(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.
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.
(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.
(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.
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
percentage of title-related revenue generated from agency operations to 42.5% in 1997 compared to 40.5% in 1996.
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.
REVENUE. The following table presents information regarding the components of the Company's revenue:
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 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
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.
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 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:
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
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.
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.
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.
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
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 corporation, for $566,667; together with a warrant to acquire an additional 14% of National Alliance common stock. In addition, the Company loaned $1,200,000 to National Alliance at closing at a rate of prime plus one percent. Subsequently, the Company agreed to increase the credit facility from $1,200,000 to $1,700,000. In consideration for the increase in the credit facility National Alliance agreed to increase the warrant shares which the Company could purchase. If the entire $1,700,000 was borrowed the Company could purchase an additional 34% of the outstanding shares of National Alliance. After receiving approval of the transaction from the California Department of Insurance, the transaction closed on July 12, 1996. National Alliance is the parent company of Alliance Home Warranty
Company ("Alliance"), a California insurance company. Alliance sells home warranty plans to buyers of resale homes, primarily in the Central and Southern California markets. A home warranty contract generally promises the repair or replacement of major operating systems and built-in appliances inside a home for a period of one year. On July 3, 1997, the Company converted the outstanding note balance in conjunction with the exercise of the warrants and now owns 51% of the outstanding common stock of National Alliance, subject to certain regulatory approvals. The outstanding balance of the notes receivable due from National Alliance at conversion was approximately $1.6 million. See Note B of Notes to Consolidated Financial Statements.
On July 10, 1997, the Company sold its former home office building in Irvine, California for a purchase price of $16.2 million, resulting in a net realized gain of $4.3 million, before applicable income taxes.
On July 22, 1997, the Company purchased 1,000,000 shares of common stock of GB Foods Corporation, which represents approximately 15.5% of the outstanding common stock of GB Foods Corporation, for a purchase price of $5.0 million. Additionally, the Company purchased warrants to acquire an additional 3,500,000 shares of GB Foods Corporation at various prices ranging from $5.00 -- $7.50 for a purchase price of $800,000, 1,500,000 warrants are exercisable at $5.00 per share, 1,000,000 warrants are exercisable at $7.00 per share and 1,000,000 warrants are exercisable at $7.50 per share. In conjunction with the common stock purchase, the Company gained control of three seats on the GB Foods Corporation Board of Directors. The purpose of the investment is consistent with the Company's strategic goal to diversify into noninterest rate sensitive businesses. The Company has announced that it expects to exercise 1,000,000 of the $5.00 warrants in conjunction with a previously announced GB Foods Corporation acquisition, in order to provide GB Foods Corporation additional capital. The GB Foods acquisition is expected to close during the second quarter of 1998. The Company's investment in GB Foods Corporation is accounted for under the equity method.
On September 18, 1997, the Company acquired the common stock of Ifland Credit Services ("ICS"), a credit reporting company headquartered in Lexington, Kentucky, for a purchase price of $3.75 million. ICS has been merged with Credit Reports, Inc. The purchase price was payable 80% in common stock of the Company (170,155 shares or $3.0 million) and 20% cash ($750,000). This transaction has been accounted for as a purchase. See Note B of Notes to Consolidated Financial Statements.
Also on October 9, 1997, the Company acquired the common stock of Express Network, Inc. ("ENI"), a provider of attorney services such as courier, messenger, courthouse filing, process serving, investigation and reprographics. ENI provides services to legal firms in Los Angeles, Orange County, San Diego, Riverside and San Francisco, California. The purchase price for ENI was $10.55 million; subject to certain purchase price adjustments based on the combined equity of ENI and CRI, its affiliate, payable in 50% common stock of the Company (302,158 shares or $5.275 million) and 50% cash (approximately $5.275 million). Approximately $2.8 million of the cash portion of the purchase price will be paid in equal installments over a four-year period. This transaction has been accounted for as a purchase. See Note B of Notes to Consolidated Financial Statements.
