, 1998, due May 1999...... 25,000 --
</TABLE>
59
<PAGE> 32
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Credit agreement, secured by common stock of certain
Insurance Subsidiaries, principal due quarterly, interest
due monthly at LIBOR plus 2.0%, due September 2001, paid
and terminated in March 1998.............................. $ -- $ 15,250
Bank revolving credit facility, secured by common stock of
certain Insurance Subsidiaries, interest due quarterly at
LIBOR plus 2.0%, principal due quarterly beginning April
1998, due September 2001, paid and terminated in March
1998...................................................... -- 5,000
Bank revolving line of credit, warehouse line, secured by
security interest in certain leases and the underlying
equipment, interest due monthly at Prime plus .625%,
unused portion of $33,200 at December 31, 1997, subsequent
to year end line of credit increased to $46,000 and
maturity date extended, paid and terminated in October
1998...................................................... -- 2,784
Equipment line of credit, secured by equipment, interest due
monthly at LIBOR plus 1.40% (6.46% at December 31, 1998),
unused portion of $143 and $3,970 at December 31, 1998 and
1997, due May 1999........................................ 9,857 4,030
Bank revolving credit facility, secured by common stock of
certain UTCs, semi-annual principal installments of $750
and interest due quarterly at LIBOR plus 1.0%, due June
2000, paid and terminated in December 1998................ -- 3,750
Bank revolving credit facility, secured by common stock of
certain UTCs, principal installments of $35 and interest
due quarterly at LIBOR plus 1%, due December 2001, paid
and terminated in December 1998........................... -- 560
Bank line of credit, unsecured, interest due monthly at
Bank's Reference Rate plus .75% (8.50% at December 31,
1998), no unused portion at December 31, 1998, paid and
terminated January 1999................................... 3,000 3,000
Bank promissory note, secured by equipment, principal and
interest due monthly at LIBOR plus 1.77% (6.83% at
December 31, 1998) due July 2002.......................... 8,903 --
Bank promissory note, secured by equipment, principal and
interest due monthly at LIBOR plus 1.77%, paid in
September 1998............................................ -- 2,134
Bank promissory note, secured by equipment, principal and
interest due monthly at LIBOR plus 2.10% (7.16% at
December 31, 1998), due June 1999......................... 718 2,052
Bank promissory note, secured by equipment, principal and
interest due monthly at 30 day commercial paper rate plus
2.44% (6.61% at December 31, 1998), due September 2000.... 3,281 5,000
Bank promissory note, secured by equipment, principal and
interest due monthly at LIBOR plus 1.84% (6.90% at
December 31, 1998), due May 2001.......................... 2,902 4,042
Bank promissory note, secured by equipment, principal and
interest due monthly at LIBOR plus 1.84% (6.90% at
December 31, 1998), due September 2001.................... 4,337 5,784
Promissory note, secured by real estate, principal and
interest due monthly at 9.875%, paid in June 1998......... -- 1,693
</TABLE>
60
<PAGE> 33
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Note payable to bank, secured by common stock of certain
subsidiaries, principal and interest due monthly at LIBOR
plus 3.50% (9.468% at December 31, 1997), due within 30
days of change in control or April 1998................... $ -- $ 8,000
Note payable secured by certain leases and a security
interest in underlying equipment, principal and interest
due monthly at 9.80%, due January 2000.................... 347 638
Note payable to bank, secured by all tangible and intangible
property of a certain subsidiary, principal and interest
due monthly at 8.72%, due May 1999........................ 926 1,292
Promissory notes, unsecured, interest due quarterly at
8.00%, principal due at various dates through July 1999... 2,982 5,100
Convertible notes, secured by assets of a subsidiary, with
interest of 9.5%; principal and interest due quarterly,
due July 2001............................................. 2,900 --
Liquid Yield Option Notes, zero coupon, convertible
subordinated notes due 2009 with interest at 5.5%,
converted or redeemed in February 1999.................... 71,307 76,635
Other promissory notes with various interest rates and
maturities................................................ 2,626 4,552
-------- --------
$192,688 $151,296
======== ========
</TABLE>
Principal maturities, including accretion of original issue discount, are
as follows (dollars in thousands):
<TABLE>
<S> <C>
1999...................................................... $ 51,174
2000...................................................... 15,864
2001...................................................... 51,477
2002...................................................... 1,877
2003...................................................... 323
Thereafter................................................ 71,973
--------
$192,688
========
</TABLE>
Also included in notes payable in the Consolidated Balance Sheets as of
December 31, 1998 and 1997 is the Class A Lease-Backed Term Note due 2001. See
Note D. The amount due related to the GFI Class A Lease-Backed Term Note was
$5,930,000 and $11,719,000 at December 31, 1998 and 1997, respectively. The GFI
note bears interest at 6.33% and is due November 2001. The carrying value of the
GFI Class A Lease-Backed term note approximates fair value at December 31, 1998
and 1997 due to the fact that the interest rate paid on the GFI Class A
Lease-Backed Note approximates market rates.
Notes payable in the Consolidated Balance Sheet as of December 31, 1998
also includes the GFVI Class A Certificates in the amount of $7,878,000 and the
Class B Certificates in the amount of $8,128,000. See Note D. The Class A and
Class B Certificates bear interest at 6.20%, and are due in September 2005 and
December 2005, respectively. The carrying value of the Class A and Class B
Certificates approximates fair value at December 31, 1998 due to the fact that
the interest rate paid on the Class A and Class B Certificates approximates
market rates.
61
<PAGE> 34
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
The carrying value and estimated fair values of the Company's notes payable
were as follows at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1998 1997
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Short-term borrowings................... $ 13,400 $ 13,400 $ 19,483 $ 19,483
Long-term borrowings, variable rate..... 99,900 99,900 44,456 44,456
Long-term borrowings, fixed rate........ 79,388 97,443 87,357 122,477
-------- -------- -------- --------
$192,688 $210,743 $151,296 $186,416
======== ======== ======== ========
</TABLE>
Short-term borrowings approximate their fair value. The fair value of the
Company's fixed rate and variable rate notes payable is estimated using
discounted cash flow analyses based on current market interest rates and
comparison of interest rates being paid to the Company's current incremental
borrowing rates for similar types of borrowing arrangements. The LYON's fair
value is calculated based on quoted market prices.
The Company's credit agreement, dated as of September 21, 1995, included a
$22 million term loan and a $13 million revolving credit facility, was secured
by the common stock of certain Insurance Subsidiaries. This credit facility was
terminated and paid in 1998 with the proceeds from a new revolving credit
facility secured by the common stock of certain Insurance Subsidiaries and a
certain UTC. Additionally, the Company must comply with certain affirmative and
negative covenants related to its bank revolving lines of credit and other debt
facilities, which require, among other things, that the Company maintain certain
financial ratios related to liquidity, net worth, capitalization, investments,
acquisitions, restricted payments and certain dividend restrictions.
In February 1994, the Company issued zero coupon, convertible subordinated
Liquid Yield Options Notes due February 2009 ("LYONs") at an interest rate of
5.5% with a principal amount at maturity of $235,750,000. Net proceeds to the
Company were approximately $101,000,000. The proceeds were used for investment
and general corporate purposes, including the repurchase of treasury shares. The
conversion rate of the LYONs is 28.077 shares of common stock per $1,000
maturity value of LYONs. Conversion is at the option of the holder, at any time
on or prior to maturity. Each holder, at its option, may put the LYONs to the
Company as of February 15, 1999 and February 15, 2004 for a purchase price per
LYON of $581.25 and $762.40, respectively. The Company at its option, may elect
to pay the put in cash or shares of its common stock. The LYONs are redeemable
by the Company for cash on or after February 15, 1999 at a price equal to the
issue price of $441.31 plus accrued original issue discount through the date of
redemption. The maturity value of LYONs outstanding at December 31, 1998 was
approximately $124,113,000.
