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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(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, 1999
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)
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<S> <C>
DELAWARE 86-0498599
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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<TABLE>
<S> <C>
17911 VON KARMAN AVENUE, SUITE 300
IRVINE, CALIFORNIA 92614 (949) 622-4333
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, (REGISTRANT'S TELEPHONE NUMBER,
INCLUDING ZIP CODE) INCLUDING AREA CODE)
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
COMMON STOCK, $.0001 PAR VALUE NEW YORK STOCK EXCHANGE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [X]
As of March 13, 2000, 27,148,867 shares of Common Stock ($.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 $343,687,432. 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 69.
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, 1999, to be filed within 120 days after the close of the fiscal
year that is the subject of this Report.
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TABLE OF CONTENTS
FORM 10-K
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PAGE
NUMBER
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 13
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters................................................... 14
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Item 7A. Quantitative and Qualitative Disclosure about the Market
Risk of Financial Instruments............................. 27
Item 8. Financial Statements and Supplementary Data................. 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 69
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 69
Item 11. Executive Compensation...................................... 69
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 69
Item 13. Certain Relationships and Related Transactions.............. 69
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 69
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PART I
ITEM 1. 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 providing
diversified 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. The Company does business in 49 states, the
District of Columbia, Mexico, Puerto Rico and the U.S. Virgin Islands.
The Company's principal title and real estate related services 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's majority-owned information technology and telecommunication
services subsidiary, Micro General Corporation (OTCBB:MGEN, "Micro General"),
offers a complete range of information technology, telecommunication and
eCommerce services. During 1999, Micro General, in a joint venture, created
RealEC, Inc. ("RealEC"), an open, multi-vendor electronic commerce network
serving the real estate industry nationwide. RealEC provides lenders with
electronic access to title insurance and other real estate related products and
services through a secure business-to-business electronic commerce exchange,
connecting more than 150 customers with more than 350 service providers. The
Company, through Micro General, has also provided a new company, escrow.com,
Inc., with financing in the form of debt. Micro General also received warrants
for escrow.com, Inc. common stock in connection with this transaction.
escrow.com, Inc. is an Internet transaction intermediary and provides a secure
haven for the transmission of funds and merchandise between a buyer and seller
by placing the funds in escrow, confirming verification and receipt of
merchandise by the buyer, and subsequent release of funds to the seller.
The Company also originates, funds, purchases, sells, securitizes and
services equipment leases for a broad range of businesses through its
wholly-owned subsidiary FNF Capital, Inc. (formerly known as Granite Financial,
Inc.).
See Note O of Notes to Consolidated Financial Statements for additional
information related to the Company's operating segments.
On August 1, 1999, the Company announced that it had signed an Agreement
and Plan of Merger ("Merger Agreement") to purchase Chicago Title Corporation
("Chicago Title"), headquartered in Chicago, Illinois, for approximately $1.13
billion, or $52.00 per share of Chicago Title common stock, using approximately
equal amounts of cash and Company common stock, subject to certain adjustments
based on the average price of Company common stock, as defined in the Merger
Agreement. Under the terms of the Merger Agreement, the allocation between cash
and stock would be adjusted so Chicago Title stockholders would receive more
than 50% of the outstanding stock of the combined company. Additionally, the
price would be payable in shares of Company common stock or, upon election by
Chicago Title stockholders, in cash, subject to proration as may be necessary to
achieve the allocation between cash and stock described above. The Merger
Agreement, which was amended on October 13, 1999 has been approved by the Boards
of Directors of both companies, and was approved by the stockholders of both the
Company and Chicago Title in February 2000. Following the receipt of requisite
regulatory approvals and the satisfaction of other customary conditions,
including amendments to the Company's Bylaws, Charter and Certificate of
Incorporation, the transaction closed on March 20, 2000.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Developments" and Note Q of Notes to
Consolidated Financial Statements.
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INDUSTRY OVERVIEW
Title Policies. Title insurance policies state the terms and conditions
upon which a title underwriter will insure title to real estate. 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 beneficiaries of
title insurance policies are generally buyers of real property or mortgage
lenders.
Title insurance is different from other types of insurance because it
relates to past events which affect title to property at the time of closing and
not unforeseen future events. Prior to issuing policies, underwriters can reduce
or eliminate future losses by accurately performing searches and examinations.
Title insurance policies are issued on the basis of a preliminary title report
or commitment. These reports are prepared after a search of public records, maps
and other relevant documents to ascertain title ownership and the existence of
easements, restrictions, rights of way, conditions, encumbrances or other
matters affecting the title to, or use of, real property. A visual inspection or
survey of the property may also be made prior to the issuance of certain title
insurance policies. To facilitate the preparation of preliminary reports without
the necessity of manually searching public records, copies of public records,
maps and other relevant historical documents are compiled and indexed in a
"title plant." Each title plant relates to a particular county and is kept
current on a periodic basis by the continual addition of copies of recorded
documents which affect real property in the particular county. Title companies
often subscribe to independent title information services to assist in the
updating of their title plants and the maintenance of title records.
The premium for title insurance is due in full at the closing of the real
estate transaction and is based upon the purchase price of the property insured
or the amount of the mortgage loan. The major expense of a title company is the
search and examination function in preparing preliminary title reports,
commitments and title policies, and not from claim losses associated with the
issuance of said policies. Claim losses generally result from errors or mistakes
made in the title search and examination process, hidden defects such as fraud,
forgery, incapacity, missing heirs or errors made in the escrow process.
Coverage under the policy generally terminates upon resale or refinance of the
property. The terms of coverage have become relatively standardized in
accordance with forms approved by state or national trade associations.
Direct and Agency Operations. 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 title underwriter.
The terms and conditions upon which the real property will be insured are
determined in accordance with the underwriting standards, policies and
procedures of the title underwriter. In direct operations, the title underwriter
issues the title insurance policy and retains the entire premium paid in
connection with the transaction. In agency operations, the search and
examination function is performed by an independent agent. The majority of the
title premium collected is retained by the agent with the balance remitted to
the title underwriter for bearing the risk of loss in the event that a claim is
made under the title insurance policy. Independent agents may select among
several title underwriters based upon the amount of the premium "split" offered
by the underwriter, the overall terms and conditions of the agency agreement and
the scope of services offered to the agent. Premium splits vary by geographic
region.
The Title Policy Process. A brief description of the process of issuing a
title insurance policy, which usually occurs over a thirty to ninety day period,
is as follows:
(i) The customer, typically a real estate salesperson or broker,
escrow agent or lender, places an order for a title policy.
(ii) The specifics of the order are noted and a request is placed with
the title department for a preliminary report.
(iii) After the relevant historical data on the property is compiled,
the title officer prepares a preliminary title report which documents (a)
the current status of title and conditions affecting the property, (b) any
exclusions, exceptions and/or limitations which the title underwriter might
include in the policy and (c) specific issues which need to be addressed
and resolved by the parties to the
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transaction before the title policy will be issued. The preliminary report
is circulated to all the parties for satisfaction of any specific issues.
(iv) After the specific issues identified in the preliminary report
are satisfied, an escrow agent closes the transaction in accordance with
the instructions of the parties and the title underwriter's conditions.
(v) Once the transaction is closed and all monies have been released,
the title underwriter issues the policies (a) to the owner and the lender
on a new home sale or resale transaction or (b) to the lender only, on a
refinance transaction.
Losses and Reserves. The maximum amount of liability under a title
insurance policy is usually the face amount of the policy plus the cost of
defending the insured's title against an adverse claim. The reserve for claim
losses is based upon known claims, as well as losses the insurer expects to
incur based on historical experience and other factors, including industry
averages, claim loss history, legal environment, geographic considerations,
expected recoupments and the types of policies written. The title underwriter
establishes a reserve for each known claim based on a review and evaluation of
potential liability.
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.
Economic Factors Affecting Industry. Title insurance revenue is closely
related to the level of real estate activity and the average price of real
estate sales. Real estate sales are directly affected by the availability of
funds to finance purchases, i.e., mortgage interest rates. Other factors
affecting real estate activity include demand, family income levels and general
economic conditions. Because these factors can be volatile, revenue levels can
also be volatile. Beginning in late 1995 and into 1998, decreases in mortgage
interest rates and the resulting improvement in the real estate market have had
a favorable effect on the level of real estate activity, including refinancing
transactions, new home sales and resales. The overall economic environment,
stable mortgage interest rates and strength in the real estate market,
especially in California and on the West Coast, contributed to very positive
conditions for the industry throughout 1997 and 1998. During 1999, steady
interest rate increases caused by actions taken by the Federal Reserve Board
resulted in a significant decline in refinancing transactions. As the level of
refinance transactions returned to historic norms, there was a shift from a
refinance driven market to a more traditional market driven by new home
purchases and resales. Increases in mortgage interest rates were partially
offset by consumer confidence in the overall economy, which resulted in record
home sales in 1999. It is impossible to predict in what future direction
interest rates and the real estate market may move or fluctuate.
TITLE INSURANCE OPERATIONS
The Insurance Subsidiaries are currently licensed to issue title insurance
policies through direct operations and independent agents in all states (with
the exception of Iowa, where title insurance is not legally permitted) the
District of Columbia, Puerto Rico and the U.S. Virgin Islands.
The Company maintains direct operations in Alabama, Arizona, California,
District of Columbia, Florida, Georgia, Hawaii, Massachusetts, Michigan, Nevada,
New Jersey, New Mexico, New York, North Carolina, Oregon, Pennsylvania, South
Carolina, Tennessee, Texas and Washington. Direct operations are divided into
approximately 90 branches consisting of more than 400 offices. Each branch
processes title insurance transactions within its geographical area, which is
usually a county boundary. Each branch is operated as a separate profit center.
The Company also transacts title insurance business through a network of
approximately 3,300 agents, primarily in those areas in which agents are the
more accepted title insurance provider.
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The following table presents for the years 1999, 1998 and 1997,
respectively, the approximate dollars and percentages of title insurance premium
revenue by state according to records maintained by the Company:
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YEAR ENDED DECEMBER 31,
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1999 1998 1997
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AMOUNT % AMOUNT % AMOUNT %
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(DOLLARS IN THOUSANDS)
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California.............................. $289,285 30.8% $301,406 33.1% $202,848 32.9%
Texas................................... 179,490 19.1 178,407 19.6 128,298 20.8
New York................................ 92,280 9.8 88,899 9.8 60,022 9.7
Florida................................. 48,596 5.2 44,860 4.9 29,457 4.8
Pennsylvania............................ 38,554 4.1 38,893 4.3 26,318 4.3
Arizona................................. 33,396 3.6 32,555 3.6 24,431 4.0
All others.............................. 257,851 27.4 225,258 24.7 144,700 23.5
-------- ----- -------- ----- -------- -----
Totals........................ $939,452 100.0% $910,278 100.0% $616,074 100.0%
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For the entire title insurance industry, 12 states accounted for 72.9% of
title premiums written in the United States in 1998. California represented the
single largest state with 19.6%. The Company is licensed and has operations in
all 12 of these states.
Direct and Agency Operations. Preliminary title reports and commitments to
issue policies are prepared by title underwriters or wholly-owned underwritten
title companies (direct operations) or by independent agents on behalf of the
underwriters (agency operations). The terms and conditions upon which the real
property will be insured are determined in accordance with the underwriting
standards, policies and procedures of the title underwriter. In direct
operations, the title underwriter issues the title insurance policy and retains
the entire premium paid in connection with the transaction. In agency
operations, the search and examination function is performed by an independent
agent. The majority of the title premium collected is retained by the agent with
the balance remitted to the title underwriter. Independent agents may select
among several title underwriters based upon the amount of the premium "split"
offered by the underwriter, the overall terms and conditions of the agency
agreement and the scope of services offered to the agent. Premium splits vary by
geographic region. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview, Revenue, Expenses and Recent
Developments."
The Company's direct operations generate higher margins than agency
operations because the Company retains the entire premium from each transaction
instead of paying commissions to agents. The Company also believes that claim
losses are less in direct operations than in agency based operations because the
Company controls the issuance of the title policy. Direct operations also
provide additional sources of income, such as escrow fees, collection and trust
fees, real estate information and technology service fees, trustee sale
guarantee fees, credit reporting fees, attorney service fees, flood
certification fees, tax monitoring fees, home warranty insurance premiums,
reconveyance fees, recording fees, foreclosure publishing and posting service
fees and exchange intermediary service fees in connection with real estate
transactions.
The relationship between the Company and each agent is governed by an
agency agreement, which states the conditions under which the agent is
authorized to issue a title insurance policy on behalf of the Company. The
agency agreement also prescribes the circumstances under which the agent may be
liable to the Company if a policy loss is attributable to errors made by the
agent. The agency agreement typically is terminable upon 30 days' notice or
immediately for cause. In determining whether to engage or retain an independent
agent the Company considers the agent's experience, financial condition and loss
history. Loss history is an important consideration in the Company's decision to
initiate or continue agency relationships. The Company maintains financial and
loss experience records for each agent and conducts periodic audits of its
agents.
Underwriting, Losses and Reserves. The Company believes that the level of
risk undertaken pursuant to its underwriting standards is consistent with that
of the industry. The maximum amount of liability under a title insurance policy
is usually the face amount of the policy plus the cost of defending the
insured's title against an adverse claim. The Company's reserve for claim losses
includes known claims as well as losses the
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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, legal environment, geographic
considerations and types of policies written. See "Reinsurance."
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.
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 sustained under the title insurance policy
under rights of subrogation.
The Company believes that its quality controls and underwriting standards
have helped minimize its net claims paid. The Company further reduces its losses
by following aggressive recoupment procedures under rights of subrogation or
warranties and by carefully reviewing all claims. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Expenses" and
Note I. There can be no assurance that the Company's current paid loss
experience will continue at these levels.
Courts and juries sometimes award damages against insurance companies,
including title insurance companies, in excess of policy limits. Such awards are
typically based on allegations of fraud, misrepresentation, deceptive trade
practices or other wrongful acts commonly referred to as "bad faith." Although
the Company has not experienced damage awards materially in excess of policy
limits, the possibility of such bad faith damage awards may cause the Company to
experience increased costs and difficulty in settling title claims.
The Company generally pays losses in cash. In some instances claims are
settled by purchasing the interest of the insured in the real property or the
interest of the adverse claimant. Such interests are generally recorded as an
asset on the Company's books at fair value less selling costs and any related
indebtedness is carried as a liability. At December 31, 1999, the amount of
these interests was $8.3 million.
Reinsurance. In the ordinary course of business, the Company reinsures
certain risks with other title insurers for the purpose of limiting its maximum
loss exposure and also assumes reinsurance for certain risks of other title
insurers for the purpose of earning additional income. The Company also cedes a
portion of certain policy and other liabilities under agent fidelity, excess of
loss and case-by-case reinsurance agreements. Reinsurance agreements provide
that the reinsurer is liable for loss and loss adjustment expense payments
exceeding the amount retained by the ceding company. However, the ceding company
remains primarily liable in the event the reinsurer does not meet its
contractual obligations.
Escrow, Trust and Other Title Related Services. In addition to title
production and the assumption of risk under title insurance policies, the
Company holds and administers funds and documents in real estate transactions
for delivery upon closing pursuant to the instructions of the respective parties
to an escrow. The Company also generates revenue as a provider of real estate
related ancillary services such as collection and trust fees, real estate
information and technology service fees, trustee sale guarantee fees, credit
reporting fees, attorney service fees, flood certification fees, tax monitoring
fees, home warranty insurance premiums, reconveyance fees, recording fees,
foreclosure publishing and posting service fees and exchange intermediary
service fees in connection with real estate transactions.
In a few cases, the Company leases its title plants to independent agents
for their examination of title records for a rental or usage fee.
Marketing. The Company markets and distributes its products and services to
customers in the residential, institutional lender and commercial market sectors
of the real estate industry. The Company attempts to increase the volume of its
business primarily through customer solicitation by sales personnel. The Company
actively encourages its personnel to develop new business relationships with
persons in the real estate community, such as real estate sales agents and
brokers, financial institutions, independent escrow
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companies and title agents, real estate developers, mortgage brokers and
attorneys. The Company's marketing efforts are also assisted by general
advertising. The Company believes customer service is the most important factor
in attracting and retaining customers and measures customer service in terms of
quality and timeliness in the delivery of services.
Competition. The title insurance industry is highly competitive. The number
and size of competing companies varies in the different geographic areas in
which the Company conducts its business. In the Company's principal markets,
competitors include other major title underwriters such as Chicago Title
Corporation (prior to acquisition), First American Financial Corporation,
LandAmerica Financial Group, Inc., Old Republic International Corporation and
Stewart Information Services Corporation, as well as numerous independent agency
operations at the regional and local level. These smaller companies may expand
into other markets in which the Company competes. Also, the removal of
regulatory barriers in the future might result in new competitors entering the
title insurance business that have greater financial resources and other
competitive advantages. Competition among the major title insurance companies,
expansion by smaller regional companies and any new entrants could affect the
Company's business operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Recent Developments" and Note Q of Notes to Consolidated Financial Statements.
The Company's real estate related ancillary service businesses face
significant competition from other similar service providers. In addition,
ancillary service customers may choose to produce these services internally
rather than purchase them from outside vendors.
Competition is based primarily on the expertise, quality and timeliness of
service, since the parties to a real estate transaction are usually concerned
with time schedules and costs associated with delays in closing the transaction.
In those states where prices are not established by regulatory authorities,
price is also a competitive factor. The Company believes that its competitive
position is enhanced by its quality customer service and pricing.
Regulation. 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 as regards policyholders ("capital and surplus")
requirements, defining suitable investments for reserves and 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 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, 1999, the combined statutory unearned premium
reserve required and reported for the Insurance Subsidiaries was $219.8 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), Fidelity New York (1998) and Nations Title Insurance of New York Inc.
("Nations New York", 1998). The Company has not received preliminary reports of
examination for Fidelity Title, Fidelity New York or Nations New York, as the
examinations are currently ongoing. The Department of Insurance of the State of
California has also recently completed a market conduct examination of Fidelity
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Title. Additionally, the Auditor Division of the Controller of the State of
California ("Controller") is currently conducting an examination of the funds
due the State of California under various escheatment regulations for the years
ended December 31, 1998 and prior. The Company has received a preliminary copy
of the Controller's report and is continuing discussion with the Controller to
quantify amounts due, if any. The Company does not believe that either the
examinations performed by the insurance regulators or the Controller will have a
material impact on its financial position, its results of operations or its
combined capital and surplus.
Statutorily calculated net worth determines the maximum insurable amount
under any single title insurance policy. As of January 1, 2000, 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, $95.0 million and $16.5 million, respectively. The
self-imposed single policy maximum insurable amount for Nations New York was
$16.0 million.
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 and distributions made in any twelve-month period
may not exceed the greater of 10% of capital and surplus 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. Fidelity New York's total amount of dividends and
distributions is limited to capital and surplus, 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. The total amount of
dividends and distributions made in any twelve-month period by Alamo Title may
not exceed the greater of 20% of capital and surplus 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, 2000, Fidelity Title could pay dividends
or make other distributions to the Company of $17.2 million, Fidelity New York
could pay dividends or make other distributions to the Company of $15.0 million
and Alamo Title could pay dividends or make other distributions to the Company
of $10.9 million.
The combined statutory capital and surplus of the Insurance Subsidiaries
was $163.5 million, $164.3 million and $122.1 million as of December 31, 1999,
1998 and 1997, respectively. The combined statutory earnings of the Insurance
Subsidiaries were $43.6 million, $37.8 million and $26.7 million for the years
ended December 31, 1999, 1998 and 1997, 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, 1999.
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, 1999.
RATINGS
The Insurance Subsidiaries are regularly assigned ratings by independent
agencies designed to indicate their financial condition and/or claims paying
ability. Financial data and other information are supplied to the
7
<PAGE> 10
rating agencies and subjected to quantitative and qualitative analyses from
which the ratings are derived. Ratings of the Company's principal Insurance
Subsidiaries, as assigned during 1999 are listed below:
<TABLE>
<CAPTION>
DUFF & PHELPS STANDARD & POOR'S
DEMOTECH, INC. CREDIT RATING CO. RATINGS GROUP
(FINANCIAL STABILITY (CLAIMS PAYING (FINANCIAL STRENGTH
RATING) ABILITY RATING) RATING)
-------------------- ----------------- -------------------
<S> <C> <C> <C>
Fidelity Title.................... A' A- A-
Fidelity New York................. A' A- A-
Alamo Title....................... A' A- A-
</TABLE>
INVESTMENT POLICIES AND INVESTMENT PORTFOLIO
The Company's investment policy is designed to maintain a high quality
portfolio, maximize income, minimize interest rate risk and match the duration
of the portfolio to the Company's liabilities. The Company also makes
investments in certain equity securities in order to take advantage of perceived
value and for strategic purposes. Most of the Company's investment assets
qualify as "admitted assets" and for purposes of capital and surplus and
unearned premium reserves as prescribed by various state insurance regulations.