Under the original terms of the definitive agreement (as adjusted for the Company's recent 10% stock dividend), each share of Granite common stock would be converted into the right to receive .771 shares of Company common stock without interest, together with cash in lieu of any fractional share. The exchange ratio was collared between $20.75 and $25.94. The adjustment factor was designed to insure that the average market value of the shares of Company common stock to be issued to the stockholders of Granite is neither less than $16.00 nor more than $20.00 per share of Granite common stock. The market value was determined based on the average closing price of Company common stock during the 20 day trading period ending on the third business day prior to the date of the shareholder meetings to be held to approve the transaction. Below $20.75 Fidelity could make up the difference in additional shares of its common stock at its option and above $25.94 Granite shareholders would have the exchange ratio reduced pro rata. Such average closing price was determined to be $28.48, resulting in an adjusted exchange ratio of .702 shares of Company common stock for each share of Granite common stock. The merger will be treated as a reorganization pursuant to Section 368(a)(1) of the Internal Revenue Code of 1986, as amended, and be accounted for as a "pooling-of-interests" for accounting purposes.
The shareholders of Granite approved the merger, and the Company shareholders approved the issuance of shares in connection with the merger, at special shareholders' meetings on Tuesday, February 24, 1998. The merger was completed Thursday, February 26, 1998. Under the terms of the definitive agreement, shareholders of Granite Financial, Inc. common stock receive .702 shares of Fidelity National Financial, Inc. common stock for each share of Granite Financial, Inc. common stock, with fractional shares to be paid in cash, resulting in the issuance of approximately 4.4 million shares of Fidelity National Financial, Inc. common stock. Fidelity National Financial, Inc. common stock, as reported by the New York Stock Exchange, closed at $28.69 on February 26, 1998. The Company believes that the acquisition of Granite Financial, Inc. complements its core title operations and is a significant step in realizing its previously stated goal of positioning the Company as a diversified financial services company. See Note O of Notes to Consolidated Financial Statements.
On March 18, 1998, the Company announced that it had entered into an agreement to sell National Title Insurance of New York Inc. to American Title Company, subject to regulatory approval and certain other conditions. The purchase price is structured at a premium to book value. National was acquired in April 1996, as part of the Nations Title Inc. acquisition and has not been actively underwriting policies since the transaction closed. American Title Company is an underwritten title company which was formerly a wholly-owned subsidiary of the Company. Effective July 1, 1997, 60% of ATC was sold to certain members of ATC management. The Company will continue to own 40% of ATC, and ultimately National, following the transaction. See Note O of Notes to Consolidated Financial Statements.
On March 25, 1998, the Company closed a new credit facility, the proceeds of which were used to terminate and pay the Company's credit agreement dated as of September 21, 1995. Additional amounts available under the new credit facility are available for general corporate purposes. See Notes G and O of Consolidated Financial Statements.
In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the consolidated financial position of Fidelity National Financial, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles.
The following describes the significant accounting policies of Fidelity National Financial, Inc. ("Fidelity Financial") and its subsidiaries (collectively, the "Company") which have been followed in preparing the accompanying Consolidated Financial Statements.
Fidelity National Financial, Inc., through its principal subsidiaries (collectively, the "Company"), is 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, reconveyance fees, recording fees, 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.
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. See Note B.
The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All material intercompany profits, transactions and balances have been eliminated. The Company's investments in non-majority-owned partnerships are accounted for on the equity method.
Other long-term investments, which consist of a limited partnership investment in an investment fund, as well as certain other debt instruments and equity investments, are carried at cost, which approximates fair value.
The fair values of financial instruments presented in the applicable notes to the Company's Consolidated Financial Statements are estimates of the fair values at a specific point in time using available market information and appropriate valuation methodologies. These estimates are subjective in nature and involve uncertainties and significant judgment in the interpretation of current market data. Therefore, the fair values presented are not necessarily indicative of amounts the Company could realize or settle currently. The Company does not necessarily intend to dispose of or liquidate such instruments prior to maturity. See Notes C, D and G.
