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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(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, 1997
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)
DELAWARE 86-0498599
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION NO.)
ORGANIZATION)
17911 VON KARMAN AVENUE 92614 (714) 622-4333
IRVINE, CALIFORNIA (ZIP CODE) (REGISTRANT'S TELEPHONE NUMBER,
(ADDRESS OF PRINCIPAL EXECUTIVE INCLUDING AREA CODE)
OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
COMMON STOCK, $.0001 PAR VALUE NEW YORK STOCK EXCHANGE
LIQUID YIELD OPTION NOTES, DUE 2009, NEW YORK STOCK EXCHANGE
ZERO COUPON, CONVERTIBLE SUBORDINATED
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
As of March 26, 1998, 22,736,836 shares of Common Stock ($.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 $672,838,000. The aggregate
market value was computed with reference to the closing price on the New York
Stock Exchange on such date.
LOCATION OF EXHIBIT INDEX: The index to exhibits is contained in Part IV
herein on page number .
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, 1997, 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
PAGE NO.
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PART I
Item 1 Business.......................................... 1
Item 2 Properties........................................ 10
Item 3 Legal Proceedings................................. 11
Item 4 Submission of Matters to a Vote of Security
Holders................................................ 11
PART II
Item 5 Market for Registrant's Common Stock and Related
Stockholder Matters.................................... 12
Item 6 Selected Financial Data........................... 13
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 17
Item 8 Financial Statements and Supplementary Data....... 30
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............. 66
PART III
Item 10 Directors and Executive Officers of the
Registrant............................................. 66
Item 11 Executive Compensation........................... 66
Item 12 Security Ownership of Certain Beneficial Owners
and Management......................................... 66
Item 13 Certain Relationships and Related Transactions... 66
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K.................................... 66
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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 performing other
title-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,
reconveyances, recordings, foreclosure publishing and posting services and
exchange intermediary services in connection with real estate transactions.
Title insurance services are provided through the Company's direct operations
and otherwise through independent title insurance agents who issue title
policies on behalf of the underwriting subsidiaries. Title insurance is
generally accepted as the most efficient means of determining title to, and the
priority of interests in, real estate in nearly all parts of the United States.
Today, virtually all real property mortgage lenders require their borrowers to
obtain a title insurance policy at the time a mortgage loan is made or to allow
the sale of loans in the secondary market.
The Company's principal subsidiaries consist of Fidelity National Title
Insurance Company ("Fidelity Title"), which, in turn, is the parent company of
Fidelity National Title Insurance Company of Tennessee ("Fidelity Tennessee"),
and was the parent company of Fidelity National Title Insurance Company of
California ("Fidelity California"), which was merged into Fidelity Title as of
August 7, 1997, and was the parent company of Nations Title Insurance Company
("Nations Title"), which was merged into Fidelity Title as of December 29, 1997;
Fidelity National Title Insurance Company of New York ("Fidelity New York"),
which, in turn, is the parent company of Nations Title Insurance of New York
Inc. ("Nations New York") and National Title Insurance of New York Inc.
("National"); Fidelity National Title Insurance Company of Pennsylvania
("Fidelity Pennsylvania"), which was merged into Fidelity New York as of April
11, 1997, which in turn, was the parent company of American Title Insurance
Company ("ATIC"), which was merged into Fidelity Pennsylvania as of November 21,
1996; (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's
Lender Express Network ("FLEXNet").
Nations Title Insurance Company, Nations Title Insurance of New York Inc.
and National Title Insurance of New York Inc. were acquired, along with Nations
Title Inc. ("NTI," collectively, "Nations Title Inc.") in a transaction which
closed on April 1, 1996. Certain of the ancillary service companies were
acquired in separate transactions during 1997.
On November 17, 1997, Fidelity National Financial, Inc. signed an Agreement
and Plan of Merger ("Merger Agreement") to merge a newly-formed subsidiary of
the Company into Granite Financial, Inc. ("Granite"). Granite, located in
Golden, Colorado, is a rapidly expanding speciality finance company engaged in
the business of originating, funding, purchasing, selling, securitizing and
servicing equipment leases for a broad range of businesses located throughout
the United States. Granite is a prominent consolidator in the $48 billion
small-ticket lease finance market with the acquisitions of Global Finance &
Leasing in March, 1997; SFR Funding, Inc., in June, 1997; and North Pacific
Funding, Inc. (dba C&W Leasing), a privately held corporation based in Seattle,
Washington, and its wholly-owned subsidiary, in December, 1997. This transaction
closed on February 26, 1998.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Developments" and Notes B and O of Notes to
Consolidated Financial Statements.
INDUSTRY OVERVIEW
TITLE POLICIES. Title insurance policies state the terms and conditions
upon which a title underwriter will insure title to real estate. The
beneficiaries of title insurance policies are generally buyers of real property
or mortgage lenders. Most mortgage lenders require title insurance as a
condition to making loans secured by real estate.
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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 daily or other 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 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. 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. 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.
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) Sales personnel note the specifics of the order and place a
request with the title department for a preliminary report (a commitment in
the eastern United States).
(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 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.
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. Other factors affecting real estate activity include
demand, mortgage interest rates, family income levels and general economic
conditions. While the level of sales activity was relatively depressed in
certain geographical areas during the period 1991 through mid-1993, lower
mortgage interest rates beginning in the latter part of 1991 triggered an
increase in refinancing activity which continued
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at record levels through 1993 and into the first quarter of 1994. During 1994
and early 1995, steady interest rate increases caused by actions taken by the
Federal Reserve Board, resulted in a significant decline in refinancing
transactions and a stagnation in residential resales and new home sales. Since
late 1995, 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 1996 and 1997 and into
the first quarter of 1998. 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) and the District of Columbia, the Bahamas, the Virgin
Islands and Puerto Rico.
The Company maintains direct operations in Arizona, California, Florida,
Georgia, Hawaii, Nevada, New Jersey, New Mexico, New York, North Carolina,
Oregon, Pennsylvania, Tennessee, Texas and Washington. Direct operations are
divided into approximately 70 branches consisting of more than 350 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 2,200 agents, primarily in those areas in which agents are the
more accepted title insurance provider.
The following table sets forth for the years 1997, 1996 and 1995,
respectively, the approximate dollars and percentages of title insurance premium
revenue by state according to records maintained by the Company:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
California................ $202,848 38.0% $183,108 38.5% $124,407 43.6%
New York.................. 60,022 11.3 45,938 9.7 17,436 6.1
Texas..................... 47,051 8.8 42,122 8.9 28,761 10.1
Florida................... 29,457 5.5 25,444 5.3 16,141 5.7
Pennsylvania.............. 26,318 5.0 25,441 5.3 13,751 4.8
Arizona................... 24,431 4.6 23,865 5.0 15,462 5.4
All others................ 143,093 26.8 130,043 27.3 69,594 24.3
-------- ----- -------- ----- -------- -----
Totals.......... $533,220 100.0% $475,961 100.0% $285,552 100.0%
======== ===== ======== ===== ======== =====
For the entire title insurance industry, 12 states accounted for 72.1% of
title premiums written in the United States in 1996. California represented the
single largest state with 17.5%. The Company is licensed and has operations in
all 12 of these states.
MARKETING. The Company attempts to increase the volume of its title
insurance 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 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.
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
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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 -- Expenses and Recent Developments."
Prior to the acquisition of the Nations group of companies, which was
completed on April 1, 1996, the Company generated the majority of its revenue
from its network of direct operations as opposed to agency relationships, the
latter being more common in the title industry. See below and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview 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 and
claim losses are less 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, reconveyance fees, recording fees, foreclosure publishing
and posting service fees and exchange intermediary service fees in connection
with real estate transactions.
