The majority of the branch offices of the Company are leased from third parties. The remaining branch offices are owned by the Company.
As of December 31, 1999, the Company leased office and storage space as follows:
The historical operating results data, per share data and balance sheet data presented below are derived from the historical financial statements of Fidelity National Financial, Inc. and subsidiaries (collectively, the "Company"). Per share data has been retroactively adjusted for stock dividends and splits since the Company's inception. Consolidated Balance Sheets at December 31, 1999 and 1998 and Consolidated Statements of Earnings, Comprehensive Earnings, Stockholders' Equity and Cash Flows for the years ended December 31, 1999, 1998 and 1997, and Notes thereto, audited by KPMG LLP, independent auditors, are included elsewhere herein and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
(5) During 1997, the Company recognized an extraordinary loss of $1.7 million, net of income taxes of $1.2 million, related to the early retirement of $45 million maturity value of the Company's Liquid Yield Option Notes. See Note G of Notes to Consolidated Financial Statements.
Title insurance revenue is closely related to the level of real estate activity and the average price of real estate sales. Real estate sales are directly affected by the availability of funds to finance purchases, i.e., mortgage interest rates. Other factors affecting real estate activity include demand, family income levels and general economic conditions. Because these factors can be volatile, revenue levels can also be volatile. Beginning in late 1995 and into 1998, decreases in mortgage interest rates and the resulting improvement in the real estate market have had a favorable effect on the level of real estate activity, including refinancing transactions, new home sales and resales. The overall economic environment, stable mortgage interest rates and strength in the real estate market, especially in California and on the West Coast, contributed to very positive conditions for the industry throughout 1997 and 1998. During 1999, steady interest rate increases caused by actions taken by the Federal Reserve Board resulted in a significant decline in refinancing transactions. As the level of refinance transactions returned to historic norms, there was a shift from a refinance driven market to a more traditional market driven by new home purchases and resales. Increases in mortgage interest rates were partially offset by consumer confidence in the overall economy, which resulted in record home sales in 1999. It is impossible to predict in what future direction interest rates and the real estate market may move or fluctuate.
- maintain a balance between direct and agency distribution to enable the Company to compete profitably on a national basis;
See "Recent Developments" and Note Q of Notes to Consolidated Financial Statements.
The following table presents information regarding title related revenue generated by the Company's direct and agency operations:
Revenue. The following table presents the components of the Company's revenue:
The following table presents the percentages of title insurance premiums generated by direct and agency operations:
Trends in escrow fees are primarily related to the title insurance activity generated by the Company's direct operations. Escrow fees during the three-year period ended December 31, 1999, have fluctuated in a pattern generally consistent with the fluctuation in direct title insurance premiums and order counts. Escrow fees were $123.7 million, $130.3 million and $86.0 million, respectively, during 1999, 1998 and 1997. In addition, the Company has focused on expansion of its escrow operations in certain areas, such as Southern California, during the three years ended December 31, 1999.
Expenses. The following table presents the components of the Company's expenses:
Personnel costs include base salaries, commissions and bonuses paid to employees, and are one of the most significant operating expenses incurred by the Company. These costs generally fluctuate with the level of orders opened and closed and with the mix of revenue. Personnel costs totaled $407.1 million, $394.3 million and $273.2 million for the years ended December 31, 1999, 1998 and 1997, respectively. Personnel costs, as a percentage of total revenue, have decreased to 30.1% in 1999 from 30.6% in 1998, which had previously decreased from 31.7% in 1997. The Company has taken significant measures to maintain appropriate personnel levels and costs relative to the volume and mix of business. These fluctuations reflect a continuing emphasis on expense control and an increase in productivity resulting from the Company's automation and electronic commerce. The Company will not, however, compromise its customer service standards or quality controls in responding to market conditions. The Company continues to monitor the prevailing market conditions and will adjust personnel costs in accordance with activity.
increases including rent escalations, travel and other general and administrative costs. Combined, these increases have offset much of the Company's cost control efforts. Total other operating expenses totaled $335.3 million, $257.1 million and $189.2 million in 1999, 1998 and 1997, respectively.
The provision for claim losses includes an estimate of anticipated claims. The estimate of anticipated claims is accrued as a percentage of title premium revenue based on the Company's historical loss experience and other relevant factors. The Company monitors its claims experience on a continual basis and adjusts the provision for claim losses accordingly. Based on Company loss development studies, the Company believes that as a result of its underwriting and claims handling practices, as well as the refinancing business of prior years, the Company will maintain the trend of favorable claim loss experience. Based on this information, in 1999, 1998 and 1997, the Company recorded a provision for claim losses of 6.0%, 7.0%, and 7.0%, respectively, of title insurance premiums, net of recoupments and prior to the impact of premium rates and Company loss experience in the state of Texas. Premiums in Texas are all-inclusive and include a closing fee in addition to a risk-related premium, which differs from similar coverage in other states, while loss experience is comparable. As a result, the provision for claim losses in Texas is much lower than in states that do not have all-inclusive premiums. These factors resulted in a net provision for claim losses of 5.6%, 6.5% and 6.7% in 1999, 1998 and 1997, respectively.
