<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended June 30, 2000
Commission File Number 1-9396
FIDELITY NATIONAL FINANCIAL, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 86-0498599
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
17911 Von Karman Avenue, Suite 300, Irvine, California 92614
------------------------------------------------------ ----------------------
(Address of principal executive offices) (Zip Code)
(949) 622-4333
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of August 9, 2000, 67,393,506 shares of the Registrant's Common
Stock were outstanding.
<PAGE> 2
FORM 10-Q
QUARTERLY REPORT
Quarter Ended June 30, 2000
INDEX
Page
----
Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
A. Condensed Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999 3
B. Condensed Consolidated Statements of Earnings for
the three months and six months ended June 30, 2000
and 1999 4
C. Condensed Consolidated Statements of Comprehensive
Earnings for the three months and six months ended
June 30, 2000 and 1999 5
D. Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2000 and 1999 6
E. Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk 15
Part II: OTHER INFORMATION
Item 1. Legal Proceedings 16
Items 2, 3 and 5 of Part II have been omitted because they are
not applicable with respect to the current reporting
period --
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
2
<PAGE> 3
Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair value,
at June 30, 2000 includes $252,150 of pledged fixed
maturity securities related to secured trust deposits $ 1,134,469 $ 347,051
Equity securities, at fair value 55,793 38,881
Other long-term investments, at cost, which approximates fair value 44,975 43,253
Short-term investments, at cost, which approximates fair value, at
June 30, 2000 includes $114,328 of pledged short-term investments
related to secured trust deposits 267,818 74,232
Investments in real estate and partnerships, net 2,896 3,499
----------- -----------
Total investments 1,505,951 506,916
Cash and cash equivalents, at June 30, 2000 includes $262,978 of
pledged cash related to secured trust deposits 362,705 38,569
Leases and residual interests in securitizations 147,187 142,141
Trade receivables, net 116,881 60,784
Notes receivable, net 18,209 18,304
Cost in excess of net assets acquired, net 765,450 53,576
Prepaid expenses and other assets 179,359 75,310
Title plants 263,872 59,914
Property and equipment, net 179,990 55,453
Deferred tax asset 150,177 31,579
----------- -----------
$ 3,689,781 $ 1,042,546
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities $ 344,446 $ 135,943
Notes payable 783,398 226,359
Reserve for claim losses 910,646 239,962
Secured trust deposits 619,709 --
Income taxes payable 47,819 3,175
----------- -----------
2,706,018 605,439
Minority interests 4,660 4,613
Stockholders' equity:
Preferred stock, $.0001 par value; authorized,
3,000,000 shares; issued and outstanding, none -- --
Common stock, $.0001 par value; authorized, 100,000,000
shares as of June 30, 2000 and 50,000,000 shares as of
December 31, 1999; issued, 67,207,969 as of June 30, 2000
and 39,224,169 as of December 31, 1999 7 4
Additional paid-in capital 637,492 246,959
Retained earnings 347,607 327,785
----------- -----------
985,106 574,748
Accumulated other comprehensive loss (6,003) (5,975)
Less treasury stock, cancelled in 2000 and 12,036,102 shares
as of December 31, 1999, at cost -- (136,279)
----------- -----------
979,103 432,494
----------- -----------
$ 3,689,781 $ 1,042,546
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE> 4
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- ---------- ---------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Title insurance premiums $535,004 $ 248,100 $ 795,404 $489,974
Escrow fees 78,917 34,213 111,200 67,008
Other fees and revenue 123,076 67,661 193,350 131,325
Interest and investment income, including
realized gains (losses) 20,645 7,845 35,345 13,786
-------- ---------- ---------- --------
757,642 357,819 1,135,299 702,093
-------- ---------- ---------- --------
EXPENSES:
Personnel costs 241,764 105,761 352,471 214,306
Other operating expenses 168,375 83,727 278,938 160,032
Agent commissions 233,098 108,605 359,006 215,597
Provision for claim losses 25,185 15,099 39,770 30,330
Interest expense 18,112 2,853 24,691 5,689
-------- ---------- ---------- --------
Total expenses 686,534 316,045 1,054,876 625,954
-------- ---------- ---------- --------
Earnings before amortization of cost in excess
of net assets acquired 71,108 41,774 80,423 76,139
Amortization of cost in excess of net assets acquired 11,874 1,536 13,528 2,397
-------- ---------- ---------- --------
Earnings before income taxes 59,234 40,238 66,895 73,742
Income tax expense 27,863 16,497 33,655 30,234
-------- ---------- ---------- --------
Net earnings $ 31,371 $ 23,741 $ 33,240 $ 43,508
======== ========== ========== ========