These investments are restricted by the state insurance regulations of their
domiciliary states and are limited primarily to cash and cash equivalents,
federal and municipal governmental securities, mortgage loans, certain
investment grade debt securities, equity securities and real estate. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
As of December 31, 1999 and 1998, the carrying amount, which approximates
the fair value, of total investments was $506.9 million and $519.3 million,
respectively.
It is the practice of the Company to purchase investment grade fixed
maturity securities, selected non-investment grade fixed maturity securities and
equity securities. The securities in the Company's portfolio are subject to
economic conditions and normal market risks and uncertainties.
The following table presents certain information regarding the investment
ratings of the Company's fixed maturity portfolio at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------
1999 1998
------------------------------------------ ------------------------------------------
AMORTIZED % OF FAIR % OF AMORTIZED % OF FAIR % OF
RATING(1) COST TOTAL VALUE TOTAL COST TOTAL VALUE TOTAL
--------- --------- ----- -------- -------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AAA................................... $163,831 46.3% $160,280 46.2% $154,592 47.9% $158,301 48.0%
AA.................................... 79,271 22.4 78,280 22.6 67,575 20.9 69,366 21.0
A..................................... 85,139 24.1 83,418 24.0 74,917 23.2 77,022 23.3
Other................................. 25,584 7.2 25,073 7.2 25,867 8.0 25,379 7.7
-------- ----- -------- ----- -------- ----- -------- -----
$353,825 100.0% $347,051 100.0% $322,951 100.0% $330,068 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
- ---------------
(1) Ratings as assigned by Standard & Poor's Ratings Group and Moody's Investors
Service.
Expected maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties. Fixed maturity securities with an amortized cost of
$51,690,000 and a fair value of $51,280,000 were callable at December 31, 1999.
8
<PAGE> 11
The following table presents certain information regarding the Company's
fixed maturity securities at December 31, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------
AMORTIZED % FAIR %
MATURITY COST OF TOTAL VALUE OF TOTAL
-------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One year or less........................... $ 10,641 3.0% $ 10,609 3.0%
After one year through five years.......... 184,042 52.0 181,375 52.3
After five years through ten years......... 135,383 38.3 131,563 37.9
After ten years............................ 23,759 6.7 23,504 6.8
-------- ----- -------- -----
$353,825 100.0% $347,051 100.0%
======== ===== ======== =====
</TABLE>
Equity securities at December 31, 1999 and 1998 consist of investments in
various industry groups as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1999 1998
------------------ ------------------
FAIR FAIR
COST VALUE COST VALUE
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Banks, trust and insurance companies........ $ 1,559 $ 1,628 $ 1,874 $ 1,949
Industrial, miscellaneous and all other..... 38,180 37,253 35,878 48,242
------- ------- ------- -------
$39,739 $38,881 $37,752 $50,191
======= ======= ======= =======
</TABLE>
The Company's investment results for the years ended December 31, 1999,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net investment income(1)(2)........................ $ 33,914 $ 26,665 $ 20,672
Average invested assets(1)......................... 547,413 482,530 375,100
Effective return on average invested assets(1)..... 6.2% 5.5% 5.5%
</TABLE>
- ---------------
(1) Excludes investments in real estate. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Revenue."
(2) Net investment income as reported in the Consolidated Statements of Earnings
has been adjusted in the presentation above to provide the tax equivalent
yield on tax exempt investments and to exclude net realized capital gains
(losses) on the sale of investments and other assets. Net realized capital
gains (losses) totaled ($76,000), $17,190,000 and $16,839,000 in 1999, 1998
and 1997, respectively.
REAL ESTATE AND PROPERTY MANAGEMENT OPERATIONS
The Company, principally through Orion Realty Group (formerly known as
Manchester Development Corporation, "Orion") a wholly-owned subsidiary of the
Company, previously invested in various real estate projects directly and
through partnerships. Some of these partnerships involve related parties. Orion
currently assists in the identification and leasing of space for operating
purposes and manages property owned by the Company. The Company's investments in
real estate and partnerships represented approximately 0.3% of the Company's
assets at December 31, 1999.
EMPLOYEES
As of December 31, 1999, the Company had approximately 6,000 full-time
equivalent employees. The Company believes that its relations with employees are
generally good.
9
<PAGE> 12
YEAR 2000 ISSUES
Information technology is an integral part of the Company's business. The
Company also recognizes the critical nature of and the technological challenges
associated with the Year 2000 issue. The Year 2000 ("Y2K") issue results from
computer programs and computer hardware that utilize only two digits to identify
a year in the date field, rather than four digits. If such programs or hardware
are not modified or upgraded information systems could fail, lock up, or in
general fail to perform according to normal expectations. The Company has
implemented a program and committed both personnel and other resources to
determine the extent of Y2K issues. The scope of the Y2K program included a
review of the systems used in our title plants, title policy processing, escrow
production, claims processing, real estate related services, financial
management, human resources, payroll and infrastructure. In addition to a review
of internal systems, the Company has formally communicated with third parties
with which it does business in order to determine whether or not they are Y2K
compliant and the extent to which the Company may be vulnerable to third
parties' failure to become Y2K compliant. The Company continues the process of
identifying Y2K compliance issues in its systems, equipment and processes. The
Company will make any necessary changes to such systems, updating or replacing
such systems and equipment, and modifying such processes to make them Y2K
compliant.
The Company developed a four phase program to become Y2K compliant. Phase I
is "Plan Preparation and Identification of the Problem." This is a continuing
phase. Phase II is "Plan Execution and Remediation." Phase III is "Testing."
Phase IV is "Maintaining Y2K Compliance." The status of the Y2K compliance
program is monitored by senior management of the Company and by the Audit
Committee of the Company's Board of Directors. The costs of the Y2K related
efforts incurred to date have not been material, and the estimate of remaining
costs to be incurred is not considered to be material. These estimates may be
subject to change due to the complexities of estimating the cost of modifying
applications to become Y2K compliant and the difficulties in assessing third
parties', including various local governments upon which the Company relies upon
to provide title related data, ability to become Y2K compliant.
The Company has not experienced any Y2K compliance related issues to date.
Management of the Company believes that its electronic data processing and
information systems are Y2K compliant; however, there can be no assurance all of
the Company's systems are Y2K compliant, or the costs to be Y2K compliant will
not exceed management's current expectations, or that the failure of such
systems to be Y2K compliant will not have a material adverse effect on the
Company's business. The Company believes that functions currently performed with
the assistance of electronic data processing equipment could be performed
manually or outsourced if certain systems are determined not to be Y2K
compliant.
The Company has substantially completed a contingency plan in the event
that any systems are not Y2K compliant.
This entire section "Year 2000 Issues" is hereby designated a "Year 2000
Readiness Disclosure", as defined in the Year 2000 Information and Readiness
Disclosure Act.
RISK FACTORS
The risk factors listed in this section and other factors noted below could
cause the Company's actual results to differ materially from those contained in
any forward-looking statements. Risk factors include, but are not limited to:
Real Estate Market and Interest Rate Sensitivity
The level of title insurance and real estate related services activity is
dependent upon, among other things, the volume of real estate transactions. The
volume of real estate transactions nationally and within particular geographic
regions has historically been influenced by such factors as the overall interest
rate environment (which impacts the availability of capital for investment in
real estate, particularly in the commercial refinancings as well as the number
of sales), the strength of the national and/or regional economy and family
income levels. During 1997 and 1998, and into 1999, historically low interest
rates resulted in an increased number of real estate sales, resales and
refinancings. However, when interest rates increase, real estate activity
10
<PAGE> 13
typically declines and the title insurance industry tends to experience lower
revenues. Moreover, a favorable interest rate environment or trend may not
necessarily result in increased levels or continued high levels of real estate
transactions if other market factors (such as a recessionary economy or
increased unemployment) combine to depress the volume of real estate
transactions. Accordingly, no assurance can be given that historical levels of
premiums and fees previously received by the Company will be available in the
future.
Geographic Concentration
Part of the Company's strategy has been to expand its market share and
increase its title insurance premiums and other real estate related revenue in
the key real estate markets of California, Texas, Florida and New York.
Approximately 64.9% of the Company's title insurance premium revenue was
generated from real estate transactions in those states in 1999. This geographic
concentration makes the Company susceptible to the risk that adverse economic
conditions or other factors affecting the real estate markets in these areas,
even with a strong national economy, could have a more pronounced adverse affect
on its premium and fee revenues than if its revenue base were more broadly
dispersed across the country.
Risks Associated With Acquisitions
Part of the Company's strategy is to pursue opportunities to diversify and
expand its operations by acquiring or making investments in other companies.
Acquisitions involve a number of risks that could adversely effect the Company's
operations, including the diversion of management's attention and the
integration of the operations and personnel of the acquired companies. If the
Company acquires other business operations, the Company cannot be certain that
such businesses will be successful, that they will enhance the Company's
existing business or that the Company will not incur significant expenses,
including goodwill, relating to such acquisitions. The Company may be required
to sell additional securities or borrow additional funds to complete any
significant acquisitions. The sale of additional equity or debt securities may
dilute stockholder interests in or increase the leverage of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Recent Developments" and Note Q of Notes to Consolidated Financial
Statements.
Risks Associated With New Business Lines
The Company has acquired, and may in the future acquire, businesses in
industries with which management is less familiar than the title insurance
industry. For example, in February 1998, the Company acquired FNF Capital, Inc.,
whose primary business is financing equipment leases. Also, in the last three
years, the Company has expanded the range and amount of ancillary title and real
estate related services it provides, began underwriting home warranty policies,
invested in restaurant businesses, expanded its commercial title insurance
business and considered acquiring underwriters of other lines of insurance
products. These activities involve risks that could adversely affect the
Company's operating results, such as diversion of management's attention,
integration of the operations, systems and personnel of the new businesses and
lack of substantial experience in operating such businesses.
Competition
The title insurance and real estate related services industries are highly
competitive. Competition is based primarily on the expertise, quality and
timeliness of service. Where price is not regulated by governmental authorities,
pricing can also be an important competitive factor. For larger commercial
customers and mortgage originators the size and financial strength of the title
insurer are important competitive factors. Our principal competitors include
Chicago Title Corporation (prior to acquisition), First American Financial
Corporation, LandAmerica Financial Group, Inc., Old Republic International
Corporation and Stewart Information Services Corporation, each of whom has the
size, capital base and distribution channels to compete effectively with the
Company. The Company also competes with many smaller title insurance and real
estate services companies that serve regional market areas. These smaller
companies may expand into other markets in which the Company competes. Also, the
removal of regulatory barriers in the future might result in new competitors
entering the title insurance business that have greater financial resources and
other
11
<PAGE> 14
competitive advantages. Competition among the major title insurance companies,
expansion by smaller regional companies and any new entrants could adversely
affect the Company's business operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Recent Developments" and Note Q of Notes to Consolidated Financial
Statements.
Government Regulation
Our title insurance business is subject to extensive regulation by state
insurance authorities in each state in which the Company operates. These
agencies have broad administrative and supervisory power relating to the
following:
- licensing requirements;
- trade practices;
- accounting and financing practices;
- capital and surplus requirements;
- the amount of dividends and other payments made by Insurance Subsidiaries
without prior regulatory approval;
- investment practices; and
- rate schedules.
Most states also regulate insurance holding companies, like Fidelity
National Financial, Inc., in a variety of matters such as acquisitions, change
of control and terms of affiliate transactions. These regulations may impede, or
impose burdensome conditions on rate increases or other actions that the Company
may want to take to enhance its operating results, and could affect its ability
to pay dividends on its common stock. In addition, the Company may incur
significant costs in the course of complying with regulatory requirements. No
assurance can be given that future legislative or regulatory changes will not
adversely affect the Company's business operations.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
The Company wishes to caution readers that the forward-looking statements
contained in this Form 10-K under "Item 1. Business," "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Form 10-K involve known and unknown risks and uncertainties
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by any forward-looking statements made by or on behalf of
the Company. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is filing the following
cautionary statements identifying important factors that in some cases have
affected, and in the future could cause the Company's actual results to differ
materially from those expressed in any such forward-looking statements.
The factors that could cause the Company's results to differ materially
include, but are not limited to, general economic and business conditions,
including interest rate fluctuations; the impact of competitive products and
pricing; success of operating initiatives; adverse publicity; changes in
business strategy or development plans; quality of management; availability,
terms, and deployment of capital; the results of financing efforts; business
abilities and judgment of personnel; availability of qualified personnel;
employee benefit costs and changes in, or the failure to comply with government
regulations.
12
<PAGE> 15
ITEM 2. PROPERTIES
The majority of the branch offices of the Company are leased from third
parties. The remaining branch offices are owned by the Company.
As of December 31, 1999, the Company leased office and storage space as
follows:
<TABLE>
<CAPTION>
NUMBER OF
LOCATIONS
---------
<S> <C>
California.................................................. 200
Texas....................................................... 76
Florida..................................................... 39
Arizona..................................................... 30
Oregon...................................................... 18
Washington.................................................. 11
Pennsylvania................................................ 9
Tennessee................................................... 8
New Jersey.................................................. 7
New Mexico, New York and North Carolina..................... 6
Georgia, Hawaii and Nevada.................................. 5
Michigan.................................................... 3
Connecticut, Kentucky, Maryland, South Carolina, and
Virginia.................................................. 2
</TABLE>
One each in Alabama, Colorado, Illinois, Kansas, Massachusetts, Minnesota,
Ohio, Rhode Island and Washington D.C.
See Note J of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
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, other than those listed below, depart from customary litigation
incidental to the business of the Company and that the resolution of all such
litigation will not have a material adverse effect on the Company.
The Company has been named as a defendant in four class action lawsuits
alleging irregularities and violations of title and escrow practices. One of
these suits was filed by the Attorney General of the State of California on
behalf of the California Controller and the California Department of Insurance
against the entire title and escrow industry in California. The other three were
filed by private law firms in Federal Court in San Francisco and the State Court
in Los Angeles. As a result of extensive meetings and discussions between the
Company and the Attorney General of the State of California, the Attorney
General has issued a letter stating that it does not expect to serve Fidelity
National Financial, Inc. with a formal complaint. The Attorney General and the
Company have previously expressed with confidence that the issues regarding the
Company are likely to be resolved without litigation. The California Department
of Insurance ("Department") and the Company reached a settlement of their
lawsuit in February 2000. The settlement does not call for any fine or penalty
to be paid by the Company. The Company anticipates that the resolution of the
action filed by the Department will serve as a basis for the resolution of the
other lawsuits filed. The Company does not believe that such resolution will
have a material impact on its financial position or on its results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders in the
fourth quarter of 1999.
13
<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The following table presents, for the calendar quarters indicated, the
range of high and low sales prices per share of Company common stock on the New
York Stock Exchange Composite Tape and the dividends per share declared on
Company common stock. The high and low sales prices per share and the amount of
dividends declared for the periods indicated have been retroactively adjusted
for stock dividends and splits declared since the Company's inception.
<TABLE>
<CAPTION>
DIVIDENDS
HIGH LOW DECLARED
------ ------ ---------
<S> <C> <C> <C>
Year ended December 31, 1999
First quarter......................................... $30.75 $14.56 $.070
Second quarter........................................ 21.00 14.50 .070
Third quarter......................................... 21.06 13.44 .070
Fourth quarter........................................ 16.00 13.81 .100
Year ended December 31, 1998
First quarter......................................... $33.86 $23.41 $.064
Second quarter........................................ 36.81 29.66 .064
Third quarter......................................... 39.66 24.55 .064
Fourth quarter........................................ 30.50 20.86 .070
</TABLE>
On March 13, 2000, the last reported sale price of Company common stock on
the New York Stock Exchange Composite Tape was $15.13 per share. As of March 13,
2000, the Company had approximately 900 stockholders of record.
Dividend Policy and Restrictions on Dividend Payments. Since the last
quarter of 1987, the Company has consistently paid cash dividends on a quarterly
basis, which payments have been made at the discretion of the Company's Board of
Directors. The continued payment of dividends will depend upon operating
results, business requirements, contractual restrictions, regulatory
considerations and other factors. The Company's Board of Directors declared a
cash dividend of $.10 per share on March 17, 2000, which will be payable on May
30, 2000 to stockholders of record as of April 10, 2000. The Company anticipates
the continued payment of dividends. See "Business -- Regulation" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Contractual Restrictions on Dividend Payments. The Company's ability to pay
dividends on its common stock and make certain payments is restricted by
provisions contained in the Company's various debt agreements. The Company
believes that amounts to fund currently anticipated dividends and certain
payments are available pursuant to the terms and conditions of its various debt
agreements. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and Note G of Notes to
Consolidated Financial Statements.
14
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The historical operating results data, per share data and balance sheet
data presented below are derived from the historical financial statements of
Fidelity National Financial, Inc. and subsidiaries (collectively, the
"Company"). Per share data has been retroactively adjusted for stock dividends
and splits since the Company's inception. Consolidated Balance Sheets at
December 31, 1999 and 1998 and Consolidated Statements of Earnings,
Comprehensive Earnings, Stockholders' Equity and Cash Flows for the years ended
December 31, 1999, 1998 and 1997, and Notes thereto, audited by KPMG LLP,
independent auditors, are included elsewhere herein and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
(2)(3)(4)(6) (2)(3)(4)(6) (2)(3)(4)(5) (2)(3)(4) (1)(4)
------------ ------------ ------------ --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS DATA:
Revenue:
Title insurance premiums........................ $ 939,452 $ 910,278 $616,074 $552,799 $351,510
Escrow fees..................................... 123,734 130,299 86,033 71,122 53,132
Other fees and revenue.......................... 260,623 208,301 125,146 91,647 66,819
Interest and investment income, including
realized gains (losses)....................... 28,395 39,587 35,806 19,227 19,432
---------- ---------- -------- -------- --------
1,352,204 1,288,465 863,059 734,795 490,893
---------- ---------- -------- -------- --------
Expenses:
Personnel costs................................. 407,078 394,284 273,221 240,232 190,419
Other operating expenses........................ 335,284 257,080 189,226 176,524 143,494
Agent commissions............................... 423,675 385,649 261,182 221,948 113,358
Provision for claim losses...................... 52,713 59,294 41,558 36,275 22,003
Interest expense................................ 15,626 17,024 12,269 11,590 10,137
---------- ---------- -------- -------- --------
1,234,376 1,113,331 777,456 686,569 479,411
---------- ---------- -------- -------- --------
Earnings before income taxes and extraordinary
item............................................ 117,828 175,134 85,603 48,226 11,482
Income tax expense................................ 46,975 69,442 36,595 18,985 2,716
---------- ---------- -------- -------- --------
Earnings before extraordinary item.............. 70,853 105,692 49,008 29,241 8,766
Extraordinary item, net of income taxes........... -- -- (1,700) -- (813)
---------- ---------- -------- -------- --------
Net earnings (Basic net earnings)............... $ 70,853 $ 105,692 $ 47,308 $ 29,241 $ 7,953
========== ========== ======== ======== ========
Diluted net earnings............................ $ 71,116 $ 108,155 $ 50,450 $ 32,437 $ 7,953
========== ========== ======== ======== ========
PER SHARE DATA:
Basic earnings per share before extraordinary
item............................................ $ 2.38 $ 3.79 $ 2.10 $ 1.43 $ .47
Extraordinary item, net of income taxes, basic
basis........................................... -- -- (0.07) -- (.04)
---------- ---------- -------- -------- --------
Basic earnings per share........................ $ 2.38 $ 3.79 $ 2.03 $ 1.43 $ .43
========== ========== ======== ======== ========
Weighted average shares outstanding, basic
basis........................................... 29,811 27,921 23,355 20,426 18,732
Diluted earnings per share before extraordinary
item............................................ $ 2.27 $ 3.23 $ 1.76 $ 1.23 $ .45
Extraordinary item, net of income taxes, diluted
basis........................................... -- -- (.06) -- (.04)
---------- ---------- -------- -------- --------
Diluted earnings per share...................... $ 2.27 $ 3.23 $ 1.70 $ 1.23 $ .41
========== ========== ======== ======== ========
Weighted average shares outstanding, diluted
basis........................................... 31,336 33,474 29,599 26,431 19,351
Dividends declared per share...................... $ .31 $ .26 $ .24 $ .22 $ .20
BALANCE SHEET DATA:
Investments....................................... $ 506,916 $ 519,332 $376,285 $270,134 $224,769
Cash and cash equivalents......................... 38,569 42,492 54,975 65,551 35,559
Total assets...................................... 1,029,173 969,470 747,695 609,658 462,166
Notes payable..................................... 226,359 214,624 163,015 179,508 146,095
Reserve for claim losses.......................... 239,962 224,534 201,674 196,527 153,207
Minority interests................................ 4,613 1,532 3,614 1,287 393
Stockholders' equity.............................. 432,494 396,740 274,050 162,645 112,920
OTHER DATA:
Orders opened by direct operations................ 780,000 987,000 621,000 575,000 489,000
Orders closed by direct operations................ 583,000 670,000 436,000 430,000 331,000
Provision for claim losses to title insurance
premiums........................................ 5.6% 6.5% 6.7% 6.6% 6.3%
Title related revenue:
Percentage direct operations.................... 53.5% 56.9% 56.9% 58.7% 67.6%
Percentage agency operations.................... 46.5% 43.1% 43.1% 41.3% 32.4%
Employees at year end............................. 6,000 7,400 6,000 5,200 4,700
Number of licensed states at year end............. 49 49 49 49 49
Return on average equity before extraordinary
item(7)......................................... 17.1% 31.5% 22.4% 21.2% 8.0%
Return on average equity including extra-ordinary
item(7)......................................... 17.1% 31.5% 21.7% 21.2% 7.2%
</TABLE>
15
<PAGE> 18
- ---------------
(1) During 1995, the Company recognized an $813,000 extraordinary loss, net of
income taxes of $437,000, related to the early retirement of its Senior
Secured Notes.
