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Fidelity National Financial Inc/DE – ‘10-Q’ for 6/30/03

On:  Thursday, 7/31/03, at 6:18pm ET   ·   As of:  8/1/03   ·   For:  6/30/03   ·   Accession #:  892569-3-1815   ·   File #:  1-09396

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

For the Quarter Ended June 30, 2003

Commission File Number 1-9396

FIDELITY NATIONAL FINANCIAL, INC.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

As of July 25, 2003, 134,668,434 shares of the Registrant’s Common Stock were outstanding

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FORM 10-Q
QUARTERLY REPORT
Quarter Ended June 30, 2003

INDEX

Table of Contents

Part I:   FINANCIAL INFORMATION

FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

See Notes to Condensed Consolidated Financial Statements

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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)

See Notes to Condensed Consolidated Financial Statements

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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands)

See Notes to Condensed Consolidated Financial Statements

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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)

See Notes to Condensed Consolidated Financial Statements

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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

See Notes to Condensed Consolidated Financial Statements

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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

See Notes to Condensed Consolidated Financial Statements

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Fidelity National Financial, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements

Note A — Basis of Financial Statements

The financial information in this report includes the accounts of Fidelity National Financial, Inc. and its subsidiaries (collectively, the “Company”) and was prepared in accordance with accounting principles generally accepted in the United States of America and the instructions to Form 10-Q and Article 10 of Regulation S-X. All adjustments considered necessary for a fair presentation are included. This report should be read in connection with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

Certain reclassifications were made in the 2002 Condensed Consolidated Financial Statements to conform to classifications used in 2003.

Note B – Recent Developments

On July 11, 2003, the Company signed a merger agreement with Fidelity National Information Services, Inc. (“FNIS”), the Company’s majority-owned real estate related services public subsidiary, whereby the Company will acquire all of the outstanding common shares of FNIS that it does not currently own. As of June 30, 2003, the Company owned approximately 66% of the outstanding common stock of FNIS.

Under the terms of the merger agreement, each share of FNIS common stock (other than FNIS common stock the Company already owns) will be exchanged for 0.830 shares of the Company’s common stock, subject to adjustment as provided in the merger agreement. The consummation of this transaction is subject to the approval of FNIS stockholders. FNF stockholder approval is required to amend the Company’s Restated Certificate of Incorporation to increase its authorized shares of common stock from 150,000,000 to 250,000,000 to allow for the issuance of new shares of the Company’s common stock to holders of FNIS common stock in the merger. The Company anticipates the merger will close late in the third quarter or early in the fourth quarter of 2003.

The acquisition of FNIS will be accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standards Board Statement No. 141. “Business Combinations” (“SFAS No. 141”). Under the purchase method of accounting, the Company will fair value the minority interest (approximately 34%) of the identifiable assets and liabilities, including identifiable intangible assets, acquired. Goodwill is created to the extent that the merger consideration exceeds the fair value of the net identifiable assets acquired. In accordance with EITF 00-23, Issue 12, the exchange for vested FNIS options and warrants for FNF replacement vested options and warrants results in a charge on the statement of earnings for the combined entity on the date the merger is consummated, equal to the intrinsic value of the FNF replacement options and warrants on the consummation date. Assuming certain affiliates of the Company and other FNIS employees exercise approximately 1.5 million FNIS options held by them and sell the FNIS shares issued upon such exercise to third parties unaffiliated with FNIS prior to the closing of the merger, this non-cash, after tax charge is estimated to be approximately $18.8 million, but could be as high as $31.1 million if no options are exercised.

Note C – Acquisitions

The results of operations and financial position of the entities acquired during 2003 are included in the Condensed Consolidated Financial Statements from and after the date of acquisition.

Significant Transaction:

ALLTEL Information Services, Inc.

On January 28, 2003, the Company entered into a stock purchase agreement with ALLTEL Corporation, Inc., a Delaware corporation (“ALLTEL”), to acquire from ALLTEL its financial services division, ALLTEL Information Services, Inc. (“AIS”). On April 1, 2003, the Company closed the acquisition and subsequently renamed the division Fidelity Information Services (“FIS”). FIS is one of the largest providers of information-based technology solutions and processing services to the mortgage and financial services industries.