Income tax expense for 1999, 1998 and 1997, as a percentage of earnings before income taxes, including the extraordinary loss in 1997 was 39.9%, 39.7% and 42.7%, respectively. See "Extraordinary Item." The fluctuations in income tax expense as a percentage of earnings before income taxes, including the extraordinary loss, are attributable to the effect of state income taxes on the Company's wholly-owned underwritten title companies, real estate related ancillary service companies, Micro General and FNF Capital; a change in the amount and characteristics of net income, operating income versus investment income; and the tax treatment of certain items. See Note H of Notes to Consolidated Financial Statements.
Extraordinary Item. In an effort to reduce the leverage of the Company while taking advantage of the favorable environment relative to the Company's common stock, on October 17, 1997, the Company in a private transaction, purchased $45 million aggregate principal amount at maturity of its outstanding Liquid Yield Option Notes due 2009 from Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") for an aggregate purchase price of $27.2 million (or $605 per $1,000 principal amount at maturity of LYONs). The purchase price was paid in the form of 1,394,381 shares, $26.4 million, of the Company's common stock (the "Exchange Shares"). The Company also paid Merrill Lynch the excess of a base price of $19.53 per Exchange Share over the actual sales price (less $0.05 per share in commissions) realized by Merrill Lynch for sales of up to 607,881 Exchange Shares. The Company also paid Merrill Lynch for each day, an amount in cash to be determined by multiplying the Net Carry Amount (number of Exchange Shares multiplied by $19.53) by the Applicable Rate (LIBOR plus 2.50%). The Company's payment obligations were subject to reduction for dividends on Exchange Shares received by Merrill Lynch during the period. The Company paid the foregoing amounts to Merrill Lynch in cash of approximately $790,000 on November 7, 1997. The purchase of the LYONs increased stockholders' equity by approximately $24.7 million while reducing outstanding debt by approximately $24.3 million. An extraordinary loss due to the early retirement of debt of approximately $1.7 million, net of applicable income taxes, related to this transaction has been recorded in the Consolidated Statement of Earnings for the year ended December 31, 1997.
The short- and long-term liquidity requirements of the Company, Insurance Subsidiaries, underwritten title companies ("UTCs"), ancillary service companies, Micro General and FNF Capital are monitored regularly to match cash inflows with cash requirements. The Company and its subsidiaries forecast their daily cash needs and periodically review their short- and long-term projected sources and uses of funds, as well as the asset, liability, investment and cash flow assumptions underlying these projections.
Two of the significant sources of the Company's funds are dividends and distributions from its subsidiaries. As a holding company, the Company receives cash from its subsidiaries in the form of dividends and as reimbursement for operating and other administrative expenses it incurs. The reimbursements are executed within the guidelines of various management agreements among the Company and its subsidiaries. The Insurance Subsidiaries are restricted by state regulations in their ability to pay dividends and make distributions. Each state of domicile regulates the extent to which the Company's title underwriters can pay dividends or make other distributions to the Company. The Company's UTCs, ancillary service companies, Micro General and FNF Capital collect revenue and pay operating expenses; however, they are not regulated to the same extent as the Insurance Subsidiaries. Positive cash flow from the UTCs, ancillary service companies, Micro General and FNF Capital is invested primarily in cash and cash equivalents. Fluctuations in operating cash flows are primarily the result of increases or decreases in revenue. See "Overview."
For purposes of satisfying insurance regulatory requirements, the Insurance Subsidiaries are required to maintain certain levels of readily marketable securities and other liquid assets. At December 31, 1999, the fair value of the Insurance Subsidiaries total investment securities was approximately $438.3 million, approximately $302.4 million of which have been designated to support statutory policyholder liabilities. These investments consist of securities which the Insurance Subsidiaries believe are readily marketable and could be liquidated if necessary. See "Business -- Investment Policies and Investment Portfolio."
Effective August 1, 1998, the Company closed a $100 million syndicated bank credit agreement which was subsequently amended to $150 million as of September 30, 1999. Certain of the proceeds of this credit agreement were used to refinance certain existing debt facilities and for general corporate purposes. This credit agreement was repaid and terminated in connection with the Company's merger with Chicago Title Corporation ("Merger"). See "Recent Developments" and Notes G and Q of Notes to Consolidated Financial Statements.
The Company must comply with certain affirmative and negative covenants related to its Credit Agreement and other debt facilities, which require, among other things, that the Company maintain certain financial ratios related to liquidity, net worth, capitalization, investments, acquisitions, restricted payments and certain dividend restrictions. The Company is in compliance with all of its debt covenants.
proceeds to the Company were approximately $101,000,000. The proceeds were used for investment and general corporate purposes. The amount of LYONs outstanding on December 31, 1998 was $124,113,000 of maturity value. On February 15, 1999, the Company redeemed, pursuant to the terms of the LYONs indenture, its outstanding Liquid Yield Option Notes due 2009 for $581.25 per $1,000 maturity value. Additionally, the LYONs holders had the right to convert the outstanding LYONs to 28.077 shares of Company common stock per $1,000 maturity value of LYONs at any time. As of February 15, 1999, $123,681,000 maturity value of LYONs had converted to 3,473,000 shares of common stock, adding approximately $70 million to equity while reducing outstanding notes payable by a like amount. The remaining $432,000 of maturity value was redeemed for cash of approximately $251,000. There are no LYONs outstanding as of December 31, 1999. See Note G of Notes to Consolidated Financial Statements.