In 1997, 46.9% of the Company's title insurance premiums were generated by
direct operations. In 1996 and 1995, 49.8% and 62.1%, respectively, of title
insurance premiums were generated by direct operations. The percentage of title
insurance premiums generated by agency operations was 53.1%, 50.2% and 37.9% in
1997, 1996 and 1995, respectively. The average percentage of premiums generated
by agents and retained by the Company was 20.9%, 21.3% and 23.7% in 1997, 1996
and 1995, respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview, Revenue and Expenses."
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.
On April 1, 1996, the Company completed its acquisition of one hundred
percent of Nations Title Inc. and its wholly-owned subsidiaries Nations Title
Insurance Company (which was merged into Fidelity Title as of December 29,
1997), Nations Title Insurance of New York Inc. and National Title Insurance of
New York Inc., from Nations Holding Group for a purchase price of $19.3 million
plus 212,960 shares, $2.1 million, of Fidelity National Financial, Inc.'s common
stock, subject to certain adjustments. The acquisition positioned the Company as
the nation's fourth largest title insurance underwriter. The Company believes
that the combination of its direct operations and Nations Title Inc.'s strong
agency network provides a balance to the Company's title premium revenue between
direct and agency, as well as a hedge against future market downturns. The
acquisition of Nations Title Inc. has also increased the Company's revenue and
positively impacted its balance sheet and margins due to the operating economies
of the combined companies. The acquisition has also increased market share in
areas where the Company has had a limited presence, particularly in those areas
where business is primarily agent driven, as well as in states where the Company
has a strong market position. During 1997, the Nations Title Inc. purchase price
was reduced $749,000, pursuant to certain terms and conditions contained in the
acquisition agreement. The purchase price adjustment resulted in Nations Holding
Group returning 26,499 shares of Company common stock. The returned shares were
subsequently cancelled. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview, Revenue and Recent
Developments."
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ESCROW, TRUST AND OTHER TITLE-RELATED SERVICES. The Company holds funds
and documents in real estate transactions for delivery upon closing pursuant to
the instructions of the respective parties to an escrow. The Company derives
revenue from other ancillary services generated from direct operations, 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, 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.
TITLE 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 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. Claims greater than
$500,000 ("major claims") are reserved for as they become known because the
unique circumstances surrounding most major claims make it inherently
impractical to predict the incidence and amount of such claims. The occurrence
of a significant major claim in any given period could have a material adverse
effect on the Company's financial condition and results of operations for such
period. See "Reinsurance." Escrow losses are expensed as they become known.
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 historical focus on
residential resale and refinance transactions have helped minimize the net title
claims paid as a percentage of title insurance premiums ("net claims paid
ratio"). The Company further reduces its losses by following aggressive
recoupment procedures under rights of subrogation or warranties and by carefully
reviewing all claims. The Company paid title claims, net of recoupments, of
approximately $35.3 million, $37.3 million and $26.2 million in 1997, 1996 and
1995, respectively, representing 6.6%, 7.8% and 9.2% of title insurance premium
revenue during such periods. The 1997 and 1996 claims paid include Nations Title
Inc. claims paid (since April 1, 1996 for the year ended December 31, 1996)
totalling $8.5 million and $9.3 million, respectively. Fluctuations in the net
claims paid ratio can be attributed to the development of claims and related
payments over time. As payments related to prior years are made, particularly
prior years in which premium volume was at higher levels than those generated in
the year the loss is paid, the net claims paid ratio increases as a simple
percentage. The inverse occurs when the payments to premiums relationship is
reversed. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Expenses." 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
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recorded as an asset on the Company's books at the lower of cost or fair value
less selling costs and any related indebtedness is carried as a liability. At
December 31, 1997, the amount of these interests was $8.8 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 cedes or
assumes a portion of certain policy 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. See Note A of Notes to Consolidated Financial
Statements.
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
Insurance Company, Commonwealth Land Title Insurance Company, First American
Title Insurance Company, Lawyers Title Insurance Corporation, Old Republic Title
Insurance Company and Stewart Title Guaranty Company, as well as numerous
independent agency operations at the regional and local level.
Competition is based primarily on the 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 the price of
the title insurance policy 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 requirements, defining suitable investments for
reserves, capital and surplus and approving rate schedules. The Company has
analyzed its current Insurance Subsidiary structure and the regulatory
environments of the various states of domicile of the Insurance Subsidiaries.
Based on this analysis the Company has implemented a program to merge certain of
its Insurance Subsidiaries, ultimately resulting in two Insurance Subsidiaries,
Fidelity Title and Fidelity New York, as opposed to the current five, which is
down from eight underwriters at the end of 1996.
Pursuant to statutory accounting requirements of the various states in
which the Insurance Subsidiaries are qualified, 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 and dollar amount of policy liabilities underwritten
or the age and dollar amount of statutory premiums written. As of December 31,
1997, the combined statutory unearned premium reserve required and reported for
the Insurance Subsidiaries was $174.5 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
(1996), Fidelity New York (1996), Nations New York (1996), National (1996) and
ATIC (1994). The Company has not received preliminary reports of examination for
Fidelity Title, Fidelity New York, Nations New York or National, as the
examinations are currently ongoing.
The Department of Insurance of the State of Florida has completed the field
portion of its triennial examination of ATIC, which was merged into Fidelity
Pennsylvania as of November 21, 1996, which was in turn merged into Fidelity New
York as of April 11, 1997; as of and for the three-year period ended
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December 31, 1994. The Company has received a preliminary report of examination.
The preliminary report, as forwarded to the Company by the Department of
Insurance of the State of Florida, indicates that the examiners are proposing
adjustments that could materially impact the statutory capital and surplus of
ATIC and subsequently, Fidelity Pennsylvania, its former parent company, and
ultimately Fidelity New York. Certain of these adjustments have not been
included in the 1997 Fidelity New York Statutory Annual Statement as filed with
insurance regulatory authorities as the Company does not agree with these
findings and has requested support for the examination report. These same
adjustments have not been considered in the calculation of dividend capability,
statutory surplus and statutory income (loss) reported below.
Examinations have been completed for Fidelity Pennsylvania (1995), Fidelity
Tennessee (1995) and Nations Title (1996). All adjustments proposed by the
examiners have been recorded by the Company for Fidelity Pennsylvania, Fidelity
Tennessee and Nations Title, and are included in the calculation of dividend
capability, statutory surplus and statutory income (loss) reported below.
Statutorily calculated net worth determines the maximum insurable amount
under any single title insurance policy. As of January 1, 1998, the Company's
self-imposed single policy maximum insurable amounts, which comply with all
statutory limitations, for Fidelity Title, Fidelity New York and Fidelity
Tennessee were $42.0 million, $80.0 million and $6.0 million, respectively. The
self-imposed single policy maximum insurable amounts for Nations New York and
National were $20.0 million and $6.7 million, respectively.
The Insurance Subsidiaries are subject to regulations that restrict their
ability to pay dividends or make other distributions of cash or property to
their immediate parent company without prior approval from the Department of
Insurance of their respective states of domicile. In the case of Fidelity Title,
the total amount of dividends made in any twelve-month period may not exceed the
greater of 10% of the surplus as regards policyholders as of the last day of the
preceding year or net income for the twelve-month period ending the last day of
the preceding year. In the case of Fidelity New York, the total amount of
dividends and distributions is limited to surplus as regards policyholders,
excluding capital stock, 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. As of January 1, 1998, Fidelity Title could pay
dividends or make other distributions to the Company of $6,823,000. Fidelity New
York does not have any dividend paying capability as of January 1, 1998.