Basic net earnings $ 31,371 $ 23,741 $ 33,240 $ 43,508
======== ========== ========== ========
Basic earnings per share $ 0.47 $ 0.78 $ 0.67 $ 1.42
======== ========== ========== ========
Weighted average shares outstanding, basic basis 66,846 30,423 49,559 30,594
======== ========== ========== ========
Diluted net earnings $ 31,371 $ 23,741 $ 33,240 $ 43,771
======== ========== ========== ========
Diluted earnings per share $ 0.46 $ 0.75 $ 0.65 $ 1.35
======== ========== ========== ========
Weighted average shares outstanding, diluted basis 68,866 31,788 51,147 32,502
======== ========== ========== ========
Cash dividends per share $ 0.10 $ 0.07 $ 0.20 $ 0.14
======== ========== ========== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE> 5
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net earnings $ 31,371 $ 23,741 $ 33,240 $ 43,508
Other comprehensive earnings (loss):
Unrealized gains (losses) on investments, net (1) (6,231) (4,023) 405 (10,031)
Reclassification adjustments for (gains) losses
included in net earnings (2) 1,245 (1,194) (433) (799)
-------- -------- -------- --------
Other comprehensive loss (4,986) (5,217) (28) (10,830)
-------- -------- -------- --------
Comprehensive earnings $ 26,385 $ 18,524 $ 33,212 $ 32,678
======== ======== ======== ========
</TABLE>
-----------------
(1) Net of income tax expense (benefit) of $(4,154) and $(2,796) and $270 and
$(6,971) for the three months and six months ended June 30, 2000 and 1999,
respectively.
(2) Net of income tax expense (benefit) of $(830) and $830 and $289 and $556
for the three months and six months ended June 30, 2000 and 1999,
respectively.
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 33,240 $ 43,508
Reconciliation of net earnings to net cash provided by
operating activities:
Depreciation and amortization 46,551 12,716
Net increase (decrease) in reserve for claim losses (61) 13,353
Net increase in provision for possible losses other
than claims 565 282
Gain on sales of assets (1,970) (1,355)
Equity (gains) losses of unconsolidated partnerships 273 (93)
Amortization of LYONs original issue discount -- 485
Change in assets and liabilities, net of effects
from acquisitions:
Net increase in leases and lease securitization
residual interest (5,046) (32,695)
Net increase in cash pledged to secure trust and
escrow deposits 156,908 --
Net increase in trade receivables (23) (1,850)
Net (increase) decrease in prepaid expenses
and other assets 17,578 (6,049)
Net decrease in accounts payable and accrued
liabilities (62,482) (7,328)
Net increase (decrease) in income taxes 17,904 (7,250)
--------- ---------
Net cash provided by operating activities 203,437 13,724
--------- ---------
Cash flows from investing activities:
Proceeds from sale of real estate 7 946
Proceeds from sales and maturities of investments 463,575 211,869
Collections of notes receivable 8,675 1,787
Additions to title plants (56) (1,247)
Additions to property and equipment (16,718) (13,105)
Additions to investments (496,392) (202,836)
Additions to notes receivable (8,364) (8,475)
Sale of a subsidiary, net of cash -- 2,468
Acquisitions of businesses, net of cash acquired (389,819) --
--------- ---------
Net cash used in investing activities $(439,092) $ (8,593)
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 7
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six months ended
June 30,
-----------------------
2000 1999
--------- --------
(Unaudited)
Cash flows from financing activities:
Borrowings $ 600,910 $ 42,152
Debt service payments (47,761) (7,074)
Dividends paid (9,408) (4,392)
Purchase of treasury stock (551) (33,812)
Stock options exercised 16,601 2,532
-------- --------
Net cash used in financing activities 559,791 (594)
--------- --------
Net increase in cash and cash equivalents 324,136 4,537
Cash and cash equivalents at beginning of period 38,569 51,309
--------- --------
Cash and cash equivalents at end of period $ 362,705 $ 55,846
========= ========
Supplemental cash flow information:
Income taxes paid $ 6,038 $ 35,878
========= ========
Interest paid $ 22,988 $ 9,232
========= ========
Noncash investing and financing activities:
Dividends declared and unpaid $ 6,722 $ 2,147
========= ========
See Notes to Condensed Consolidated Financial Statements
7
<PAGE> 8
Fidelity National Financial, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note A - Basis of Financial Statements
The financial information included in this report includes the accounts of
Fidelity National Financial, Inc. and its subsidiaries (collectively, the
"Company") and has been prepared in accordance with generally accepted
accounting principles and the instructions to Form 10-Q and Article 10 of
Regulation S-X. All adjustments considered necessary for a fair presentation
have been included. This report should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 1999 and the
Company's Reports on Form 8-K/A, dated March 20, 2000.