Seasonality. Historically, the greatest volume of residential resale activity has occurred in the spring and summer months. However, events during the past five years, including numerous actions taken by the Federal Reserve Board, have caused unusual fluctuations in real estate activity, particularly in the seasonal pattern of resale and refinance activity. The Company cannot predict whether the historical pattern of resale and refinance activity will continue to be affected by such outside factors.
On March 17, 1999, the Company's Board of Directors approved an increase to the number of shares of outstanding Company common stock authorized for purchase under the Company's previously announced purchase program. The additional authorization permitted the Company to purchase up to 4.0 million shares. On September 13, 1999, the Company announced that its Board of Directors had approved a second increase of 2.0 million shares, bringing the total number of shares of outstanding Company common stock authorized for purchase to 6.0 million. As of December 31, 1999, the Company had purchased 5.4 million shares at an average purchase price of $15.19 per share totaling $81.9 million. Purchases may be made from time to time by the Company in the open market or in block purchases or in privately negotiated transactions depending on market conditions and other factors. There have been no significant purchases since December 31, 1999.
Also on March 17, 1999, the Company's Board of Directors approved the adoption of the Fidelity National Financial, Inc. Employee Stock Purchase Loan Plan ("Loan Plan") and the Non-Employee Director Stock Purchase Loan Program ("Loan Program"). The purpose of the Loan Plan and Loan Program is to provide key employees and directors with further incentive to maximize stockholder value. The Company offered an aggregate of $8,650,000 in loans. Loan Plan and Loan Program funds must be used to make private or open market purchases of Company common stock through a broker-dealer designated by the Company. All loans are full recourse and unsecured, and will have a five-year term. Interest will accrue on the loans at a rate of 5% per annum due at maturity. Loans may be prepaid any time without penalty. As of December 31,
The transition and integration process, led by a team comprised of senior managers from both the Company and Chicago Title Corporation, is proceeding very smoothly and a senior management team has recently been named. The combined company will be the largest title insurer and provider of real estate related products and services in the world; distinguished by an unsurpassed distribution system comprised of over 1,000 offices and 7,000 agents, leading market share in excess of 30%, geographic diversity, complementary business mixes and the strongest financial position in the industry.
Recent Accounting Pronouncements. The American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), in March 1998. SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use. SOP 98-1 requires that certain costs related to the development or purchase of internal use computer software be capitalized and amortized over the estimated useful life of the software. Costs related to the preliminary project stage and the post-implementation/operations stage, as defined, in an internal use computer software development project are to be expensed as incurred. Costs incurred prior to initial application of SOP 98-1, whether capitalized or not, are not adjusted to the amounts that would have been capitalized had SOP 98-1 been in effect when those costs were incurred. SOP 98-1 is applicable to all non-governmental entities and effective for fiscal years beginning after
Los Angeles, California February 16, 2000, except as to Note Q to the Consolidated Financial Statements, which is as of March 20, 2000
- --------------- (1) Net of income tax expense (benefit) of ($11,255), ($1,059) and $15,214 for 1999, 1998 and 1997, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The Company's principal title and real estate related services subsidiaries consist of Fidelity National Title Insurance Company ("Fidelity Title"), Fidelity National Title Insurance Company of New York ("Fidelity New York"), Alamo Title Insurance ("Alamo Title") (collectively, the "Insurance Subsidiaries"); its wholly-owned underwritten title companies (collectively, the "UTCs"); and its network of wholly-owned title related ancillary service companies known as Fidelity National Lender Express Network ("FLEXNet").
The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All material intercompany profits, transactions and balances have been eliminated. The Company's investments in non-majority-owned partnerships and affiliates are accounted for on the equity method.
On February 26, 1998, the Company, in exchange for approximately 5.0 million shares of Company common stock plus cash in lieu of fractional shares, acquired the common stock of FNF Capital, Inc. and subsidiaries ("FNF Capital"). Fidelity National Financial, Inc. common stock, as reported by the New York Stock Exchange, closed at $26.08 on February 26, 1998. The transaction has been accounted for as a pooling-of-interests. Accordingly, the Consolidated Balance Sheet as of December 31, 1997 and the related Consolidated Statements of Earnings, Stockholders' Equity and Cash Flows for each of the years in the two-year period ended December 31, 1997 and the related Notes to Consolidated Financial Statements, have been restated to reflect the inclusion of FNF Capital.
Fixed maturity securities are purchased to support the investment strategies of the Company, which are developed based on many factors including rate of return, maturity, credit risk, tax considerations and regulatory requirements. Fixed maturity securities which may be sold prior to maturity to support the Company's investment strategies are carried at fair value and are classified as available for sale as of the balance sheet dates. Fair values for fixed maturity securities are principally a function of current interest rates and are based on quoted market prices.
Investments in real estate and partnerships are generally held for investment purposes and are carried at cost in the absence of any other than temporary impairment in value. Investments in real estate which are held for sale, including real estate acquired through foreclosure of properties in satisfaction of commercial and real estate loans, are carried at the lower of cost or fair value less estimated costs to sell.