Intangible assets include cost in excess of net assets acquired, capitalized licensing costs and capitalized software costs and are amortized on a straight line basis over three to forty years. Intangible assets at December 31, 1997 consist of cost in excess of net assets acquired of $28,977,000 less accumulated amortization of $2,394,000, capitalized licensing costs of $2,500,000 less accumulated amortization of $159,000, capitalized software of $12,326,000 less accumulated amortization of $4,636,000 and capitalized debt offering costs of $4,163,000 less accumulated amortization of $2,008,000. At December 31, 1996, intangible assets consist of cost in excess of net assets acquired of $8,349,000 less accumulated amortization of $1,733,000, capitalized licensing costs of $3,937,000 less accumulated amortization of $98,000, capitalized software of $11,720,000 less accumulated amortization of $2,740,000 and capitalized debt offering costs of $4,738,000 less accumulated amortization of $1,738,000.
Basic earnings per share is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding during the period. Dilutive earnings per share is
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.
- --------------- (1) As the conversion of the Liquid Yield Option Notes ("LYONs") have an antidilutive effect in 1995, the assumed conversion is not considered in the Diluted Earnings Per Share Calculation. Assumed conversion of the LYONs would result in additional net earnings of $3,245,000 and 4,793,000 additional dilutive potential shares.
On April 1, 1996, the Company completed its acquisition of Nations Title 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. This transaction has been accounted for as a purchase. 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.
The assets acquired and liabilities assumed in the Nations Title Inc. acquisition were as follows (dollars in thousands):
On April 4, 1996, the Company purchased 17% of the outstanding common stock of National Alliance Marketing Group, Inc. ("National Alliance"), a California corporation, for $566,667; together with a warrant to acquire an additional 14% of National Alliance common stock. In addition, the Company loaned $1,200,000 to National Alliance at closing at a rate of prime plus one percent. Subsequently, the Company agreed to increase the credit facility from $1,200,000 to $1,700,000. In consideration for the increase in the credit facility National Alliance agreed to increase the warrant shares which the Company could purchase. If the entire $1,700,000 was borrowed, the Company could purchase an additional 34% of the outstanding shares of National Alliance. After receiving approval of the transaction from the California Department of Insurance, the transaction closed on July 12, 1996. National Alliance is the parent company of Alliance Home Warranty Company ("Alliance"), a California insurance company. Alliance sells home warranty plans to buyers of resale homes, primarily in the Central and Southern California markets. A home warranty contract generally promises the repair or replacement of major operating systems and built-in appliances inside a home for a period of one year. On July 3, 1997, the Company converted the outstanding note balance in conjunction with the exercise of the warrants and now owns 51% of the outstanding common stock of National Alliance, subject to certain regulatory approvals. The outstanding balance of the notes receivable due from National Alliance at conversion was approximately $1.6 million.
On November 1, 1996, the Company acquired 80% of the outstanding stock of CRM, Inc. ("CRM") for a purchase price of $3.5 million, $1.0 million in cash and 191,169 shares, $2.5 million, of the Company's Common Stock. CRM provides real estate information services with a heavy concentration in the areas of tax services and flood certification. The Company combined its existing tax service business with that of CRM. Under certain circumstances the Company can purchase the remaining 20% of the outstanding stock of CRM. CRM, Inc. operates as a majority-owned subsidiary of the Company and is now known as Fidelity National Tax Service, Inc. ("Fidelity National Tax"). This transaction has been accounted for as a purchase. The CRM results of operations were not material to the 1996 Consolidated Financial Statements.