On October 17, 1997, the Company in a private transaction, purchased $45
million aggregate principal amount at maturity of its outstanding Liquid Yield
Option Notes due 2009 from Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") for an aggregate purchase price of $27.2 million (or $605 per
$1,000 principal amount at maturity of LYONs). The purchase price was paid in
the form of 1,394,381 shares, $26.4 million, of the Company's common stock (the
"Exchange Shares"). The Company also paid Merrill Lynch the excess of a base
price of $19.53 per Exchange Share over the actual sales price (less $0.05 per
share in commissions) realized by Merrill Lynch for sales of up to 607,881
Exchange Shares. The Company also paid Merrill Lynch, for each day, an amount in
cash to be determined by multiplying the Net Carry Amount (number of Exchange
Shares multiplied by $19.53) by the Applicable Rate (LIBOR plus 2.50%). The
Company's payment obligations were subject to reduction for dividends on
Exchange Shares received by Merrill Lynch during the period. The Company paid
the foregoing amounts to Merrill Lynch in cash of approximately $790,000 on
November 7, 1997. The purchase of the LYONs increased stockholders'
62
<PAGE> 35
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
equity by approximately $24.7 million while reducing outstanding debt by
approximately $24.3 million. Additionally, an extraordinary loss due to the
early retirement of debt of approximately $1.7 million, net of applicable income
taxes, was recorded in the fourth quarter of 1997.
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 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. As of February 15, 1999, $123,681,000 maturity value of LYONs had
converted to 3,473,000 shares of common stock, adding approximately $70 million
to equity while reducing outstanding note payable by a like amount. The
remaining $432,000 of maturity value was redeemed for cash of approximately
$251,000.
I. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current.............................................. $ 82,267 $33,729 $10,373
Deferred............................................. (12,825) 1,686 8,612
-------- ------- -------
$ 69,442 $35,415 $18,985
======== ======= =======
</TABLE>
Total income tax expense (benefit) for the years ended December 31, 1998,
1997 and 1996 was allocated as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income from continuing operations..................... $69,442 $36,595 $18,985
Extraordinary gain (loss)............................. -- (1,180) --
------- ------- -------
$69,442 $35,415 $18,985
======= ======= =======
</TABLE>
The effective tax rate differs from the statutory income tax rate as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Statutory income tax rate................................... 35.0% 35.0% 35.0%
Tax exempt interest income.................................. (1.6) (1.7) (1.1)
Non-deductible expenses..................................... 1.7 5.8 2.4
State taxes, net of Federal deduction....................... 3.6 3.1 2.3
Other....................................................... 1.0 .6 .8
---- ---- ----
39.7% 42.8% 39.4%
==== ==== ====
</TABLE>
63
<PAGE> 36
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
The deferred tax assets and liabilities at December 31, 1998 consist of the
following:
<TABLE>
<CAPTION>
DEFERRED DEFERRED TAX
TAX ASSETS LIABILITIES
---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Provision for claim losses in excess of statutory
amounts.......................................... $65,191 $ --
Employee benefit accruals.......................... 11,339 --
Excess book over tax provision for bad debts....... 4,511 --
Accrued liabilities................................ 8,264 --
Deferred state income taxes........................ 5,423 --
Other assets....................................... 112 --
Statutory unearned premium reserve................. -- 60,024
Accelerated depreciation........................... -- 3,433
Investment securities.............................. -- 8,101
Investments in partnerships........................ -- 389
Investments in real estate......................... -- 153
Section 338(h)(10) gain deferral................... -- 1,670
Other acquisition accruals......................... -- 5,563
Lease accounting................................... -- 1,786
Other liabilities.................................. -- 4,995
Net operating loss available for carryovers........ 4,539 --
------- -------
99,379 86,114
Less: valuation allowance.......................... 2,300 --
------- -------
Total deferred taxes..................... $97,079 $86,114
======= =======
</TABLE>
The deferred tax assets and liabilities at December 31, 1997 consist of the
following:
<TABLE>
<CAPTION>
DEFERRED DEFERRED TAX
TAX ASSETS LIABILITIES
---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Provision for claim losses in excess of statutory
amounts.......................................... $50,275 $ --
Employee benefit accruals.......................... 8,365 --
Excess book over tax provision for bad debts....... 4,217 --
Other assets....................................... 2,301 --
Statutory unearned premium reserve................. -- 52,411
Accelerated depreciation........................... -- 875
Investment securities.............................. -- 16,156
Investments in partnerships........................ -- 392
Investments in real estate......................... -- 154
Section 338(h)(10) gain deferral................... -- 2,046
Other acquisition accruals......................... -- 5,509
Lease accounting................................... -- 3,214
Other liabilities.................................. -- 2,012
Net operating loss available for carryover......... 1,812 --
------- -------
66,970 82,769
Less: valuation allowance.......................... 711 --
------- -------
Total deferred taxes..................... $66,259 $82,769
======= =======
</TABLE>
64
<PAGE> 37
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
Based upon the Company's current and historical pretax earnings, management
believes it is more likely than not that the Company will realize the benefit of
its existing deferred tax assets, net of the recorded valuation allowance.
Management believes the existing net deductible temporary differences will
reverse during periods in which the Company generates net taxable income.
However, there can be no assurance that the Company will generate any earnings
or any specific level of continuing earnings in future years. Certain tax
planning or other strategies could be implemented, if necessary, to supplement
income from operations to fully realize recorded tax benefits.
The Company's 1995 and 1996 Federal income tax returns are currently under
examination by the Internal Revenue Service. Based on information currently
available, management does not believe the outcome of these examinations will
have a material impact on the financial condition or results of operations of
the Company.
J. SUMMARY OF RESERVE FOR CLAIM LOSSES
A summary of the reserve for claim losses follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance.................................. $201,674 $196,527 $153,207
Reserves assumed from First Title Corp. ......... -- 284 --
Reserves transferred due to the sale of American
Title Company................................. -- (160) --
Reserves assumed from Nations Title Inc.......... -- -- 45,171
Title claim loss provision related to:
Current year.................................. 59,294 39,301 35,478
Prior years................................... -- 2,257 797
-------- -------- --------
Total title claim loss provision................. 59,294 41,558 36,275
Title claims paid, net of recoupments related to:
Current year.................................. (1,045) (3,385) (2,749)
Prior years................................... (35,389) (33,150) (35,377)
-------- -------- --------
Total title claims paid, net of recoupments...... (36,434) (36,535) (38,126)
-------- -------- --------
Ending balance..................................... $224,534 $201,674 $196,527
======== ======== ========
</TABLE>
The provision for claim losses includes an estimate of anticipated title
claims and major claims. The estimate of anticipated title claims is accrued as
a percentage of title premium revenue based on the Company's historical loss
experience and other relevant factors. The Company monitors its claims
experience on a continual basis and adjusts the provision for claim losses
accordingly.
K. COMMITMENTS AND CONTINGENCIES
The Company's title insurance underwriting subsidiaries are, in the
ordinary course of business, subject to claims made under, and from time-to-time
are named as defendants in legal proceedings relating to, policies of insurance
they have issued or other services performed on behalf of insured policyholders
and other customers. The Company believes that the reserves reflected in its
Consolidated Financial Statements are adequate to pay losses and loss adjustment
expenses which may result from such claims and proceedings; however, such
estimates may be more or less than the amount ultimately paid when the claims
are settled.
The Company has entered into various employment agreements with officers of
the Company. These agreements provide for a specified salary to be paid to the
officers and include incentive compensation
65
<PAGE> 38
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
arrangements. The agreements contain non-compete provisions. The terms of the
agreements range from three to five years and normally contain extension
provisions.
In the ordinary course of business, the Company is involved in various
pending and threatened litigation matters related to its operations, some of
which include claims for punitive or exemplary damages. Management believes that
no actions depart from customary litigation incidental to the business of the
Company and that resolution of all such litigation will not have a material
adverse effect on the Company.