Leases and residual interests in securitizations includes direct financing leases, direct financing leases assigned to lender and residual interests in securitizations.
The Company's leases are accounted for as direct financing leases. Under this method, the amount by which gross lease rentals exceed the cost of the related assets, less the estimated recoverable residual value at the expiration of the lease, is recognized as income from direct financing leases over the life of the lease using the interest method. Interest is accrued only if deemed collectible. Direct financing leases which the Company has both the intent and ability to hold to maturity are classified as held to maturity. Direct financing leases originated principally for the purpose of selling in the near term are classified as available for sale and are stated at the lower of amortized cost or market as determined by outstanding commitments from investors or current investor yield requirements calculated on an aggregate basis.
The Company establishes an allowance for credit losses to provide for expected losses in the Company's existing portfolio of leases. The allowance for credit losses is based on the Company's historical and expected loss experience, industry knowledge and other economic factors. The ultimate obligation for defaults and delinquencies related to leases transferred on a recourse basis is measured and recorded at the time of transfer.
Residual interests in securitizations ("Residuals") of lease receivables in a trust are recorded as a result of the sale of lease receivables through securitization. The securitizations are generally structured as follows: first, the Company sells a portfolio of lease receivables to a special purpose entity ("SPE") which has been established for the limited purpose of buying and reselling the Company's lease receivables; next, the SPE transfers the same lease receivables to a trust ("Trust"), and the Trust in turn issues interest bearing asset-backed securities ("Bonds and Certificates"), generally in an amount equal to the aggregate initial principal balance of the lease receivables multiplied by an advance rate. The Company typically sells these lease receivables at face value and with limited recourse relating to defaulted loans, prepayments, and certain representations and warranties provided by the Company to the Trust in the form of Bonds and Certificates.
The Company is entitled to the cash flows from the Residuals that represent collections on the lease receivables in excess of the amounts required to pay the Bond and Certificate principal and interest, the base servicing fees and certain other fees such as trustee and custodial fees. At the end of each collection period, the aggregate cash collections from the lease receivables are allocated first to the servicing fees and certain other fees such as trustee and custodial fees for the period, then to the Bond and Certificate holders for interest at the pass-through rate on the Bonds and Certificates plus principal, as defined in the Trust and Security Agreements. If the amount of cash required for the above allocations exceeds the amount collected during the collection period, the shortfall is drawn from the Cash Collateral Account. If the cash collected during the period exceeds the amount necessary for the above allocations, and there is no shortfall in the related Cash Collateral Account, the excess is released to the Company. If the Cash Collateral Account balance is not at the required credit enhancement level, the excess cash collected is used to build the Cash Collateral Account until the credit enhancement level is achieved. The specified credit enhancement levels are defined in the applicable Trust and Security Agreements, which are expressed generally as a percentage of either the original or current collateral principal balance.
The implicit interest rate on the lease receivables is relatively high in comparison to the pass-through rate on the Bonds and Certificates. In determining the value of the Residuals described above, the Company estimates the future rates of prepayments, delinquencies, defaults and default loss severity as they impact the amount and timing of the estimated cash flows. The Company uses a zero prepayment estimate because the lease contracts generally require the lessee to pay all or a majority of the lease payments due under the remaining lease term. The Company's loss estimate is 2.5% to 4.5% of the lease net investment value, which is based on historical loss data for comparable leases and the specific characteristics of the leases originated by the Company. The Company's default estimates resulted in a weighted average life of the pool of leases of between approximately 1.5 and 2.0 years.
The Bond and Certificate holders and the securitization trusts have no recourse to the Company's other assets for failure of lessees to pay when due, and the assets of the securitization trusts are not available to the general creditors of the Company. The Company's Residuals are subordinate to the Bond and Certificate holders until the Bond and Certificate holders are fully paid.
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.
Property and equipment are recorded at cost, less depreciation. Depreciation is computed primarily using the straight-line method based on the estimated useful lives of the related assets which range from three to thirty years. Leasehold improvements are amortized on a straight-line basis over the lesser of the term of the applicable lease or the estimated useful lives of such assets.
Cost in Excess of Net Assets Acquired and Other Intangible Assets
Intangible assets include cost in excess of net assets acquired, capitalized software costs, capitalized licensing costs and capitalized debt offering costs, and are amortized on a straight-line basis over three to forty years. Intangible assets at December 31, 1999 consist of cost in excess of net assets acquired of $64,781,000 less accumulated amortization of $13,423,000, capitalized licensing costs of $2,500,000 less accumulated amortization of $282,000, capitalized software of $18,257,000 less accumulated amortization of $9,950,000 and capitalized debt offering costs of $1,473,000 less accumulated amortization of $975,000. At December 31, 1998, intangible assets consist of cost in excess of net assets acquired of $60,830,000 less accumulated amortization of $6,916,000, capitalized licensing costs of $2,500,000 less accumulated amortization of $221,000, capitalized software of $13,515,000 less accumulated amortization of $7,085,000 and capitalized debt offering costs of $4,536,000 less accumulated amortization of $2,500,000.