The combined statutory capital and surplus of the Insurance Subsidiaries
was $94,101,000, $73,326,000 and $67,174,000 as of December 31, 1997, 1996 and
1995, respectively. The combined statutory income (loss) of the Insurance
Subsidiaries was $21,500,000, $6,052,000 and $(1,533,000) for the years ended
December 31, 1997, 1996 and 1995, respectively. These amounts do not include
certain of the proposed ATIC examination adjustments previously discussed.
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, 1997. See
Note K of Notes to Consolidated Financial Statements.
The UTCs are also subject to certain regulation by insurance regulatory or
banking authorities, primarily relating to minimum net worth and dividend
capability. 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. In addition, the Company has agreed to
notify the State of California Department of Insurance of dividend payments by
FNTC and FNCAL greater than 30% of earnings before income taxes through 1998.
7
10
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 is supplied to the rating agencies
and subjected to quantitative and qualitative analyses from which the ratings
were derived. Ratings of the Company's principal Insurance Subsidiaries, as
assigned by Demotech, Inc. during 1997, are listed below.
DEMOTECH, INC.
(FINANCIAL STABILITY RATING)
------------------------------------
Fidelity Title A = Exceptional
Fidelity New York A = Exceptional
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, 1997 and 1996, the carrying amount, which approximates
the fair value, of total investments was $326.3 million and $227.7 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 sets forth certain information regarding the investment
ratings of the Company's fixed maturity portfolio at December 31, 1997 and 1996:
DECEMBER 31,
----------------------------------------------------------------------------------
1997 1996
--------------------------------------- --------------------------------------
% % % %
AMORTIZED OF FAIR OF AMORTIZED OF FAIR OF
RATINGS(1) COST TOTAL VALUE TOTAL COST TOTAL VALUE TOTAL
---------- --------- ----- -------- ----- --------- ----- -------- -----
(DOLLARS IN THOUSANDS)
AAA.................. $103,187 48.3% $104,488 48.2% $110,718 66.0% $109,956 66.1%
AA................... 36,484 17.1 37,141 17.1 10,485 6.3 10,572 6.3
A.................... 66,215 31.0 66,655 30.7 40,587 24.2 40,007 24.1
Other................ 7,703 3.6 8,717 4.0 5,822 3.5 5,794 3.5
-------- ----- -------- ----- -------- ----- -------- -----
Total........... $213,589 100.0% $217,001 100.0% $167,612 100.0% $166,329 100.0%
======== ===== ======== ===== ======== ===== ======== =====
- ---------------
(1) Ratings as assigned by Standard & Poor's Corporation
The following table sets forth certain information regarding the Company's
fixed maturity securities at December 31, 1997. 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
8
11
securities with an amortized cost of $17,640,000 and a fair value of $18,159,000
were callable at December 31, 1997:
DECEMBER 31, 1997
---------------------------------------
% %
AMORTIZED OF FAIR OF
MATURITY COST TOTAL VALUE TOTAL
-------- --------- ----- -------- -----
(DOLLARS IN THOUSANDS)
One year or less.............................. $ 5,180 2.4% $ 5,188 2.4%
After one year through five years............. 120,134 56.2 121,780 56.1
After five years through ten years............ 76,760 35.9 78,346 36.1
After ten years............................... 11,515 5.5 11,687 5.4
-------- ----- -------- -----
Total............................... $213,589 100.0% $217,001 100.0%
======== ===== ======== =====
Equity securities at December 31, 1997 and 1996 consist of investments in
various industry groups as follows:
DECEMBER 31,
----------------------------------------
1997 1996
------------------ ------------------
FAIR FAIR
COST VALUE COST VALUE
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Banks, trust and insurance companies........ $ 50 $ 50 $ 800 $ 863
Industrial, miscellaneous and all other..... 35,826 70,368 19,349 41,475
------- ------- ------- -------
Total............................. $35,876 $70,418 $20,149 $42,338
======= ======= ======= =======
The Company's investment results for the years ended December 31, 1997,
1996 and 1995 were as follows:
DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Net investment income(1)(2)........................ $ 18,275 $ 15,523 $ 15,014
Average invested assets(1)......................... 328,172 266,480 233,831
Effective return on average invested assets(1)..... 5.6% 5.8% 6.4%
- ---------------
(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 to provide the tax equivalent yield on tax exempt
investments and to exclude net realized capital gains on the sale of
investments. Net realized capital gains totalled $16,988,000, $2,625,000 and
$5,213,000 in 1997, 1996 and 1995, respectively.
REAL ESTATE AND PROPERTY MANAGEMENT OPERATIONS
The Company, principally through Manchester Development Corporation
("Manchester"), currently doing business as Orion Realty Group, a wholly-owned
subsidiary, previously invested in various real estate projects directly and
through partnerships. Some of these partnerships involve related parties. See
Notes D and E of Notes to Consolidated Financial Statements. Manchester
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 1.0% of the Company's
assets at December 31, 1997.
9
12
EMPLOYEES
As of December 31, 1997, the Company had approximately 5,200 full-time
equivalent employees. The Company believes that its relations with employees are
generally good.
YEAR 2000 ISSUES
The Company has reviewed its information systems hardware, operations and
application software relative to their compliance with potential Year 2000
issues. The Company believes that it has identified substantially all of the
application software programs which require modification in order to become Year
2000 compliant and has a formal plan to correct and test the programs affected
by the conversion of a two-digit year to a four-digit year. The Company expects
the early phases of the project to be completed during the middle of 1998. The
final phase of the project is scheduled to be completed by mid-1999. The review
of systems also included the identification of vendors that may have a
significant impact on the Company's operations and their expected completion of
any conversions.
The Company believes that its information systems operations and those of
its significant vendors are or will become Year 2000 compliant such that there
will not be any material adverse impact on the Company's results of operations
or financial condition. The Company estimates costs to be incurred prior to
December 31, 1999 to be approximately $200,000 to complete all programming
changes, related testing and implementation.
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.
ITEM 2. PROPERTIES
During 1997, the Company sold its corporate home office building in Irvine,
California, which housed the Company's corporate departments and certain
operating subsidiaries, recording a net realized gain of $4.3 million, prior to
applicable income taxes. Also during 1997, a subsidiary of the Company completed
the purchase of a building in Santa Barbara, California, which houses certain of
the Company's corporate departments.
The majority of the branch offices of the Company are leased from third
parties. The remainder are owned by the Company or leased from partnerships in
which the Company has an interest or leased from affiliates.
10
13
As of December 31, 1997, the Company leased office and storage spaces as
follows:
NUMBER OF
LOCATIONS
---------
California.................................................. 197
Florida..................................................... 36
Texas....................................................... 33
Arizona..................................................... 29
Oregon...................................................... 19
Pennsylvania and Tennessee.................................. 8
New Jersey, New York and Washington......................... 7
Nevada, New Mexico and North Carolina....................... 6
Georgia, Hawaii and Michigan................................ 4
Connecticut................................................. 2
One each in: Alabama, Colorado, Illinois, Kansas, Maryland,
Massachusetts, Minnesota, Missouri, Ohio, Rhode Island and Virginia.
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 depart from customary litigation incidental to the business of the
Company and that resolution of all such litigation will not have a material
adverse effect on the Company.
See Note J of Notes to Consolidated Financial Statements.
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 1997.
See "Management's Discussion and Analysis of Financial Condition -- Recent
Developments" and Note O of Notes to Consolidated Financial Statements.
11
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The following table sets forth the range of high and low closing prices for
the common stock on the New York Stock Exchange. The high and low closing prices
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.