(2) The Company acquired Nations Title Inc. and its wholly-owned subsidiaries on
April 1, 1996. The selected financial data above includes the balance sheet
accounts of Nations Title Inc. and subsidiaries at December 31, 1999, 1998,
1997 and 1996; and the results of its operations for the years ended
December 31, 1999, 1998, 1997 and for the nine-month period ended December
31, 1996.
(3) During 1996 and 1997 the Company acquired certain real estate related
ancillary service companies in various transactions. The selected financial
data above includes the balance sheet accounts of the acquired companies as
of December 31 of the year acquired and all subsequent years presented; and
the results of their operations for the periods from the date of acquisition
through December 31 of the acquisition year and for the years ended December
31 for all subsequent years presented.
(4) The Company acquired FNF Capital, Inc. and subsidiaries (formerly known as
Granite Financial, Inc., "FNF Capital") on February 26, 1998. This
acquisition has been accounted for as a pooling-of-interests. The selected
financial data above includes the balance sheet accounts of FNF Capital at
December 31, 1999, 1998, 1997 and 1996; and the results of its operations
for the years ended December 31, 1999, 1998, 1997 and 1996. FNF Capital's
financial position and results of operations for the years ended December
31, 1995 and prior were insignificant, and as such, the 1995 selected
financial data above has not been restated to include FNF Capital.
(5) During 1997, the Company recognized an extraordinary loss of $1.7 million,
net of income taxes of $1.2 million, related to the early retirement of $45
million maturity value of the Company's Liquid Yield Option Notes. See Note
G of Notes to Consolidated Financial Statements.
(6) The Company completed the merger of its wholly-owned subsidiary ACS Systems,
Inc. ("ACS") with and into Micro General Corporation (OTCBB:MGEN, "Micro
General") on May 14, 1998. This transaction has been accounted for as a
reverse merger of Micro General into ACS, with Micro General as the
surviving legal entity. The selected financial data above includes the
balance sheet accounts of Micro General at December 31, 1999 and 1998 and
the results of its operations for the year ended December 31, 1999 and for
the period from May 14, 1998 through December 31, 1998. The Company
currently owns 69.3% of Micro General Corporation. See Note B of Notes to
Consolidated Financial Statements.
(7) Percentage return on average equity is net earnings for the period divided
by the simple average of total stockholders' equity as of the beginning and
end of each year presented.
16
<PAGE> 19
QUARTERLY FINANCIAL DATA
Selected quarterly financial data is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1999
Revenue..................................... $344,274 $357,819 $341,837 $308,274
Earnings before income taxes................ 33,504 40,238 30,216 13,870(1)
Net earnings, basic basis................... 19,767 23,741 18,607 8,738
Net earnings, diluted basis................. 20,030 23,741 18,607 8,738
Basic earnings per share.................... .64 .78 .62 .31
Diluted earnings per share.................. .60 .75 .60 .30
Dividends paid per share.................... .07 .07 .07 .07
1998
Revenue..................................... $262,213 $321,441 $329,416 $375,395
Earnings before income taxes................ 28,799 57,451 46,210 42,674
Net earnings, basic basis................... 16,680 33,439 26,801 28,772
Net earnings, diluted basis................. 17,304 34,038 27,461 29,352
Basic earnings per share.................... .62 1.21 .94 1.00
Diluted earnings per share.................. .53 1.02 .81 .87
Dividends paid per share.................... .06 .06 .06 .06
</TABLE>
- ---------------
(1) Includes the impact of recording the Company's provision for claim losses at
6.0% as a percentage of title insurance premiums for the year ended December
31, 1999, compared to 6.5% for the nine-month period ended September 30,
1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to provide information to facilitate
the understanding and assessment of significant changes and trends related to
the financial condition and results of operations of Fidelity National
Financial, Inc. and subsidiaries (collectively, the "Company"). This discussion
and analysis should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto appearing elsewhere herein.
OVERVIEW
The following table presents certain financial and other data for the years
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total revenue................................... $1,352,204 $1,288,465 $863,059
========== ========== ========
Total expenses.................................. $1,234,376 $1,113,331 $777,456
========== ========== ========
Earnings before extraordinary item.............. $ 70,853 $ 105,692 $ 49,008
Extraordinary item -- loss on early retirement
of debt, net of income taxes.................. -- -- (1,700)
---------- ---------- --------
Net earnings.......................... $ 70,853 $ 105,692 $ 47,308
========== ========== ========
Return on average equity before extraordinary
item(1)....................................... 17.1% 31.5% 22.4%
Return on average equity including extraordinary
item(1)....................................... 17.1% 31.5% 21.7%
</TABLE>
- ---------------
(1) Percentage return on average equity is net earnings for the period divided
by the simple average of total stockholders' equity as of the beginning and
end of each year presented.
17
<PAGE> 20
Title insurance revenue is closely related to the level of real estate
activity and the average price of real estate sales. Real estate sales are
directly affected by the availability of funds to finance purchases, i.e.,
mortgage interest rates. Other factors affecting real estate activity include
demand, family income levels and general economic conditions. Because these
factors can be volatile, revenue levels can also be volatile. Beginning in late
1995 and into 1998, decreases in mortgage interest rates and the resulting
improvement in the real estate market have had a favorable effect on the level
of real estate activity, including refinancing transactions, new home sales and
resales. The overall economic environment, stable mortgage interest rates and
strength in the real estate market, especially in California and on the West
Coast, contributed to very positive conditions for the industry throughout 1997
and 1998. During 1999, steady interest rate increases caused by actions taken by
the Federal Reserve Board resulted in a significant decline in refinancing
transactions. As the level of refinance transactions returned to historic norms,
there was a shift from a refinance driven market to a more traditional market
driven by new home purchases and resales. Increases in mortgage interest rates
were partially offset by consumer confidence in the overall economy, which
resulted in record home sales in 1999. It is impossible to predict in what
future direction interest rates and the real estate market may move or
fluctuate.
The Company's strategies are to (i) maximize operating profits by
increasing its share of the title insurance business in the markets it serves;
(ii) effectively manage operating expenses through the real estate cycle; (iii)
minimize net claim payments and (iv) continue a value-added acquisition and
diversification strategy. The Company intends to execute these strategies by
continuing to implement the following elements:
- expand into the commercial title insurance market while maintaining its
strong position in the residential and institutional lender markets;
- generate an increasing portion of its revenue from the sale of ancillary
services;
- develop and integrate advanced proprietary technologies that respond to
the needs of customers in each of its markets;
- adhere to quality controls and strict monitoring of direct and agency
operations to minimize title claims paid;
- maintain a balance between direct and agency distribution to enable the
Company to compete profitably on a national basis;
- deliver quality customer service and provide its employees with extensive
training and incentive and equity based compensation programs; and
- explore opportunities that are less interest rate sensitive.
See "Recent Developments" and Note Q of Notes to Consolidated Financial
Statements.
The following table presents information regarding title related revenue
generated by the Company's direct and agency operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
% OF % OF % OF
1999 TOTAL 1998 TOTAL 1997 TOTAL
---------- ----- ---------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue from direct operations:
Title insurance premiums............. $ 407,769 35.6% $ 425,551 37.9% $286,487 37.5%
Escrow fees.......................... 123,734 10.8 130,299 11.6 86,033 11.3
Other title related fees and
revenue........................... 81,364 7.1 83,724 7.4 62,227 8.1
---------- ----- ---------- ----- -------- -----
Total........................ 612,867 53.5 639,574 56.9 434,747 56.9
Revenue from agency operations:
Title insurance premiums............. 531,683 46.5 484,727 43.1 329,587 43.1
---------- ----- ---------- ----- -------- -----
Total title related
revenue.................... $1,144,550 100.0% $1,124,301 100.0% $764,334 100.0%
========== ===== ========== ===== ======== =====
</TABLE>
18
<PAGE> 21
The Company also earns income from its non-title related operations and
from its investment portfolio. See Notes C and O of Notes to Consolidated
Financial Statements.
RESULTS OF OPERATIONS
Revenue. The following table presents the components of the Company's
revenue:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Title insurance premiums........................ $ 939,452 $ 910,278 $616,074
Escrow fees..................................... 123,734 130,299 86,033
Other fees and revenue.......................... 260,623 208,301 125,146
Interest and investment income, including
realized gains (losses)....................... 28,395 39,587 35,806
---------- ---------- --------
Total revenue......................... $1,352,204 $1,288,465 $863,059
========== ========== ========
Orders opened by direct operations.............. 780,000 987,000 621,000
Orders closed by direct operations.............. 583,000 670,000 436,000
</TABLE>
Total revenue in 1999 increased 4.9% to $1,352.2 million from $1,288.5
million in 1998. Revenue in 1998 of $1,288.5 million reflected a 49.3% increase
from 1997 revenue of $863.1 million. The increases in total revenue are
primarily the result of strength in the Company's core title and real estate
related operations, which were positively impacted by favorable market
conditions leading to an increase in real estate activity. The increased real
estate activity, combined with acquisitions of ancillary service companies and
the integration of those ancillary service operations into the Company's core
businesses, also contributed to increased revenue.
Title insurance premiums increased by 3.2% to $939.4 million in 1999 from
$910.3 million in 1998. In 1998, title premiums increased by 47.8% to $910.3
million from $616.1 million in 1997. The premium increases from 1997 through
1999 are indicative of the favorable market conditions existing during the
period. In 1999, refinance transactions declined from record levels in 1998 to
levels consistent with historical norms due to interest rate increases caused by
actions taken by the Federal Reserve Board. Increases in mortgage interest rates
were partially offset by consumer confidence in the overall economy, which
resulted in record home sales in 1999. As the volume of refinance transactions
decreased, the market shifted from a refinance driven market to a more
traditional market driven by new home purchases and resales. The Company also
experienced a slight shift in its title premium mix from direct operations to
agency operations during 1999.
The following table presents the percentages of title insurance premiums
generated by direct and agency operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
AMOUNTS % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Direct title insurance premiums........... $407,769 43.4% $425,551 46.7% $286,487 46.5%
Agency title insurance premiums........... 531,683 56.6 484,727 53.3 329,587 53.5
-------- ----- -------- ----- -------- -----
Total title insurance
premiums...................... $939,452 100.0% $910,278 100.0% $616,074 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
Trends in escrow fees are primarily related to the title insurance activity
generated by the Company's direct operations. Escrow fees during the three-year
period ended December 31, 1999, have fluctuated in a pattern generally
consistent with the fluctuation in direct title insurance premiums and order
counts. Escrow fees were $123.7 million, $130.3 million and $86.0 million,
respectively, during 1999, 1998 and 1997. In addition, the Company has focused
on expansion of its escrow operations in certain areas, such as Southern
California, during the three years ended December 31, 1999.
19
<PAGE> 22
Other fees and revenue generally trend closely with the level and mix of
business, as well as the performance of certain of the Company's title related
subsidiaries. During 1996 and 1997, the Company acquired certain ancillary
service companies in various separate transactions. The Company's strategy in
making the ancillary service company acquisitions was to acquire previously
existing entities in businesses it believed to be complementary to its core
title and escrow businesses. Further, the Company sought to acquire companies
with strong management and efficient operations in order to provide for a
seamless transition from their being stand-alone operations to being
subsidiaries of the Company and to prevent any disruption of the acquired
companies' businesses, while minimizing integration costs. The integration of
the ancillary service companies continues as expected and integration related
costs have been negligible. The acquired ancillary service companies have been
bundled with other existing lender services to form Fidelity National Lender
Express Network ("FLEXNet"). Utilizing its extensive network as its primary
distribution channel and FLEXNet as the platform to provide a comprehensive
network of real estate related services, the Company has made a concerted effort
to develop the ancillary service contribution to title and real estate related
revenue. The Company has been able to leverage its core title and escrow
businesses, national presence and proprietary technology in successfully
expanding the market presence of its ancillary service businesses. FLEXNet
provides a complete range of real estate transactional services, leading to
increased other fees and revenue. These services include 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. In addition to the impact of increased title and
real estate related revenue, other fees and revenue have increased as a result
of an increased contribution from Micro General Corporation (OTCBB:MGEN, "Micro
General"), the Company's majority-owned information technology and
telecommunication services subsidiary, and FNF Capital, Inc. (formerly known as
Granite Financial, Inc., "FNF Capital"), the Company's leasing subsidiary. 1999
other fees and revenue were $260.6 million, an increase of $52.3 million, or
25.1%, over 1998 other fees and revenue of $208.3 million. In 1998, other fees
and revenue increased $83.2 million, or 66.4%, to $208.3 million from $125.1
million in 1997.
Interest and investment income levels are primarily a function of
securities markets, interest rates and the amount of cash available for
investment. 1999 interest and investment income was $28.4 million compared to
$39.6 million in 1998, a decrease of $11.2 million, or 28.3%. Average invested
assets, excluding real estate, increased 13.4% to $547.4 million from $482.5
million in 1998. The tax equivalent yield in 1999, excluding net realized
losses, was 6.2%. The decrease in investment income in 1999 from 1998 is the
result of net realized losses in 1999 of ($76,000) compared to net realized
gains in 1998 of $17.2 million, offset by an increase in interest and dividend
income generated by the increased invested asset base and interest rate
increases during the year. 1998 investment income increased $3.8 million, or
10.6%, to $39.6 million compared to $35.8 million in 1997. Average invested
assets, excluding real estate, increased 28.6% to $482.5 million in 1998 from
$375.1 million in 1997, while the tax equivalent yield remained at 5.5%. The
increase in investment income in 1998 over 1997 is primarily the result of an
increase in interest and dividend income generated by the increased invested
asset base. Net realized gains from the sale of investment securities and other
assets in 1998 were $17.2 million compared to $16.8 million in 1997, prior to
applicable income taxes. Included in 1998 net realized gains is a gain from the
conversion of the Company's investment in Data Tree Corporation of approximately
$9.7 million. The primary components of 1997 net realized gains are the
following: $10.4 million in capital gains from the sale of investment securities
and other assets, $4.3 million in capital gain from the sale of the Company's
former home office building, $1.3 million from the sale of a majority interest
in
20
<PAGE> 23
American Title Company and approximately $800,000 in capital gain from the sale
of the Company's former small business investment company subsidiary, FNF
Ventures, Inc.
Expenses. The following table presents the components of the Company's
expenses:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Personnel costs................................. $ 407,078 $ 394,284 $273,221
Other operating expenses........................ 335,284 257,080 189,226
Agent commissions............................... 423,675 385,649 261,182
Provision for claim losses...................... 52,713 59,294 41,558
Interest expense................................ 15,626 17,024 12,269
---------- ---------- --------
Total expenses........................ $1,234,376 $1,113,331 $777,456
========== ========== ========
</TABLE>
The Company's operating expenses consist primarily of personnel costs,
other operating expenses and agent commissions, which are incurred as orders are
received and processed. Title insurance premiums, escrow fees and other fees and
revenue are generally recognized as income at the time the underlying
transaction closes. Certain other fees and revenue are recognized over the
period the related services are provided. As a result, revenue lags
approximately 60-90 days behind expenses and therefore gross margins may
fluctuate. The changes in the market environment, mix of business between direct
and agency operations and the contributions from our various business units have
impacted margins and net earnings. The Company has implemented programs and
taken the 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 the most significant operating expenses incurred by
the Company. These costs generally fluctuate with the level of orders opened and
closed and with the mix of revenue. Personnel costs totaled $407.1 million,
$394.3 million and $273.2 million for the years ended December 31, 1999, 1998
and 1997, respectively. Personnel costs, as a percentage of total revenue, have
decreased to 30.1% in 1999 from 30.6% in 1998, which had previously decreased
from 31.7% in 1997. The Company has taken significant measures to maintain
appropriate personnel levels and costs relative to the volume and mix of
business. These fluctuations reflect a continuing emphasis on expense control
and an increase in productivity resulting from the Company's automation and
electronic commerce. The Company will not, however, compromise its customer
service standards or quality controls in responding to market conditions. The
Company continues to monitor the prevailing market conditions and will adjust
personnel costs in accordance with activity.
Other operating expenses consist of facilities expenses, title plant
maintenance, premium taxes (which insurance underwriters are required to pay on
title premiums and title related revenue in lieu of franchise and other state
taxes), postage and courier services, computer services, professional services,
advertising expenses, general insurance, trade and notes receivable allowances
and depreciation. The Company continues to be committed to cost control
measures. In response to market conditions, the Company 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 year over year percentage
fluctuations. The Company's cost control programs are designed to evaluate
expenses, both current and budgeted, relative to existing and projected market
conditions. Items considered include, but are not limited to, capital
expenditures, service contracts, property requirements (e.g.,
renewal/termination of leases and relocation of offices), expected fluctuations
in the number of personnel, the impact of technology and profitability.
Additionally, the Company has centralized its purchasing function in order to
obtain the most favorable prices/rates available for vendor provided products
and services, which also facilitates a highly structured requisition/approval
process and cost analysis program. Other operating expenses increased as a
percentage of total revenue to 24.8% in 1999 from 20.0% in 1998, which had
previously decreased from 21.9% in 1997. The primary components of the increase
in 1999 are the impact of Micro General's business expansion, increased data
processing and information technology costs and normal year over year price
21
<PAGE> 24
increases including rent escalations, travel and other general and
administrative costs. Combined, these increases have offset much of the
Company's cost control efforts. Total other operating expenses totaled $335.3
million, $257.1 million and $189.2 million in 1999, 1998 and 1997, respectively.
Agent commissions represent the portion of premiums retained by agents
pursuant to the terms of their respective agency contracts. Agent commissions
and the resulting percentage of agent premiums retained by the Company vary
according to regional differences in real estate closing practices and state
regulations.
The following table illustrates the relationship of agent premiums and
agent commissions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Agent premiums............................ $531,683 100.0% $484,727 100.0% $329,587 100.0%
Agent commissions......................... 423,675 79.7 385,649 79.6 261,182 79.2
-------- ----- -------- ----- -------- -----
Premiums retained by the
Company....................... $108,008 20.3% $ 99,078 20.4% $ 68,405 20.8%
======== ===== ======== ===== ======== =====
</TABLE>
The provision for claim losses includes an estimate of anticipated claims.
The estimate of anticipated claims is accrued as a percentage of title premium
revenue based on the Company's historical loss experience and other relevant
factors. The Company monitors its claims experience on a continual basis and
adjusts the provision for claim losses accordingly. Based on Company loss
development studies, the Company believes that as a result of its underwriting
and claims handling practices, as well as the refinancing business of prior
years, the Company will maintain the trend of favorable claim loss experience.