Tax monitoring service fees are recognized over the period the related services are provided. Tax service revenue is recognized ratably over the expected life of the tax monitoring service period ("service period") by recognizing revenue in an amount consistent with the amount of risk undertaken by the Company in providing the service. A portion of the tax monitoring service revenue is initially deferred, 50% in 1999, with the remaining revenue amortized on a straight-line basis over the expected life of the service period. The expected life of the tax monitoring service period is estimated based on historical data, characteristics of the client portfolio and external factors such as the overall economy, interest rate environment, and conditions in the real estate market. The expected life of the service period used in 1999 is one year. Fluctuations or volatility in any of these factors may impact the expected life of the service period and require the Company to adjust the amount and timing of tax monitoring service revenue recognized.
Certain reclassifications have been made in the 1998 and 1997 Consolidated Financial Statements to conform to the classifications used in 1999.
The Company completed the merger of its wholly-owned subsidiary ACS Systems, Inc. ("ACS") with and into Micro General Corporation for 4.6 million shares of Micro General common stock, valued at $1,297,000, on May 14, 1998. Micro General provides small to medium size businesses within the real estate industry with software, systems integration and communication services including telecommunications hardware, long distance reselling, computer hardware and system software reselling, consulting services, technical services, Internet services, electronic commerce and title and escrow software applications. Micro General will continue to provide the above listed services to the Company at preferred customer rates. The Company currently owns 69.3% of Micro General Corporation. This transaction has been accounted for as a reverse merger of Micro General into ACS, with Micro General as the surviving legal entity.
Prior to 1999, Micro General's financial position and results of operations were insignificant.
The carrying amounts and fair values of the Company's fixed maturity securities at December 31, 1999 and 1998 are as follows:
The change in unrealized gains (losses) on fixed maturities for the years ended December 31, 1999, 1998, and 1997 was ($13,891,000), $3,170,000, and $5,263,000, respectively.
The following table presents certain information regarding the Company's fixed maturity securities at December 31, 1999:
Fixed maturity securities valued at approximately $16,320,000 and $18,041,000 were on deposit with various governmental authorities at December 31, 1999 and 1998, respectively, as required by law.
Equity securities at December 31, 1999 and 1998 consist of investments in various industry groups as follows:
Net realized gains (losses) included in interest and investment income amounted to ($76,000), $17,190,000 and $16,839,000 for the years ended December 31, 1999, 1998 and 1997, respectively. There were no individually significant net realized gains or losses in 1999. 1998 net realized gains include a gain of approximately $9,700,000 related to the conversion of the Company's investment in Data Tree Corporation common stock to common stock of First American Financial Corporation. Included in net realized gains for the year ended December 31, 1997, are net realized gains from the sales of investments of approximately $10,400,000, a net realized gain from the sale of the Company's former home office building of approximately $4,300,000, and net realized gains on the sale of 60% of American Title Company, a former wholly-owned underwritten title company subsidiary, and the sale of FNF Ventures, Inc., a small business investment company subsidiary of approximately $1,300,000 and $800,000, respectively. All amounts are before applicable income taxes.
During the years ended December 31, 1999, 1998 and 1997, gross realized gains on sales of equity securities considered available for sale were $6,281,000, $32,603,000 and $12,986,000, respectively; and gross realized losses were $7,207,000, $10,990,000 and $2,515,000, respectively. Gross proceeds from the sale of equity securities amounted to $48,805,000, $108,554,000 and $120,094,000 during the years ended December 31, 1999, 1998 and 1997, respectively.
assigned to lender at December 31, 1999 and 1998 approximated the carrying value because the interest rate on the related Class A Lease-Backed Term Notes approximates current market rates.
The allowance for doubtful receivables is primarily related to certain promissory notes at December 31, 1999 and 1998. Interest income is not recognized on the Company's non-performing notes receivable. There were no non-performing notes receivable at December 31, 1999. FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
On March 17, 1999, the Company's Board of Directors approved the adoption of the Fidelity National Financial, Inc. Employee Stock Purchase Loan Plan ("Loan Plan") and the Non-Employee Director Stock Purchase Loan Program ("Loan Program"). The purpose of the Loan Plan and Loan Program is to provide key employees and directors with further incentive to maximize stockholder value. The Company offered an aggregate of $8,650,000 in loans. Loan Plan and Loan Program funds must be used to make private or open market purchases of Company common stock through a broker-dealer designated by the Company. All loans are full recourse and unsecured, and will have a five-year term. Interest will accrue on the loans at a rate of 5% per annum due at maturity. Loans may be prepaid any time without penalty. As of December 31, 1999, loans had been made in the amount of $7.25 million to purchase 484,000 shares of Company common stock at an average purchase price of $15.41 per share. There have been no significant purchases since December 31, 1999.
The carrying value and estimated fair values of the Company's notes payable, excluding Lease-Backed notes payable, were as follows at December 31, 1999 and 1998:
Also included in notes payable in the Consolidated Balance Sheets as of December 31, 1999 and 1998 is the Class A Lease-Backed Term Note due 2001. See Note D. The amount due related to the GFI Class A Lease-Backed Term Note was $2,112,000 and $5,930,000 at December 31, 1999 and 1998, respectively. The GFI Class A Lease-Backed Note bears interest at 6.33% and is due November 2001. The carrying value of the GFI Class A Lease-Backed term note approximates fair value at December 31, 1999 and 1998 due to the fact that the interest rate paid on the GFI Class A Lease-Backed Note approximates market rates.