In conducting its operations, the Company routinely holds customers' assets
in trust, pending completion of real estate transactions. Such amounts are
maintained in segregated bank accounts and have not been included in the
accompanying Consolidated Balance Sheets. The Company has a contingent liability
relating to proper disposition of these balances for its customers which
amounted to $532.2 million at December 31, 1998.
The Company leases certain of its premises and equipment under leases which
expire at various dates. Several of these agreements include escalation clauses
and provide for purchases and renewal options for periods ranging from one to
five years.
Future minimum operating lease payments are as follows (dollars in
thousands):
<TABLE>
<S> <C>
1999...................................................... $ 29,999
2000...................................................... 24,776
2001...................................................... 20,418
2002...................................................... 14,856
2003...................................................... 9,992
Thereafter................................................ 24,590
--------
Total future minimum operating lease payments... $124,631
========
</TABLE>
Rent expense incurred under operating leases during the years ended
December 31, 1998, 1997 and 1996 was $32,609,000, $29,730,000 and $28,117,000,
respectively. Included in rent expense for 1998, 1997 and 1996 is $485,000,
$523,000 and $523,000, respectively paid to related parties.
L. STOCKHOLDERS' EQUITY
Title insurance companies, including underwriters, underwritten title
companies and independent agents, are subject to extensive regulation under
applicable state laws. Each insurance underwriter is usually subject to a
holding company act in its state of domicile which regulates, among other
matters, the ability to pay dividends and investment policies. The laws of most
states in which the Company transacts business establish supervisory agencies
with broad administrative powers relating to issuing and revoking licenses to
transact business, regulating trade practices, licensing agents, approving
policy forms, accounting principles, financial practices, establishing reserve
and capital and surplus requirements, defining suitable investments for
reserves, capital and surplus and approving rate schedules. In 1998, the
National Association of Insurance Commissioners approved codified accounting
practices that changed the definition of what constitutes prescribed statutory
accounting practices and will result in changes to the accounting policies that
insurance enterprises use to prepare their statutory financial statements
commencing in 2001. The Company is currently evaluating the impact of the rules.
Pursuant to statutory accounting requirements of the various states in
which the Insurance Subsidiaries are licensed, they must defer a portion of
premiums earned as an unearned premium reserve for the protection of
policyholders and must maintain qualified assets in an amount equal to the
statutory requirements. The level of unearned premium reserve required to be
maintained at any time is determined on a quarterly basis by
66
<PAGE> 39
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
statutory formula based upon either the age, number of policies and dollar
amount of policy liabilities underwritten or the age and dollar amount of
statutory premiums written. As of December 31, 1998, the combined statutory
unearned premium reserve required and reported for the Insurance Subsidiaries
was $207.2 million.
The Insurance Subsidiaries are regulated by the insurance commissioners of
their respective states of domicile. Regulatory examinations usually occur at
three year intervals. Examinations are currently in progress for Fidelity Title
(1998, which was previously scheduled for 1997 but will now be as of 1998),
Fidelity New York (1996), Nations New York (1996) and National (1996). The
Company has not received preliminary reports of examination for Fidelity Title,
Fidelity New York, Nations New York or National, as the examinations are
currently ongoing. Additionally, the Auditor Division of the Controller of the
State of California is currently conducting an audit of the funds due the State
of California under various escheatment regulations for the years ended December
31, 1998 and prior. The Company does not believe that either the audits
performed by the insurance regulators or the Controller of the State of
California will have a material impact on its financial position, its results of
operations or its combined statutory capital and surplus.
Statutorily calculated net worth determines the maximum insurable amount
under any single title insurance policy. As of January 1, 1999, the Company's
self-imposed single policy maximum insurable amounts, which comply with all
statutory limitations, for Fidelity Title, Fidelity New York and Alamo Title
were $60.0 million, $90.0 million and $17.5 million, respectively. The
self-imposed single policy maximum insurable amounts for Nations New York and
National were $19.0 million and $5.0 million, respectively.
The Insurance Subsidiaries are subject to regulations that restrict their
ability to pay dividends or make other distributions of cash or property to
their immediate parent company without prior approval from the Department of
Insurance of their respective states of domicile. In the case of Fidelity Title,
the total amount of dividends made in any twelve-month period may not exceed the
greater of 10% of the surplus as regards policyholders as of the last day of the
preceding year or net earnings for the twelve-month period ending the last day
of the preceding year. In the case of Fidelity New York, the total amount of
dividends and distributions is limited to surplus as regards policyholders,
excluding capital stock and surplus resulting from unrealized gains on
investments, less fifty percent of statutory premium reserve as of the last day
of the preceding year and capital contributions received in the latest five-year
period. In the case of Alamo Title, the total amount of dividends made in any
twelve-month period may not exceed the greater of 20% of the surplus as regards
policyholders as of the last day of the preceding year or net earnings for the
twelve-month period ending the last day of the preceding year. As of January 1,
1999, Fidelity Title could pay dividends or make other distributions to the
Company of $10,588,000, Fidelity New York could pay dividends or make other
distributions to the Company of $13,325,000 and Alamo Title could pay dividends
or make other distributions to the Company of $9,064,000.
The combined statutory capital and surplus of the Insurance Subsidiaries
was $164,953,000, $122,107,000 and $97,845,000 as of December 31, 1998, 1997 and
1996, respectively. The combined statutory earnings of the Insurance
Subsidiaries were $37,771,000, $26,701,000 and $12,243,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
As a condition to continued authority to underwrite policies in the states
in which the Insurance Subsidiaries conduct their business, the Insurance
Subsidiaries are required to pay certain fees and file information regarding
their officers, directors and financial condition. In addition, the Company's
escrow and trust business is subject to regulation by various state banking
authorities.
Pursuant to statutory requirements of the various states in which the
Insurance Subsidiaries are domiciled, they must maintain certain levels of
minimum capital and surplus. Each of the Company's title underwriters have
complied with the minimum statutory requirements as of December 31, 1998.
67
<PAGE> 40
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
On March 18, 1998, the Company announced that it had entered into an
agreement to sell National Title Insurance of New York Inc. to ATC for $3.25
million, subject to regulatory approval and certain other conditions. The
purchase price is structured at a premium to book value. National was acquired
in April 1996, as part of the Nations Title Inc. acquisition, and has not been
actively underwriting policies since the transaction closed. This transaction
has not yet received regulatory approval. See also Note C.
The UTCs are also subject to certain regulation by insurance regulatory or
banking authorities, primarily relating to minimum net worth. Minimum net worth
of $7.5 million and $2.5 million is required for Fidelity National Title Company
("FNTC") and Fidelity National Title Company of California ("FNCAL"),
respectively. FNTC and FNCAL are in compliance with their respective minimum net
worth requirements at December 31, 1998.
M. EMPLOYEE BENEFIT PLANS
Employee benefits include an employee stock purchase plan, three stock
option plans and a 401(k) plan.
In 1987, stockholders approved the adoption of an Employee Stock Purchase
Plan ("ESPP"). Under the terms of the ESPP and subsequent amendments, there are
8,785,000 shares of the Company's common stock available for purchase at current
market prices by Company employees who meet certain vesting requirements.
Pursuant to the ESPP, Company employees may contribute an amount between 5% and
15% of their base salary and certain commissions. The Company contributes
varying amounts as specified in the ESPP. During the years ended December 31,
1998, 1997 and 1996, 282,216, 353,594 and 371,852 shares, respectively, were
purchased and allocated to employees, based upon their contributions, at an
average price of $29.42, $13.73 and $11.32 per share, respectively. The Company
contributed $2.0 million or the equivalent of 67,407 shares for the year ended
December 31, 1998, $1.7 million or the equivalent of 122,740 shares for the year
ended December 31, 1997 and $1.2 million or the equivalent of 107,218 shares for
the year ended December 31, 1996 in accordance with the employer's matching
contribution. A total of 7,526,473 shares have been purchased by both the ESPP
and employees since the adoption of the ESPP.