Certain reclassifications have been made in the 1999 Condensed Consolidated
Financial Statements to conform to classifications used in 2000.
Note B - Chicago Title Corporation Merger
On March 20, 2000, Chicago Title Corporation ("Chicago Title") was merged with
and into the Company pursuant to an Agreement and Plan of Merger ("Merger
Agreement") signed on August 1, 1999 and amended on October 13, 1999. Pursuant
to the terms of the Merger Agreement, Chicago Title stockholders received
aggregate merger consideration of approximately $1.1 billion. The merger
consideration was paid in the form of 1.7673 shares of Company common stock and
$26.00 in cash for each share of Chicago Title common stock, resulting in the
issuance of approximately 38.8 million shares of Company common stock at an
average price during the applicable trading period of $13.1771 per share and the
payment of approximately $570.2 million in cash. The merger has been accounted
for as a purchase.
The Company has recorded certain preliminary purchase accounting adjustments,
which are based on estimates utilizing available information. Such purchase
accounting adjustments may be refined as additional information becomes
available. Cost in excess of net assets acquired which has been recorded as a
result of the merger will be amortized on a straight-line basis over 20 years.
The Company's Condensed Consolidated Statements of Earnings include the results
of operations of Chicago Title for the period subsequent to March 20, 2000, the
merger date, through June 30, 2000.
A roll-forward of consolidated stockholders' equity from December 31, 1999 to
June 30, 2000, including the effect of the Chicago Title merger is as follows:
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Treasury Stock
---------------- Paid-in Retained Comprehensive --------------------
Shares Amount Capital Earnings Loss Shares Amount
------- ------ --------- --------- ------------- ------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 39,224 $ 4 $ 246,959 $ 327,785 $(5,975) 12,036 $(136,279)
Purchase of treasury stock -- -- -- -- -- 39 (551)
Exercise of stock options 1,298 -- 16,601 -- -- -- --
Other comprehensive loss -
unrealized loss on
investments and other
financial instruments -- -- -- -- (28) -- --
Acquisition of Chicago
Title Corporation 38,761 4 510,762 -- -- -- --
Retirement of treasury
stock (12,075) (1) (136,830) -- -- (12,075) 136,830
Cash dividends -- -- -- (13,418) -- -- --
Net earnings -- -- -- 33,240 -- -- --
------- --- --------- --------- ------- ------- ---------
Balance, March 31, 2000 67,208 $ 7 $ 637,492 $ 347,607 $(6,003) -- $ --
======= === ========= ========= ======= ======= =========
</TABLE>
In connection with the merger, the Company entered into an $800.0 million
syndicated credit agreement ("Credit Agreement"). The Credit Agreement provides
for three distinct credit facilities: a $100.0 million, 18-month revolving
credit facility, a $250.0 million, 6-year revolving credit facility and a $450.0
million term loan facility with a 6-year amortization period. The Credit
Agreement bears interest at a variable interest rate based on the debt ratings
assigned to the Company by certain independent agencies, and is unsecured. The
initial interest rate is LIBOR plus 1.50%. Proceeds from the Credit
8
<PAGE> 9
Notes to Condensed Consolidated Financial Statements, Continued
Agreement are available and have been used to finance the cash portion of the
merger consideration, to refinance certain previously existing indebtedness, to
pay fees and expenses incurred in connection with the merger and to fund other
general corporate purposes of the combined company.
Selected unaudited pro forma combined results of operations for the six-month
periods ended June 30, 2000 and 1999, assuming the merger occurred on January 1,
2000 and 1999 and using actual general and administrative expenses prior to the
merger, are as follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------------
2000 1999
---------- ----------
(In thousands, except
per share data)
<S> <C> <C>
Total revenue $1,464,764 $1,702,617
Net earnings before merger-related expenses
and non-recurring charges $ 43,065 $ 70,507
Basic net earnings $ 29,694 $ 70,507
Basic net earnings per share before merger-related
expenses and non-recurring charges $ 0.65 $ 1.02
Basic net earnings per share $ 0.45 $ 1.02
Diluted net earnings $ 29,694 $ 70,770
Diluted net earnings per share before merger-related
expenses and non-recurring charges $ 0.63 $ 0.98
Diluted net earnings per share $ 0.44 $ 0.98
</TABLE>
Note C - Dividends
On March 17, 2000, the Company's Board of Directors declared a cash dividend of
$.10 per share, payable on May 30, 2000, to stockholders of record as of April
10, 2000. On June 28, 2000, the Company's Board of Directors declared a cash
dividend of $0.10 per share, payable on July 24, 2000 to stockholders of record
as of July 10, 2000.