Notes payable in the Consolidated Balance Sheet as of December 31, 1999 and 1998 also includes the GFVI Class A Certificates in the amount of $3,013,000 and $7,878,000, respectively, and the Class B Certificates in the amount of $2,817,000 and $8,128,000, respectively. See Note D. The Class A and Class B Certificates bear interest at 6.20%, and are due in September 2005 and December 2005, respectively. The
In February 1994, the Company issued zero coupon, convertible subordinated Liquid Yield Option Notes due February 2009 at an interest rate of 5.5% with a principal amount at maturity of $235,750,000. Net proceeds to the Company were approximately $101,000,000. The proceeds were used for investment and general corporate purposes. The amount of LYONs outstanding on December 31, 1998 was $124,113,000 of maturity value. On February 15, 1999, the Company redeemed, pursuant to the terms of the LYONs indenture, its outstanding Liquid Yield Option Notes due 2009 for $581.25 per $1,000 maturity value. Additionally, the LYONs holders had the right to convert the outstanding LYONs to 28.077 shares of Company common stock per $1,000 maturity value of LYONs at any time. As of February 15, 1999, $123,681,000 maturity value of LYONs had converted to 3,473,000 shares of common stock, adding approximately $70 million to equity while reducing outstanding notes payable by a like amount. The remaining $432,000 of maturity value was redeemed for cash of approximately $251,000. There are no LYONs outstanding as of December 31, 1999.
On October 17, 1997, the Company in a private transaction, purchased $45 million aggregate principal amount at maturity of its outstanding Liquid Yield Option Notes due 2009 from Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") for an aggregate purchase price of $27.2 million (or $605 per $1,000 principal amount at maturity of LYONs). The purchase price was paid in the form of 1,394,381 shares, $26.4 million, of the Company's common stock (the "Exchange Shares"). The Company also paid Merrill Lynch the excess of a base price of $19.53 per Exchange Share over the actual sales price (less $0.05 per share in commissions) realized by Merrill Lynch for sales of up to 607,881 Exchange Shares. The Company also paid Merrill Lynch for each day, an amount in cash to be determined by multiplying the Net Carry Amount (number of Exchange Shares multiplied by $19.53) by the Applicable Rate (LIBOR plus 2.50%). The Company's payment obligations were subject to reduction for dividends on Exchange Shares received by Merrill Lynch during the period. The Company paid the foregoing amounts to Merrill Lynch in cash of approximately $790,000 on November 7, 1997. The purchase of the LYONs increased stockholders' equity by approximately $24.7 million while reducing outstanding debt by approximately $24.3 million. An extraordinary loss due to the early retirement of debt of approximately $1.7 million, net of applicable income taxes, related to this transaction has been recorded in the Consolidated Statement of Earnings for the year ended December 31, 1997.
In connection with the Company's merger with Chicago Title Corporation ("Merger"), the Company has entered into an $800 million Syndicated Credit Agreement ("Credit Agreement"). See Note Q. The Credit Agreement provides for three distinct credit facilities: a $100 million, 18-month revolving credit facility, a $250 million 6-year revolving credit facility and a $450 million term loan facility with a 6-year amortization period. The Credit Agreement is unsecured at a variable interest rate based on the debt ratings assigned to the Company by independent agencies. The initial interest rate is LIBOR plus 1.50%. The Company believes that the terms of the Credit Agreement are favorable.
The Company has been named as a defendant in four class action lawsuits alleging irregularities and violations of title and escrow practices. One of these suits was filed by the Attorney General of the State of California on behalf of the California Controller and the California Department of Insurance against the entire title and escrow industry in California. The other three were filed by private law firms in Federal Court in San Francisco and the State Court in Los Angeles. As a result of extensive meetings and discussions between the Company and the Attorney General of the State of California, the Attorney General has issued a letter stating that it does not expect to serve Fidelity National Financial, Inc. with a formal complaint. The Attorney General and the Company have previously expressed with confidence that the issues regarding the Company are likely to be resolved without litigation. The California Department of Insurance ("Department") and the Company reached a settlement of their lawsuit in February 2000. The settlement does not call for any fine or penalty to be paid by the Company. The Company anticipates that the resolution of the action filed by the Department will serve as a basis for the resolution of the other lawsuits filed. The Company does not believe that such resolution will have a material impact on its financial position or on its results of operations.
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
Pursuant to statutory accounting requirements of the various states in which the Insurance Subsidiaries are licensed, they must defer a portion of premiums earned as an unearned premium reserve for the protection of policyholders and must maintain qualified assets in an amount equal to the statutory requirements. The level of unearned premium reserve required to be maintained at any time is determined on a quarterly basis by statutory formula based upon either the age, number of policies and dollar amount of policy liabilities underwritten or the age and dollar amount of statutory premiums written. As of December 31, 1999, the combined statutory unearned premium reserve required and reported for the Insurance Subsidiaries was $219.8 million.
Company of $15.0 million and Alamo Title could pay dividends or make other distributions to the Company of $10.9 million.
The combined statutory capital and surplus of the Insurance Subsidiaries was $163.5 million, $164.3 million and $122.1 million as of December 31, 1999, 1998 and 1997, respectively. The combined statutory earnings of the Insurance Subsidiaries were $43.6 million, $37.8 million and $26.7 million for the years ended December 31, 1999, 1998 and 1997, respectively.