In 1987, stockholders also approved the adoption of a Stock Option Plan
("1987 Option Plan"). Under the terms of the 1987 Option Plan, the Company may
grant stock options to certain key employees and non-employee directors or
officers. The number of shares issuable under the 1987 Option Plan is 1,812,000
shares of common stock at not less than fair market value on the date of grant.
Employees are eligible to receive incentive stock options or non-qualified stock
options and non-employee directors are eligible to receive non-qualified stock
options. Options available to directors or officers may not exceed one-half of
the aggregate number of shares available for grant. All options granted become
exercisable at the discretion of the Board of Directors and expire five to
eleven years from the date of grant. Options that lapse or are cancelled prior
to exercise are added to the shares authorized for future grants. The 1987
Option Plan expired December 31, 1997.
In 1992, stockholders approved the adoption of the 1991 Stock Option Plan
("1991 Option Plan"). Under the terms of the 1991 Option Plan, options may be
granted to officers and key employees of the Company or any or all of its
present or future subsidiaries. The number of shares reserved for issuance under
the 1991 Option Plan and subsequent amendments is 1,953,000 shares of common
stock, which may be newly issued or treasury shares. The per share option price
is determined at the date of grant. The option price may be less than the fair
market value of the common stock at the date of grant to reflect the application
of the optionee's deferred bonus, if applicable. Options granted under the 1991
Option Plan shall be exercisable in such installments and for such periods as
may be fixed at the time of grant, but in no event shall any stock options
extend for a period in excess of 12 years from the date of grant.
68
<PAGE> 41
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
This plan allows for exercise prices with a fixed discount from the quoted
market price. 115,169 options were granted in 1996 at an exercise price of $9.39
to key employees of the Company who applied deferred bonuses expensed in 1995
amounting to $433,000 to the exercise price, reducing it to $5.64 if exercised
within the first year of the grant. The exercise price of these options
decreases approximately 5.0% per year through 2001 and $.16 per share from 2002
through 2007, at which time the exercise price will be $3.31. In 1997, 201,169
options were granted at an exercise price of $10.44 to key employees of the
Company who applied deferred bonuses expensed in 1996 amounting to $876,000 to
the exercise price, reducing it to $6.30 if exercised within the first year of
the grant. The exercise price of these options decreases approximately 7% per
year through 2002 and $.18 per share from 2003 through 2008, at which time the
exercise price will be $3.74. In 1998, 388,123 options were granted at an
exercise price of $24.26 to key employees of the Company who applied deferred
bonuses expensed in 1997 amounting to $1,764,000 to the exercise price, reducing
it to $19.72 if exercised within the first year of the grant. The exercise price
of these options decreases approximately 7% per year through 2003 and $.20 per
share from 2004 through 2009, at which time the exercise price will be $16.90.
Additionally, the Company recorded compensation expense relating to the price
decrease of $282,000, 194,000 and $111,000, for the years ended December 31,
1998, 1997 and 1996, respectively.
In 1994, stockholders approved the adoption of the 1993 Stock Plan ("1993
Plan"). Under the terms of the 1993 Plan, options may be granted to officers,
key employees and non-employee directors of the Company. The number of shares of
common stock reserved for issuance under the 1993 Plan is 1,098,000. The per
share option price is determined at the date of grant, provided that the price
for incentive stock options shall not be less than 100% of their market value or
award stock shares. The 1993 Plan also contains an automatic grant of
non-qualified stock options to non-employee directors at an exercise price equal
to 100% of fair value at date of grant, and the right to exercise such options
shall vest equally over three years. Stock options granted under the 1993 plan
are exercisable subject to the terms and conditions set by the Board of
Directors, however, options shall be exercisable no earlier than six months nor
later than ten years following the grant date.
In 1996, Granite adopted a Stock Option Plan ("Granite Plan", now issuable
in Company common stock) allowing for the issuance of qualified and
non-qualified stock options to purchase an aggregate of 347,000 shares of common
stock to directors, officers, employees, agents and consultants of Granite. The
Granite Plan is administered by the Board of Directors. The Granite Plan
provides that qualified stock options be granted at an exercise price equal to
fair market value of the common shares of Granite on the date of the grant, and
must be at least 110% of fair market value when granted to a 10% or more
shareholder. The term of all qualified stock options granted under the Granite
Plan may not exceed ten years, except the term of qualified stock options
granted to a 10% or more shareholder, which may not exceed five years. The
Granite Plan provides that non-qualified stock options be granted at an exercise
price not less than 85% of the fair market value of the common shares of Granite
on the date of grant. The term of all non-qualified stock options granted under
the Granite Plan may not exceed ten years, except the term of non-qualified
stock options granted to a 10% or more shareholder, which may not exceed five
years. In April 1997, the Granite Plan was amended and restated in order to make
certain technical modifications thereto and was further amended in June 1997 to
increase the shares of common stock reserved for issuance to 695,000.
During 1998, stockholders approved the adoption of the 1998 Stock Incentive
Plan ("1998 Plan"). The 1998 Plan authorizes up to 1,100,000 shares of common
stock, plus an additional 220,000 shares of common stock on the date of each
annual meeting of the stockholders of the Company, for issuance under the terms
of the 1998 Plan. The authorized number of shares is subject to adjustment in
the event of stock splits, stock dividends or certain other similar changes in
the capital structure of the Company. The 1998 Plan provides for grants of
"incentive stock options" as defined in Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), non-qualified stock options and rights to
purchase shares of common stock ("Purchase Rights"). Incentive stock options,
non-qualified stock options and Purchase Rights may be granted to employees of
the Company and its subsidiaries and affiliates. Non-qualified stock options and
69
<PAGE> 42
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
Purchase Rights may be granted to employees of the Company and its subsidiaries
and affiliates, non-employee directors and officers, consultants and other
service providers.
The Board of Directors, or a committee consisting of two or more members of
the Board of Directors, will administer the 1998 Plan (the "Administrator"). The
Administrator will have the full power and authority to interpret the 1998 Plan,
select the recipients of options and Purchase Rights, determine and authorize
the type, terms and conditions of, including vesting provisions, and the number
of shares subject to, grants under the 1998 Plan, and adopt, amend and rescind
rules relating to the 1998 Plan. The term of options may not exceed 10 years
from the date of grant (5 years in the case of a person who owns or is deemed to
own more than 10% of the total combined voting power of all classes of stock of
the Company). The option exercise price for each share granted pursuant to an
incentive stock option may not be less than 100% of the fair market value of a
share of common stock at the time such options is granted (110% of fair market
value in the case of an incentive stock option granted to a person who owns more
than 10% of the combined voting power of all classes of stock of the Company).
There is no minimum purchase price for shares of common stock purchased pursuant
to a Purchase Right, and any such purchase price shall be determined by the
Administrator. The maximum number of shares for which options or Purchase Rights
may be granted to any one person during any one calendar year under the 1998
Plan is 300,000 and in no event shall the aggregate number of shares subject to
incentive stock options exceed 1,000,000. The aggregate fair market value of the
common stock (determined as of the date of grant) with respect to incentive
stock options granted under the 1998 Plan or any other stock option plan of the
Company that become exercisable for the first time by any optionee during any
calendar year may not exceed $100,000.
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Stock options outstanding,
beginning of year.............. 4,089,410 $ 7.49 3,254,645 $ 6.77 2,710,202 $ 6.25
Stock options granted............ 1,730,043 23.46 993,867 9.90 725,651 8.64
Stock options exercised.......... (1,290,640) 7.12 (159,101) 7.85 (67,412) 3.87
Stock options cancelled.......... -- -- (1) 5.31 (113,796) 8.11
---------- ------ --------- ------ --------- ------
Stock options outstanding,
end of year.................... 4,528,813 $13.72 4,089,410 $ 7.49 3,254,645 $ 6.77
Exercisable at end of year....... 3,180,984 9.31 3,451,363 6.98 2,831,914 6.37
Weighted-average fair value of
options granted during the
year........................... -- $26.63 -- $10.73 -- $10.11
</TABLE>
The weighted average remaining contractual life of the options outstanding
at December 31, 1998 is 7.68 years.