DIVIDENDS
HIGH LOW DECLARED
------ ------ ---------
Year ended December 31, 1997
First quarter............................................. $14.09 $10.91 $.064
Second quarter............................................ $15.34 $10.45 $.064
Third quarter............................................. $21.59 $14.44 $.064
Fourth quarter............................................ $31.25 $18.64 $ .07
Year ended December 31, 1996
First quarter............................................. $14.67 $12.39 $.058
Second quarter............................................ $12.91 $10.33 $.058
Third quarter............................................. $13.33 $11.26 $.058
Fourth quarter............................................ $13.98 $12.60 $.064
On March 26, 1998, the last reported sale price of the common stock on the
New York Stock Exchange Composite Tape was $36.00 per share. As of March 26,
1998, 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. On March 19, 1998, the Company's Board of Directors declared a cash
dividend of $.07 per share which will be payable on May 1, 1998 to stockholders
of record on April 10, 1998. The continued payment of dividends will depend upon
operating results, business requirements, contractual restrictions, regulatory
considerations and other factors. 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 Notes G and O of
Notes to Consolidated Financial Statements.
12
15
ITEM 6. SELECTED FINANCIAL DATA
The historical operating results data, per share data and balance sheet
data set forth below are derived from the Consolidated Financial Statements of
the Company. Per share data has been retroactively adjusted for stock dividends
and splits since the Company's inception. The Consolidated Financial Statements
for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 have been
audited by KPMG Peat Marwick LLP, independent certified public accountants.
Audited Consolidated Balance Sheets at December 31, 1997 and 1996 and
Consolidated Statements of Earnings, Stockholders' Equity and Cash Flows for the
years ended December 31, 1997, 1996, and 1995, and Notes thereto 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.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994
(3)(4)(5)(6) (3)(4) (2) (1) 1993
------------ -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
OPERATING RESULTS DATA:
Revenue:
Title insurance premiums............. $533,220 $475,961 $285,552 $369,275 $429,772
Escrow fees.......................... 81,241 66,927 49,723 52,260 69,982
Other fees and revenue............... 98,695 76,333 56,954 59,351 60,958
Interest and investment income,
including realized gains
(losses)........................... 33,556 17,692 17,616 11,918 14,671
-------- -------- -------- -------- --------
746,712 636,913 409,845 492,804 575,383
-------- -------- -------- -------- --------
Expenses:
Personnel costs...................... 240,223 211,668 165,514 181,953 196,470
Other operating expenses............. 161,200 154,043 123,888 129,367 137,125
Agent commissions.................... 223,797 187,901 82,713 132,713 147,427
Provision for claim losses........... 38,661 33,302 19,031 27,838 39,220
Interest expense..................... 9,401 9,446 9,239 8,594 2,587
-------- -------- -------- -------- --------
673,282 596,360 400,385 480,465 522,829
-------- -------- -------- -------- --------
Earnings before income taxes and
extraordinary item................... 73,430 40,553 9,460 12,339 52,554
Income tax expense...................... 31,959 16,216 1,828 2,594 16,259
-------- -------- -------- -------- --------
Earnings before extraordinary item...... 41,471 24,337 7,632 9,745 36,295
Extraordinary item, net of income taxes
(1)(2)(6)............................ (1,700) -- (813) 2,400 --
-------- -------- -------- -------- --------
Net earnings......................... $ 39,771 $ 24,337 $ 6,819 $ 12,145 $ 36,295
======== ======== ======== ======== ========
Diluted net earnings................. $ 42,913 $ 27,533 $ 6,819 $ 15,201 $ 36,295
======== ======== ======== ======== ========
PER SHARE DATA:
Net diluted earnings per share before
extraordinary item................... $ 2.08 $ 1.34 $ .49 $ .51 $ 1.78
Extraordinary item, net of income taxes,
diluted basis........................ (.08) -- (.05) .10 --
-------- -------- -------- -------- --------
Net earnings per share, diluted basis
................................... $ 2.00 $ 1.34 $ .44 $ .61 $ 1.78
======== ======== ======== ======== ========
Weighted average shares outstanding,
diluted basis (000's)................ 21,483 20,484 15,694 24,864 20,365
Dividends per share..................... $ .26 $ .24 $ .22 $ .20 $ .18
13
16
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994
(3)(4)(5)(6) (3)(4) (2) (1) 1993
------------ -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
OTHER DATA:
Direct operations market share(7)....... 21.3% 21.0% 20.3% 20.6% 18.3%
Orders closed by direct operations...... 406,000 394,000 302,000 335,000 464,000
Average fee per file(8)................. $ 853 $ 806 $ 790 $ 750 $ 710
Provision for claim losses to title
insurance premiums................... 7.3% 7.0% 6.7% 7.5% 9.1%
Net claims paid ratio(9)................ 6.6% 7.8% 9.2% 6.3% 4.2%
Title-related revenue:
Percentage direct operations......... 57.5% 59.5% 71.1% 62.6% 65.3%
Percentage agency operations......... 42.5% 40.5% 28.9% 37.4% 34.7%
Employees at year end................... 5,200 4,500 4,100 3,500 4,700
Number of licensed states at year end... 49 49 49 49 48
Return on average equity before
extraordinary item(1)(2)(6)(10)...... 27.1% 25.9% 10.0% 10.3% 40.3%
Return on average equity including
extraordinary item(1)(2)(6)(10)...... 25.9% 25.9% 9.0% 12.9% 40.3%
BALANCE SHEET DATA:
Investments............................. $326,277 $227,674 $180,082 $217,648 $236,533
Cash and cash equivalents............... 54,005 63,971 47,431 34,689 42,731
Total assets............................ 600,559 509,296 405,063 418,119 396,279
Notes payable........................... 123,023 148,922 136,047 142,129 52,769
Reserve for claim losses................ 190,747 187,245 146,094 153,306 142,512
Minority interest....................... 3,614 1,287 393 616 22,424
Stockholders' equity.................... 196,319 110,251 77,947 73,954 114,926
- ---------------
(1) During 1994, the Company recognized a $2.4 million extraordinary gain, net
of related income taxes of $1.3 million, related to the early retirement of
$48 million maturity value of the Company's Liquid Yield Option Notes (the
"LYONs").
(2) During 1995, the Company recognized an $813,000 extraordinary loss, net of
related income taxes of $437,000, related to the early retirement of its
Senior Secured Notes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Extraordinary Item."
(3) The Company acquired NTI and its wholly-owned subsidiaries Nations Title,
Nations New York and National on April 1, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments" and Note B of Notes to Consolidated
Financial Statements. The selected financial data above includes the
balance sheet accounts of NTI and subsidiaries at December 31, 1997 and
1996 and the results of its operations for the year ended December 31, 1997
and for the nine-month period ended December 31, 1996.
(4) The Company acquired 80% of CRM, Inc. ("CRM") on November 1, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments" and Note B of Notes to Consolidated
Financial Statements. The selected financial data above includes the
Company's interest in the balance sheet accounts of CRM at December 31,
1997 and 1996 and the Company's interest in the results of its operations
for the year ended December 31, 1997 and for the two-month period ended
December 31, 1996.
(5) On July 3, 1997, the Company converted an outstanding note balance in
conjunction with the exercise of warrants into a 51% ownership interest of
National Alliance Marketing Group ("National Alliance"), subject to certain
regulatory approvals. The selected financial data above includes the
Company's
14
17
interest in the balance sheet accounts of National Alliance at December 31,
1997 and the Company's interest in the results of operations for the period
from July 3, 1997 through December 31, 1997.