Pursuant to statutory requirements of the various states in which the Insurance Subsidiaries are domiciled, they must maintain certain levels of minimum capital and surplus. Each of the Company's title underwriters have complied with the minimum statutory requirements as of December 31, 1999.
The UTCs are also subject to certain regulation by insurance regulatory or banking authorities, primarily relating to minimum net worth. Minimum net worth of $7.5 million and $2.5 million is required for Fidelity National Title Company ("FNTC") and Fidelity National Title Company of California ("FNCAL"), respectively. FNTC and FNCAL are in compliance with their respective minimum net worth requirements at December 31, 1999.
In 1987, stockholders approved the adoption of an Employee Stock Purchase Plan ("ESPP"). Under the terms of the ESPP and subsequent amendments, there are 8,785,000 shares of the Company's common stock available for purchase at current market prices by Company employees who meet certain vesting requirements. Pursuant to the ESPP, Company employees may contribute an amount between 5% and 15% of their base salary and certain commissions. The Company contributes varying amounts as specified in the ESPP. During the years ended December 31, 1999, 1998 and 1997, 631,596, 282,216 and 353,594 shares, respectively, were purchased and allocated to employees, based upon their contributions, at an average price of $16.78, $29.42 and $13.73 per share, respectively. The Company contributed $3.3 million or the equivalent of 193,923 shares for the year ended December 31, 1999, $2.0 million or the equivalent of 67,407 shares for the year ended December 31, 1998 and $1.7 million or the equivalent of 122,740 shares for the year ended December 31, 1997 in accordance with the employer's matching contribution. A total of 8,351,992 shares have been purchased by both the ESPP and employees since the adoption of the ESPP.
In 1992, stockholders approved the adoption of the 1991 Stock Option Plan ("1991 Option Plan"). Under the terms of the 1991 Option Plan, options may be granted to officers and key employees of the Company or any or all of its present or future subsidiaries. The number of shares reserved for issuance under the 1991 Option Plan and subsequent amendments is 1,953,000 shares of common stock, which may be newly issued or treasury shares. The per share option price is determined at the date of grant. The option price may be less than the fair market value of the common stock at the date of grant to reflect the application of the optionee's deferred bonus, if applicable. Options granted under the 1991 Option Plan shall be exercisable in such installments and for such periods as may be fixed at the time of grant, but in no event shall any stock options extend for a period in excess of 12 years from the date of grant. This plan allows for exercise prices with a fixed discount from the quoted market price.
In 1997, 211,926 options were granted at an exercise price of $6.30 to key employees of the Company who applied deferred bonuses expensed in 1996 amounting to $876,000 to the exercise price. The exercise price of these options decreases approximately $.30 per year through 2002 and $.18 per share from 2003 through 2008, at which time the exercise price will be $3.74. In 1998, 388,123 options were granted at an exercise price of $19.72 to key employees of the Company who applied deferred bonuses expensed in 1997 amounting to $1,764,000 to the exercise price. The exercise price of these options decreases approximately $.32 per year through 2003 and $.20 per share from 2004 through 2009, at which time the exercise price will be $16.90. 985,354 options were granted in 1999 at an exercise price of $9.63 to key employees of the Company who applied deferred bonuses expensed in 1998 amounting to $4,927,000 to the exercise price. The exercise price of these options decreases approximately $.35 per year through 2004 and $.22 per share from 2005 through 2010, at which time the exercise price will be $6.53. Additionally, the Company recorded compensation expense relating to the price decrease of $460,000, $282,000 and $194,000, for the years ended December 31, 1999, 1998 and 1997, respectively.
employees, agents and consultants of Granite. The Granite Plan is administered by the Board of Directors. The Granite Plan provides that qualified stock options be granted at an exercise price equal to fair market value of the common shares of Granite on the date of the grant, and must be at least 110% of fair market value when granted to a 10% or more stockholder. The term of all qualified stock options granted under the Granite Plan may not exceed ten years, except the term of qualified stock options granted to a 10% or more stockholder, which may not exceed five years. The Granite Plan provides that non-qualified stock options be granted at an exercise price not less than 85% of the fair market value of the common shares of Granite on the date of grant. The term of all non-qualified stock options granted under the Granite Plan may not exceed ten years, except the term of non-qualified stock options granted to a 10% or more stockholder, which may not exceed five years. In April 1997, the Granite Plan was amended and restated in order to make certain technical modifications thereto and was further amended in June 1997 to increase the shares of common stock reserved for issuance to 695,000.
During 1998, stockholders approved the adoption of the 1998 Stock Incentive Plan ("1998 Plan"). The 1998 Plan authorizes up to 1,100,000 shares of common stock, plus an additional 220,000 shares of common stock on the date of each annual meeting of the stockholders of the Company, for issuance under the terms of the 1998 Plan. The authorized number of shares is subject to adjustment in the event of stock splits, stock dividends or certain other similar changes in the capital structure of the Company. The 1998 Plan provides for grants of "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), non-qualified stock options and rights to purchase shares of common stock ("Purchase Rights"). Incentive stock options, non-qualified stock options and Purchase Rights may be granted to employees of the Company and its subsidiaries and affiliates. Non-qualified stock options and Purchase Rights may be granted to employees of the Company and its subsidiaries and affiliates, non-employee directors and officers, consultants and other service providers.