70
<PAGE> 43
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
The following table sets forth options outstanding and exercisable by price
range as of December 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
- -----------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------- ---------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OF SHARES LIFE PRICE OF SHARES PRICE
- --------------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.48 - 5.31 472,159 7.24 $ 4.19 472,159 $ 4.19
6.01 - 6.49 524,269 7.18 6.34 524,269 6.34
6.83 - 9.48 687,834 6.00 7.88 687,834 7.88
9.58 - 10.02 485,973 7.60 9.72 385,140 9.64
10.13 - 10.43 646,840 6.44 10.41 646,840 10.41
10.85 - 19.40 475,042 9.13 17.96 454,742 17.98
24.26 - 24.26 706,200 9.03 24.26 -- --
25.97 - 28.64 461,746 9.19 26.24 10,000 28.64
29.43 - 31.53 63,250 9.65 31.26 -- --
34.77 - 34.77 5,500 9.30 34.77 -- --
- -------------- --------- ---- ------ --------- ------
$ 0.48 - 34.77 4,528,813 7.68 $13.72 3,180,984 $ 9.31
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("Opinion 25") and related
Interpretations in accounting for its employee stock options. As discussed
below, in management's opinion, the alternative fair value accounting provided
for under Statement of Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123") requires use of option valuation models that were not
developed for use in valuing employee stock options. Under Opinion 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of the grant, no compensation expense
is recognized.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that do not have vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the value of an estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Pro forma information regarding net earnings and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions. The risk free interest rates used in the calculation is the rate on
the date the options were granted. The risk free interest rate used for options
granted during 1998, 1997 and 1996 were 5.7%, 6.0% and 6.5%, respectively. A
volatility factor for the expected market price of the common stock of 50% was
used for options granted in 1998, 1997 and 1996. The expected dividend yield
used for 1998, 1997 and 1996 was 1.0%, 1.0% and 2.0%, respectively. A weighted
average expected life of seven years was used in all years as the Company has
little history of options being exercised.
71
<PAGE> 44
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
For purpose of pro forma disclosures, the estimated fair value of the
options is amortized into expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE INFORMATION)
<S> <C> <C> <C>
Pro forma basic net earnings.................. $94,982 $44,056 $26,334
Pro forma diluted net earnings................ 97,445 47,198 29,530
Pro forma earnings per share
Basic....................................... $ 3.40 $ 1.89 $ 1.29
Diluted..................................... 2.91 1.59 1.12
</TABLE>
The Company also offers the Fidelity National Financial, Inc. 401(k) Profit
Sharing Plan, a qualified voluntary contributory savings plan, available to
substantially all employees. Eligible employees may contribute up to 15% of
their pretax annual compensation, up to the amount allowed pursuant to the
Internal Revenue Code. The Company may elect to make matching contributions. The
Company has historically not made matching contributions.
N. SUPPLEMENTARY CASH FLOW INFORMATION
The following supplemental cash flow information is provided with respect
to interest and tax payments, as well as certain non-cash investing and
financing activities. See Notes B, H and I.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the year:
Interest.................................... $ 8,153 $ 6,923 $ 6,887
======= ======= =======
Income taxes................................ $77,277 $17,325 $18,403
======= ======= =======
Non-cash investing and financing activities:
Dividends declared and unpaid............... $ 2,270 $ 1,254 $ 975
======= ======= =======
Acquisitions................................ $ 6,250 $24,377 $ 4,650
======= ======= =======
Retirement of LYONs......................... $ -- $26,422 $ --
======= ======= =======
Conversion of LYONs......................... $ 9,202 $ 888 $ --
======= ======= =======
</TABLE>
O. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF RISK
The Company generates a significant amount of title insurance premiums in
California and Texas, 33.1% and 19.6% in 1998, 32.9% and 20.8% in 1997, and
33.1% and 21.1% in 1996, respectively.
Granite's leases are originated through a network of approximately 73
independent lease originators located throughout the United States. No single
lease originator accounted for more than 10% of the leases funded by the Company
during the years ended December 31, 1998 and 1997. Transactions generated by the
Company's ten largest independent lease originators accounted for approximately
26.0% and 53.9% of leases funded during the years ended December 31, 1998 and
1997.
Granite approved contingent fundings of approximately $67,900,000 and
$73,200,000 in leases at December 31, 1998 and 1997, respectively.
72
<PAGE> 45
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-term
investments, leases, residual interests in securitizations, trade receivables
and notes receivable.
The Company places its cash equivalents and short-term investments with
high credit quality financial institutions and, by policy, limits the amount of
credit exposure with any one financial institution. Investments in commercial
paper of industrial firms and financial institutions are rated A1, P1 or better.
Concentrations of credit risk with respect to trade receivables are limited
because a large number of geographically diverse customers make up the Company's
customer base, thus spreading the trade receivables credit risk. The Company
controls credit risk through monitoring procedures.
Concentrations of credit risk with respect to notes receivable are limited
because a number of diverse entities make up the Company's notes receivable
base, thus spreading the credit risk. The Company controls credit risk through
credit approvals, credit limits and monitoring procedures. The Company performs
in-depth credit evaluations for all notes and requires guarantees and/or
collateral, if deemed necessary.
P. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and
display of comprehensive income and its components (revenue, expenses, gains and
losses) in a full set of general-purpose financial statements. SFAS 130 requires
all items that are necessary to be recognized under accounting standards as
components of comprehensive earnings to be reported in a financial statement
that is displayed with the same prominence as other financial statements. SFAS
130 does not require a specific format for that financial statement, but
requires that an enterprise display an amount representing total comprehensive
earnings for the period covered by that financial statement. SFAS 130 requires
an enterprise to (a) classify items of other comprehensive earnings by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS 130
became effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS 130 has not had a material impact on the Company's financial
reporting.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for public business
enterprises to report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes FASB Statement
No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
SFAS 131 requires, among other items, that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
segment assets, information about the revenues derived from the enterprise's
products or services and major customers. SFAS 131 also requires that the
enterprise report descriptive information about the way that the operating
segments were determined and the products and services provided by the operating
segments. SFAS 131 became effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. SFAS 131 need not
be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application is to be reported in financial
73
<PAGE> 46
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 (RESTATED) AND 1996
(RESTATED)
statements for interim periods in the second year of application. The adoption
of SFAS 131 has not had a material impact on the Company's financial reporting.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively, "derivatives") and for hedging activities. SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. It requires changes in the
fair value of a derivative instrument and the changes in fair value of assets or
liabilities hedged by that instrument to be included in earnings. To the extent
that the hedge transaction is effective, earnings are equally offset by both
investments. Currently the changes in fair value of derivative instruments and
hedged items are reported in net unrealized gain (loss) on securities.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of this Statement should be as of the
beginning of an entity's fiscal quarter; on that date, hedging relationships
must be designated anew and documented pursuant to the provisions of this
Statement. Earlier application of all of the provisions of SFAS 133 is
encouraged, but it is permitted only as of the beginning of any fiscal quarter
that begins after issuance of this statement. The Company does not believe the
adoption of SFAS 133 will have a material impact on its financial reporting.
Q. SUBSEQUENT EVENTS
The Company's Board of Directors declared a cash dividend of $.07 per share
on March 17, 1999, which will be payable on May 28, 1999 to stockholders of
record on April 9, 1999.
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 new authorization
will permit the Company to purchase up to 4.0 million shares. Through March 25,
1999, the Company has purchased 1,202,050 shares at an average purchase price of
$16.61 per share totalling $19,960,000. 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"). The purpose of the Loan Plan is to provide key employees
with further incentive to maximize shareholder value. The Company intends to
offer an aggregate of $7,750,000 in loans. Loan Plan 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 will be 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 at any time without penalty.