9
<PAGE> 10
Notes to Condensed Consolidated Financial Statements, Continued
Note D - Segment Information
During the first quarter of 2000, the Company restructured its business segments
to more accurately reflect a change in the Company's current operating
structure. All previously reported segment information has been restated to be
consistent with the 2000 presentation.
Summarized financial information concerning the Company's reportable segments is
shown in the following table. The amounts reported for Chicago Title reflect
only the period subsequent to March 20, 2000, the merger date, through June 30,
2000. Reportable segments are determined based on the organizational structure
and types of products and services from which each reportable segment derives
its revenue.
<TABLE>
<CAPTION>
REAL ESTATE
SIX MONTHS ENDED TITLE INFORMATION
JUNE 30, 2000 INSURANCE SERVICES CORPORATE TOTAL
---------------- ---------- ----------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Total revenue $ 994,522 $67,089 $ 73,688 $1,135,299
========== ======= ========= ==========
Operating earnings (loss) $ 105,576 $ 8,588 $ (11,372) $ 102,792
Interest and investment
income, including
realized gains (losses) 28,507 921 5,917 35,345
Depreciation and
amortization expense 36,895 1,233 8,423 46,551
Interest expense 335 21 24,335 24,691
---------- ------- --------- ----------
Earnings (loss) before
income taxes 96,853 8,255 (38,213) 66,895
Income tax expense (benefit) 38,118 3,249 (7,712) 33,655
---------- ------- --------- ----------
Net earnings (loss) $ 58,735 $ 5,006 $ (30,501) $ 33,240
---------- ------- --------- ----------
Assets $3,329,006 $94,871 $ 265,904 $3,689,781
========== ======= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
REAL ESTATE
SIX MONTHS ENDED TITLE INFORMATION
JUNE 30, 2000 INSURANCE SERVICES CORPORATE TOTAL
---------------- ---------- ----------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Total revenue $ 597,790 $39,068 $ 65,235 $ 702,093
========== ======= ========= ==========
Operating earnings (loss) $ 81,691 $ 4,268 $ (7,598) $ 78,361
Interest and investment
income, including
realized gains (losses) 12,260 167 1,359 13,786
Depreciation and
amortization expense 8,722 159 3,835 12,716
Interest expense 43 18 5,628 5,689
---------- ------- --------- ----------
Earnings (loss) before
income taxes 85,186 4,258 (15,702) 73,742
Income tax expense (benefit) 32,714 1,663 (4,143) 30,234
---------- ------- --------- ----------
Net earnings (loss) $ 52,472 $ 2,595 $ (11,559) $ 43,508
========== ======= ========= ==========
Assets $ 715,260 $50,119 $ 231,867 $ 997,246
========== ======= ========= ==========
</TABLE>
10
<PAGE> 11
Notes to Condensed Consolidated Financial Statements, Continued
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 and ancillary
service 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, home warranty
insurance, credit reporting, real estate referral services, flood monitoring,
and foreclosure publishing and posting. These services require specialized
expertise and have been centralized for efficiency and management purposes.
Corporate
The corporate segment includes the operations of the parent holding company.
These operations consist of certain investment activities, including Micro
General Corporation, FNF Capital, Inc., Express Network, Inc. and the issuance
and repayment of corporate debt obligations. The non-recurring charges of $13.4
million that were recorded during the first quarter of 2000 are included in the
corporate segment.
The accounting policies of the segments are the same as those used in the
Condensed Consolidated Financial Statements. Intersegment sales or transfers
which occurred in the ordinary course of consolidated operations, other than
transactions between the Company (primarily the Title Insurance segment) and
Micro General Corporation, have been eliminated from the segment information
provided.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The statements contained in this Quarterly Report on Form 10-Q that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including statements regarding our expectations, hopes, intentions or
strategies regarding the future. All forward-looking statements included in this
document are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statements. It is
important to note that our actual results could vary materially from those
forward-looking statements contained herein due to many factors, including, but
not limited to: general economic and business conditions, including interest
rate fluctuations and general volatility in the capital markets; changes in the
performance of the real estate markets; the impact of competitive products and
pricing; success of operating initiatives; our ability to integrate the acquired
business operations of Chicago Title and our ability to implement cost-saving
synergies associated with the acquisition; adverse publicity; the ability to
identify businesses to be acquired; availability of qualified personnel;
employee benefits costs and changes in, or the failure to comply with government
regulations and other risks detailed in our filings with the Securities and
Exchange Commission.