The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Fidelity National Tax acquisition were as follows (dollars in thousands):
On August 22, 1997, the Company acquired the common stock of First Title Corporation ("First Title"), a title company with fourteen offices throughout the southeastern United States. First Title has been merged into a subsidiary of the Company. First Title was acquired for $4.7 million; payable in 80% common stock of the Company (253,398 shares or $3.8 million) and 20% cash (approximately $900,000). This transaction has been accounted for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the First Title Corporation acquisition were as follows (dollars in thousands):
On October 9, 1997, the Company acquired the common stock of Credit Reports, Inc. a credit reporting company headquartered in Scottsdale, Arizona, with operations in California, Colorado, Nevada and Oregon. CRI has been merged with ICS and CCD in order to form Fidelity National Credit Services. The purchase price for CRI was $200,000, subject to certain purchase price adjustments based on the combined equity of CRI and Express Network, Inc., its affiliate, payable in 11,455 shares of Company common stock. This transaction has been accounted for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Express Network, Inc. acquisition were as follows (dollars in thousands):
On October 21, 1997, the Company acquired 100% of the common stock of Classified Credit Data, Inc., a credit reporting company headquartered in Orange County, California, for a purchase price of $300,000, which was paid in cash. CCD was merged with ICS and CRI in order to form Fidelity National Credit Services. This transaction has been accounted for as a purchase.
The assets acquired, including cost in excess of net assets acquired, and liabilities assumed in the Classified Credit Data acquisition were as follows (dollars in thousands):
The carrying amounts and fair values of the Company's fixed maturity securities at December 31, 1997 and 1996 are as follows:
Fixed maturity securities valued at approximately $18,881,000 and $17,670,000 were on deposit with various governmental authorities at December 31, 1997 and 1996, respectively, as required by law.
Equity securities at December 31, 1997 and 1996 consist of investments in various industry groups as follows:
The carrying value of the Company's investment in equity securities is fair value. As of December 31, 1997, gross unrealized gains and gross unrealized losses on equity securities were $36,774,000 and $2,232,000, respectively. Gross unrealized gains and gross unrealized losses on equity securities were $22,912,000 and $723,000, respectively, as of December 31, 1996.
Included in equity securities at December 31, 1997 and 1996, is an investment in a certain equity security, CKE Restaurants, Inc., with a cost basis of $3,366,000 and a fair value of $31,404,000 at December 31, 1997 and a cost basis of $3,366,000 and a fair value of $17,892,000 at December 31, 1996.
The change in unrealized gains on equity securities for the years ended December 31, 1997, 1996 and 1995 was $12,353,000, $15,245,000 and $9,369,000, respectively.
Interest and investment income, including realized gains (losses), consists of the following:
maturity securities considered available for sale amounted to $137,019,000, $93,108,000 and $188,902,000, during the years ended December 31, 1997, 1996 and 1995, respectively.
During the years ended December 31, 1997, 1996 and 1995, gross realized gains on sales of equity securities considered available for sale were $12,658,000, $5,937,000 and $5,111,000, respectively; and gross realized losses were $2,430,000, $1,962,000 and $457,000, respectively. Gross proceeds from the sale of equity securities amounted to $135,747,000, $89,404,000 and $25,622,000 during the years ended December 31, 1997, 1996 and 1995, respectively.
In September 1991, Manchester Development Corporation ("Manchester"), a wholly-owned subsidiary, sold certain real estate investments and operating properties to Folco Development Corporation ("Folco"), of which the Company's Chief Executive Officer and spouse are sole shareholders, at the assets' net book value of $2,211,000. This transaction resulted in a note receivable from Folco to Manchester of approximately $1,492,000 secured by subordinated deeds of trust on the 11 office buildings included in the sale to Folco. In connection with the sale, the existing leases of space by the Company were amended thereby increasing rental rates approximately 20%. The terms of the agreement between Manchester and Folco provide that each of the subordinated deeds of trust will be released and reconveyed upon payment to Manchester of 15% of the net sales proceeds from the sale of the property encumbered by the subordinated deeds of trust. The note was paid on November 10, 1997. At December 31, 1996, the balance outstanding on the note approximated $471,000 and one property remained unsold.