Based on this information, in 1999, 1998 and 1997, the Company recorded a
provision for claim losses of 6.0%, 7.0%, and 7.0%, respectively, of title
insurance premiums, net of recoupments and prior to the impact of premium rates
and Company loss experience in the state of Texas. Premiums in Texas are
all-inclusive and include a closing fee in addition to a risk-related premium,
which differs from similar coverage in other states, while loss experience is
comparable. As a result, the provision for claim losses in Texas is much lower
than in states that do not have all-inclusive premiums. These factors resulted
in a net provision for claim losses of 5.6%, 6.5% and 6.7% in 1999, 1998 and
1997, respectively.
A summary of the reserve for claim losses follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance................................ $224,534 $201,674 $196,527
Reserves assumed............................... -- -- 284
Reserves transferred........................... (4,310)(1) -- (160)
Claim loss provision related to:
Current year................................ 57,321 59,294 39,301
Prior years................................. (4,608) -- 2,257
-------- -------- --------
Total claim loss provision............. 52,713 59,294 41,558
Claims paid, net of recoupments related to:
Current year................................ (1,229) (1,045) (3,385)
Prior years................................. (31,746) (35,389) (33,150)
-------- -------- --------
Total claims paid, net of
recoupments.......................... (32,975) (36,434) (36,535)
-------- -------- --------
Ending balance................................... $239,962 $224,534 $201,674
======== ======== ========
Provision for claim losses as a percentage of
title insurance premiums....................... 5.6% 6.5% 6.7%
</TABLE>
- ---------------
(1) On March 18, 1998, the Company announced that it had entered into an
agreement to sell National Title Insurance of New York Inc. ("National") to
American Title Company, a wholly-owned subsidiary of American National
Financial, Inc. ("ANFI"), for $3.25 million, subject to regulatory approval
and
22
<PAGE> 25
certain other conditions. The purchase price was structured at a premium to
book value. The Company currently holds a 29.2% interest in ANFI. National
was acquired in April 1996, as part of the Nations Title Inc. acquisition,
and has not been actively underwriting policies since that time. This
transaction received regulatory approval on May 27, 1999 and closed on June
10, 1999. The Company recognized a gain of approximately $1.2 million prior
to applicable income taxes, in connection with the sale of National. This
gain has been reflected in the Consolidated Statement of Earnings for the
year ended December 31, 1999.
Interest expense is incurred by the Company in financing its capital asset
purchases, lease originations, certain acquisitions and certain general
corporate purposes. Interest expense consists of interest related to the
Company's outstanding debt and the amortization of original issue discount and
debt issuance costs related to the Liquid Yield Option Notes due 2009 ("LYONs")
issued in February 1994. Interest expense on non-LYONs debt totaled $15.2
million, $12.8 million and $7.0 million for the years 1999, 1998 and 1997,
respectively. The LYONs-related component of interest expense amounted to
$445,000, $4.2 million and $5.3 million for 1999, 1998 and 1997, respectively.
Included in 1998 interest expense is $4.7 million of interest relating to the
settlement of an Internal Revenue Service examination for the tax years 1990
through 1994. Excluding the interest expense related to the tax examination, the
fluctuation in interest expense in 1999 compared to 1998 can be attributed to an
increase in non-LYONs debt and related interest rates, offset by the redemption
and conversion of LYONs in 1999. The increase in 1998 over 1997 can be
attributed to an increase in non-LYONs debt outstanding offset by more favorable
interest rates in 1998 than 1997 and the conversion of LYONs during 1998. See
"Recent Developments" and Note G of Notes to Consolidated Financial Statements.
Income tax expense for 1999, 1998 and 1997, as a percentage of earnings
before income taxes, including the extraordinary loss in 1997 was 39.9%, 39.7%
and 42.7%, respectively. See "Extraordinary Item." The fluctuations in income
tax expense as a percentage of earnings before income taxes, including the
extraordinary loss, are attributable to the effect of state income taxes on the
Company's wholly-owned underwritten title companies, real estate related
ancillary service companies, Micro General and FNF Capital; a change in the
amount and characteristics of net income, operating income versus investment
income; and the tax treatment of certain items. See Note H of Notes to
Consolidated Financial Statements.
Extraordinary Item. In an effort to reduce the leverage of the Company
while taking advantage of the favorable environment relative to the Company's
common stock, 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' equity by
approximately $24.7 million while reducing outstanding debt by approximately
$24.3 million. An extraordinary loss due to the early retirement of debt of
approximately $1.7 million, net of applicable income taxes, related to this
transaction has been recorded in the Consolidated Statement of Earnings for the
year ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements include debt service, operating expenses,
lease fundings, lease securitizations, taxes and dividends on its common stock.
The Company believes that all anticipated cash requirements for current
operations will be met from internally generated funds, through cash received
from subsidiaries, cash generated by investment securities and bank borrowings
through existing credit facilities.
23
<PAGE> 26
The short- and long-term liquidity requirements of the Company, Insurance
Subsidiaries, underwritten title companies ("UTCs"), ancillary service
companies, Micro General and FNF Capital are monitored regularly to match cash
inflows with cash requirements. The Company and its subsidiaries forecast their
daily cash needs and periodically review their short- and long-term projected
sources and uses of funds, as well as the asset, liability, investment and cash
flow assumptions underlying these projections.
Two of the significant sources of the Company's funds are dividends and
distributions from its subsidiaries. As a holding company, the Company receives
cash from its subsidiaries in the form of dividends and as reimbursement for
operating and other administrative expenses it incurs. The reimbursements are
executed within the guidelines of various management agreements among the
Company and its subsidiaries. The Insurance Subsidiaries are restricted by state
regulations in their ability to pay dividends and make distributions. Each state
of domicile regulates the extent to which the Company's title underwriters can
pay dividends or make other distributions to the Company. The Company's UTCs,
ancillary service companies, Micro General and FNF Capital collect revenue and
pay operating expenses; however, they are not regulated to the same extent as
the Insurance Subsidiaries. Positive cash flow from the UTCs, ancillary service
companies, Micro General and FNF Capital is invested primarily in cash and cash
equivalents. Fluctuations in operating cash flows are primarily the result of
increases or decreases in revenue. See "Overview."
The Company's Insurance Subsidiaries and UTCs collect premiums and pay
claims and operating expenses. The Insurance Subsidiaries also have cash flow
sources derived from investment income, repayments of principal and proceeds
from sales and maturities of investments and dividends from subsidiaries.
Positive cash flow from the Insurance Subsidiaries is invested primarily in
short-term investments and medium-term bonds. Short-term investments held by the
Company's Insurance Subsidiaries provide liquidity for projected claims and
operating expenses.
For purposes of satisfying insurance regulatory requirements, the Insurance
Subsidiaries are required to maintain certain levels of readily marketable
securities and other liquid assets. At December 31, 1999, the fair value of the
Insurance Subsidiaries total investment securities was approximately $438.3
million, approximately $302.4 million of which have been designated to support
statutory policyholder liabilities. These investments consist of securities
which the Insurance Subsidiaries believe are readily marketable and could be
liquidated if necessary. See "Business -- Investment Policies and Investment
Portfolio."
Effective August 1, 1998, the Company closed a $100 million syndicated bank
credit agreement which was subsequently amended to $150 million as of September
30, 1999. Certain of the proceeds of this credit agreement were used to
refinance certain existing debt facilities and for general corporate purposes.
This credit agreement was repaid and terminated in connection with the Company's
merger with Chicago Title Corporation ("Merger"). See "Recent Developments" and
Notes G and Q of Notes to Consolidated Financial Statements.
In connection with the Merger, the Company has entered into an $800 million
syndicated credit agreement ("Credit Agreement"). The Credit Agreement provides
for three distinct credit facilities: a $100 million, 18-month revolving credit
facility, a $250 million 6-year revolving credit facility and a $450 million
term loan facility with a 6-year amortization period. The Credit Agreement is
unsecured at a variable interest rate based on the debt ratings assigned to the
Company by independent agencies. 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 of the combined company. The
Company believes that the terms of the Credit Agreement are favorable.
The Company must comply with certain affirmative and negative covenants
related to its Credit Agreement 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. The Company is in compliance with
all of its debt covenants.
In February 1994, the Company issued zero coupon, convertible subordinated
Liquid Yield Option Notes due February 2009 at an interest rate of 5.5% with a
principal amount at maturity of $235,750,000. Net
24
<PAGE> 27
proceeds to the Company were approximately $101,000,000. The proceeds were used
for investment and general corporate purposes. The amount of LYONs outstanding
on December 31, 1998 was $124,113,000 of maturity value. On February 15, 1999,
the Company redeemed, pursuant to the terms of the LYONs indenture, its
outstanding Liquid Yield Option Notes due 2009 for $581.25 per $1,000 maturity
value. 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 notes payable by a like amount. The
remaining $432,000 of maturity value was redeemed for cash of approximately
$251,000. There are no LYONs outstanding as of December 31, 1999. See Note G of
Notes to Consolidated Financial Statements.
In the normal course of business the Company and certain of its
subsidiaries enter into off-balance sheet credit risk associated with certain
aspects of its title insurance policies and other activities. This credit risk
is in the form of guarantees and support agreements. The Company believes that
this credit risk is adequately secured.
Seasonality. Historically, the greatest volume of residential resale
activity has occurred in the spring and summer months. However, events during
the past five years, including numerous actions taken by the Federal Reserve
Board, have caused unusual fluctuations in real estate activity, particularly in
the seasonal pattern of resale and refinance activity. The Company cannot
predict whether the historical pattern of resale and refinance activity will
continue to be affected by such outside factors.
Inflation. To the extent real estate prices or mortgage interest rates
increase due to inflationary factors, the Company's title insurance premium
revenue generally increases because premiums are determined in part by the value
of property or the amount of the mortgage loan. The Company's personnel costs
and other operating expenses are also sensitive to inflation.
Recent Developments. The Company completed the merger of its wholly-owned
subsidiary ACS Systems, Inc. ("ACS") with and into Micro General Corporation for
4.6 million shares of Micro General common stock valued at $1,297,000, on May
14, 1998. Micro General 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. Micro General will continue to provide the above listed services
to the Company at preferred customer rates. This transaction has been accounted
for as a reverse merger of Micro General into ACS, with Micro General as the
surviving legal entity. The Company currently owns 69.3% of Micro General
Corporation. See Note B of Notes to Consolidated Financial Statements.
On March 17, 1999, the Company's Board of Directors approved an increase to
the number of shares of outstanding Company common stock authorized for purchase
under the Company's previously announced purchase program. The additional
authorization permitted the Company to purchase up to 4.0 million shares. On
September 13, 1999, the Company announced that its Board of Directors had
approved a second increase of 2.0 million shares, bringing the total number of
shares of outstanding Company common stock authorized for purchase to 6.0
million. As of December 31, 1999, the Company had purchased 5.4 million shares
at an average purchase price of $15.19 per share totaling $81.9 million.
Purchases may be made from time to time by the Company in the open market or in
block purchases or in privately negotiated transactions depending on market
conditions and other factors. There have been no significant purchases since
December 31, 1999.
Also on March 17, 1999, the Company's Board of Directors approved the
adoption of the Fidelity National Financial, Inc. Employee Stock Purchase Loan
Plan ("Loan Plan") and the Non-Employee Director Stock Purchase Loan Program
("Loan Program"). The purpose of the Loan Plan and Loan Program is to provide
key employees and directors with further incentive to maximize stockholder
value. The Company offered an aggregate of $8,650,000 in loans. Loan Plan and
Loan Program funds must be used to make private or open market purchases of
Company common stock through a broker-dealer designated by the Company. All
loans are full recourse and unsecured, and will have a five-year term. Interest
will accrue on the loans at a rate of 5% per annum due at maturity. Loans may be
prepaid any time without penalty. As of December 31,
25
<PAGE> 28
1999, loans had been made in the amount of $7.25 million to purchase 484,000
shares of Company common stock at an average purchase price of $15.41 per share.
There have been no significant purchases since December 31, 1999.
On August 1, 1999, the Company announced that it had signed an Agreement
and Plan of Merger ("Merger Agreement") to purchase Chicago Title Corporation
("Chicago Title"), headquartered in Chicago, Illinois, for approximately $1.13
billion, or $52.00 per share of Chicago Title common stock, using approximately
equal amounts of cash and Company common stock, subject to certain adjustments
based on the average price of Company common stock, as defined in the Merger
Agreement. Under the terms of the Merger Agreement, the allocation between cash
and stock would be adjusted so Chicago Title stockholders would receive more
than 50% of the outstanding stock of the combined company. Additionally, the
price would be payable in shares of Company common stock or, upon election by
Chicago Title stockholders, in cash, subject to proration as may be necessary to
achieve the allocation between cash and stock described above. The Merger
Agreement, which was amended on October 13, 1999 has been approved by the Boards
of Directors of both companies, and was approved by the stockholders of both the
Company and Chicago Title in February 2000. Following the receipt of requisite
regulatory approvals and the satisfaction of other customary conditions,
including amendments to the Company's Bylaws, Charter and Certificate of
Incorporation, the transaction closed on March 20, 2000.
The transition and integration process, led by a team comprised of senior
managers from both the Company and Chicago Title Corporation, is proceeding very
smoothly and a senior management team has recently been named. The combined
company will be the largest title insurer and provider of real estate related
products and services in the world; distinguished by an unsurpassed distribution
system comprised of over 1,000 offices and 7,000 agents, leading market share in
excess of 30%, geographic diversity, complementary business mixes and the
strongest financial position in the industry.
Pursuant to the terms of the Merger Agreement, Chicago Title stockholders
received an aggregate purchase price of approximately $1.1 billion. The purchase
price was paid in the form of 1.7673 shares of Company common stock and $26.00
in cash for each share of Chicago Title Corporation 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 will be accounted
for as a purchase.
In connection with the Merger, the Company has entered into an $800 million
syndicated credit agreement. The Credit Agreement provides for three distinct
credit facilities: a $100 million, 18-month revolving credit facility, a $250
million 6-year revolving credit facility and a $450 million term loan facility
with a 6-year amortization period. The Credit Agreement is unsecured at a
variable interest rate based on the debt ratings assigned to the Company by
independent agencies. 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 of the combined company. The
Company believes that the terms of the Credit Agreement are favorable.
The Company's Board of Directors declared a cash dividend of $.10 per share
on March 17, 2000, which will be payable on May 30, 2000 to stockholders of
record as of April 10, 2000.
Recent Accounting Pronouncements. The American Institute of Certified
Public Accountants issued Statement of Position 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), in
March 1998. SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use. SOP 98-1 requires that certain
costs related to the development or purchase of internal use computer software
be capitalized and amortized over the estimated useful life of the software.
Costs related to the preliminary project stage and the
post-implementation/operations stage, as defined, in an internal use computer
software development project are to be expensed as incurred. Costs incurred
prior to initial application of SOP 98-1, whether capitalized or not, are not
adjusted to the amounts that would have been capitalized had SOP 98-1 been in
effect when those costs were incurred. SOP 98-1 is applicable to all
non-governmental entities and effective for fiscal years beginning after
26
<PAGE> 29
December 15, 1998. The adoption of SOP 98-1 has not had a material impact on the
Company's financial position, results of operations or financial reporting.
In June 1998, the Financial Accounting Standards Board 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, changes
in the fair value of derivative instruments and hedged items are reported in
accumulated other comprehensive earnings (loss).
SFAS 133 was originally 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 SFAS 133. 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. In June 1999, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities --
Deferral of the Effective Date of FASB No. 133" ("SFAS 137"). SFAS 137 defers
the effective date of SFAS 133 until June 2000. The adoption of SFAS 133 is not
expected to have a material impact on the Company's financial position, results
of operations or financial reporting.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT THE MARKET RISK OF
FINANCIAL INSTRUMENTS
The Company's Consolidated Balance Sheet includes a substantial amount of
assets and liabilities whose fair values are subject to market risks. See
"Business -- Investment Policies and Investment Portfolio" and Notes C and G of
Notes to Consolidated Financial Statements. The following sections address the
significant market risks associated with the Company's financial activities as
of year end 1999.
Interest Rate Risk
The Company's fixed maturity investments and borrowings are subject to
interest rate risk. Increases and decreases in prevailing interest rates
generally translate into decreases and increases in fair values of those
instruments. Additionally, fair values of interest rate sensitive instruments
may be affected by the creditworthiness of the issuer, prepayment options,
relative values of alternative investments, the liquidity of the instrument and
other general market conditions.
Equity Price Risk
The carrying values of investments subject to equity price risks are based
on quoted market prices or management's estimates of fair value as of the
balance sheet date. Market prices are subject to fluctuation and, consequently,
the amount realized in the subsequent sale of an investment may significantly
differ from the reported market value. Fluctuation in the market price of a
security may result from perceived changes in the underlying economic
characteristics of the investee, the relative price of alternative investments
and general market conditions. Furthermore, amounts realized in the sale of a
particular security may be affected by the relative quantity of the security
being sold.
27
<PAGE> 30
Caution should be used in evaluating the Company's overall market risk from
the information below, since actual results could differ materially because the
information was developed using estimates and assumptions as described below,
and because the Company's reserve for claim losses (representing 40.7% of total
liabilities) is not included in the hypothetical effects.
The hypothetical effects of changes in market rates or prices on the fair
values of financial instruments would have been as follows as of December 31,
1999:
a. An approximate $12.5 million net increase (decrease) in the fair
value of fixed maturity securities would have occurred if interest rates
had (decreased) increased by 100 basis points. The change in fair values
was determined by estimating the present value of future cash flows using
various models, primarily duration modeling.
b. An approximate $7.9 million net increase (decrease) in the fair
value of equity securities would have occurred if there was a 20% price
increase (decrease) in market prices.
c. It is not anticipated that there would be a significant change in
the fair value of other long-term investments or short-term investments if
there was a change in market conditions, based on the nature and duration
of the financial instruments involved.
d. Interest expense on outstanding debt would have increased
(decreased) approximately $1.9 million, if interest rates increased
(decreased) 100 basis points.
28
<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Independent Auditors' Report................................ 30
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... 31
Consolidated Statements of Earnings for the years ended
December 31, 1999, 1998 and 1997.......................... 32
Consolidated Statements of Comprehensive Earnings for the
years ended December 31, 1999, 1998 and 1997.............. 33
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997.............. 34
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... 35
Notes to Consolidated Financial Statements.................. 36
</TABLE>
29
<PAGE> 32
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Fidelity National Financial, Inc.:
We have audited the accompanying Consolidated Balance Sheets of Fidelity
National Financial, Inc. and subsidiaries as of December 31, 1999 and 1998 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, 1999. 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, 1999 and
1998, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999 in conformity with
generally accepted accounting principles.
KPMG LLP
Los Angeles, California
February 16, 2000, except as to Note Q
to the Consolidated Financial Statements,
which is as of March 20, 2000
30
<PAGE> 33
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
---------- --------
<S> <C> <C>
Investments:
Fixed maturities available for sale, at fair value........ $ 347,051 $330,068
Equity securities, at fair value.......................... 38,881 50,191
Other long-term investments............................... 43,253 40,278
Short-term investments, at cost, which approximates fair
value.................................................. 74,232 94,122
Investments in real estate and partnerships, net.......... 3,499 4,673
---------- --------
Total investments................................. 506,916 519,332
Cash and cash equivalents................................... 38,569 42,492
Leases and residual interests in securitizations............ 142,141 93,507
Trade receivables (less allowance of $5,397 in 1999 and
$6,733 in 1998)........................................... 60,784 75,940
Notes receivable, net (including $10,957 in 1999 and $1,798
in 1998 with affiliated parties).......................... 18,304 10,761
Prepaid expenses and other assets........................... 115,513 111,471
Title plants................................................ 59,914 58,932
Property and equipment, net................................. 55,453 46,070
Deferred tax asset.......................................... 31,579 10,965
---------- --------
$1,029,173 $969,470
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities.................. $ 122,570 $123,357
Notes payable............................................. 226,359 214,624
Reserve for claim losses.................................. 239,962 224,534
Income taxes payable...................................... 3,175 8,683
---------- --------
592,066 571,198
Minority interests........................................ 4,613 1,532
Stockholders' equity:
Preferred stock, $.0001 par value; authorized, 3,000,000
shares; issued and outstanding, none................... -- --
Common stock, $.0001 par value; authorized, 50,000,000
shares in 1999 and 1998; issued 39,224,169 in 1999 and
35,540,036 in 1998..................................... 4 3
Additional paid-in capital................................ 246,959 173,888
Retained earnings......................................... 327,785 265,567
---------- --------
574,748 439,458
Accumulated other comprehensive earnings (loss)........... (5,975) 11,657
Less treasury stock, 12,036,102 shares in 1999 and
6,645,487 shares in 1998, at cost...................... 136,279 54,375
---------- --------
432,494 396,740
Commitments and contingencies.............................