Factors Affecting Comparability
Our Condensed Consolidated Statements of Earnings include the results of
operations of Chicago Title for the period subsequent to March 20, 2000, the
merger date, through June 30, 2000. As a result, quarter over quarter and year
over year comparisons may not be meaningful. Excluding the effect of the Chicago
Title merger, our title insurance premiums for the three and six months ended
June 30, 2000 were $210.3 million and $405.3 million, respectively.
11
<PAGE> 12
In addition, during the first quarter of 2000 we recorded certain non-recurring
charges totaling $13.4 million, after applicable taxes. These charges primarily
relate to the revaluation of non-title assets, including our investment in
Express Network, Inc. and certain existing goodwill and obsolete software.
RESULTS OF OPERATIONS
Net earnings for the second quarter of 2000 were $31.4 million, or $0.46 per
diluted share, as compared with net earnings of $23.7 million, or $0.75 per
diluted shared for the second quarter of 1999. Net earnings for the six months
ended June 30, 2000 were $33.2 million, or $0.65 per diluted share. Excluding
the non-recurring, non-title related charges we recorded in the first quarter of
2000 of $13.4 million, or $0.26 per diluted share, net earnings for the
six-month period were $46.6 million, or $0.91 per diluted share as compared with
net earnings for the corresponding period in 1999 of $43.5 million, or $1.35 per
diluted share.
Excluding the effects of amortization of cost in excess of net assets acquired,
net earnings were $42.9 million, or $0.62 per diluted share for the second
quarter of 2000 compared with $25.3 million, or $0.80 per diluted share for the
second quarter of 1999. Net earnings before amortization of cost in excess of
net assets acquired and before the non-recurring charges we recorded in the
first quarter of 2000, were $59.8 million, or $1.17 per diluted share for the
six months ended June 30, 2000 as compared with $45.9 million, or $1.41 per
diluted share for the corresponding prior year period. We believe that earnings
before amortization of cost in excess of net assets acquired and non-recurring
charges better reflects the operational performance of our business.
The following table presents the calculation of net earnings before amortization
of cost in excess of net assets acquired and non-recurring charges:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
-------- ------- -------- -------
(In thousands, except (In thousands, except
per share data) per share data)
<S> <C> <C> <C> <C>
Net earnings $ 31,371 $23,741 $ 33,240 $43,508
Amortization of cost in excess of
net assets acquired 11,874 1,536 13,528 2,397
Tax effect of amortization of cost in
excess of net assets acquired (316) -- (316) --
Non-recurring charges, net of tax -- -- 13,371 --
-------- ------- -------- -------
Net earnings before amortization
of cost in excess of net assets
acquired and non-recurring charges $ 42,929 $25,277 $ 59,823 $45,905
======== ======= ======== =======
Diluted net earnings per share before
amortization of cost in excess of net
assets acquired and non-recurring
charges $ 0.62 $ 0.80 $ 1.17 $ 1.41
======== ======= ======== =======
Diluted weighted average shares
outstanding 68,866 31,788 51,147 32,502
======== ======= ======== =======
</TABLE>
Our acquisition of Chicago Title on March 20, 2000 has impacted the mix of
business between our direct and agency operations as compared with the prior
year periods. Economic conditions, including the continued volatility in
mortgage rates, have shifted the mix of our core title and escrow business from
a refinance-driven market in the first half of 1999 to a more traditional new
home purchase and resale market.
12
<PAGE> 13
The following table presents information regarding the components of title
premiums:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
-------------------------------------- ------------------------------------
% of % of % of % of
2000 Total 1999 Total 2000 Total 1999 Total
-------- ----- -------- ----- -------- ----- -------- -----
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Title premiums from direct
operations $233,362 43.6% $111,683 45.0% $335,828 42.2% $219,642 44.8%
Title premiums from agency
operations 301,642 56.4% 136,417 55.0% 459,576 57.8% 270,332 55.2%
-------- ----- -------- ----- -------- ----- -------- -----
Total $535,004 100.0% $248,100 100.0% $795,404 100.0% $489,974 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The decrease in real estate activity has been more than offset by an increase in
the average fee per file as well as the addition of the Chicago Title
operations. The increase in fee per file is consistent with a return to more
normalized levels of refinance activity and the continuing increase in housing
values, as well as increased commercial activity as we continue to grow our
National Commercial Division.