On August 22, 1997, the Company acquired First Title Corporation ("First
Title"). The selected financial data above includes the balance sheet
accounts of First Title at December 31, 1997 and the results of its
operations for the period from August 22, 1997 through December 31, 1997.
The Company acquired Ifland Credit Services ("ICS") on September 18, 1997.
The selected financial data above includes the balance sheet accounts of
ICS at December 31, 1997 and the results of its operations for the period
from September 18, 1997 through December 31, 1997.
The Company acquired Credit Reports, Inc. ("CRI") and Express Network, Inc.
("ENI") on October 9, 1997. The selected financial data above includes the
balance sheet accounts of CRI and ENI at December 31, 1997 and the results
of their operations for the period from October 9, 1997 through December
31, 1997.
The Company acquired Classified Credit Data, Inc. ("CCD") on October 21,
1997. The selected financial data above includes the balance sheet accounts
of CCD at December 31, 1997 and the results of their operations for the
period from October 21, 1997 through December 31, 1997.
The Company acquired Bron Research, Inc. ("BRON") on October 1, 1997. This
acquisition has been accounted for as a pooling-of-interests. The selected
financial data above includes the balance sheet accounts of BRON at
December 31, 1997 and the results of its operations for the year ended
December 31, 1997. BRON's financial position and results of operations
prior to 1997 were insignificant, and as such, the selected financial data
above has not been restated for prior years.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Developments" and Note B of Notes to
Consolidated Financial Statements.
(6) During 1997, the Company recognized an extraordinary loss of $1.7 million,
net of related income taxes of $1.1 million, related to the early
retirement of $45 million maturity value of the Company's LYONs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Extraordinary Item and Recent Developments."
(7) This estimate of direct operations market share is based upon the number of
title recordings by the Company in the counties where the Company maintains
direct operations and excludes title recordings by the Company's agents and
excludes title recordings in certain eastern and southeastern states
because such information is not available. The direct operations market
share percentage has been weighted to give effect to the Company's related
direct revenue in the applicable counties.
(8) Average fee per file is based upon title insurance premiums, escrow fees
and certain other title-related fees from direct operations divided by
orders closed.
(9) The net claims paid ratio is the percentage resulting from total title
claims paid, net of recoupments, divided by title insurance premiums.
(10) 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.
15
18
QUARTERLY FINANCIAL DATA
Selected quarterly financial data is as follows:
QUARTER ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997
Revenue......................................... $153,192 $178,458 $197,915 $217,147
Earnings before income taxes and extraordinary
loss.......................................... 5,123 15,075 27,271 25,961
Earnings before extraordinary loss.............. 3,023 9,105 15,857 13,486
Extraordinary loss, net of income taxes......... -- -- -- (1,700)
Net earnings basic basis........................ 3,023 9,105 15,857 11,786
Net earnings diluted basis...................... 3,831 9,913 16,675 12,494
Earnings per share before extraordinary item,
basic basis................................... .20 .60 1.03 .76
Extraordinary loss, net of income taxes, basic
basis......................................... -- -- -- (.09)
Basic earnings per share........................ .20 .60 1.03 .67
Earnings per share before extraordinary item,
diluted basis................................. .18 .48 .78 .62
Extraordinary loss net of income taxes, diluted
basis......................................... -- -- -- (.07)
Diluted earnings per share...................... .18 .48 .78 .55
Dividends paid per share........................ .06 .06 .06 .07
1996
Revenue......................................... $126,398 $171,628 $166,692 $172,195
Earnings before income taxes.................... 8,300 11,757 10,623 9,873
Net earnings, basic basis....................... 5,145 6,946 6,317 5,929
Net earnings, diluted basis..................... 5,985 7,720 7,102 6,726
Basic earnings per share........................ .35 .46 .42 .39
Diluted earnings per share...................... .29 .38 .35 .33
Dividends paid per share........................ .06 .06 .06 .06
1995
Revenue......................................... $ 83,059 $ 95,494 $113,471 $117,821
Earnings (loss) before income taxes and
extraordinary loss............................ (4,737) 1,322 7,831 5,044
Earnings (loss) before extraordinary loss....... (2,447) 1,021 5,873 3,185
Extraordinary loss, net of income taxes......... (813) -- -- --
Net earnings (loss), basic basis................ (3,260) 1,021 5,873 3,185
Net earnings (loss), diluted basis.............. (3,260) 1,021 6,677 4,000
Earnings (loss) per share before extraordinary
item, basic basis............................. (.15) .07 .40 .21
Extraordinary loss, net of income taxes, basic
basis......................................... (.05) -- -- --
Basic earnings (loss) per share................. (.20) .07 .40 .21
Earnings (loss) per share before extraordinary
item, diluted basis........................... (.15) .06 .33 .20
Extraordinary loss net of income taxes, diluted
basis......................................... (.05) -- -- --
Diluted earnings (loss) per share............... (.20) .06 .33 .20
Dividends paid per share........................ .05 .05 .05 .06
16
19
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 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 sets forth certain financial and other data for the
years indicated:
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Total revenue...................................... $746,712 $636,913 $409,845
Total expenses..................................... $673,282 $596,360 $400,385
Earnings before extraordinary item................. $ 41,471 $ 24,337 $ 7,632
Extraordinary item -- loss on early retirement of
debt, net of income taxes........................ (1,700) -- (813)
-------- -------- --------
Net earnings..................................... $ 39,771 $ 24,337 $ 6,819
======== ======== ========
Net claims paid ratio(1)........................... 6.6% 7.8% 9.2%
Return on average equity before extraordinary
item(2).......................................... 27.1% 25.9% 10.0%
Return on average equity including extraordinary
item(2).......................................... 25.9% 25.9% 9.0%
- ---------------
(1) The net claims paid ratio is the percentage resulting from total title
claims paid, net of recoupments, divided by title insurance premiums.
(2) 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.
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. Other
factors affecting real estate activity include demand, mortgage interest rates,
family income levels and general economic conditions. While the level of sales
activity was relatively depressed in certain geographical areas during the
period 1991 through mid-1993, lower mortgage interest rates beginning in the
latter part of 1991 triggered an increase in refinancing activity which
continued at record levels through 1993 and into the first quarter of 1994.
During 1994 and early 1995, steady interest rate increases caused by actions
taken by the Federal Reserve Board resulted in a significant decline in
refinancing transactions and a stagnation in residential resales and new home
sales. Since late 1995, 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 1996
and 1997 and into the first quarter of 1998. It is impossible to predict in what
future direction interest rates and the real estate market may move or
fluctuate.
Additionally, during 1997, the Company acquired certain ancillary service
companies in various separate transactions. See "Recent Developments." The
acquired ancillary service companies have been bundled with other existing
lender services to form Fidelity's Lender Express Network ("FLEXNet"). FLEXNet
provides a complete range of real estate transactional services, leading to a
broader base of services provided and increased other fees and revenue.
Also, during 1997 the Company sold a majority interest of its subsidiary
American Title Company ("ATC"), an underwritten title company, to certain
members of ATC's management. See "Recent Developments." ATC functions as an
exclusive agent of the Company, and represents one of the Company's largest
agents. The conversion of ATC business from direct to agency resulted in a
continued increase in the
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percentage of title-related revenue generated from agency operations to 42.5% in
1997 compared to 40.5% in 1996.