Subsequent events.........................................
---------- --------
$1,029,173 $969,470
========== ========
</TABLE>
See Notes to Consolidated Financial Statements.
31
<PAGE> 34
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
REVENUE:
Title insurance premiums.............................. $ 939,452 $ 910,278 $616,074
Escrow fees........................................... 123,734 130,299 86,033
Other fees and revenue................................ 260,623 208,301 125,146
Interest and investment income, including realized
gains (losses)..................................... 28,395 39,587 35,806
---------- ---------- --------
1,352,204 1,288,465 863,059
---------- ---------- --------
EXPENSES:
Personnel costs....................................... 407,078 394,284 273,221
Other operating expenses.............................. 335,284 257,080 189,226
Agent commissions..................................... 423,675 385,649 261,182
Provision for claim losses............................ 52,713 59,294 41,558
Interest expense...................................... 15,626 17,024 12,269
---------- ---------- --------
1,234,376 1,113,331 777,456
---------- ---------- --------
Earnings before income taxes and extraordinary item... 117,828 175,134 85,603
Income tax expense.................................... 46,975 69,442 36,595
---------- ---------- --------
Earnings before extraordinary item............... 70,853 105,692 49,008
Extraordinary item -- loss on early retirement of
debt, net of applicable income tax benefit of
$1,180............................................. -- -- (1,700)
---------- ---------- --------
Net earnings..................................... $ 70,853 $ 105,692 $ 47,308
========== ========== ========
Basic net earnings.................................... $ 70,853 $ 105,692 $ 47,308
========== ========== ========
Basic earnings per share before extraordinary item.... $ 2.38 $ 3.79 $ 2.10
Extraordinary item -- loss on early retirement of
debt, net of applicable income tax benefit, basic
basis.............................................. -- -- (0.07)
---------- ---------- --------
Basic net earnings per share.......................... $ 2.38 $ 3.79 $ 2.03
========== ========== ========
Weighted average shares outstanding, basic basis...... 29,811 27,921 23,355
========== ========== ========
Diluted net earnings.................................. $ 71,116 $ 108,155 $ 50,450
========== ========== ========
Diluted net earnings per share before extraordinary
item............................................... $ 2.27 $ 3.23 $ 1.76
Extraordinary item -- loss on early retirement of
debt, net of applicable income tax benefit, diluted
basis.............................................. -- -- (0.06)
---------- ---------- --------
Diluted net earnings per share........................ $ 2.27 $ 3.23 $ 1.70
========== ========== ========
Weighted average shares outstanding, diluted basis.... 31,336 33,474 29,599
========== ========== ========
</TABLE>
See Notes to Consolidated Financial Statements.
32
<PAGE> 35
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Net earnings................................................ $ 70,853 $105,692 $47,308
-------- -------- -------
Other comprehensive earnings (loss):
Unrealized gains (losses) on investments, net(1).......... (17,678) (1,608) 20,333
Reclassification adjustments for (gains) losses included
in net earnings(2)..................................... 46 (10,366) (9,632)
-------- -------- -------
Other comprehensive earnings (loss)......................... (17,632) (11,974) 10,701
-------- -------- -------
Comprehensive earnings...................................... $ 53,221 $ 93,718 $58,009
======== ======== =======
</TABLE>
- ---------------
(1) Net of income tax expense (benefit) of ($11,255), ($1,059) and $15,214 for
1999, 1998 and 1997, respectively.
(2) Net of income tax expense (benefit) of ($30), $6,824 and $7,207 for 1999,
1998 and 1997, respectively.
See Notes to Consolidated Financial Statements.
33
<PAGE> 36
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TREASURY STOCK
--------------- PAID-IN RETAINED COMPREHENSIVE ------------------
SHARES AMOUNT CAPITAL EARNINGS EARNINGS (LOSS) SHARES AMOUNT
------ ------ ---------- -------- --------------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996....................... 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 and other financial
instruments.................................. -- -- -- -- 10,701 -- --
Acquisitions................................... 1,386 -- 12,450 -- -- -- --
Retirement and conversion of LYONs............. 1,455 -- 27,351 -- -- -- --
Nations Title Inc. purchase adjustments........ (29) -- (749) -- -- -- --
Issuance of common stock pursuant to FNF
Capital, Inc. secondary offering net of
offering costs............................... 1,867 -- 17,989 -- -- -- --
Cash dividends................................. -- -- -- (5,178) -- -- --
Net earnings................................... -- -- -- 47,308 -- -- --
------ -- -------- -------- -------- ------ ---------
Balance, December 31, 1997....................... 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 and other financial
instruments.................................. -- -- -- -- (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)
------ -- -------- -------- -------- ------ ---------
Purchase of treasury stock..................... -- -- -- -- -- 5,391 (81,904)
Exercise of stock options...................... 211 -- 2,488 -- -- -- --
Other comprehensive loss -- unrealized loss on
investments and other financial
instruments.................................. -- -- -- -- (17,632) -- --
Acquisitions................................... -- -- 297 -- -- -- --
Redemption and conversion of LYONs............. 3,473 1 70,286 -- -- -- --
Cash dividends................................. -- -- -- (8,635) -- -- --
Net earnings................................... -- -- -- 70,853 -- -- --
------ -- -------- -------- -------- ------ ---------
Balance, December 31, 1999....................... 39,224 $4 $246,959 $327,785 $ (5,975) 12,036 $(136,279)
====== == ======== ======== ======== ====== =========
</TABLE>
See Notes to Consolidated Financial Statements.
34
<PAGE> 37
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 70,853 $105,692 $ 47,308
Adjustment to reconcile net earnings to net cash provided
by operating activities:
Extraordinary item: loss on early retirement of LYONs... -- -- 2,880
Depreciation and amortization........................... 29,968 21,373 18,175
Net increase in reserve for claim losses................ 19,738 22,860 5,023
Amortization of LYONs original issue discount and other
debt issuance costs................................... 602 4,432 5,939
Provision for losses (recovery) on real estate and notes
receivable............................................ (154) 582 2,714
Equity in earnings of unconsolidated partnerships and
affiliates............................................ (2,593) (4,361) (488)
(Gain) loss on sales of investments..................... 2,093 (19,679) (10,801)
(Gain) loss on sales of real estate and other assets.... (2,017) 2,489 (6,038)
Changes in assets and liabilities, net of effects from
acquisitions:
Net increase in leases and residual interests in
securitizations....................................... (48,634) (39,725) (22,540)
Net (increase) decrease in trade receivables............ 15,153 (22,486) 2,177
Net increase in prepaid expenses and other assets....... (15,604) (17,703) (17,601)
Net increase (decrease) in accounts payable and accrued
liabilities........................................... (3,238) 39,568 12,336
Net increase (decrease) in income taxes................. (16,303) (21,280) 19,820
--------- -------- ---------
Net cash provided by operating activities.......... 49,864 71,762 58,904
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of investment
securities available for sale........................... 377,189 179,668 263,179
Proceeds from sales of title plant........................ 1,100 -- --
Proceeds from sales of other assets....................... 2,168 6,848 17,673
Proceeds from sales of real estate........................ 1,380 -- 6,407
Collections of notes receivable........................... 5,213 9,372 14,094
Additions to title plants................................. (2,092) (1,480) (1,792)
Additions to property and equipment....................... (29,313) (22,393) (23,174)
Additions to notes receivable............................. (12,768) (11,717) (3,868)
Purchases of investment securities available for sale..... (396,908) (315,445) (347,064)
Investments in real estate and partnerships............... (559) -- (1,048)
Sale of subsidiary, net of cash........................... 2,469 -- 5,939
Acquisition of businesses, net of cash acquired........... -- (1,036) (10,866)
--------- -------- ---------
Net cash used in investing activities.............. (52,121) (156,183) (80,520)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings................................................ 108,878 84,287 21,570
Principal payments........................................ (22,936) (28,877) (25,241)
Dividends paid............................................ (8,192) (6,340) (4,703)
Stock offering proceeds, net.............................. -- -- 17,990
Exercise of stock options................................. 2,488 22,868 1,424
Purchases of treasury stock............................... (81,904) -- --
--------- -------- ---------
Net cash provided by (used in) financing
activities....................................... (1,666) 71,938 11,040
--------- -------- ---------
Net decrease in cash and cash equivalents................. (3,923) (12,483) (10,576)
Cash and cash equivalents at beginning of year............ 42,492 54,975 65,551
--------- -------- ---------
Cash and cash equivalents at end of year.................. $ 38,569 $ 42,492 $ 54,975
========= ======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
35
<PAGE> 38
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following describes the significant accounting policies of Fidelity
National Financial, Inc. 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 providing
diversified 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. The Company does business in 49 states, the
District of Columbia, Mexico, Puerto Rico and the U.S. Virgin Islands.
The Company's principal title and real estate related services 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's majority-owned information technology and telecommunication
services subsidiary, Micro General Corporation (OTCBB:MGEN, "Micro General"),
offers a complete range of information technology, telecommunication and
eCommerce services.
The Company also originates, funds, purchases, sells, securitizes and
services equipment leases for a broad range of businesses through its
wholly-owned subsidiary FNF Capital, Inc. (formerly known as Granite Financial,
Inc.).
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 have been eliminated. The
Company's investments in non-majority-owned partnerships and affiliates are
accounted for on the equity method.
Poolings-of-Interests
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 FNF Capital, Inc. and subsidiaries ("FNF Capital").
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 FNF
Capital.
The Company acquired the common stock of Alamo Title Holding Company and
subsidiaries ("Alamo") 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
36
<PAGE> 39
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
York Stock Exchange, closed at $33.13 on August 20, 1998. The transaction has
been accounted for as a pooling-of-interests.
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.
FNF Capital previously reported its results of operations based on a fiscal
year ended June 30. FNF Capital'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.
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 fixed maturity
and equity securities which are classified as available for sale, net of
applicable deferred income taxes (benefits), are excluded from earnings and
credited or charged directly to a separate component of stockholders' equity. If
any unrealized losses on fixed maturity or equity securities 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.
37
<PAGE> 40
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
Direct Financing Leases
The Company's leases 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. Interest is accrued only if deemed
collectible. Direct financing leases which the Company has both the intent and
ability to hold to maturity are classified as held to maturity. Direct financing
leases originated principally for the purpose of selling in the near term are
classified as available for sale and are stated at the lower of amortized cost
or market as determined by outstanding commitments from investors or current
investor yield requirements calculated on an aggregate basis.
Direct Financing Leases Assigned to Lender
Direct financing leases securitized through the issuance of a debt security
prior to the effective date of Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS 125") are accounted for as collateralized
borrowings. The leases collateralizing the debt are recorded as direct financing
leases assigned to lenders. The related debt is recorded as notes payable.
Allowance for Credit Losses on Leases
The Company establishes an allowance for credit losses to provide for
expected losses in the Company's existing portfolio of leases. The allowance for
credit 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 equipment. In addition, 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 and
notes receivable is not usually possible.
Lease Securitization and Residual Interests in Securitizations
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 are measured by
allocating the previous carrying value between the assets sold and the interest
retained, if any, based on their relative fair values at the date of transfer.
Residual interests in securitizations ("Residuals") of lease receivables in
a 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 ("Trust"), and the Trust in turn issues interest
bearing asset-backed securities ("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 in the form of Bonds and Certificates.
38
<PAGE> 41
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
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 that is accounted for as a sale, the
Company removes from its Consolidated Balance Sheet the lease receivables held
for sale and adds to its consolidated balance sheet (i) the cash received and
(ii) the allocated cost of the Residuals which consists of (a) cash collateral
account ("Cash Collateral Account") and (b) net excess cash flows. 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 and the portion retained based on the
relative fair values of those portions on the date of the sale.
Residuals are recorded at estimated fair value and accounted for as
available for sale securities. Changes in the fair value of the Residuals are
recorded as unrealized gains or losses, net of applicable deferred income taxes
(benefits), and are excluded from earnings and credited or charged directly to a
separate component of stockholders' equity. Included in accumulated other
comprehensive earnings (loss) at December 31, 1999 and 1998 are net unrealized
gains (losses) of ($914,000) and $0, respectively, related to Residuals. 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 approximately 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 Bond 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 Agreements, 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 uses 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's loss estimate is 2.5% to 4.5% of the lease
net investment value, which is based on historical loss data for comparable
leases and the specific characteristics of the leases originated by the Company.
The Company's 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 carrying value of the
Residuals if the actual performance of the lease receivables results in an
estimated fair value higher than the original estimate. If the
39
<PAGE> 42
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
actual performance of the lease receivables results in an estimated fair value
that is lower than the original estimate, a decrease in the carrying value of
the Residuals may be required.
The Bond and Certificate holders and the securitization trusts have no
recourse to the Company's other assets for failure of lessees to pay when due,
and the assets of the securitization trusts are not available to the general
creditors of the Company. The Company's Residuals are subordinate to the Bond
and Certificate holders until the Bond and Certificate holders are fully paid.
Sales of Leases
Gains or losses resulting from the sales of leases are recognized in the
accompanying Consolidated Statements of Earnings at the date of sale and are
based upon the excess of the proceeds over the allocated cost of the leases
sold. Nonrefundable fees and direct costs associated with the origination of
leases are deferred and recognized when the leases are sold.
Lease Acquisition Costs and Broker Commissions
Lease acquisition costs consist of broker bonuses and commissions paid upon
the origination of equipment lease contracts. The costs are included in direct
finance leases and are amortized to expense over the life of the related lease
using 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.
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.
40
<PAGE> 43
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
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, 1999 consist of cost in excess of net
assets acquired of $64,781,000 less accumulated amortization of $13,423,000,
capitalized licensing costs of $2,500,000 less accumulated amortization of
$282,000, capitalized software of $18,257,000 less accumulated amortization of
$9,950,000 and capitalized debt offering costs of $1,473,000 less accumulated
amortization of $975,000. At December 31, 1998, intangible assets 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.
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 reserve for claim losses also includes reserves for losses arising from
the escrow, closing and disbursement functions due to fraud or operational error
based on historical experience.
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.
See Note I.
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 also cedes a portion of certain policy
and other liabilities
41
<PAGE> 44
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
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 and Other Fees and Revenue
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.
Tax monitoring service fees are recognized over the period the related
services are provided. Tax service revenue is recognized ratably over the
expected life of the tax monitoring service period ("service period") by
recognizing revenue in an amount consistent with the amount of risk undertaken
by the Company in providing the service. A portion of the tax monitoring service
revenue is initially deferred, 50% in 1999, with the remaining revenue amortized
on a straight-line basis over the expected life of the service period. The
expected life of the tax monitoring service period is estimated based on
historical data, characteristics of the client portfolio and external factors
such as the overall economy, interest rate environment, and conditions in the
real estate market. The expected life of the service period used in 1999 is one
year. Fluctuations or volatility in any of these factors may impact the expected
life of the service period and require the Company to adjust the amount and
timing of tax monitoring service revenue recognized.
Other fees and revenue includes revenue derived from the operations of
Micro General and FNF Capital, 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
The Company declared a 10% stock dividend on December 17, 1997 to
stockholders of record on December 29, 1997, distributed January 14, 1998. On
December 13, 1998, the Company declared a 10% stock dividend to stockholders 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 and 1997, 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 for acquisitions accounted for as poolings-of-interests.
Earnings Per Share
Basic earnings per share is computed by dividing net earnings available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is calculated by dividing net
earnings available to common stockholders 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.
42
<PAGE> 45
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
The following table presents the calculation of basic and diluted earnings
per share for each of the years in the three-year period ended December 31,
1999:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Basic earnings per share calculation:
Earnings before extraordinary loss................. $70,853 $105,692 $49,008
Extraordinary loss, net of applicable income tax
benefit of $1,180............................... -- -- (1,700)
------- -------- -------
Net earnings....................................... $70,853 $105,692 $47,308
======= ======== =======
Weighted average shares outstanding, basic basis..... 29,811 27,921 23,355
======= ======== =======
Basic earnings per share:
Earnings before extraordinary loss................. $ 2.38 $ 3.79 $ 2.10
Extraordinary loss................................. -- -- (.07)
------- -------- -------
Net earnings....................................... $ 2.38 $ 3.79 $ 2.03
======= ======== =======
Diluted earnings per share calculation:
Earnings before extraordinary loss................. $70,853 $105,692 $49,008
Plus: Impact of assumed conversion of LYONs........ 263 2,463 3,142
------- -------- -------
Earnings before extraordinary loss plus assumed
conversion...................................... 71,116 108,155 52,150
Extraordinary loss, net of applicable income tax
benefit of $1,180............................... -- -- (1,700)
------- -------- -------
Net earnings plus assumed conversions.............. $71,116 $108,155 $50,450
======= ======== =======
Weighted average shares outstanding, basic basis..... 29,811 27,921 23,355
Plus: Incremental shares from assumed conversions
LYONs........................................... 353 3,694 5,008
Options......................................... 1,172 1,859 1,236
------- -------- -------
Weighted average shares outstanding, diluted basis... 31,336 33,474 29,599
======= ======== =======
Diluted earnings per share:
Earnings before extraordinary loss plus assumed
conversions..................................... $ 2.27 $ 3.23 $ 1.76
Extraordinary loss................................. -- -- (0.06)
------- -------- -------
Net earnings....................................... $ 2.27 $ 3.23 $ 1.70
======= ======== =======
</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.
43
<PAGE> 46
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
Certain Reclassifications
Certain reclassifications have been made in the 1998 and 1997 Consolidated
Financial Statements to conform to the classifications used in 1999.
B. ACQUISITIONS
The Company completed the merger of its wholly-owned subsidiary ACS
Systems, Inc. ("ACS") with and into Micro General Corporation for 4.6 million
shares of Micro General common stock, valued at $1,297,000, on May 14, 1998.
Micro General 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. Micro
General will continue to provide the above listed services to the Company at
preferred customer rates. The Company currently owns 69.3% of Micro General
Corporation. This transaction has been accounted for as a reverse merger of
Micro General into ACS, with Micro General as the surviving legal entity.
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...................... $ 305
Cost in excess of net assets acquired....................... 5,709
Liabilities assumed at fair value........................... (4,717)
-------
Total purchase price.............................. $ 1,297
=======
</TABLE>
Prior to 1999, Micro General's financial position and results of operations
were insignificant.
C. INVESTMENTS
The carrying amounts and fair values of the Company's fixed maturity
securities at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------------------
GROSS GROSS
CARRYING AMORTIZED UNREALIZED UNREALIZED
VALUE COST GAINS LOSSES FAIR VALUE
-------- --------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Fixed maturity investments (available for
sale):
U.S. government and agencies.............. $ 46,063 $ 48,049 $ 4 $(1,990) $ 46,063
States and political subdivisions......... 203,571 205,929 462 (2,820) 203,571
Corporate securities...................... 93,486 95,781 124 (2,419) 93,486
Foreign government bonds.................. 75 75 -- -- 75
Mortgage-backed securities................ 3,856 3,991 39 (174) 3,856
-------- -------- ---- ------- --------
$347,051 $353,825 $629 $(7,403) $347,051
======== ======== ==== ======= ========
</TABLE>
44
<PAGE> 47
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------------------------
GROSS GROSS
CARRYING AMORTIZED UNREALIZED UNREALIZED
VALUE COST GAINS LOSSES FAIR 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>
The change in unrealized gains (losses) on fixed maturities for the years
ended December 31, 1999, 1998, and 1997 was ($13,891,000), $3,170,000, and
$5,263,000, respectively.
Expected maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties.
The following table presents certain information regarding the Company's
fixed maturity securities at December 31, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------
AMORTIZED % FAIR %
MATURITY COST OF TOTAL VALUE OF TOTAL
-------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One year or less........................... $ 10,641 3.0% $ 10,609 3.0%
After one year through five years.......... 184,042 52.0 181,375 52.3
After five years through ten years......... 135,383 38.3 131,563 37.9
After ten years............................ 23,759 6.7 23,504 6.8
-------- ----- -------- -----
$353,825 100.0% $347,051 100.0%
======== ===== ======== =====
Subject to call.......................... $ 51,690 14.6% $ 51,280 14.8%
</TABLE>
Fixed maturity securities valued at approximately $16,320,000 and
$18,041,000 were on deposit with various governmental authorities at December
31, 1999 and 1998, respectively, as required by law.