Through March 25, 1999, loans have been made in the amount of $5,700,000 to
purchase 382,650 shares of Company common stock at an average purchase price of
$14.90 per share.
74
<PAGE> 47
R. SEGMENT INFORMATION
The Company's Consolidated Financial Statements as of December 31, 1998
and 1997 and for the three years ended December 31, 1998 include four reportable
segments. Reportable segments are determined based on the organizational
structure and types of products and services from which each reportable segment
derives its revenue.
As of and for the year ended December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
REAL ESTATE
TITLE INFORMATION
INSURANCE SERVICES LEASING CORPORATE TOTAL
---------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Total revenue $1,138,239 $ 114,022 $ 24,939 $ 11,265 $1,288,465
========== ========= ========= ======== ==========
Operating earnings
(loss) $ 182,381 $ 5,202 $ (5,773) $ (7,866) $ 173,944
Interest and investment
income, including
realized gains (losses) 27,940 288 94 11,265 39,587
Depreciation and
amortization 16,390 3,173 1,810 -- 21,373
Interest expense 5,664 617 3,187 7,556 17,024
---------- --------- --------- -------- ----------
Earnings (loss) before
income taxes 188,267 1,700 (10,676) (4,157) 175,134
Income tax expense
(benefit) 72,588 2,881 (4,378) (1,649) 69,442
---------- --------- --------- -------- ----------
Net earnings (loss) $ 115,679 $ (1,181) $ (6,298) $ (2,508) $ 105,692
========== ========= ========= ======== ==========
Assets $ 696,071 $ 74,195 $ 115,505 $ 83,699 $ 969,470
========== ========= ========= ======== ==========
</TABLE>
As of and for the year ended December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
REAL ESTATE
TITLE INFORMATION
INSURANCE SERVICES LEASING CORPORATE TOTAL
---------- ----------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total revenue $803,643 $41,066 $16,469 $ 1,881 $ 863,059
======== ======= ======= ======== =========
Operating earnings
(loss) $ 75,568 $ 4,676 $ 9,642 $ (9,645) $ 80,241
Interest and investment
income, including
realized gains (losses) 33,823 102 -- 1,881 35,806
Depreciation and
amortization 15,366 842 1,967 -- 18,175
Interest expense 2,804 49 2,253 7,163 12,269
-------- ------- ------- -------- ---------
Earnings (loss) before
income taxes and extra-
ordinary item 91,221 3,887 5,422 (14,927) 85,603
Income tax expense
(benefit) 39,649 1,343 2,096 (6,493) 36,595
-------- ------- ------- -------- ---------
Earnings (loss) before
extraordinary item 51,572 2,544 3,326 (8,434) 49,008
Extraordinary item, net -- -- -- (1,700) (1,700)
-------- ------- ------- -------- ---------
Net earnings (loss) $ 51,572 $ 2,544 $ 3,326 $(10,134) $ 47,308
======== ======= ======= ======== =========
Assets $569,831 $43,775 $79,033 $ 55,056 $ 747,695
======== ======= ======= ======== =========
</TABLE>
75
<PAGE> 48
As of and for the year ended December 31, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
REAL ESTATE
TITLE INFORMATION
INSURANCE SERVICES LEASING CORPORATE TOTAL
---------- ----------- ------- --------- --------
<S> <C> <C> <C> <C> <C>
Total revenue $705,222 $22,265 $ 5,464 $ 1,844 $734,795
======== ======= ======= ======== ========
Operating earnings
(loss) $ 49,693 $ 4,518 $ 3,694 $ (2,288) $ 55,617
Interest and investment
income, including
realized gains (losses) 17,560 50 -- 1,844 19,454
Depreciation and
amortization 14,774 97 384 -- 15,255
Interest expense 2,923 -- 1,490 7,177 11,590
-------- ------- ------- -------- --------
Earnings (loss) before
income taxes 49,556 4,471 1,820 (7,621) 48,226
Income tax expense
(benefit) 19,898 1,505 630 (3,048) 18,985
-------- ------- ------- -------- --------
Net earnings (loss) $ 29,658 $ 2,966 $ 1,190 $ (4,573) $ 29,241
======== ======= ======= ======== ========
Assets $499,846 $16,552 $39,107 $ 54,153 $609,658
======== ======= ======= ======== ========
</TABLE>
The activities of the reportable segments include the following:
TITLE INSURANCE
This segment, consisting of title insurance underwriters and wholly
owned title insurance agencies; provides core title insurance and escrow
services, including document preparation, collection and trust activities and
certain real estate information services. This segment coordinates its
activities with those of the real estate information services segment described
below in order to offer the full range of real estate products and services
required to execute and close a real estate transaction.
REAL ESTATE INFORMATION SERVICES
This segment, consisting of various real estate information
subsidiaries, offers the complementary specialized products and services
required to execute and close a real estate transaction that are not offered by
the title insurance segment described above. These services include document
recording services on a nationwide basis, tax qualifying property exchange
services, property appraisal services, tax monitoring services, credit
reporting, real estate referral services, flood monitoring, foreclosure
publishing and posting and real estate information technology (Micro General
Corporation). These services require specialized expertise and have been
centralized for efficiency and management purposes.
LEASING
The leasing segment originates, funds, purchases, sells, securitizes
and services equipment leases for a broad range of businesses.
CORPORATE
The corporate segment includes the operations of the parent holding
company. These operations consist of certain investment activities and the
issuance and repayment of corporate debt obligations.
Expenditures for long-lived assets relate primarily to the title
insurance segment.
The accounting policies of the segments are the same as those described
in Note A, Summary of Significant Accounting Policies. Intersegment sales or
transfers which occurred in the ordinary course of consolidated operations have
been eliminated from the segment information provided.
76
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.2.1 Amendment to Article VII, Section 7 of the Bylaws of
Registrant dated April 22, 1988, incorporated by reference
from Form 10-K filed January 29, 1990.
3.2.2 Amendment to Article III, Section 3(d) of the Bylaws of
Registrant dated September 14, 1991, incorporated by
reference from Form 10-K filed March 29, 1993.
3.2.3 Amendment to Article II, Section 1(b) of the Bylaws of
Registrant dated October 29, 1991, incorporated by reference
from Form 10-K filed March 29, 1993.
3.2.4 Amendment to Article II, Section 1(b) of the Bylaws of
Registrant dated December 10, 1991, incorporated by
reference from Form 10-K filed March 29, 1993.
3.2.5 Amendment to Article IV, Sections 1(a) and (b) and Section 4
of the Bylaws of Registrant dated June 9, 1992, incorporated
by reference from Form 10-K filed March 29, 1993.
4 Instruments Defining Rights of Security Holders.
4.1 Specimen Certificate, incorporated by reference from Form
S-1, Registration No. 33-11321.
4.2 Articles FOURTH and EIGHTH of Certificate of Incorporation
of Registrant, with Amendments, incorporated by reference
from Form S-1, Registration No. 33-11321.
4.2.1 Amendment to Article FOURTH of Certificate of Incorporation
of Registrant dated February 2, 1989 and approved by the
stockholders of the Company on March 24, 1989, incorporated
by reference from Form 10-K filed January 29, 1990.
4.2.2 Amendment to Article FOURTH of Certificate of Incorporation
of Registrant dated June 10, 1992 and approved by the
stockholders of the Company on July 15, 1992, incorporated
by reference from Proxy Statement on Schedule 14A dated June
17, 1992.
4.2.3 Amendment to Article FOURTH of Certificate of Incorporation
of Registrant dated June 14, 1994 and approved by the
stockholders of the Company on June 14, 1994, incorporated
by reference from Proxy Statement on Schedule 14A dated May
11, 1994.
4.3 Articles II and IV of the Bylaws of the Registrant with
Amendments, incorporated by reference from Form S-1,
Registration No. 33-11321.
4.4 Subscription Documents, incorporated by reference from Form
S-1, Registration No. 33-11321.