The following table sets forth information regarding title-related revenue
derived from direct operations and title-related revenue derived from agency
operations:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
% % %
1997 OF TOTAL 1996 OF TOTAL 1995 OF TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Revenue from direct
operations:
Title insurance premiums.... $250,314 37.6% $237,244 40.2% $177,202 47.3%
Escrow fees................. 81,241 12.2 66,927 11.4 49,723 13.3
Other title-related fees and
revenue.................. 50,899 7.7 46,762 7.9 39,117 10.5
-------- ----- -------- ----- -------- -----
Total............... 382,454 57.5 350,933 59.5 266,042 71.1
Revenue from agency
operations:
Title insurance premiums.... 282,906 42.5 238,717 40.5 108,350 28.9
-------- ----- -------- ----- -------- -----
Total title-related
revenue........... $665,360 100.0% $589,650 100.0% $374,392 100.0%
======== ===== ======== ===== ======== =====
On April 1, 1996, the Company completed its acquisition of the Nations
Title Inc. group of companies. See "Recent Developments." The acquisition
positioned Fidelity National Financial, Inc. as the nation's fourth largest
title insurance underwriter. Nations Title Inc. and its three wholly-owned
underwriting subsidiaries, Nations Title Insurance Company (which was
subsequently merged into Fidelity Title), Nations Title Insurance of New York
Inc. and National Title Insurance of New York Inc., expanded the Company's
national agency network and increased its market share in the more traditional
agency driven states. The Nations Title Inc. acquisition resulted in additional
agency business and a shift in the mix of business from direct to agency during
1996. The revenue and expense information presented in Management's Discussion
and Analysis of Financial Condition and Results of Operations includes Nations
Title Inc.'s results of operations for the nine-month period ended December 31,
1996. In 1996, the total title-related revenue (excluding interest and
investment income and non-title-related other fees and revenue) generated by
agency operations increased to 40.5% from 28.9% in 1995.
During 1995, 71.1% of total title-related revenue was generated from direct
operations. The Company traditionally focused on direct operations because it
retains the entire premium from each transaction and is able to generate
additional sources of revenue by providing other title-related services.
The Company's strategy of expanding into selected markets continues. The
Company's strategy includes the restructuring of acquired operations, expansion
into the commercial market while maintaining its level of focus on the
residential resale and refinance markets, enhancing sales and marketing efforts,
minimizing net claim payments through stringent quality controls and effectively
managing overhead costs.
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RESULTS OF OPERATIONS
REVENUE. The following table presents information regarding the components
of the Company's revenue:
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS, OTHER THAN
FEE PER FILE)
Title insurance premiums........................... $533,220 $475,961 $285,552
Escrow fees........................................ 81,241 66,927 49,723
Other fees and revenue............................. 98,695 76,333 56,954
Interest and investment income, including realized
gains (losses)................................... 33,556 17,692 17,616
-------- -------- --------
Total revenue.................................... $746,712 $636,913 $409,845
======== ======== ========
Orders closed by direct operations................. 406,000 394,000 302,000
Average fee per file from direct operations........ $ 853 $ 806 $ 790
Favorable mortgage interest rates in the latter part of 1991 through early
1994 triggered refinancing activity at record levels. Beginning in early 1994
through mid-1995, steady interest rate increases caused by actions taken by the
Federal Reserve Board resulted in a significant decline in refinancing
transactions and a stagnation in residential resales and new home sales. Title
orders and requests for title-related services followed the market trend as
expected. Since late 1995, decreases in mortgage interest rates and the
resulting improvement in the real estate market have had a positive impact on
the level of real estate activity, order counts and closed orders. The overall
economic environment, stable mortgage interest rates in the seven percent range
and strength in the real estate market, especially in California, the Company's
strongest market, and on the West Coast, were positive factors through 1996 and
1997 and into the first quarter of 1998. These factors and the Company's
acquisition of Nations Title Inc., which was completed on April 1, 1996, have
resulted in title premiums of $533.2 million, $476.0 million and $285.6 million,
for 1997, 1996 and 1995, respectively. The difference in title insurance
premiums between 1997 and 1996 of $57.2 million represents an increase of 12.0%.
Title insurance premiums increased $190.4 million, or 66.7%, in 1996 from 1995.
The average fee per file increased to $853 in 1997 from $806 in 1996, which
had previously increased from $790 in 1995. The increase in fee per file in 1997
over 1996 and 1996 over 1995 is the result of increased fee revenue attributable
to higher fees charged per policy due to appreciated property values,
particularly in California, an overall rate increase and an expansion in the
commercial business sector offset by an increase in refinancing transactions.
Title business generated was primarily related to new home sale or resale
transactions, which typically charge higher fees than refinancing transactions.
Fees generated from refinancing transactions are generally less than fees
generated from resale transactions because the base rate charged on such a
policy is usually lower. Furthermore, one policy is issued to a lender in a
refinance transaction and two policies are issued in a resale transaction (buyer
and lender).
The Company's direct operations generate escrow fees from holding funds and
documents in connection with the closing of real estate transactions, as well as
real estate information and technology service fees, trustee sale guarantee
fees, credit reporting fees, attorney service fees, flood certification fees,
tax monitoring fees, reconveyance fees, recording fees, foreclosure publishing
and posting service fees and exchange intermediary service fees in connection
with real estate transactions.
The trends in escrow fees are primarily related to the title insurance
activity generated by the Company's direct operations. Escrow fees have
fluctuated during the 1997, 1996 and 1995 years in a pattern generally
consistent with the fluctuation in title insurance premiums. Escrow fees
increased $14.3 million to $81.2 million in 1997, a 21.4% increase from $66.9
million in 1996. This increase is consistent with the trend in title premiums
but is also due to the Company's focused efforts to expand its escrow market
presence in certain areas, such as Southern California. Escrow fees increased
$17.2 million to $66.9 million in 1996, a 34.6% increase from $49.7 million in
1995. The 1996 percentage increase in escrow fees is not as significant as the
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percentage increase in title premiums due to the change in the direct
operation/agency business mix. See "Overview." Agency title insurance premiums
do not generate escrow fees for the Company.
Other fees and revenue trend closely with the level and mix of business, as
well as the performance of certain of the Company's title-related subsidiaries.
During 1997, the Company acquired certain ancillary service companies in various
separate transactions. See "Recent Developments." The acquired ancillary service
companies have been bundled with other existing lender services to form
Fidelity's Lender Express Network ("FLEXNet"). FLEXNet provides a complete range
of real estate transactional services, leading to increased other fees and
revenues in 1997 as compared to 1996. 1997 other fees and revenue were $98.7
million, an increase of $22.4 million, or 29.4%, over 1996 other fees and
revenue of $76.3 million. In 1996, other fees and revenue increased $19.3
million, or 33.9%, to $76.3 million from $57.0 million in 1995. The increase is
primarily related to the increase in title premiums and escrow fees generated by
the Company's direct operations. Direct operations generate other fees and
income. Additionally, over the past two years the Company's ancillary service
businesses have significantly expanded their market presence and revenue, which
are included in other fees and revenue. The Company continues to make a
concerted effort to expand and develop the ancillary service contribution to
title-related operations.