Equity securities at December 31, 1999 and 1998 consist of investments in
various industry groups as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1999 1998
------------------ ------------------
FAIR FAIR
COST VALUE COST VALUE
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Banks, trust and insurance companies........ $ 1,559 $ 1,628 $ 1,874 $ 1,949
Industrial, miscellaneous and all other..... 38,180 37,253 35,878 48,242
------- ------- ------- -------
$39,739 $38,881 $37,752 $50,191
======= ======= ======= =======
</TABLE>
The carrying value of the Company's investment in equity securities is fair
value. As of December 31, 1999, gross unrealized gains and gross unrealized
losses on equity securities were $8,381,000 and $9,239,000, respectively. Gross
unrealized gains and gross unrealized losses on equity securities were
$22,464,000 and $10,025,000, respectively, as of December 31, 1998.
45
<PAGE> 48
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
The change in unrealized gains and losses on equity securities for the
years ended December 31, 1999, 1998 and 1997 was ($13,297,000), ($23,443,000),
and $12,756,000, 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 $3,685,000 at December 31, 1999 and a cost basis of $2,341,000 and a
fair value of $18,462,000 at December 31, 1998.
Interest and investment income, including realized gains (losses), consists
of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents............................. $ 1,681 $ 2,798 $ 1,370
Fixed maturity securities............................. 15,692 13,014 11,256
Equity securities..................................... 2,241 22,867 12,062
Short-term investments................................ 3,219 1,483 1,891
Notes receivable...................................... 3,569 1,913 2,486
Other................................................. 1,993 (2,488) 6,741
------- ------- -------
$28,395 $39,587 $35,806
======= ======= =======
</TABLE>
Net realized gains (losses) included in interest and investment income
amounted to ($76,000), $17,190,000 and $16,839,000 for the years ended December
31, 1999, 1998 and 1997, respectively. There were no individually significant
net realized gains or losses in 1999. 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 $10,400,000, 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, 1999, 1998 and 1997, gross realized
gains on sales of fixed maturity securities considered available for sale were
$384,000, $700,000 and $798,000, respectively; and gross realized losses were
$277,000, $268,000 and $468,000, respectively. Gross proceeds from the sale of
fixed maturity securities considered available for sale amounted to
$328,384,000, $71,114,000 and $143,085,000, during the years ended December 31,
1999, 1998 and 1997, respectively.
During the years ended December 31, 1999, 1998 and 1997, gross realized
gains on sales of equity securities considered available for sale were
$6,281,000, $32,603,000 and $12,986,000, respectively; and gross realized losses
were $7,207,000, $10,990,000 and $2,515,000, respectively. Gross proceeds from
the sale of equity securities amounted to $48,805,000, $108,554,000 and
$120,094,000 during the years ended December 31, 1999, 1998 and 1997,
respectively.
46
<PAGE> 49
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
D. LEASES AND RESIDUAL INTERESTS IN SECURITIZATIONS
Direct Financing Leases
Direct financing leases at December 31, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------
DIRECT FINANCING
DIRECT FINANCING LEASES ASSIGNED
LEASES TO LENDER
---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Minimum lease payments receivable.............. $123,733 $2,527
Estimated residual values of leased property... 5,179 395
Lease acquisition costs and broker
commissions.................................. 3,221 11
Unearned income................................ (25,876) (232)
Allowance for credit losses.................... (13,841) (120)
Security deposits.............................. (321) (42)
-------- ------
$ 92,095 $2,539
======== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------
DIRECT FINANCING
DIRECT FINANCING LEASES ASSIGNED
LEASES TO 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>
Scheduled collections of minimum lease payments receivable are as follows:
<TABLE>
<CAPTION>
DIRECT FINANCING
DIRECT FINANCING LEASES ASSIGNED
LEASES TO LENDER
---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
2000........................................... $ 34,428 $2,123
2001........................................... 32,345 299
2002........................................... 27,954 93
2003........................................... 18,381 11
2004........................................... 10,625 1
Thereafter..................................... -- --
-------- ------
$123,733 $2,527
======== ======
</TABLE>
At December 31, 1999, the weighted average implicit rate of interest is
approximately 11.35%.
The carrying value of the direct financing leases at December 31, 1999 and
1998 approximates 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
47
<PAGE> 50
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
assigned to lender at December 31, 1999 and 1998 approximated the carrying value
because the interest rate on the related Class A Lease-Backed Term Notes
approximates current market rates.
Lease Securitization and Residual Interests in Securitizations
The Company has completed seven securitization facilities that provide for
aggregate funding limits of approximately $546,000,000 and $354,000,000 as of
December 31, 1999 and 1998, respectively. Three of the securitization
facilities, GF Funding IV, GF Funding V and GF Funding VII, are revolving
facilities. GF Funding I and VI are accounted for as collateralized borrowings.
See Note G.
The following table presents certain information related to the Company's
securitization facilities at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
1999 1998
------------------------------------ ------------------------------------
NET NET
AVAILABLE OUTSTANDING RESIDUAL AVAILABLE OUTSTANDING RESIDUAL
CREDIT BALANCE INTEREST CREDIT BALANCE INTEREST
--------- ----------- -------- --------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GF Funding II.............. $ -- $ 22,359 $ 6,239 $ -- $ 40,839 $ 8,727
GF Funding III............. -- 9,150 2,060 -- 16,520 3,037
GF Funding IV.............. -- 97,033 22,330 37,741 108,060 19,849
GF Funding V............... -- 38,703 6,065 -- 56,902 6,677
GF Funding VII............. -- -- -- -- -- --
GF Funding VIII............ 574 87,144 10,813 -- -- --
---- -------- ------- ------- -------- -------
$574 $254,389 $47,507 $37,741 $222,321 $38,290
==== ======== ======= ======= ======== =======
</TABLE>
E. NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage notes, secured by various deeds of trust,
installments due monthly including interest at rates
ranging from 8.5% to 10.0%, due through 2016.............. $ 975 $ 1,316
Promissory notes, secured by various assets and unsecured,
installments due monthly including interest at rates
ranging from 7.5% to 13.0%, due through 2008.............. 8,126 9,711
Officer and employee secured and unsecured notes receivable
at rates ranging from 7.0% to 10.0%, due through 2004..... 3,806 1,798
Loan Plan and Loan Program, unsecured notes receivable at
5.0% due through 2004..................................... 7,151 --
------- -------
20,058 12,825
Allowance for doubtful receivables.......................... (1,754) (2,064)
------- -------
$18,304 $10,761
======= =======
</TABLE>
The allowance for doubtful receivables is primarily related to certain
promissory notes at December 31, 1999 and 1998. Interest income is not
recognized on the Company's non-performing notes receivable. There were no
non-performing notes receivable at December 31, 1999.
48
<PAGE> 51
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
On March 17, 1999, the Company's Board of Directors approved the adoption
of the Fidelity National Financial, Inc. Employee Stock Purchase Loan Plan
("Loan Plan") and the Non-Employee Director Stock Purchase Loan Program ("Loan
Program"). The purpose of the Loan Plan and Loan Program is to provide key
employees and directors with further incentive to maximize stockholder value.
The Company offered an aggregate of $8,650,000 in loans. Loan Plan and Loan
Program funds must be used to make private or open market purchases of Company
common stock through a broker-dealer designated by the Company. All loans are
full recourse and unsecured, and will have a five-year term. Interest will
accrue on the loans at a rate of 5% per annum due at maturity. Loans may be
prepaid any time without penalty. As of December 31, 1999, loans had been made
in the amount of $7.25 million to purchase 484,000 shares of Company common
stock at an average purchase price of $15.41 per share. There have been no
significant purchases since December 31, 1999.
The carrying value and estimated fair values of the Company's notes
receivable were as follows at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1999 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage notes...................................... $ 920 $ 920 $ 1,199 $ 1,199
Other promissory notes.............................. 7,126 7,126 7,999 7,999
Affiliated notes.................................... 3,107 3,107 1,563 1,563
Loan Plan and Loan Program.......................... 7,151 7,151 -- --
------- ------- ------- -------
$18,304 $18,304 $10,761 $10,761
======= ======= ======= =======
</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.
F. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land.................................................. $ 1,724 $ 1,724
Buildings............................................. 3,921 3,754
Leasehold improvements................................ 18,141 14,596
Furniture, fixtures and equipment..................... 142,717 121,272
--------- --------
166,503 141,346
Accumulated depreciation and amortization............. (111,050) (95,276)
--------- --------
$ 55,453 $ 46,070
========= ========
</TABLE>
49
<PAGE> 52
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
G. NOTES PAYABLE
Notes payable, excluding Lease-Backed notes payable, consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Bank revolving credit facility, as amended, secured by
common stock of certain Insurance Subsidiaries and a
certain UTC, interest due monthly at LIBOR plus 1.15%
(6.97% at December 31, 1999), unused portion of $25,500
and $53,698 at December 31, 1999 and 1998, due July 2001,
repaid and terminated March 2000.......................... $124,500 $ 46,302
Bank revolving credit facility, as amended, unsecured,
interest due monthly at LIBOR plus 1.15% (6.97% at
December 31, 1999), no unused portion at December 31, 1999
and 1998, due September 2000, repaid and terminated March
2000...................................................... 25,000 25,000
Bank revolving line of credit, as amended, warehouse line,
secured by security interest in certain leases and the
underlying equipment, interest due monthly at LIBOR plus
1.75% (7.57% at December 31, 1999), unused portion of
$21,929 and $27,700 at December 31, 1999 and 1998, due
June 2000................................................. 28,071 7,300
Equipment line of credit, secured by equipment, interest due
monthly at LIBOR plus 1.40% (7.22% at December 31, 1999),
unused portion of $8,638 and $143 at December 31, 1999 and
1998, due July 2000....................................... 1,362 9,857
Bank line of credit, unsecured, interest due monthly at
Bank's Reference Rate plus .75%, no unused portion at
December 31, 1998, paid and terminated January 1999....... -- 3,000
Bank promissory note, secured by equipment, principal and
interest due monthly at LIBOR plus 2.10%, due and repaid
June 1999................................................. -- 718
Bank promissory note, secured by equipment, principal and
interest due monthly at 30 day commercial paper rate plus
2.44% (7.24% at December 31, 1999), due September 2000.... 1,406 3,281
Bank promissory note, secured by equipment, principal and
interest due monthly at LIBOR plus 1.84% (7.66% at
December 31, 1999), due May 2001.......................... 1,664 2,902
Bank promissory note, secured by equipment, principal and
interest due monthly at LIBOR plus 2.10% (7.92% at
December 31, 1999), due September 2001.................... 2,924 4,337
Bank promissory note, secured by equipment, principal and
interest due monthly at LIBOR plus 1.40% (7.22% at
December 31, 1999), due July 2002......................... 6,324 8,903
Bank promissory note, secured by equipment, principal and
interest due monthly at 6.95%, due February 2003.......... 7,038 --
Bank promissory note, secured by equipment, principal and
interest due monthly at LIBOR plus 1.42% (7.24% at
December 31, 1999), due June 2003......................... 8,073 --
Bank promissory note, secured by equipment, principal and
interest due monthly at 30 day commercial paper rate plus
1.65% (6.45% at December 31, 1999), due June 2003......... 9,243 --
Note payable secured by certain leases and a security
interest in underlying equipment, principal and interest
due monthly at 9.80%, due and repaid January 2000......... 28 347
Note payable to bank, secured by all tangible and intangible
property of a certain subsidiary, principal and interest
due monthly at 8.72%, due and repaid May 1999............. -- 926
Promissory notes, unsecured, interest due quarterly at
8.00%, principal due and repaid at various dates through
July 1999................................................. -- 2,982
</TABLE>
50
<PAGE> 53
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Convertible notes, secured by assets of a majority-owned
subsidiary, with interest at 9.5%, principal and interest
due quarterly, due July 2001, converted December 1999..... -- 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
Other promissory notes with various interest rates and
maturities................................................ 2,784 2,626
-------- --------
$218,417 $192,688
======== ========
</TABLE>
Principal maturities, excluding Lease-Backed notes payable, are as follows
(dollars in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 68,519
2001........................................................ 135,818
2002........................................................ 8,946
2003........................................................ 4,706
2004........................................................ 141
Thereafter.................................................. 287
--------
$218,417
========
</TABLE>
The carrying value and estimated fair values of the Company's notes
payable, excluding Lease-Backed notes payable, were as follows at December 31,
1999 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1999 1998
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Short-term borrowings........................... $ 54,433 $ 54,433 $ 42,157 $ 42,157
Long-term borrowings, variable rate............. 156,946 156,946 71,143 71,143
Long-term borrowings, fixed rate................ 7,038 7,038 79,388 97,443
-------- -------- -------- --------
$218,417 $218,417 $192,688 $210,743
======== ======== ======== ========
</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 LYONs fair
value is calculated based on quoted market prices.
Also included in notes payable in the Consolidated Balance Sheets as of
December 31, 1999 and 1998 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
$2,112,000 and $5,930,000 at December 31, 1999 and 1998, respectively. The GFI
Class A Lease-Backed 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, 1999 and 1998 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, 1999 and
1998 also includes the GFVI Class A Certificates in the amount of $3,013,000 and
$7,878,000, respectively, and the Class B Certificates in the amount of
$2,817,000 and $8,128,000, respectively. 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
51
<PAGE> 54
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
carrying value of the Class A and Class B Certificates approximates fair value
at December 31, 1999 and 1998 due to the fact that the interest rate paid on the
Class A and Class B Certificates approximates market rates.
The Company's Lease-Backed notes payable do not have contractually
scheduled principal payments. The required principal payments vary based on
lease collections, recovery of collateral and other factors.
In February 1994, the Company issued zero coupon, convertible subordinated
Liquid Yield Option Notes due February 2009 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. The amount of LYONs outstanding on December 31, 1998 was
$124,113,000 of maturity value. On February 15, 1999, the Company redeemed,
pursuant to the terms of the LYONs indenture, its outstanding Liquid Yield
Option Notes due 2009 for $581.25 per $1,000 maturity value. 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 notes payable by a like amount. The remaining
$432,000 of maturity value was redeemed for cash of approximately $251,000.
There are no LYONs outstanding as of December 31, 1999.
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' equity by
approximately $24.7 million while reducing outstanding debt by approximately
$24.3 million. An extraordinary loss due to the early retirement of debt of
approximately $1.7 million, net of applicable income taxes, related to this
transaction has been recorded in the Consolidated Statement of Earnings for the
year ended December 31, 1997.
In connection with the Company's merger with Chicago Title Corporation
("Merger"), the Company has entered into an $800 million Syndicated Credit
Agreement ("Credit Agreement"). See Note Q. The Credit Agreement provides for
three distinct credit facilities: a $100 million, 18-month revolving credit
facility, a $250 million 6-year revolving credit facility and a $450 million
term loan facility with a 6-year amortization period. The Credit Agreement is
unsecured at a variable interest rate based on the debt ratings assigned to the
Company by independent agencies. The initial interest rate is LIBOR plus 1.50%.
The Company believes that the terms of the Credit Agreement are favorable.
The Company must comply with certain affirmative and negative covenants
related to its Credit Agreement 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. The Company is in compliance with
all of its debt covenants.
52
<PAGE> 55
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
H. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current.............................................. $49,383 $ 82,267 $33,729
Deferred............................................. (2,408) (12,825) 1,686
------- -------- -------
$46,975 $ 69,442 $35,415
======= ======== =======
</TABLE>
Total income tax expense (benefit) for the years ended December 31, 1999,
1998 and 1997 was allocated as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income from continuing operations..................... $46,975 $69,442 $36,595
Extraordinary loss.................................... -- -- (1,180)
------- ------- -------
$46,975 $69,442 $35,415
======= ======= =======
</TABLE>
The effective income tax rate differs from the statutory income tax rate as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Statutory income tax rate................................... 35.0% 35.0% 35.0%
Tax exempt interest income.................................. (2.9) (1.6) (1.7)
Non-deductible expenses..................................... 3.9 1.7 5.8
State taxes, net of Federal deduction....................... 2.8 3.6 3.1
Other....................................................... 1.1 1.0 .5
---- ---- ----
39.9% 39.7% 42.7%
==== ==== ====
</TABLE>
53
<PAGE> 56
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
The deferred tax assets and liabilities at December 31, 1999 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... $ 65,888 $ --
Employee benefit accruals................................... 11,314 --
Excess book over tax provision for bad debts................ 3,560 --
Accrued liabilities......................................... 9,738 --
Deferred state income taxes................................. 2,450 --
Lease accounting............................................ 116 --
Accelerated depreciation.................................... 415 --
Investment securities....................................... 3,157 --
Other assets................................................ 823 --
Statutory unearned premium reserve.......................... -- 54,321
Investment in partnerships.................................. -- 745
Investments in real estate.................................. -- 152
Section 338 (h)(10) gain deferral........................... -- 1,246
Other acquisition accruals.................................. -- 1,674
Other liabilities........................................... -- 8,251
Net operating loss available for carryovers................. 5,324 --
-------- -------
102,785 66,389
Less: valuation allowance................................... 4,817 --
-------- -------
Total deferred taxes.............................. $ 97,968 $66,389
======== =======
</TABLE>
54
<PAGE> 57
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
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
Investment 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>
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.
55
<PAGE> 58
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
I. SUMMARY OF RESERVE FOR CLAIM LOSSES
A summary of the reserve for claim losses follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance.................................. $224,534 $201,674 $196,527
Reserves assumed................................. -- -- 284
Reserves transferred............................. (4,310)(1) -- (160)
Claim loss provision related to:
Current year.................................. 57,321 59,294 39,301
Prior years................................... (4,608) -- 2,257
-------- -------- --------
Total claim loss provision............... 52,713 59,294 41,558
Claims paid, net of recoupments related to:
Current year.................................. (1,229) (1,045) (3,385)
Prior years................................... (31,746) (35,389) (33,150)
-------- -------- --------
Total claims paid, net of recoupments.... (32,975) (36,434) (36,535)
-------- -------- --------
Ending balance..................................... $239,962 $224,534 $201,674
======== ======== ========
Provision for claim losses as a percentage of title
insurance premiums............................... 5.6% 6.5% 6.7%
</TABLE>
- ---------------
(1) On March 18, 1998, the Company announced that it had entered into an
agreement to sell National Title Insurance of New York Inc. ("National") to
American Title Company, a wholly-owned subsidiary of American National
Financial, Inc. ("ANFI"), for $3.25 million, subject to regulatory approval
and certain other conditions. The purchase price was structured at a premium
to book value. The Company currently holds a 29.2% interest in ANFI.
National was acquired in April 1996, as part of the Nations Title Inc.
acquisition, and has not been actively underwriting policies since that
time. This transaction received regulatory approval on May 27, 1999 and
closed on June 10, 1999. The Company recognized a gain of approximately $1.2
million prior to applicable income taxes, in connection with the sale of
National. This gain has been reflected in the Consolidated Statement of
Earnings for the year ended December 31, 1999.
J. 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 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.
56
<PAGE> 59
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
Management believes that no actions, other than those listed below, depart from
customary litigation incidental to the business of the Company and that the
resolution of all such litigation will not have a material adverse effect on the
Company.
The Company has been named as a defendant in four class action lawsuits
alleging irregularities and violations of title and escrow practices. One of
these suits was filed by the Attorney General of the State of California on
behalf of the California Controller and the California Department of Insurance
against the entire title and escrow industry in California. The other three were
filed by private law firms in Federal Court in San Francisco and the State Court
in Los Angeles. As a result of extensive meetings and discussions between the
Company and the Attorney General of the State of California, the Attorney
General has issued a letter stating that it does not expect to serve Fidelity
National Financial, Inc. with a formal complaint. The Attorney General and the
Company have previously expressed with confidence that the issues regarding the
Company are likely to be resolved without litigation. The California Department
of Insurance ("Department") and the Company reached a settlement of their
lawsuit in February 2000. The settlement does not call for any fine or penalty
to be paid by the Company. The Company anticipates that the resolution of the
action filed by the Department will serve as a basis for the resolution of the
other lawsuits filed. The Company does not believe that such resolution will
have a material impact on its financial position or on its results of
operations.
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 $524.1 million at December 31, 1999.