Escrow fees for the three and six months ended June 30, 2000 were $78.9 million
and $111.2 million, respectively as compared with $34.2 million and $67.0
million, respectively, for the corresponding periods of the prior year. The
trend in escrow fees is generally consistent with that of our direct title
premiums.
Other fees and income represent revenue generated by our real estate information
services business, the revenue of Micro General Corporation, our majority-owned
information and telecommunication services subsidiary, and the revenue generated
by FNF Capital, Inc., our equipment leasing subsidiary. Other fees and income
for the second quarter of 2000 were $123.1 million as compared with $67.7
million for the second quarter of 1999. On a year-to-date basis, other fees and
income were $193.4 million for the 2000 period as compared with $131.3 million
in 1999. The increases in other fees and income is primarily the result of the
acquisition of Chicago Title.
Interest and investment income was $20.6 million in the second quarter of 2000
as compared with $7.8 million in the second quarter of 1999. The increase in
interest and investment income earned during the 2000 quarter is primarily due
to an increase in invested assets as a result of the Chicago Title acquisition.
The increase in invested assets and interest earned thereon was partially offset
in the second quarter of 2000 by net realized losses on the sale of assets of
$2.6 million as compared with net realized gains of $2.0 million in the second
quarter of 1999. Interest and investment income for the six months ended June
30, 2000 was $35.3 million as compared with $13.8 million for the corresponding
period in 1999. The increase in the year-to-date numbers is consistent with that
of the quarter; however we recorded net realized gains on the sale of assets in
the 2000 period of $2.0 million as compared with net realized gains of $1.4
million for the corresponding 1999 period.
Our operating expenses consist primarily of personnel costs, other operating
expenses and agent commissions, which are incurred as orders are received and
processed. Title insurance premiums, escrow fees and other fees and revenue are
generally recognized as income at the time the underlying transaction closes. As
a result, revenue lags approximately 60-90 days behind expenses and therefore
gross margins may fluctuate. The changes in the market environment, mix of
business between direct and agency operations and the contributions from our
various business units have impacted margins and net earnings. We have
implemented programs and have taken necessary actions to maintain expense levels
consistent with revenue; however, a short time lag does exist in reducing
variable costs and certain fixed costs are incurred regardless of revenue
levels.
Personnel costs include base salaries, commissions and bonuses paid to
employees, and are one of our most significant operating expenses. These costs
generally fluctuate with the level of orders opened and closed and with the mix
of revenue. For the second quarter of 2000 personnel costs were $241.8 million,
or 31.9% of total revenue, compared with $105.8 million, or 29.6% of total
revenue for the corresponding 1999 quarter. For the six months ended June 30,
2000 and 1999, personnel costs were $352.5 million, or 31.0% of total revenue,
and $214.3 million, or 30.5% of total revenue, respectively. We have taken
significant measures to maintain appropriate personnel levels and costs relative
to the volume and mix of business while maintaining customer service standards
and quality controls. We will continue to monitor prevailing market conditions
and will adjust personnel costs in accordance with activity.
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Other operating expenses consist primarily of facilities expenses, title plant
maintenance, premium taxes (which insurance underwriters are required to pay on
title premiums in lieu of franchise and other state taxes), postage and courier
services, computer services, professional services, advertising expenses,
general insurance, depreciation and trade and notes receivable allowances. We
continue to be committed to cost control measures. In response to market
conditions, we have implemented aggressive cost control programs in order to
maintain operating expenses at levels consistent with the levels of revenue;
however, certain fixed costs are incurred regardless of revenue levels,
resulting in period-over-period fluctuations. Our cost control programs are
designed to evaluate expenses, both current and budgeted, relative to existing
and projected market conditions. Total other operating expenses were $168.4
million, or 22.2% of total revenues for the second quarter of 2000 as compared
with $83.7 million, or 23.4% of total revenues for the second quarter of 1999.
For the six months ended June 30, 2000, these expenses were $262.4 million,
excluding the non-recurring charges we took in the first quarter of 2000, and
$160.0 million for the corresponding 1999 period. As a percentage of total
revenue, other operating expenses for the 2000 period were 23.1% as compared
with 22.8% for the 1999 period, excluding the non-recurring charges.