10 Material Contracts.
10.1 Employment Agreement effective as of April 1, 1991, between
William P. Foley, II and Fidelity National Financial, Inc.,
incorporated by reference from Form 10-K filed March 23,
1992.
10.1.1 First amendment to Employment Agreement between William P.
Foley, II and Fidelity National Financial, Inc., effective
as of January 1, 1996, incorporated by reference from Form
10-K filed March 31, 1997.
10.1.2 Employment Agreements effective as of January 1, 1996
between four key executives and Fidelity National Financial,
Inc., incorporated by reference from Form 10-K filed March
31, 1997.
10.1.2.1 First amendments and revisions to Employment Agreements
between four key executives and Fidelity National Financial,
Inc., effective January 1, 1997 and April 1, 1997,
incorporated by reference from Form 10-K filed March 30,
1998.
</TABLE>
77
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.1.3 Employment Agreement effective as of September 15, 1997
between a key executive and Fidelity National Financial,
Inc., incorporated by reference from Form 10-K filed March
30, 1998.
10.1.4 Employment Agreement effective as of October 1, 1998 between
a key executive and Fidelity National Financial, Inc.,
incorporated by reference from Form 10-K filed March 31,
1999.
10.4 Fidelity National Financial, Inc. 1987 Stock Option Plan,
incorporated by reference from Form S-1, Registration No.
33-11321.
10.4.1 Amendments to Fidelity National Financial, Inc. 1987 Stock
Option Plan approved by the stockholders of the Company on
March 24, 1989, incorporated by reference from Form S-8,
Registration No. 33-34300.
10.5 Fidelity National Financial, Inc. 1987 Employee Stock
Purchase Plan, incorporated by reference from Form S-1,
Registration No. 33-11321.
10.5.1 Amendments to Fidelity National Financial, Inc. 1987
Employee Stock Purchase Plan approved by the stockholders of
the Company on March 24, 1989, incorporated by reference
from Form S-8, Registration No. 33-15027.
10.5.2 Amendments to Fidelity National Financial, Inc. 1987
Employee Stock Purchase Plan, incorporated by reference from
Form S-8, Registration No. 33-45709.
10.5.3 Amendments to Fidelity National Financial, Inc. 1987
Employee Stock Purchase Plan approved by the stockholders of
the Company on June 15, 1993, incorporated by reference from
Form S-8, Registration No. 33-64836.
10.5.4 Amendments to Fidelity National Financial, Inc. 1987 Stock
Purchase Plan approved by the stockholders of the Company on
June 20, 1995, incorporated by reference from Form S-8,
Registration No. 33-61983.
10.6 Fidelity National Financial, Inc. 401(k) Profit Sharing
Defined Contribution Plan and Trust adopted January 1, 1990,
incorporated by reference from Form 10-K filed January 29,
1991.
10.6.1 Amendments to Fidelity National Financial, Inc. 401(k)
Profit Sharing Plan, incorporated by reference from Form
S-8, Registration No. 33-56514.
10.7 Fidelity National Financial, Inc. 1991 Stock Option Plan,
approved by the stockholders of the Company on July 15,
1992, incorporated by reference from Form S-8, Registration
No. 33-45272.
10.7.1 Amendments to Fidelity National Financial, Inc. 1991 Stock
Option Plan approved by the stockholders of the Company on
June 15, 1993, incorporated by reference from Form S-8,
Registration No. 33-64834.
10.7.2 Amendment to Fidelity National Financial, Inc. 1991 Stock
Plan, approved by the stockholders of the Company on June
14, 1994, incorporated by reference from Form S-8,
Registration No. 33-83026.
10.7.3 Amendment to Fidelity National Financial, Inc. 1991 Stock
Option Plan and the 1998 Stock Option Plan, approved by the
stockholders of the Company on June 17, 1998, incorporated
by reference from Form S-8, registration No. 333-61111.
</TABLE>
78
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.10 Agreement of Limited Partnership of Folco Mission Valley
Partners Limited Partnership, a California limited
partnership, dated August 8, 1991, by Folco Development
Corporation, an Arizona corporation, as general partner, and
Fidelity National Title Insurance Company, an Arizona
corporation, as limited partner, incorporated by reference
from Form 10-K filed March 23, 1992.
10.10.2 Office Building Lease dated October 1, 1991 between Folco
Mission Valley Partners Limited Partnership, a California
limited partnership, as Landlord, and Fidelity National
Title Insurance Company, an Arizona corporation, as Tenant,
incorporated by reference from Form 10-K filed March 23,
1992.
10.12 Form of First Amendment to Office Building Lease between
Folco Development Corporation, an Arizona corporation, as
Landlord, and Fidelity National Title Insurance Company, an
Arizona corporation, as Tenant, with respect to nine office
buildings, and the schedule of such buildings, incorporated
by reference from Form 10-K filed March 23, 1992.
10.14 Goodyear Investors Number II Partnership Agreement dated
October 7, 1986 among Manchester Development Corporation,
Folco Development Corporation Defined Benefit Pension Plan,
Enfield Construction Company, et al., incorporated by
reference from Form S-1, Registration No. 33-11321.
10.16 Agreement of Limited Partnership of Prospect Office
Partners, a California limited partnership, dated September
1, 1988 by and among William P. Foley, II, Frank P. Willey,
Max F. Hickman, Manchester Development Corporation, and
James G. Watt Partnership, incorporated by reference from
Form 10-K filed January 29, 1989.
10.16.1 Promissory Note dated October 1, 1988 in the original
principal amount of $850,000 to Manchester Development
Corporation by Prospect Office Partners, incorporated by
reference from Form 10-K filed March 29, 1993.
10.16.2 Modification Agreement dated November 30, 1992 between
Manchester Development Corporation and Prospect Office
Partners, incorporated by reference from Form 10-K filed
March 29, 1993.
10.18 Wilmac III Limited Partnership Certificate and Agreement of
Limited Partnership, dated December 31, 1987 by and among
Manchester Development Corporation, Stephen L. McCartney,
Frank P. Willey and Robert P. Coluccio, incorporated by
reference from Form 10-K filed January 29, 1989.
10.19 Agreement of Limited Partnership of Tustin Retail, a
California limited partnership, dated April 1988 by and
among Manchester Development Corporation and Vistar
Financial Inc., incorporated by reference from Form 10-K
filed January 29, 1989.
10.19.1 Amendment to Agreement of Limited Partnership of Tustin
Retail by and among Manchester Development Corporation,
Vistar Financial, Inc., William P. Foley, II, Frank P.
Willey, John E. Hock, Robert A. Diemer, Gerald S. Misurek
and Stuart R. Boesche, incorporated by reference from Form
10-K filed March 29, 1993.
10.19.2 Promissory Note dated May 1, 1988 in the original principal
amount of $700,000 to Manchester Development Corporation by
Tustin Retail, incorporated by reference from Form 10-K
filed March 29, 1993.
10.19.3 Fixed Rate Promissory Note dated March 1, 1992 in the
original principal amount of $303,500 to Manchester
Development Corporation by Tustin Retail, incorporated by
reference from Form 10-K filed March 29, 1993.
</TABLE>
79
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.19.4 Modification Agreement dated November 30, 1992 between
Manchester Development Corporation and Tustin Retail,
incorporated by reference from Form 10-K filed March 29,
1993.
10.35 Fidelity National Financial, Inc. 1993 Stock Plan, approved
by stockholders of the Company on June 14, 1994,
incorporated by reference from Form S-8, Registration No.
33-83026.
10.43 Stock Purchase Agreement dated as of August 18, 1995 by and
among William D. Rothenberg, Marshall D. Wexler, Southern
California Title Company and Fidelity National Financial,
Inc., incorporated by reference from Form 10-K filed March
25, 1996.
10.44 Acquisition Agreement dated September 13, 1995 by and among
Fidelity National Financial, Inc. and Nations Holding Group,
Inc. and its wholly-owned subsidiary Nations Title Inc. to
acquire all of the issued and outstanding shares of Nations
Title Inc., incorporated by reference from Form 10-K filed
March 25, 1996.