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>
2000........................................................ $ 32,882
2001........................................................ 29,229
2002........................................................ 23,347
2003........................................................ 16,446
2004........................................................ 11,218
Thereafter.................................................. 24,422
--------
Total future minimum operating lease payments..... $137,544
========
</TABLE>
Rent expense incurred under operating leases during the years ended
December 31, 1999, 1998 and 1997 was $36,167,000, $32,609,000 and $29,730,000,
respectively. Included in rent expense for 1999, 1998 and 1997 is $88,000,
$485,000 and $523,000, respectively, paid to related parties.
K. REGULATION AND 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
57
<PAGE> 60
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
practices, establishing reserve and capital and surplus as regards policyholders
("capital and surplus") requirements, defining suitable investments for reserves
and 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 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, 1999, the combined statutory unearned premium
reserve required and reported for the Insurance Subsidiaries was $219.8 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), Fidelity New York (1998) and Nations Title Insurance of New York Inc.
("Nations New York", 1998). The Company has not received preliminary reports of
examination for Fidelity Title, Fidelity New York or Nations New York, as the
examinations are currently ongoing. The Department of Insurance of the State of
California has also recently completed a market conduct examination of Fidelity
Title. Additionally, the Auditor Division of the Controller of the State of
California ("Controller") is currently conducting an examination of the funds
due the State of California under various escheatment regulations for the years
ended December 31, 1998 and prior. The Company has received a preliminary copy
of the Controller's report and is continuing discussion with the Controller to
quantify amounts due, if any. The Company does not believe that either the
examinations performed by the insurance regulators or the Controller will have a
material impact on its financial position, its results of operations or its
combined capital and surplus.
Statutorily calculated net worth determines the maximum insurable amount
under any single title insurance policy. As of January 1, 2000, 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, $95.0 million and $16.5 million, respectively. The
self-imposed single policy maximum insurable amount for Nations New York was
$16.0 million.
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 and distributions made in any twelve-month period
may not exceed the greater of 10% of capital and 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. Fidelity New
York's total amount of dividends and distributions is limited to capital and
surplus, 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. The total amount of dividends and distributions made in any twelve-month
period by Alamo Title may not exceed the greater of 20% of capital and surplus
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, 2000,
Fidelity Title could pay dividends or make other distributions to the Company of
$17.2 million, Fidelity New York could pay dividends or make other distributions
to the
58
<PAGE> 61
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
Company of $15.0 million and Alamo Title could pay dividends or make other
distributions to the Company of $10.9 million.
The combined statutory capital and surplus of the Insurance Subsidiaries
was $163.5 million, $164.3 million and $122.1 million as of December 31, 1999,
1998 and 1997, respectively. The combined statutory earnings of the Insurance
Subsidiaries were $43.6 million, $37.8 million and $26.7 million for the years
ended December 31, 1999, 1998 and 1997, 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, 1999.
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, 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 additional
authorization permitted the Company to purchase up to 4.0 million shares. On
September 13, 1999, the Company announced that its Board of Directors had
approved a second increase of 2.0 million shares, bringing the total number of
shares of outstanding Company common stock authorized for purchase to 6.0
million. As of December 31, 1999, the Company had purchased 5.4 million shares
at an average purchase price of $15.19 per share totaling $81.9 million.
Purchases may be made from time to time by the Company in the open market or in
block purchases or in privately negotiated transactions depending on market
conditions and other factors. There have been no significant purchases since
December 31, 1999.
L. EMPLOYEE BENEFIT PLANS
Employee benefits include an employee stock purchase plan, five 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,
1999, 1998 and 1997, 631,596, 282,216 and 353,594 shares, respectively, were
purchased and allocated to employees, based upon their contributions, at an
average price of $16.78, $29.42 and $13.73 per share, respectively. The Company
contributed $3.3 million or the equivalent of 193,923 shares for the year ended
December 31, 1999, $2.0 million or the equivalent of 67,407 shares for the year
ended December 31, 1998 and $1.7 million or the equivalent of 122,740 shares for
the year ended December 31, 1997 in accordance with the employer's matching
contribution. A total of 8,351,992 shares have been purchased by both the ESPP
and employees since the adoption of the ESPP.
59
<PAGE> 62
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
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. This plan
allows for exercise prices with a fixed discount from the quoted market price.
In 1997, 211,926 options were granted at an exercise price of $6.30 to key
employees of the Company who applied deferred bonuses expensed in 1996 amounting
to $876,000 to the exercise price. The exercise price of these options decreases
approximately $.30 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 $19.72 to key employees of the Company who
applied deferred bonuses expensed in 1997 amounting to $1,764,000 to the
exercise price. The exercise price of these options decreases approximately $.32
per year through 2003 and $.20 per share from 2004 through 2009, at which time
the exercise price will be $16.90. 985,354 options were granted in 1999 at an
exercise price of $9.63 to key employees of the Company who applied deferred
bonuses expensed in 1998 amounting to $4,927,000 to the exercise price. The
exercise price of these options decreases approximately $.35 per year through
2004 and $.22 per share from 2005 through 2010, at which time the exercise price
will be $6.53. Additionally, the Company recorded compensation expense relating
to the price decrease of $460,000, $282,000 and $194,000, for the years ended
December 31, 1999, 1998 and 1997, 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 Financial, Inc. (now known as FNF Capital, Inc.,
"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,
60
<PAGE> 63
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
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 stockholder. 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 stockholder,
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 stockholder, 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
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 option 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.
61
<PAGE> 64
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- --------------------- --------------------
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................ 4,222,466 $12.96 4,057,946 $ 7.48 3,254,641 $6.77
Stock options granted.............. 1,736,802 13.15 1,730,043 23.46 993,867 9.84
Stock options exercised............ (211,542) 9.08 (1,290,640) 7.12 (159,101) 7.85
Stock options cancelled............ (186,840) 24.78 (274,883) 26.08 (31,461) 6.30
--------- ------ ---------- ------ --------- -----
Stock options outstanding, end of
year............................. 5,560,886 $12.77 4,222,466 $12.96 4,057,946 $7.48
Exercisable at end of year......... 4,555,740 11.33 3,149,520 9.33 3,451,359 6.96
Weighted average fair value of
options granted during the
year............................. -- 8.61 -- 14.15 -- 6.00
</TABLE>
The weighted average remaining contractual life of the options outstanding
at December 31, 1999 is 7.61 years.
The following table presents options outstanding and exercisable by price
range as of December 31, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OF SHARES CONTRACTUAL LIFE PRICE OF SHARES PRICE
- --------------- --------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 0.43 - 6.49 864,553 6.12 $ 5.29 864,553 $ 5.29
6.83 - 9.48 670,667 4.99 7.90 670,667 7.90
9.58 - 9.58 311,531 6.27 9.58 311,531 9.58
9.63 - 9.63 972,120 10.22 9.63 972,120 9.63
9.69 - 10.43 821,282 5.81 10.32 770,864 10.33
10.85 - 14.63 556,662 9.16 14.26 54,100 12.47
14.68 - 19.40 357,371 9.92 19.18 357,371 19.18
24.26 - 24.26 681,450 8.03 24.26 433,950 24.26
25.31 - 31.53 319,750 8.90 27.57 115,084 27.75
34.77 - 34.77 5,500 8.30 34.77 5,500 34.77
-------------- --------- ----- ------ --------- ------
$ 0.43 - 34.77 5,560,886 7.61 $12.77 4,555,740 $11.33
</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
62
<PAGE> 65
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
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 1999, 1998 and 1997 were 6.5%, 5.7% and 6.0%, respectively. A
volatility factor for the expected market price of the common stock of 50% was
used for options granted in 1999, 1998 and 1997. The expected dividend yield
used for 1999, 1998 and 1997 was 2.0%, 1.0% and 1.0%, respectively. A weighted
average expected life of seven years was used in all years as the Company has
little history of options being exercised.
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,
-----------------------------
1999 1998 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Pro forma basic net earnings.......................... $62,523 $96,346 $44,349
Pro forma diluted net earnings........................ 62,786 98,809 47,491
Pro forma earnings per share:
Basic............................................... $ 2.10 $ 3.45 $ 1.90
Diluted............................................. 2.00 2.95 1.60
</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.
63
<PAGE> 66
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
M. 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the year:
Interest............................................ $19,676 $ 8,153 $ 6,923
======= ======= =======
Income taxes........................................ $62,128 $77,277 $17,325
======= ======= =======
Non-cash investing and financing activities:
Dividends declared and unpaid....................... $ 2,712 $ 2,270 $ 1,254
======= ======= =======
Acquisitions........................................ $ -- $ 6,250 $24,377
======= ======= =======
Retirement of LYONs................................. $ -- $ -- $26,463
======= ======= =======
Conversion of LYONs................................. $70,286 $ 9,201 $ 888
======= ======= =======
Acquisition by majority-owned subsidiary............ $ 297 $ -- $ --
======= ======= =======
Conversion of majority-owned subsidiary debt........ $ 2,900 $ -- $ --
======= ======= =======
</TABLE>
N. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATION OF RISK
In the normal course of business the Company and certain of its
subsidiaries enter into off-balance sheet credit risk associated with certain
aspects of its title insurance policies and other activities. This credit risk
is in the form of guarantees and support agreements. The Company believes that
this credit risk is adequately secured.
The Company generates a significant amount of title insurance premiums in
California and Texas, 30.8% and 19.1% in 1999, 33.1% and 19.6% in 1998 and 32.9%
and 20.8% in 1997, respectively.
FNF Capital's leases are originated through a network of approximately 50
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, 1999 and 1998. Transactions generated by the
Company's ten largest independent lease originators accounted for approximately
24.0% and 26.0% of leases funded during the years ended December 31, 1999 and
1998, respectively.
FNF Capital approved contingent fundings of approximately $60,000,000 and
$67,900,000 in leases at December 31, 1999 and 1998, respectively.
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 investment grade
by nationally recognized rating agencies.
64
<PAGE> 67
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
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.
O. SEGMENT INFORMATION
During 1999, 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 current presentation.
The Company's Consolidated Financial Statements as of December 31, 1999 and
1998 and for the three years ended December 31, 1999, include five 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, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
REAL ESTATE
TITLE INFORMATION MICRO
INSURANCE SERVICES GENERAL(1) LEASING CORPORATE TOTAL
---------- ----------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total revenue.......................... $1,120,610 $81,776 $95,294 $ 28,907 $ 25,617 $1,352,204
========== ======= ======= ======== ======== ==========
Operating earnings (loss).............. $ 147,397 $(3,093) $ (70) $ (8,192) $ (1,015) $ 135,027
Interest and investment income,
including realized gains (losses).... 3,048 386 46 5 24,910 28,395
Depreciation and amortization.......... 20,981 2,261 3,404 2,720 602 29,968
Interest expense....................... 3,034 20 286 5,004 7,282 15,626
---------- ------- ------- -------- -------- ----------
Earnings (loss) before income taxes.... 126,430 (4,988) (3,714) (15,911) 16,011 117,828
Income tax expense (benefit)........... 61,517 (1,928) 3 (6,233) (6,384) 46,975
---------- ------- ------- -------- -------- ----------
Net earnings (loss).................... $ 64,913 $(3,060) $(3,717) $ (9,678) $ 22,395 $ 70,853
========== ======= ======= ======== ======== ==========
Assets................................. $ 672,949 $59,369 $24,236 $167,569 $105,050 $1,029,173
========== ======= ======= ======== ======== ==========
</TABLE>
- ---------------
(1) Intersegment revenue represented 29% of Micro General's total revenue in
1999.
65
<PAGE> 68
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
As of and for the year ended December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
REAL ESTATE
TITLE INFORMATION MICRO
INSURANCE SERVICES GENERAL(1) LEASING CORPORATE TOTAL
---------- ----------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total revenue.......................... $1,138,239 $86,328 $27,694 $ 24,939 $11,265 $1,288,465
========== ======= ======= ======== ======= ==========
Operating earnings (loss).............. $ 182,381 $ 9,092 $(3,890) $ (5,773) $(7,866) $ 173,944
Interest and investment income,
including realized gains (losses).... 27,940 282 6 94 11,265 39,587
Depreciation and amortization.......... 16,390 2,026 1,147 1,810 -- 21,373
Interest expense....................... 5,664 15 602 3,187 7,556 17,024
---------- ------- ------- -------- ------- ----------
Earnings (loss) before income taxes.... 188,267 7,333 (5,633) (10,676) (4,157) 175,134
Income tax expense (benefit)........... 72,588 2,804 77 (4,378) (1,649) 69,442
---------- ------- ------- -------- ------- ----------
Net earnings (loss).................... $ 115,679 $ 4,529 $(5,710) $ (6,298) $(2,508) $ 105,692
========== ======= ======= ======== ======= ==========
Assets................................. $ 691,571 $55,329 $18,866 $115,505 $88,199 $ 969,470
========== ======= ======= ======== ======= ==========
</TABLE>
- ---------------
(1) Intersegment revenue represented 66% of Micro General's total revenue in
1998.
As of and for the year ended December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
REAL ESTATE
TITLE INFORMATION MICRO
INSURANCE SERVICES GENERAL LEASING CORPORATE TOTAL
--------- ----------- ------- ------- --------- --------
<S> <C> <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>
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
66
<PAGE> 69
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
monitoring services, 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.
Micro General Corporation
Micro General Corporation is a full service enterprise solutions provider
offering a complete range of information technology and telecommunication
services including systems integration, application development, real estate
industry applications and eCommerce. Micro General Corporation was not included
in the Company's Consolidated Financial Statements until the second quarter of
1998.
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,
other than transactions between the Company (primarily the Title Insurance
segment) and Micro General, have been eliminated from the segment information
provided.
P. RECENT ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants issued Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"), in March 1998. SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. SOP 98-1 requires that certain costs related to the
development or purchase of internal use computer software be capitalized and
amortized over the estimated useful life of the software. Costs related to the
preliminary project stage and the post-implementation/operations stage, as
defined, in an internal use computer software development project are to be
expensed as incurred. Costs incurred prior to initial application of SOP 98-1,
whether capitalized or not, are not adjusted to the amounts that would have been
capitalized had SOP 98-1 been in effect when those costs were incurred. SOP 98-1
is applicable to all non-governmental entities and effective for fiscal years
beginning after December 15, 1998. The adoption of SOP 98-1 has not had a
material impact on the Company's financial position, results of operations or
financial reporting.
In June 1998, the Financial Accounting Standards Board 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,
67
<PAGE> 70
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
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, changes
in the fair value of derivative instruments and hedged items are reported in
accumulated other comprehensive earnings (loss).
SFAS 133 was originally 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 SFAS 133. 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. In June 1999, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB No. 133" ("SFAS 137"). SFAS
137 defers the effective date of SFAS 133 until June 2000. The adoption of SFAS
133 is not expected to have a material impact on the Company's financial
position, results of operations or financial reporting.
Q. CHICAGO TITLE ACQUISITION
On August 1, 1999, the Company announced that it had signed an Agreement
and Plan of Merger ("Merger Agreement") to purchase Chicago Title Corporation
("Chicago Title"), headquartered in Chicago, Illinois, for approximately $1.13
billion, or $52.00 per share of Chicago Title common stock, using approximately
equal amounts of cash and Company common stock, subject to certain adjustments
based on the average price of Company common stock, as defined in the Merger
Agreement. Under the terms of the Merger Agreement, the allocation between cash
and stock would be adjusted so Chicago Title stockholders would receive more
than 50% of the outstanding stock of the combined company. Additionally, the
price would be payable in shares of Company common stock or, upon election by
Chicago Title stockholders, in cash, subject to proration as may be necessary to
achieve the allocation between cash and stock described above. The Merger
Agreement, which was amended on October 13, 1999 has been approved by the Boards
of Directors of both companies, and was approved by the stockholders of both the
Company and Chicago Title in February 2000. Following the receipt of requisite
regulatory approvals and the satisfaction of other customary conditions,
including amendments to the Company's Bylaws, Charter and Certificate of
Incorporation, the transaction closed on March 20, 2000 ("Merger").
Pursuant to the terms of the Merger Agreement, Chicago Title stockholders
received an aggregate purchase price of approximately $1.1 billion. The purchase
price was paid in the form of 1.7673 shares of Company common stock and $26.00
in cash for each share of Chicago Title Corporation 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 will be accounted
for as a purchase.
In connection with the Merger, the Company has entered into an $800 million
syndicated credit agreement. The Credit Agreement provides for three distinct
credit facilities: a $100 million, 18-month revolving credit facility, a $250
million 6-year revolving credit facility and a $450 million term loan facility
with a 6-year amortization period. The Credit Agreement is unsecured at a
variable interest rate based on the debt ratings assigned to the Company by
independent agencies. 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 of the combined company. The
Company believes that the terms of the Credit Agreement are favorable.
68
<PAGE> 71
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10. THROUGH 13.
Within 120 days after the close of its fiscal year, the Company intends to
file with the Securities and Exchange Commission a definitive proxy statement
pursuant to Regulation 14A of the Securities Exchange Act of 1934 as amended,
which will include the election of directors, the report of compensation
committee on annual compensation, certain relationships and related transactions
and other business.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS. The following is a list of the Consolidated
Financial Statements of Fidelity National Financial, Inc. and its subsidiaries
included in Item 8 of Part II:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Earnings for the years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Comprehensive Earnings for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES. The following is a list of financial
statement schedules filed as part of this annual report on Form 10-K:
Schedule II: Fidelity National Financial, Inc. (Parent Company Financial
Statements)
Schedule V: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or not
required, or because the required information is included in the Consolidated
Financial Statements or notes thereto.
(a)(3) The following exhibits are incorporated by reference or are set
forth on pages to this Form 10-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3 Charter and Bylaws of the Issuer
3.1 Restated Certificate of Incorporation of Registrant,
incorporated by reference from Form S-3, Registration No.
333-65837
3.2 Restated Bylaws of Registrant, incorporated by reference
from Form S-3, Registration No. 333-65837
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
</TABLE>
69
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
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
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>
70
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.8 1996 Omnibus Stock Option Plan (Granite), incorporated by
reference from Form S-8, Registration No. 333-48411
10.9 Two Stock Option Agreements and Amended Stock Award
Agreement (Alamo), incorporated by reference from Form S-8,
Registration No. 333-64229
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
10.18 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
10.35 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
</TABLE>
71
<PAGE> 74
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
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
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
10.56 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 of 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
10.59 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
10.60 Agreement and Plan of Merger, dated as of August 1, 1999, by
and between Fidelity National Financial, Inc. and Chicago
Title Corporation and amended as of October 13, 1999,
incorporated by reference from Form S-4, Registration No.
333-89163
10.61 Credit Agreement, dated as of February 10, 2000, among
Fidelity National Financial, Inc., as borrower, Bank of
America, N.A., Chase Securities Inc., Morgan Stanley Senior
Funding, Inc., and various Financial Institutions, as
Lenders, incorporated by reference from Form 8-K, dated
February 9, 2000 and filed February 15, 2000
</TABLE>
72
<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
11 Computation of Basic and Diluted Earnings per Share
21 List of Subsidiaries
23 Independent Auditors' Consent
27 Financial Data Schedule -- December 31, 1999
</TABLE>
(b) REPORTS ON FORM 8-K. The Company filed reports on Form 8-K during the
quarter ending December 31, 1999 as follows:
None
73
<PAGE> 76
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/ WILLIAM P. FOLEY, II
------------------------------------
William P. Foley, II
Chief Executive Officer
Date: March 17, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ WILLIAM P. FOLEY, II Chairman of the Board and March 17, 2000
- ----------------------------------------------------- Chief Executive Officer
William P. Foley, II (Principal Executive Officer)
/s/ FRANK P. WILLEY Vice Chairman and Director March 17, 2000
- -----------------------------------------------------
Frank P. Willey
/s/ ALAN L. STINSON Executive Vice President, March 17, 2000
- ----------------------------------------------------- Chief Financial Officer and
Alan L. Stinson Treasurer (Principal Financial
and Accounting Officer)
Director March , 2000
- -----------------------------------------------------
John J. Burns, Jr.
Director March , 2000
- -----------------------------------------------------
John F. Farrell, Jr.