Agent commissions represent the portion of policy premiums retained by agents
pursuant to the terms of their respective agency contracts. Agent commissions
were 77.3% of agent title premiums in the second quarter of 2000 as compared
with 79.6% of agent title premiums for the second quarter of 1999. Agent
commissions, as a percentage of agent title premiums, for the six months ended
June 30, 2000 and 1999 were 78.1% and 79.8%, respectively. Agent commissions and
the resulting percentage of agent title premiums retained by us vary according
to regional differences in real estate closing practices and state regulations.
The provision for claim losses includes an estimate of anticipated title claims
and major claims. The estimate of anticipated title claims is accrued as a
percentage of title premium revenue based on our historical loss experience and
other relevant factors. We monitor our claims loss experience on a continual
basis and adjust the provision for claim losses accordingly. Based on our loss
development studies, we believe that as a result of our underwriting and claims
handling practices, as well as the refinancing business of prior years, we will
maintain the favorable claim loss trends we have experienced over the past
several years. As such, our claim loss provision as a percentage of total title
premiums was 4.7% in the second quarter of 2000 as compared with 6.1% in the
second quarter of 1999. On a year-to-date basis, our provision for claim losses
as a percentage of total title premiums was 5.0% in 2000 as compared with 6.2%
in 1999.
Interest expense for the three and six months ended June 30, 2000 was $18.1
million and $24.7 million, respectively. Interest expense for the three and six
months ended June 30, 1999 was $2.9 million and $5.7 million, respectively. The
increase in interest expense for the 2000 periods is attributable to the
increase in outstanding notes payable, primarily related to the Chicago Title
merger financing, and an increase in certain indices, on which our variable
interest rates are based.
Amortization of cost in excess of net assets acquired was $11.9 million in the
second quarter of 2000 as compared with $1.5 million in the second quarter of
1999. These expenses totaled $13.5 million and $2.4 million for the six months
ended June 30, 2000 and 1999, respectively. In connection with the acquisition
of Chicago Title, we recorded estimated cost in excess of net assets acquired of
approximately $729.8 million. As a result, amortization of cost in excess of net
assets acquired has increased accordingly.
Income tax expense for the three-month and six-month periods ended June 30, 2000
and 1999, as a percentage of earnings before income taxes was 47.0% and 41.0%;
and 50.3% and 41.0%, respectively. The fluctuation in income tax expense as a
percentage of earnings before income taxes is attributable to our estimate of
ultimate income tax liability, the impact of the non-recurring charges and the
non-deductible goodwill recorded pursuant to the Chicago Title merger and the
characteristics of net earnings, i.e. operating income versus investment income.
LIQUIDITY AND CAPITAL RESOURCES
On March 20, 2000 we acquired Chicago Title via merger. Pursuant to the terms of
the Merger Agreement, Chicago Title stockholders received aggregate merger
consideration of approximately $1.1 billion. The merger consideration was paid
in the form of 1.7673 shares of our common stock and $26.00 in cash for each
share of Chicago Title common stock, resulting in the issuance of approximately
38.8 million shares of our common stock at an average price during the
applicable period of $13.1771 per share and the payment of approximately $570.2
million in cash.
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In connection with the Chicago Title merger, we entered into an $800.0 million
syndicated credit agreement ("Credit Agreement"). The Credit Agreement provides
for three distinct credit facilities: a $100.0 million, 18-month revolving
credit facility, a $250.0 million, 6-year revolving credit facility and a $450.0
million term loan facility with a 6-year amortization period. The Credit
Agreement bears interest at a variable rate of interest based on the debt
ratings assigned to us by certain independent agencies, and is unsecured. The
initial interest rate is LIBOR plus 1.50%. Proceeds from the Credit Agreement
are available and have been used to finance the cash portion of the merger
consideration, to refinance certain previously existing indebtedness, to pay
fees and expenses incurred in connection with the merger and to fund other
general corporate purposes.
We must comply with certain affirmative and negative covenants related to our
Credit Agreement and other debt facilities, which require, among other things,
that we maintain our current debt ratings and certain financial ratios related
to liquidity, net worth, capitalization, investments, acquisitions, restricted
payments and certain dividend restrictions. We are in compliance with all of our
debt covenants as of June 30, 2000. Our cash requirements include debt service,
operating expenses, lease fundings, lease securitizations, taxes and dividends
on our common stock. We believe that all anticipated cash requirements for
current operations will be met from internally generated funds, through cash
dividends from subsidiaries, cash generated by investment securities and bank
borrowings through existing credit facilities. Our short-and long-term liquidity
requirements are monitored regularly to match cash inflows with cash
requirements. We forecast the daily needs of all of our subsidiaries and
periodically review their short- and long-term projected sources and uses of
funds, as well as the asset, liability, investment and cash flow assumptions
underlying these projections.