10.45 Agreement for purchase and sale of stock dated November 4,
1996 by and between Fidelity National Financial, Inc. and
the stockholders of CRM, Inc., incorporated by reference
from Form 10-K filed March 31, 1997.
10.46 Stock Purchase and Loan Agreement by and among ATC Holdings,
Inc., Fidelity National Financial, Inc. and American Title
Company, incorporated by reference from Form 10-K filed
March 30, 1998.
10.47 Agreement and Plan of Reorganization dated as of August 15,
1997 by and among Fidelity National Financial, Inc., First
Title Corporation, Ernest N. Moore, Jeanene S. Moore and T.
Frank Jordan and First Title Acquisition Corporation,
incorporated by reference from Form 10-K filed March 30,
1998.
10.48 Agreement and Plan of Reorganization dated September 1997 by
and among Fidelity National Financial, Inc., ICS Ifland
Credit Services, Inc., Rick W. Ifland and ICS Acquisition
Corporation, incorporated by reference from Form 10-K filed
March 30, 1998.
10.49 Agreement and Plan of Reorganization by and among Fidelity
National Financial, Inc.; Bron Acquisition Corporation, Bron
Research, Inc., and the Shareholders of Bron Research, Inc.,
dated as of September 24, 1997, incorporated by reference
from Form 10-K filed March 30, 1998.
10.50 Agreement and Plan of Reorganization dated as of September
12, 1997, by and among Fidelity National Financial, Inc.,
Credit Reports, Inc., Colin Howard Friedman and Hedy Kramer
Friedman, as trustees of the Friedman Family Trust UDT,
dated July 23, 1987, Colin H. Friedman, Farid Meshkatai and
CRI Acquisition Corporation, incorporated by reference from
Form 10-K filed March 30, 1998,
10.51 Agreement and Plan of Reorganization dated as of September
12, 1997 by and among Fidelity National, Inc., Express
Network, Inc., Colin Howard Friedman and Hedy Kramer
Friedman, as trustees of the Friedman Family Trust UDT,
dated July 23, 1987, Farid Meshkatai, and Anita Kramer
Meshkatai, as Trustee of the Anita Kramer Living Trust,
dated July 23, 1987, Colin H. Friedman, and ENI Acquisition
Corporation, incorporated by reference from Form 10-K filed
March 30, 1998.
</TABLE>
80
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.52 Fidelity National Financial, Inc. Liquid Yield Option Notes,
due 2009 (zero coupon-subordinated) Exchange Agreement dated
October 17, 1997, incorporated by reference from Form 10-K
filed March 30, 1998.
10.53 Stock and Asset Purchase Agreement dated as of May 22, 1997,
by and between Randall F. Zurbach and John C. Wilbur, Jr.
and Fidelity National Financial, Inc., incorporated by
reference from Form 10-K filed March 30, 1998.
10.54 Agreement and Plan of Merger, dated November 17, 1997 by and
among Fidelity National Financial, Inc.; Granite Acquisition
Corporation and Granite Financial, Inc., incorporated by
reference from Form S-4, Registration No. 333-44153.
10.55 Securities Purchase Agreement, dated April 8, 1998, by and
among Walter W. Cruttenden, III, Cruttenden Roth
Incorporated, and Fidelity National Financial, Inc.,
incorporated by reference from Form 10-K filed March 31,
1999.
10.56 Agreement and Plan of Merger, dated May 6, 1998 by and among
Fidelity National Financial, Inc.; AT Merger, Inc. and Alamo
Title Holding Company, incorporated by reference from Form
S-4, Registration No. 333-58573.
10.57 Agreement and Plan of Reorganization, dated May 14, 1998, by
and among ACS Systems, Inc., a California Corporation, ACS
Merger, Inc., a Delaware Corporation, Micro General
Corporation, a Delaware Corporation, and Fidelity National
Financial, Inc., a Delaware Corporation, incorporated by
reference from Form 10-K filed March 31, 1999.
10.57.1 Agreement of Merger, dated May 14, 1998, by and among ACS
Systems, Inc., a California Corporation, ACS Merger, Inc., a
Delaware Corporation, Micro General Corporation, a Delaware
Corporation, and Fidelity National Financial, Inc., a
Delaware Corporation, incorporated by reference from Form
10-K filed March 31, 1999.
10.58 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,
incorporated by reference from Form 10-K filed March 31,
1999.
10.58.1 First Amendment, dated as of December 31, 1998, 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,
incorporated by reference from Form 10-K filed March 31,
1999.
10.59 Stock Purchase Agreement, dated as of August 31, 1998, by and
among Granite Financial, Inc., Fidelity National Financial,
Inc., Lexington Capital Corporation, and the Shareholders of
Lexington Capital Corporation, incorporated by reference from
Form 10-K filed March 31, 1999.
11 Computation of Basic and Diluted Earnings per Share,
incorporated by reference from Form 10-K filed March 31,
1999.
21 List of Subsidiaries, incorporated by reference from Form
10-K filed March 31, 1999.
23 Independent Auditors' Consent.
27 Financial Data Schedule -- December 31, 1998, incorporated by
reference from Form 10-K filed March 31, 1999.
27.1 Financial Data Schedule -- September 30, 1998 (Restated),
incorporated by reference from Form 10-K filed March 31,
1999.
27.2 Financial Data Schedule -- June 30, 1998 (Restated),
incorporated by reference from Form 10-K filed March 31,
1999.
27.3 Financial Data Schedule -- March 31, 1998 (Restated),
incorporated by reference from Form 10-K filed March 31,
1999.
27.4 Financial Data Schedule -- December 31, 1997 (Restated),
incorporated by reference from Form 10-K filed March 31,
1999.
27.5 Financial Data Schedule -- September 30, 1997 (Restated),
incorporated by reference from Form 10-K filed March 31,
1999.
27.6 Financial Data Schedule -- June 30, 1997 (Restated),
incorporated by reference from Form 10-K filed March 31,
1999.
</TABLE>
81
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.7 Financial Data Schedule -- March 31, 1997 (Restated),
incorporated by reference from Form 10-K filed March 31,
1999.
27.8 Financial Data Schedule -- December 31, 1996 (Restated),
incorporated by reference from Form 10-K filed March 31,
1999.
</TABLE>
(b) REPORTS ON FORM 8-K. The Company filed reports on Form 8-K during the
fourth quarter ending December 31, 1998 as follows:
Current report on Form 8-K dated October 22, 1998, relating to the
combined financial results of Fidelity National Financial, Inc. and Alamo
Title Holding Company for the quarter ended September 30, 1998.
82
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
FIDELITY NATIONAL FINANCIAL, INC.
By: /s/ ALAN L. STINSON
------------------------------------
Alan L. Stinson
Executive Vice President, Chief
Financial Officer and Treasurer
Date: December 20, 1999
83
<PAGE> 56
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- -------------
<S> <C> <C>
23 Independent Auditors' Consent...............................
</TABLE>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Fidelity National Financial, Inc.:
We consent to incorporation by reference in the Registration Statements
(No. 33-32853, 33-15027, 33-34300, 33-45709, 33-45272, 33-15008, 33-56514,
33-64834, 33-64836, 33-83026, 33-61983, 333-48411, 333-61111, 333-64229) on Form
S-8 of Fidelity National Financial, Inc. of our reports dated February 17, 1999,
except as to Note Q to the Consolidated Financial Statements, which is as of
March 25, 1999, relating to the Consolidated Balance Sheets of Fidelity National
Financial, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
related Consolidated Statements of Earnings, Comprehensive Earnings,
Stockholders' Equity and Cash Flows and related schedules for each of the years
in the three-year period ended December 31, 1998 which reports appear in the
December 31, 1998 Annual Report on Form 10-K of Fidelity National Financial,
Inc.
KPMG LLP
Los Angeles, California
December 20, 1999