Interest and investment income levels are primarily a function of
securities markets, interest rates and the amount of cash available for
investment. In 1997 investment income increased $15.9 million, or 89.8%, to
$33.6 million compared to $17.7 million in 1996. Average invested assets,
excluding real estate, increased 23.2% to $328.2 million in 1997 from $266.5
million in 1996, while the tax equivalent yield decreased to 5.6% in 1997 from
5.8% in 1996 due to declining interest rates, which resulted in an increase in
interest and dividend income of approximately $1.5 million. The Company shifted
the emphasis in its fixed income portfolio from taxable to non-taxable
securities during 1997. The difference in investment income results is primarily
attributable to the substantial increase in net realized capital gains during
1997 compared to 1996. In 1997, net realized capital gains totalled
approximately $17.0 million compared to $2.6 million in 1996. The primary
components of 1997 capital gains, prior to applicable income taxes, are the
following: $10.5 million in capital gains from the sale of investment
securities, $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
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. During 1996, interest and investment income increased .6% to
$17.7 million from $17.6 million in 1995. As interest rates declined during 1996
from 1995, the tax adjusted yield decreased to 5.8% in 1996 compared to 6.4% in
1995. Average invested assets, excluding real estate, increased $32.7 million,
or 14.0%, to $266.5 million in 1996 from $233.8 million in 1995. The difference
in investment income results is primarily attributable to increased interest
income resulting from an increase in average invested assets offset by a
decrease in yield and in capital gains. During 1996, the Company recognized $2.6
million of capital gains compared to $5.2 million of capital gains recorded in
1995. Included in the 1995 gain amount is a $3.4 million net gain realized upon
the sale of the Company's common stock holdings in US Facilities Corporation
during the third quarter of 1995.
EXPENSES. The following table presents the components of the Company's
expenses:
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1995 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
Personnel costs............................ $240,223 $211,668 $165,514
Other operating expenses................... 161,200 154,043 123,888
Agent commissions.......................... 223,797 187,901 82,713
Provision for claim losses................. 38,661 33,302 19,031
Interest expense........................... 9,401 9,446 9,239
-------- -------- --------
Total expenses................... $673,282 $596,360 $400,385
======== ======== ========
The Company's operating expenses primarily consist of personnel costs and
other operating expenses which are incurred as title insurance orders are
received and processed. Direct title insurance premiums and
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escrow fee revenue are recognized as income at the time the underlying real
estate transaction closes. As a result, revenue lags approximately 60-90 days
behind expenses and therefore gross margins may fluctuate.
Personnel costs include both base salaries and commissions (direct
operations) paid to employees and are the most significant operating expense
incurred by the Company. These costs generally fluctuate with the level of
orders opened and closed and with the mix of revenue between direct and agency
operations. Personnel costs totalled $240.2 million, $211.7 million and $165.5
million for the years ended December 31, 1997, 1996 and 1995, respectively. See
"Overview" and "Revenue." Personnel costs, as a percentage of total revenue,
have decreased to 32.2% from 33.2% in 1996, which had previously decreased from
40.4% in 1995.
The Company has taken significant measures to maintain appropriate
personnel levels and costs relative to the volume and mix of business and
revenues. 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 respond as
necessary.
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), escrow losses, postage and courier services, computer services,
professional services, advertising expenses, general insurance, trade and notes
receivable allowances and depreciation. Other operating expenses decreased as a
percentage of total revenue to 21.6% in 1997 from 24.2% in 1996, which had
previously decreased from 30.2% in 1995. 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 title-related
revenue; however, certain fixed costs are incurred regardless of revenue levels,
resulting in the year over year percentage fluctuations. The Company continues
to be committed to these cost control measures. Total other operating expenses
totalled $161.2 million, $154.0 million and $123.9 million in 1997, 1996 and
1995, respectively. See "Overview."
The period over period fluctuations in personnel costs and other operating
expenses are primarily the result of the fluctuations in total revenue, the
impact of the continued implementation of the Company's proprietary title and
escrow related technology on productivity and efficiency, as well as the changes
in the direct operation and agency operation title premium mix and the effect of
the newly acquired ancillary service companies on personnel and other operating
expenses. Additionally, the sale of ATC has shifted certain costs from personnel
and other operating expenses to commissions.
The 1996 addition of Nations Title Inc. title premiums, which are primarily
agency-related, has provided a balance between direct operation and agency
revenue. In previous periods the majority of title premiums and total revenue
were generated by direct operations, which resulted in higher personnel costs
and other operating expenses.
Agent commissions represent the portion of premiums retained by agents
pursuant to the terms of their respective agency contracts. The following table
illustrates the relationship of agent premiums and agent commissions:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Agent premiums.................... $282,906 100.0% $238,717 100.0% $108,350 100.0%
Agent commissions................. 223,797 79.1 187,901 78.7 82,713 76.3
-------- ----- -------- ----- -------- -----
Premiums retained by the
Company.................... $ 59,109 20.9% $ 50,816 21.3% $ 25,637 23.7%
======== ===== ======== ===== ======== =====
Agent commissions and the resulting percentage of agent premiums retained
by the Company varies according to regional differences in real estate closing
practices and state regulations. During 1997, the Company sold a majority
interest in its underwritten title company subsidiary ATC resulting in the
transfer of premiums from direct operations to agency operations and increased
commission expense in 1997 compared to
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1996, as well as a decrease in premiums retained by the Company on a year over
year basis. Commission rates paid to ATC are higher than average commission
rates paid to the 1996 agent base. The 1996 increase in agent commissions as a
percentage of agency premiums over 1995, resulting in a decrease in the
percentage of agency premiums retained by the Company, is attributable to the
fact that the average commissions paid to agents acquired in the Nations Title
Inc. acquisition exceed those paid to the former agent base. The combination of
higher agency commission rates and the significant agency revenue generated
since the sale of ATC and by the Nations Title Inc. acquisition have resulted in
higher overall commissions in 1997 and 1996.
The provision for claim losses includes an estimate of anticipated title
claims and major claims. The estimate of anticipated title claims is accrued as
a percentage of title premium revenue based on the Company's historical loss
experience and other relevant factors. The Company monitors its claims
experience on a continual basis and adjusts the provision for claim losses
accordingly. Based on Company loss development studies, the Company believes
that as a result of its underwriting and claims handling practices, as well as
the refinancing business of prior years, the Company will maintain the trend of
favorable claim loss experience. Based on this information, in 1997, 1996 and
1995, the Company recorded a provision for claim losses of 7.0% of title
insurance premiums prior to major claim expense, net of recoupments and the
impact of premium rates and Company loss experience in the state of Texas.
Premiums are generally higher in Texas for similar coverage than in other
states, while loss experience is comparable. As a result, losses as a percentage
of premiums are lower. These factors resulted in a net provision for claim
losses of 7.3%, 7.0% and 6.7% in 1997, 1996 and 1995, respectively.
A summary of the reserve for claim losses follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Beginning balance.................................. $187,245 $146,094 $153,306
Reserves assumed from First Title Corp........... 284 -- --
Reserves relinquished due to the sale of American
Title Company................................. (160) -- --
Reserves assumed from Nations Title Inc.......... -- 45,171 --
Title claim loss provision related to:
Current year.................................. 36,404 32,505 23,901
Prior years................................... 2,257 797 (4,870)
-------- -------- --------
Total title claim loss provision................. 38,661 33,302 19,031
Title claims paid, net of recoupments related to:
Current year.................................. (2,376) (2,430) (2,818)
Prior years................................... (32,907) (34,892) (23,425)
-------- -------- --------
Total title claims paid, net of recoupments...... (35,283) (37,322) (26,243)
-------- -------- --------
Ending balance..................................... $190,747 $187,245 $146,094
======== ======== ========
Provision for title claim losses to title insurance
premiums......................................... 7.3% 7.0% 6.7%
Net claims paid ratio.............................. 6.6% 7.8% 9.2%
Interest expense is incurred by the Company in financing its capital asset
purchases and certain acquisitions. 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
totalled $4.1 million, $4.2 million and $4.3 million for the years 1997, 1996
and 1995, respectively. The LYONs-related component of interest expense amounted
to $5.3 million, $5.2 million and $4.9 million for 1997, 1996 and 1995,
respectively. Interest expense was comparable over the three-year period
primarily as a result of slightly more favorable interest rates related to
outstanding non-LYONs debt, offset by an increase in the LYONs component of
interest expense. See "Extraordinary Item and Recent Developments."