Director March , 2000
- -----------------------------------------------------
Phillip G. Heasley
/s/ WILLIAM A. IMPARATO Director March 17, 2000
- -----------------------------------------------------
William A. Imparato
/s/ DONALD M. KOLL Director March 17, 2000
- -----------------------------------------------------
Donald M. Koll
/s/ DANIEL D. (RON) LANE Director March 17, 2000
- -----------------------------------------------------
Daniel D. (Ron) Lane
/s/ GENERAL WILLIAM LYON Director March 17, 2000
- -----------------------------------------------------
General William Lyon
/s/ J. THOMAS TALBOT Director March 17, 2000
- -----------------------------------------------------
J. Thomas Talbot
/s/ CARY H. THOMPSON Director March 17, 2000
- -----------------------------------------------------
Cary H. Thompson
Director March , 2000
- -----------------------------------------------------
Richard P. Toft
</TABLE>
74
<PAGE> 77
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Fidelity National Financial, Inc.:
Under date of February 16, 2000, except as to Note Q to the Consolidated
Financial Statements which is as of March 20, 2000, we reported on the
accompanying Consolidated Balance Sheets of Fidelity National Financial, Inc.
and subsidiaries as of December 31, 1999 and 1998, 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, 1999
which are included in the Annual Report on Form 10-K. In connection with our
audits of the aforementioned consolidated Financial Statements, we also audited
the related financial statement schedules in the Annual Report on Form 10-K.
These Financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits.
In our opinion, such schedules, when considered in relation to the basic
Consolidated Financial Statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
KPMG LLP
Los Angeles, California
February 16, 2000, except as to
Note Q to the Consolidated Financial
Statements which is as of March 20, 2000
75
<PAGE> 78
SCHEDULE II
FIDELITY NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash........................................................ $ 1,972 $ 2,751
Investment securities available for sale, at fair value..... 42,405 51,950
Leases receivable, net...................................... 11,953 14,265
Notes receivable, net....................................... 9,126 1,770
Investment in subsidiaries.................................. 549,881 458,975
Investments in real estate and partnerships, net............ 696 1,435
Prepaid expenses and other assets........................... 7,319 5,063
Deferred tax asset.......................................... 31,579 10,965
-------- --------
$654,931 $547,174
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities.................. $ 24,762 $ 19,858
Notes payable............................................. 124,500 117,609
Accounts payable to subsidiaries.......................... 70,000 4,284
Income taxes payable...................................... 3,175 8,683
-------- --------
222,437 150,434
-------- --------
Stockholders' Equity:
Preferred stock, $.0001 par value; authorized 3,000,000
shares; issued and outstanding none.................... -- --
Common stock, $.0001 par value; authorized, 50,000,000
shares in 1999 and 1998; issued 39,224,169 in 1999 and
35,540,036 in 1998..................................... 4 3
Additional paid-in capital................................ 246,959 173,888
Retained earnings......................................... 327,785 265,567
-------- --------
574,748 439,458
Accumulated other comprehensive earnings.................. (5,975) 11,657
Less treasury stock, 12,036,102 shares in 1999 and
6,645,487 in 1998, at cost............................. 136,279 54,375
-------- --------
432,494 396,740
Commitments and contingencies.............................
Subsequent events.........................................
-------- --------
$654,931 $547,174
======== ========
</TABLE>
See Notes to Financial Statements.
76
<PAGE> 79
SCHEDULE II (CONTINUED)
FIDELITY NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUE:
Other fees and revenue................................... $ (427) $ 2 $ 13
Interest and investment income........................... 26,044 13,315 1,868
-------- -------- --------
25,617 13,317 1,881
-------- -------- --------
EXPENSES:
Other operating expenses................................. 1,190 7,866 9,645
Interest expense......................................... 7,282 7,556 7,163
-------- -------- --------
8,472 15,422 16,808
-------- -------- --------
Earnings (loss) before income tax expense (benefit), equity
in earnings of subsidiaries and extraordinary item....... 17,145 (2,105) (14,927)
Income tax expense (benefit)............................... (6,836) 835 6,493
-------- -------- --------
Earnings (loss) before equity in earnings of subsidiaries
and extraordinary item................................... 10,309 (1,270) (8,434)
Equity in earnings of subsidiaries......................... 60,544 106,962 57,442
-------- -------- --------
Earnings before extraordinary item......................... 70,853 105,692 49,008
Extraordinary item -- loss on early retirement of debt, net
of applicable income tax benefit of $1,180 in 1997....... -- -- (1,700)
-------- -------- --------
Net earnings............................................... $ 70,853 $105,692 $ 47,308
======== ======== ========
Basic net earnings......................................... $ 70,853 $105,692 $ 47,308
======== ======== ========
Basic earnings per share before extraordinary item......... $ 2.38 $ 3.79 $ 2.10
Extraordinary item -- loss on early retirement of debt, net
of applicable income tax benefit......................... -- -- (.07)
-------- -------- --------
Basic net earnings per share............................... 2.38 3.79 2.03
======== ======== ========
Weighted average shares outstanding, basic basis........... 29,811 27,921 23,355
======== ======== ========
Diluted net earnings....................................... $ 71,116 $108,155 $ 50,450
======== ======== ========
Diluted net earnings per share before extraordinary item... $ 2.27 $ 3.23 $ 1.76
Extraordinary item -- loss on early retirement of debt, net
of applicable income tax benefit......................... -- -- (.06)
-------- -------- --------
Diluted net earnings per share............................. $ 2.27 $ 3.23 $ 1.70
======== ======== ========
Weighted average shares outstanding, diluted basis......... 31,336 33,474 29,599
======== ======== ========
Retained earnings, beginning of year....................... $265,567 $167,222 $125,092
Dividends declared....................................... (8,635) (7,347) (5,178)
Net earnings............................................. 70,853 105,692 47,308
-------- -------- --------
Retained earnings, end of year............................. $327,785 $265,567 $167,222
======== ======== ========
</TABLE>
See Notes to Financial Statements.
77
<PAGE> 80
SCHEDULE II (CONTINUED)
FIDELITY NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................ $ 70,853 $ 105,692 $ 47,308
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Extraordinary item: loss on early retirement of
LYONs.............................................. -- -- 2,880
Amortization of LYONs original issue discount and
issuance costs..................................... 602 4,432 5,939
Provision for losses on notes receivable............. 190 240 195
Equity in earnings of subsidiaries................... (60,544) (106,962) (57,442)
Gain on sales of investments......................... (3,248) (8,381) (746)
Net increase (decrease) in income taxes.............. (16,303) (21,280) 19,820
Loss on sales of real estate......................... 156 -- --
Net increase in prepaid expenses and other assets.... (3,879) (1,245) (99)
Net increase in accounts payable and accrued
liabilities........................................ 3,974 6,769 1,748
-------- --------- --------
Net cash provided by (used in) operating
activities.................................... (8,199) (20,735) 19,603
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments...................... 7,055 6,645 7,491
Purchases of investments................................ (4,024) (21,930) (12,217)
Proceeds from sales of real estate...................... 433 -- --
Collections of notes receivable......................... 1,405 490 1,590
Additions to notes receivable........................... (8,801) -- --
Additions to investment in subsidiaries................. (516) (5,050) (7,055)
Lease (purchases) sales................................. 13,606 -- --
-------- --------- --------
Net cash provided by (used in) financing
activities.................................... 9,158 (19,845) (10,191)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings.............................................. 105,216 46,236 --
Principal payments...................................... (27,018) (20,250) (3,000)
Dividends paid.......................................... (8,192) (6,340) (4,703)
Purchases of treasury stock............................. (81,904) -- --
Exercise of stock options............................... 2,488 22,868 1,424
Net borrowings from (payments to) subsidiaries.......... 7,672 817 (6,055)
-------- --------- --------
Net cash provided by (used in) financing
activities.................................... (1,738) 43,331 (12,334)
-------- --------- --------
Net increase (decrease) in cash and cash equivalents...... (779) 2,751 (2,922)
Cash and cash equivalents at beginning of year............ 2,751 -- 2,922
-------- --------- --------
Cash and cash equivalents at end of year.................. $ 1,972 $ 2,751 $ --
======== ========= ========
</TABLE>
See Notes to Financial Statements.
78
<PAGE> 81
SCHEDULE II (CONTINUED)
FIDELITY NATIONAL FINANCIAL, INC.
(PARENT COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fidelity National Financial, Inc. (the "Company") transacts substantially
all of its business through its subsidiaries. The Parent Company Financial
Statements should be read in connection with the aforementioned Consolidated
Financial Statements and Notes thereto included elsewhere herein.
B. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Bank revolving credit facility, as amended, secured by
common stock of certain Insurance Subsidiaries and a
certain UTC, interest due monthly at LIBOR plus 1.15%
(6.97% at December 31, 1999), unused portion of $25,500
and $53,698 at December 31, 1999 and 1998, due July 2001,
repaid and terminated March 2000.......................... $124,500 $ 46,302
Liquid Yield Option Notes, zero coupon, convertible
subordinated notes due 2009 with interest at 5.5%,
converted or redeemed in February 1999.................... -- 71,307
-------- --------
$124,500 $117,609
======== ========
</TABLE>
In the normal course of business the Company enters into off-balance sheet
credit risk. This credit risk is in the form of guarantees and support
agreements. The Company believes that this credit risk is adequately secured.
C. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the year:
Interest............................................ $ 8,865 $ 1,691 $ 1,931
======= ======= =======
Income taxes........................................ $62,128 $77,277 $17,325
======= ======= =======
Non-cash investing and financing activities:
Dividends declared and unpaid....................... $ 2,712 $ 2,270 $ 1,254
======= ======= =======
Acquisitions........................................ $ -- $ 6,250 $24,377
======= ======= =======
Retirement of LYONs................................. $ -- $ -- $26,463
======= ======= =======
Conversion of LYONs................................. $70,286 $ 9,201 $ 888
======= ======= =======
</TABLE>
D. CASH DIVIDENDS RECEIVED
The Company has received cash dividends from subsidiaries and affiliates of
$21.1 million, $14.2 million and $5.0 in 1999, 1998 and 1997, respectively.
79
<PAGE> 82
SCHEDULE V
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ------------------------ ----------- ----------
ADDITIONS
---------
BALANCE AT CHARGE TO BALANCE AT
BEGINNING COSTS AND OTHER DEDUCTION END OF
DESCRIPTION OF PERIOD EXPENSES (DESCRIBED) (DESCRIBED) PERIOD
----------- ---------- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Reserve for claim losses......... $224,534 $52,713 $(4,310)(1) $32,975(2) $239,962
Allowance on:
Leases and residual interests
in securitizations.......... 10,482 20,628 -- 17,149(3) 13,961
Trade receivables............. 6,733 581 -- 1,917(3) 5,397
Notes receivable.............. 2,064 -- -- 310(3) 1,754
Real estate allowance............ 1,752 155 (275)(1) 430(4) 1,202
Amortization of cost in excess of
net assets acquired and other
intangible assets............. 16,722 7,908 -- -- 24,630
Year ended December 31, 1998:
Reserve for claim losses......... $201,674 $59,294 $ -- $36,434(2) $224,534
Allowance on:
Leases and residual
interests in
securitizations.......... 2,640 18,813 -- 10,971(3) 10,482
Trade receivables........... 5,153 3,287 -- 1,707(3) 6,733
Notes receivable............ 1,758 344 -- 38(3) 2,064
Real estate allowance............ 1,514 238 -- -- 1,752
Amortization of cost in excess of
net assets acquired and other
intangible assets............. 13,028 3,694 -- -- 16,722
Year ended December 31, 1997:
Reserve for claim losses......... $196,527 $41,558 $ 124(1) $36,535(2) $201,674
Allowance on:
Leases and residual
interests in
securitizations.......... 355 2,114 3,130(1) 2,959(3) 2,640
Trade receivables........... 6,831 1,920 204(1) 3,802(3) 5,153
Notes receivable............ 2,662 2,384 (153)(1) 3,135(3) 1,758
Real estate allowance............ 4,467 330 -- 3,283(4) 1,514
Amortization of cost in excess of
net assets acquired and other
intangible assets............. 8,322 4,706 -- -- 13,028
</TABLE>
- ---------------
(1) Represents net reserve for claim losses and other allowances assumed and
relieved from sales and acquisitions during the year.
(2) Represents payments of claim losses, net of recoupments.
(3) Represents uncollectible accounts written-off, change in reserve due to
reevaluation of specific items and change in reserve due to sale of certain
assets.
(4) Represents reduction in the reserve balance due to the sale of real estate
property.
80
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
3 Charter and Bylaws of the Issuer
3.1 Restated Certificate of Incorporation of Registrant,
incorporated by reference from Form S-3, Registration No.
333-65837
3.2 Restated Bylaws of Registrant, incorporated by reference
from Form S-3, Registration No. 333-65837
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
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
</TABLE>
81
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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
10.8 1996 Omnibus Stock Option Plan (Granite), incorporated by
reference from Form S-8, Registration No. 333-48411
10.9 Two Stock Option Agreements and Amended Stock Award
Agreement (Alamo), incorporated by reference from Form S-8,
Registration No. 333-64229
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
10.18 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
10.35 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
</TABLE>
82
<PAGE> 85
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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
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
10.56 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 of 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
</TABLE>
83
<PAGE> 86
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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
10.60 Agreement and Plan of Merger, dated as of August 1, 1999, by
and between Fidelity National Financial, Inc. and Chicago
Title Corporation and amended as of October 13, 1999,
incorporated by reference from Form S-4, Registration No.
333-89163
10.61 Credit Agreement, dated as of February 10, 2000, among
Fidelity National Financial, Inc., as borrower, Bank of
America, N.A., Chase Securities Inc., Morgan Stanley Senior
Funding, Inc., and various Financial Institutions, as
Lenders, incorporated by reference from Form 8-K, dated
February 9, 2000 and filed February 15, 2000
11 Computation of Basic and Diluted Earnings per Share
21 List of Subsidiaries
23 Independent Auditors' Consent
27 Financial Data Schedule -- December 31, 1999
</TABLE>
84
<PAGE> 1
EXHIBIT 11
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Basic earnings per share calculation:
Earnings before extraordinary loss ............................... $ 70,853 $105,692 $ 49,008
Extraordinary loss, net of applicable income tax benefit of $1,180 -- -- (1,700)
-------- -------- --------
Net earnings ..................................................... $ 70,853 $105,692 $ 47,308
======== ======== ========
Weighted average shares outstanding, basic basis .................... 29,811 27,921 23,355
======== ======== ========
Basic earnings per share:
Earnings before extraordinary loss ............................... $ 2.38 $ 3.79 $ 2.10
Extraordinary loss ............................................... -- -- (.07)
-------- -------- --------
Net earnings ..................................................... $ 2.38 $ 3.79 $ 2.03
======== ======== ========
Diluted earnings per share calculation:
Earnings before extraordinary loss ............................... $ 70,853 $105,692 $ 49,008
Plus: Impact of assumed conversion of LYONs ..................... 263 2,463 3,142
-------- -------- --------
Earnings before extraordinary loss plus assumed conversion ....... 71,116 108,155 52,150
Extraordinary loss, net of applicable income tax benefit of $1,180 -- -- (1,700)
-------- -------- --------
Net earnings plus assumed conversion ............................. $ 71,116 $108,155 $ 50,450
======== ======== ========
Weighted average shares outstanding, basic basis ................. 29,811 27,921 23,355
Plus: Incremental shares from assumed conversions
LYONs .................................................... 353 3,694 5,008
Options .................................................. 1,172 1,859 1,236
-------- -------- --------
Weighted average shares outstanding, diluted basis .................. 31,336 33,474 29,599
======== ======== ========
Diluted earnings per share:
Earnings before extraordinary loss plus assumed conversions ...... $ 2.27 $ 3.23 $ 1.76
Extraordinary loss ............................................... -- -- (.06)
-------- -------- --------
Net earnings ..................................................... $ 2.27 $ 3.23 $ 1.70
======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 21
FIDELITY NATIONAL FINANCIAL, INC.
LIST OF SUBSIDIARIES
A.S.A.P. Legal Publication Services, Inc.
ACS Systems, Inc.
Agency Sales and Posting, Inc.
Alamo Title Company
Alamo Title Company of Brazoria County, Inc., d/b/a Alamo Title Company
Alamo Title Company of Harris County, Inc., d/b/a Alamo Title Company
Alamo Title Company of Tarrant County, Inc., d/b/a Alamo Title Company
Alamo Title Holding Company
Alamo Title Insurance
Alamo Title of Guadalupe County, Inc., d/b/a Alamo Title Company
Alamo Title of Travis County, Inc., d/b/a Alamo Title Company
Amtitle Company
Arizona Sales and Posting, Inc.
BHC&M, Ltd.
Calwest Service Corporation
CKC Corporation
Classified Credit Data, Inc.
Credit Reports, Inc.
Dallas-Fidelity National Title Agency, Inc.
Fidelity Asset Management, Inc. (AZ)
Fidelity Asset Management, Inc. (CA)
Fidelity Express Network, Inc.
Fidelity National 1031 Exchange Services, Inc.
Fidelity National Agency of Arizona, Inc.
Fidelity National Appraisal Services, Inc.
Fidelity National Company of California
Fidelity National Company of Northern California
Fidelity National Credit Services, Inc.
Fidelity National Flood, Inc.
Fidelity National Home Warranty Company
Fidelity National Information Services, Inc.
Fidelity National Insurance Services, Inc
Fidelity National Tax Service, Inc.
Fidelity National Title & Escrow of Hawaii, Inc.
Fidelity National Title Agency of Nevada, Inc.
Fidelity National Title Agency of Pinal County, Inc.
Fidelity National Title Agency, Inc.
Fidelity National Title and Abstract, Inc.
Fidelity National Title Company
Fidelity National Title Company of California
Fidelity National Title Company of Oregon
Fidelity National Title Company of Washington
Fidelity National Title Insurance Agency of Coconino
Fidelity National Title Insurance Company
Fidelity National Title Insurance Company of New York
Fidelity Participations, Inc.
Fidelity Tax Service, Inc.
First Title Corporation
FNF Capital, Inc.
FNTIC Properties
GF Funding Corp. I
GF Funding Corp. II
GF Funding Corp. III
GF Funding Corp. IV
GF Funding Corp. V
GF Funding Corp. VI
GF Funding Corp. VII
GF Funding Corp. VIII
Gulf Stream Title Company of Miami
Investment Property Exchange Services, Inc.
Kensington Development Corporation
LD Exchange.com, Inc.
<PAGE> 2
Lexington Capital Corporation
LRT Record Services, Inc.
Manchester Development Corporation
Micro General Corporation
National Alliance Marketing Group, Inc.
National Title Insurance Services, Inc.
Nations Post and Pub. Services, Inc.
Nations Title of Arizona, Inc.
Nations Title, Inc.
Nations Title Insurance of New York, Inc.
Nationwide Recording Services, Inc.
North Pacific Funding, Inc.
Pacific American Property Exchange Corporation
Professional Escrow Inc.
Rocky Mountain Printing Services, Inc.
Rocky Mountain Aviation, Inc.
Rocky Mountain Support Services, Inc.
San Joaquin Title Company
Statewide Research, Inc.
SWT Holding, Inc.
Title Insurance & Escrow Services, Inc.
Title Insurance Policy Co. of Pinal County
Title Services, Inc.
UTC Capital Group, Inc.
WAEC Apartments, Inc.
WAEC, Inc.
Western Financial Trust Company
<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, 333-32806, 333-48411, 333-61111,
333-64229) on Form S-8 of Fidelity National Financial, Inc. of our reports dated
February 16, 2000, except as to Note Q to the Consolidated Financial Statements,
which is as of March 20, 2000 relating to the Consolidated Balance Sheets of
Fidelity National Financial, Inc. and subsidiaries as of December 31, 1999 and
1998 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, 1999 which reports appear
in the December 31, 1999 Annual Report on Form 10-K of Fidelity National
Financial, Inc.
KPMG LLP
Los Angeles, California
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 347,051
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 38,881
<MORTGAGE> 0
<REAL-ESTATE> 3,499
<TOTAL-INVEST> 506,916
<CASH> 38,569
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 1,029,173
<POLICY-LOSSES> 239,962
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 226,359
0
0
<COMMON> 4
<OTHER-SE> 432,490
<TOTAL-LIABILITY-AND-EQUITY> 1,029,173
939,452
<INVESTMENT-INCOME> 28,471
<INVESTMENT-GAINS> (76)
<OTHER-INCOME> 384,357
<BENEFITS> 52,713
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 1,181,663
<INCOME-PRETAX> 117,828
<INCOME-TAX> 46,975
<INCOME-CONTINUING> 70,853
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,853
<EPS-BASIC> 2.38
<EPS-DILUTED> 2.27
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