The weighted average remaining contractual life of the options outstanding at December 31, 1999 is 7.61 years.
The following table presents options outstanding and exercisable by price range as of December 31, 1999:
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that do not have vesting restrictions and are fully transferable. In addition, option valuation models
Pro forma information regarding net earnings and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions. The risk free interest rates used in the calculation is the rate on the date the options were granted. The risk free interest rate used for options granted during 1999, 1998 and 1997 were 6.5%, 5.7% and 6.0%, respectively. A volatility factor for the expected market price of the common stock of 50% was used for options granted in 1999, 1998 and 1997. The expected dividend yield used for 1999, 1998 and 1997 was 2.0%, 1.0% and 1.0%, respectively. A weighted average expected life of seven years was used in all years as the Company has little history of options being exercised.
N. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATION OF RISK
FNF Capital's leases are originated through a network of approximately 50 independent lease originators located throughout the United States. No single lease originator accounted for more than 10% of the leases funded by the Company during the years ended December 31, 1999 and 1998. Transactions generated by the Company's ten largest independent lease originators accounted for approximately 24.0% and 26.0% of leases funded during the years ended December 31, 1999 and 1998, respectively.
As of and for the year ended December 31, 1999 (dollars in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 1999 AND 1998 AND FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
As of and for the year ended December 31, 1998 (dollars in thousands):
As of and for the year ended December 31, 1997 (dollars in thousands):
This segment, consisting of title insurance underwriters and wholly-owned title insurance agencies, provides core title insurance and escrow services, including document preparation, collection and trust activities and certain real estate information services. This segment coordinates its activities with those of the real estate information services segment described below in order to offer the full range of real estate products and services required to execute and close a real estate transaction.
monitoring services, credit reporting, real estate referral services, flood monitoring, and foreclosure publishing and posting. These services require specialized expertise and have been centralized for efficiency and management purposes.
The leasing segment originates, funds, purchases, sells, securitizes and services equipment leases for a broad range of businesses.
The accounting policies of the segments are the same as those described in Note A, Summary of Significant Accounting Policies. Intersegment sales or transfers which occurred in the ordinary course of consolidated operations, other than transactions between the Company (primarily the Title Insurance segment) and Micro General, have been eliminated from the segment information provided.
The American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), in March 1998. SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use. SOP 98-1 requires that certain costs related to the development or purchase of internal use computer software be capitalized and amortized over the estimated useful life of the software. Costs related to the preliminary project stage and the post-implementation/operations stage, as defined, in an internal use computer software development project are to be expensed as incurred. Costs incurred prior to initial application of SOP 98-1, whether capitalized or not, are not adjusted to the amounts that would have been capitalized had SOP 98-1 been in effect when those costs were incurred. SOP 98-1 is applicable to all non-governmental entities and effective for fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 has not had a material impact on the Company's financial position, results of operations or financial reporting.
SFAS 133 was originally effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Initial application of this Statement should be as of the beginning of an entity's fiscal quarter; on that date, hedging relationships must be designated anew and documented pursuant to the provisions of SFAS 133. Earlier application of all of the provisions of SFAS 133 is encouraged, but it is permitted only as of the beginning of any fiscal quarter that begins after issuance of this statement. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB No. 133" ("SFAS 137"). SFAS 137 defers the effective date of SFAS 133 until June 2000. The adoption of SFAS 133 is not expected to have a material impact on the Company's financial position, results of operations or financial reporting.
On August 1, 1999, the Company announced that it had signed an Agreement and Plan of Merger ("Merger Agreement") to purchase Chicago Title Corporation ("Chicago Title"), headquartered in Chicago, Illinois, for approximately $1.13 billion, or $52.00 per share of Chicago Title common stock, using approximately equal amounts of cash and Company common stock, subject to certain adjustments based on the average price of Company common stock, as defined in the Merger Agreement. Under the terms of the Merger Agreement, the allocation between cash and stock would be adjusted so Chicago Title stockholders would receive more than 50% of the outstanding stock of the combined company. Additionally, the price would be payable in shares of Company common stock or, upon election by Chicago Title stockholders, in cash, subject to proration as may be necessary to achieve the allocation between cash and stock described above. The Merger Agreement, which was amended on October 13, 1999 has been approved by the Boards of Directors of both companies, and was approved by the stockholders of both the Company and Chicago Title in February 2000. Following the receipt of requisite regulatory approvals and the satisfaction of other customary conditions, including amendments to the Company's Bylaws, Charter and Certificate of Incorporation, the transaction closed on March 20, 2000 ("Merger").
Pursuant to the terms of the Merger Agreement, Chicago Title stockholders received an aggregate purchase price of approximately $1.1 billion. The purchase price was paid in the form of 1.7673 shares of Company common stock and $26.00 in cash for each share of Chicago Title Corporation common stock, resulting in the issuance of approximately 38.8 million shares of Company common stock at an average price during the applicable trading period of $13.1771 per share and the payment of approximately $570.2 million in cash. The Merger will be accounted for as a purchase.