At December 31, 1997 and 1996, the Company had financial interests ranging from 22% to 50% in three real estate partnerships which were accounted for under the equity method. These partnerships are involved in the ownership and management of commercial office buildings, retail facilities and have acquired specific parcels of real property for investment purposes. The Company, through Manchester Development Corporation ("Manchester"), a wholly-owned subsidiary, had a general partnership interest in one of the three real estate partnerships at December 31, 1997 and 1996.
On September 30, 1996, the Company accepted the assignment from a real estate partnership of the right to redeem a retail shopping center valued at $4.5 million in exchange for a net payment of $434,000. Officers and directors of the Company, who have ownership interests in the real estate partnership, assigned their rights to redeem to the Company. On November 21, 1996, the Company redeemed the retail property at a price of $2.8 million. The Company continues to collect rent from the retail tenants while actively marketing the property for sale. The property is carried at cost, which approximates fair value.
The Company's credit agreement, dated as of September 21, 1995, included a $22 million term loan and a $13 million revolving credit facility, is and was collateralized by the common stock of certain Insurance Subsidiaries. This credit facility was terminated and paid subsequent to year end with the proceeds from a new credit facility. Additionally, the Company must comply with certain affirmative and negative covenants related to its debt agreements which require, among other things, that the Company maintain certain financial ratios related to liquidity, net worth, capitalization, investments, restricted payments and certain dividend restrictions.
The Company entered into an interest rate swap agreement concurrent with the funding of the credit agreement, dated as of September 21, 1995, which is principally used by the Company in the management of interest rate exposure. The interest rate swap agreement is accounted for on the accrual basis. Income and expense are recorded in the same category as that arising from the related debt. Amounts to be paid or received under interest rate swap agreements are recognized as interest income or expense in the period in which they accrue. The interest rate swap agreement has not had a material impact on the Consolidated Financial Statements. See Note N.
In February 1994, the Company issued zero coupon, convertible subordinated Liquid Yield Options Notes due February 2009 ("LYONs") at an interest rate of 5.5% with a principal amount at maturity of $235,750,000. Net proceeds to the Company were approximately $101,000,000. The proceeds were used for investment and general corporate purposes, including the repurchase of treasury shares. See Note K.
planning or other strategies could be implemented, if necessary, to supplement income from operations to fully realize recorded tax benefits.
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 their 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 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, 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.
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.
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 FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
In 1987, stockholders approved the adoption of an Employee Stock Purchase Plan ("ESPP"). Under the terms of the ESPP and subsequent amendments, there are 7,986,000 shares of the Company's Common Stock available for purchase at current market prices by Company employees who meet certain vesting requirements. Pursuant to the ESPP, Company employees may contribute an amount between 5% and 15% of their base salary and certain commissions. The Company contributes varying amounts as specified in the ESPP. During the years ended December 31, 1997, 1996 and 1995, 321,449, 338,047 and 315,901 shares, respectively, were purchased and allocated to employees, based upon their contributions, at an average price of $15.10, $12.45 and $9.77 per share, respectively. The Company contributed $1.7 million or the equivalent of 111,582 shares for the year ended December 31, 1997, $1.2 million or the equivalent of 97,471 shares for the year ended December 31, 1996 and $1.4 million or the equivalent of 143,559 shares for the year ended December 31, 1995 in accordance with the employer's matching contribution. A total of 6,524,409 shares have been purchased by both the ESPP and employees since the adoption of the ESPP.