22
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Income tax expense for 1997, 1996 and 1995, as a percentage of earnings
before income taxes, including the extraordinary losses in 1997 and 1995, was
43.6%, 40.0% and 16.9%, respectively. See "Extraordinary Item." The fluctuations
in income tax expense as a percentage of earnings before income taxes, including
the extraordinary item, are attributable to the effect of state income taxes on
the Company's wholly-owned underwritten title companies and ancillary service
companies; 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 for additional information
regarding income taxes.
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 Note due 2009 from Merrill Lynch, Pierce, Fenner & Smith
Incorporated for an aggregate purchase price of $27.2 million (or $605 per
$1,000 principal amount at maturity of LYONs), which exceeded the accreted value
recorded by the Company pursuant to the LYONs Indenture at that date. The
purchase price was paid in the form of 1,267,619 shares, $26.4 million, of the
Company's common stock and $790,000 in cash. 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. See "Recent
Developments."
In order to reduce interest expense incurred and interest rates paid, the
Company prepaid the Senior Secured Notes (the "Senior Notes") issued in March
1993. Pursuant to the terms and conditions of the Senior Note Agreement, the
Company provided for the Make Whole Provision, as defined, and related expenses
in 1995. This amount, $813,000, net of applicable income taxes, has been
reflected as an extraordinary item in the Consolidated Statements of Earnings
for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements include debt service, operating expenses,
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 short-term bank borrowings through existing credit
facilities.
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. 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. The
Insurance Subsidiaries are restricted by state regulations in their ability to
pay dividends and make distributions. Each state of domicile regulates the
extent to which the Company's title underwriters can pay dividends or make other
distributions to the Company. The UTCs are also regulated by insurance
regulatory or banking authorities. The Company's ancillary service subsidiaries
collect revenue and pay operating expenses; however, they are not regulated by
insurance regulatory or banking authorities. Positive cash flow from the UTCs
and ancillary service subsidiaries is invested primarily in cash and cash
equivalents.
The short- and long-term liquidity requirements of the Company, Insurance
Subsidiaries and UTCs are monitored regularly to match cash inflows with cash
requirements. The Company, Insurance Subsidiaries, UTCs and ancillary service
subsidiaries forecast their daily cash needs and periodically review their
short- and
23
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long-term projected sources and uses of funds, as well as the asset, liability,
investment and cash flow assumptions underlying these projections.
For purposes of satisfying insurance regulatory requirements, the Company
is required to maintain certain levels of readily marketable securities and
other liquid assets. At December 31, 1997, the fair value of the Company's total
investment securities was approximately $326.3 million. These investments
consist of securities which the Company believes are readily marketable and
could be liquidated if necessary. See "Business -- Investment Policies and
Investment Portfolio."
On September 21, 1995, the Company obtained a $35 million credit facility
with a banking syndicate led by Chase Manhattan Bank N.A. The facility includes
a $22 million term loan and a $13 million revolving credit facility. The $22
million term loan was used to refinance higher rate indebtedness and for general
corporate purposes. $5 million of the $13 million revolving credit facility was
used to fund a portion of the Nations Title Inc. acquisition and the remainder
was available for general corporate purposes. This credit facility was
terminated and paid subsequent to year end with proceeds from a new credit
facility containing terms more favorable to the Company. See Note G of Notes to
Consolidated Financial Statements.
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, including the repurchase of treasury shares. See "Recent
Developments" and Note G of Notes to Consolidated Financial Statements.
In the normal course of business certain of the Company's subsidiaries
enter into off-balance sheet credit risk associated with certain aspects of its
title insurance policies and Manchester's real estate activities. This credit
risk is in the form of standby letters of credit and general partnership
guarantees. The Company believes that this credit risk is adequately secured by
either legal remedies associated with settlement procedures or the underlying
real estate assets. See Note J of Notes to Consolidated Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS. In March 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("SFAS 128"), effective for fiscal years ending after
December 15, 1997. SFAS 128 introduces and requires the presentation of "basic"
earnings per share which represents net earnings divided by the weighted average
shares outstanding excluding all common stock equivalents. Dual presentation of
"diluted" earnings per share, reflecting the dilutive effects of all common
stock equivalents, is also required. The diluted presentation is similar to the
former presentation of fully diluted earnings per share. All quarterly and
annual per share data have been restated to reflect the impact of SFAS 128. The
adoption of SFAS 128 did not have a material impact on the Consolidated
Financial Statements of the Company.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of general-
purpose financial statements. SFAS 130 requires all items that are necessary to
be recognized under accounting standards as components of comprehensive income
to be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS 130 does not require a specific
format for that financial statement, but requires that an enterprise display an
amount representing total comprehensive income for the period covered by that
financial statement. SFAS 130 requires an enterprise to (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS 130 will not have a
material impact on the Company's financial reporting.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for public business enterprises to
report information about operating segments in annual financial statements
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27
and requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes FASB Statement
No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
SFAS 131 requires, among other items, that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
segment assets, information about the revenues derived from the enterprise's
products or services and major customers. SFAS 131 also requires that the
enterprise report descriptive information about the way that the operating
segments were determined and the products and services provided by the operating
segments. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. SFAS 131 need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. Management has not determined whether the adoption of SFAS 131
will have a material impact on the Company's financial reporting.
RECENT DEVELOPMENTS
In February of 1996, the Company proposed a merger with Giant Group, Ltd.
("Giant"). The Company had purchased 705,489 shares (or 14.8%) of Giant's
outstanding common stock. The Company's intent in acquiring Giant was to utilize
its liquid assets to take advantage of investment opportunities in non-interest
rate sensitive businesses. On April 26, 1996, the parties reached a settlement
agreement pursuant to which Giant repurchased its shares from Fidelity. In
addition, as part of the settlement, Fidelity acquired 767,807 shares of Rally's
Hamburger, Inc. ("Rally's") stock from Giant for $.83 per share, as well as an
option to purchase additional shares of Rally's common stock.
On April 1, 1996, the Company completed its acquisition of one hundred
percent of Nations Title Inc. and its whollyowned subsidiaries Nations Title
Insurance Company (which was merged into Fidelity Title as of December 29,
1997), Nations Title Insurance of New York Inc. and National Title Insurance of
New York Inc. from Nations Holding Group for a purchase price of $19.3 million
plus 212,960 shares, $2.1 million, of the Company's common stock, subject to
certain adjustments. The acquisition positioned Fidelity National Financial,
Inc. as the nation's fourth largest title insurance underwriter. The Company
believes that the combination of its direct operations and Nations Title Inc.'s
strong agency network provides a balance to the Company's title premium revenue
between direct and agency, as well as a hedge against future market downturns.
The acquisition of Nations Title Inc. has also increased the Company's revenue
and positively impacted its balance sheet and margins due to the operating
economies of the combined companies. The acquisition has also increased market
share in areas where the Company has had a limited presence, particularly in
those areas where business is primarily agent driven, as well as in states where
the Company has a strong market position. During 1997, the Nations Title Inc.
purchase price was reduced $749,000, pursuant to certain terms and conditions
contained in the acquisition agreement. The purchase price adjustment resulted
in Nations Holding Group returning 26,499 shares of common stock to the Company.
The returned shares were subsequently cancelled. This transaction has been
accounted for as a purchase. See Note B of Notes to Consolidated Financial
Statements.
On April 4, 1996, the Company purchased 17% of the outstanding common stock
of National Alliance Marketing Group, Inc. ("National Alliance"), a California
corp