The two significant sources of our funds are dividends and distributions from
our subsidiaries. As a holding company, we receive cash from our subsidiaries in
the form of dividends and as reimbursement for operating and other
administrative expenses they incur. The reimbursements are executed within the
guidelines of various management agreements among us and our subsidiaries. Our
insurance subsidiaries are restricted by state regulations in their ability to
pay dividends and make distributions. Each state of domicile regulates the
extent to which our title underwriters can pay dividends or make other
distributions to us. Our underwritten title companies, real estate information
service companies, Micro General Corporation and FNF Capital, Inc. collect
revenue and pay operating expenses; however, they are not regulated to the same
extent as our insurance subsidiaries. Positive cash flow from these subsidiaries
are invested primarily in cash and cash equivalents.
Year 2000 Issues
We have not experienced any Year 2000 ("Y2K") compliance related issues to date.
We believe that our electronic data processing and information systems are Y2K
compliant; however, there can be no assurance that all of our systems are Y2K
compliant, or the costs to be Y2K compliant will not exceed our current
expectations, or that the failure of such systems to be Y2K compliant will not
have a material adverse effect on our business. We believe that functions
currently performed with the assistance of electronic data processing equipment
could be performed manually or outsourced if certain systems are determined not
to be Y2K compliant.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
There have been no material changes in the market risks described in our Annual
Report on Form 10-K for the year ended December 31, 1999.
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Part II: OTHER INFORMATION
Item 1. Legal Proceedings
As previously disclosed in our prior Securities and Exchange Commission
filings, we have been named as a defendant in four class action
lawsuits alleging irregularities and violations of title and escrow
practices. One of these suits was filed by the Attorney General of the
State of California on behalf of the California Controller and the
California Department of Insurance against the entire title and escrow
industry in California. The other three were filed by private law firms
in Federal Court in San Francisco and the State Court in Los Angeles.
In February 2000, we reached a settlement of the lawsuit filed by the
California Department of Insurance ("Department"). The settlement does
not require us to pay any fine or penalty. We are vigorously defending
the remaining lawsuits. We do not believe that the resolution of these
lawsuits will have a material impact on us or on our results of
operations.
Item 4. Submission of Matters to Vote of Securities Holders
Our Annual Meeting of Stockholders was held on June 12, 2000 for the
purpose of electing certain members of the board of directors and to
approve amendments to increase the shares available under our 1991 and
1998 Stock Option Plans.
Nominees for directors, whose term expired as of the date of the Annual
Meeting, were elected by the following vote:
Shares Voted Authority to Vote
"For" "Withheld"
------------ -----------------
Daniel D. Lane 58,122,130 2,173,289
J. Thomas Talbot 58,123,399 2,172,020
John F. Farrell, Jr. 58,170,495 2,124,924
Philip G. Heasley 58,170,495 2,122,948
The proposal to approve the amendment to our 1991 Stock Option Plan
received the following votes:
Votes Percentage
---------- ----------
Shares Voted "For" 49,794,519 82.6%
Shares Voted "Against" 10,245,734 17.0%
Shares Voted "Abstain" 255,166 0.4%
The proposal to approve the amendment our 1998 Stock Option Plan
received the following votes:
Votes Percentage
---------- ----------
Shares Voted "For" 48,326,974 80.2%
Shares Voted "Against" 11,738,359 19.5%
Shares Voted "Abstain" 230,086 0.3%
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11 -- Computation of Earnings Per Share
Exhibit 27 -- Financial Data Schedule (included only with
electronic filing)
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(b) Reports on Form 8-K:
A Current Report on Form 8-K, dated March 20, 2000, was filed during
the second quarter of 2000 to announce that we completed our
acquisition, by merger, of Chicago Title on March 20, 2000.
Amendments No. 1, 2 and 3 to our Current Report on Form 8-K dated March
20, 2000 were filed during the second quarter of 2000 to report matters
relating to our acquisition, by merger, of Chicago Title.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
FIDELITY NATIONAL FINANCIAL, INC.
(Registrant)
By: /s/ Alan L. Stinson
-----------------------------------------
Alan L. Stinson
Executive Vice President, Chief
Financial Officer (Principal Financial
and Accounting Officer) Date: August 13, 2000
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
11 Computation of Earning Per Share
27 Financial Data Schedule