In 1992, the stockholders approved the adoption of the 1991 Stock Option Plan ("1991 Option Plan"). Under the terms of the 1991 Option Plan, options may be granted to officers and key employees of the Company or any or all of its present or future subsidiaries. The number of shares reserved for issuance under the 1991 Option Plan and subsequent amendments is 2,362,525 shares of Common Stock, which may be newly issued or treasury shares. The per share option price is determined at the date of grant. The option price may be less than the fair market value of the Common Stock at the date of grant to reflect the application of the optionee's deferred bonus, if applicable. Options granted under the 1991 Option Plan shall be exercisable in such installments and for such periods as may be fixed at the time of grant, but in no event shall any stock options extend for a period in excess of 12 years from the date of grant.
In 1994, the stockholders approved the adoption of the 1993 Stock Plan ("1993 Plan"). Under the terms of the 1993 Plan, options may be granted to officers, key employees and non-employee directors of the Company. The number of shares of Common Stock reserved for issuance under the 1993 Plan is 998,250. The per share option price is determined at the date of grant provided that the price for incentive stock options shall not be less than 100% of their market value or award stock shares. The 1993 Plan also contains an automatic grant of non-qualified stock options to non-employee directors at an exercise price equal to 100% of fair value at date of grant, and the right to exercise such options shall vest equally over three years. Stock options granted under the 1993 Plan are exercisable subject to the terms and conditions set by the Board of Directors; however, options shall be exercisable no earlier than six months nor ten years following the grant date.
The following table sets forth activity in the 1987 and 1991 Stock Option Plans and the 1993 Stock Plan from December 31, 1994 through December 31, 1997:
Pro forma information regarding net earnings and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value
A summary of the Company's stock option activity, and related information for the years ended December 31, 1997, 1996 and 1995 is as follows:
The counterparty to the agreement relating to the Company's interest rate swap instrument consists of a major high credit quality financial institution. The Company does not believe that there is significant risk of nonperformance by this counterparty because the Company continually monitors the credit rating of such counterparties and limits the financial exposure and the amount of agreements entered into with any one financial institution. While the notional amounts of financial instruments are often used to express the volume of these transactions, the potential accounting loss on these transactions if the counterparty failed to perform is limited to the amounts, if any, by which the counterparty's obligation under the contract exceeds the obligation of the Company to the counterparty.
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.
The shareholders of Granite approved the merger, and the Company shareholders approved the issuance of shares in connection with the merger, at special shareholders' meetings on Tuesday, February 24, 1998. The merger was completed Thursday, February 26, 1998. Under the terms of the definitive agreement, shareholders of Granite Financial, Inc. common stock receive .702 shares of Fidelity National Financial, Inc. common stock for each share of Granite Financial, Inc. common stock, with fractional shares to be paid in cash, resulting in the issuance of approximately 4.4 million shares of Fidelity National Financial, Inc. common stock. Fidelity National Financial, Inc. common stock, as reported by the New York Stock Exchange, closed at $28.69 on February 26, 1998.
Selected unaudited pro forma combined financial position and results of operations as of and for the years ending December 31, 1997, 1996 and 1995, assuming the Granite Financial, Inc. acquisition occurred on January 1, 1997, 1996 and 1995, are presented as follows:
On March 18, 1998, the Company announced that it had entered into an agreement to sell National Title Insurance of New York Inc. to American Title Company, subject to regulatory approval and certain other conditions. The purchase price is structured at a premium to book value. National was acquired in April 1996, as part of the Nations Title Inc. acquisition and has not been actively underwriting policies since the transaction closed. American Title Company is an underwritten title company which was formerly a wholly-owned subsidiary of the Company. Effective July 1, 1997, 60% of ATC was sold to certain members of ATC management. The Company will continue to own 40% of ATC, and ultimately National, following the transaction.
Also, on March 25, 1998, the Company announced that it had executed an agreement to merge Matrix Capital Corporation ("Matrix") with a newly-formed subsidiary of the Company. The merger is subject to due diligence, regulatory approvals and other customary conditions, and requires approval of the merger by the shareholders of Matrix and approval of the issuance of Company common stock in connection with the merger by the shareholders of the Company.