The Company acquired FIS for approximately $1,069.6 million (including the payment for certain working capital adjustments and estimated transaction costs), consisting of $794.6 million in cash and $275.0 million of the Company’s common stock. The

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Company funded the cash portion of the purchase price through the issuance of $250.0 million aggregate principal amount of 5.25% notes due March 15, 2013 (See Note D), and $544.6 million in available cash. The stock portion of the purchase price resulted in the issuance of 10,187,902 shares of the Company’s common stock to ALLTEL. Those shares are restricted from sale to the public until April 1, 2004.

In connection with the closing of the acquisition, the Company entered into a stockholder’s agreement, a non-competition agreement and certain transition agreements with ALLTEL. The stockholder’s agreement: (1) restricts the sale by ALLTEL of the Company’s common stock received in the transaction until April 1, 2004, (2) grants ALLTEL the right to designate one nominee to the Company’s Board of Directors, so long as it continues to hold at least 50% of the shares of the Company’s common stock received in the transaction, and (3) grants ALLTEL certain registration rights with respect to the Company’s common stock it receives in the transaction. The non-competition agreement prohibits, with certain exceptions, ALLTEL and its affiliates from engaging in the business relating to the assets acquired by the Company for a period of two years after the transaction. The transaction was accounted for under the purchase method of accounting, and as a result, the Company has allocated $434.3 million to goodwill, $348.0 million to other intangible assets, namely acquired customer relationship intangibles, and $95.0 million to capitalized software based on studies and valuations that are currently being finalized. Such purchase accounting adjustments may be refined as additional information becomes available. The Company is amortizing the other intangible assets using an accelerated method which takes into consideration expected customer attrition rates over a 10-year period. The acquired software is amortized over a seven-year period using an accelerated method that contemplates the period of expected economic benefit and future enhancements to the underlying software.

The assets acquired and liabilities assumed in the FIS acquisition were as follows (dollars in thousands):

Selected unaudited pro forma combined results of operations for the six-month periods ended June 30, 2003 and 2002, assuming the acquisition had occurred as of January 1, 2002, and using actual general and administrative expenses prior to the acquisition, are set forth below:

All Other Insignificant Transactions:

The following acquisitions individually, and in the aggregate, are not significant to require pro forma presentation:

Omaha Property and Casualty Insurance Company

On May 2, 2003, the Company acquired the flood insurance business of Mutual of Omaha’s subsidiary, Omaha Property and Casualty Insurance Company (“OPAC”), for approximately $18.0 million in cash. This acquisition, along with the Bankers Insurance Group acquisition (described below) expands the Company’s presence in the flood insurance business. The transaction was accounted for under the purchase method of accounting.

Key Title Company

On March 31, 2003, the Company acquired Key Title Company (“Key Title”) for approximately $22.5 million in cash. Key Title operates in 12 counties in the state of Oregon. The acquisition was accounted for as a purchase.

ANFI, Inc.

On March 26, 2003, the Company merged with ANFI, Inc. (“ANFI”), and ANFI became a wholly-owned subsidiary of the Company. In the merger, each share of ANFI common stock (other than ANFI common stock the Company already owned) was exchanged for 0.454 shares of the Company’s common stock. The Company issued 4,711,912 shares of its common stock to the ANFI stockholders in the merger. The acquisition was accounted for as a purchase.

Lenders Service, Inc.

On February 10, 2003, the Company acquired Lenders Service, Inc., a Delaware corporation (“LSI”), for approximately $75.0 million in cash. LSI is a leading provider of appraisal, title and closing services to residential mortgage originators. The acquisition was accounted for as a purchase.

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Bankers Insurance Group

On January 9, 2003, the Company acquired certain assets of Bankers Insurance Group (“Bankers”) for approximately $41.6 million in cash. The assets include the right to issue new and renewal flood insurance policies underwritten by Bankers and its subsidiaries, Bankers Insurance Company, Bankers Security Insurance Company and First Community Insurance Company (“FCIC”). As part of the transaction, the Company also acquired FCIC, a fifty-state licensed insurance carrier, to act as the underwriter for the policies. The acquisition was accounted for as a purchase.

Acquisition of Micro General Corporation by FNIS

On July 9, 2002, FNIS acquired Micro General Corporation (“Micro General”), the Company’s majority-owned public subsidiary, through a tender offer and subsequent short-form merger. Under the terms of the tender offer and merger, each share of Micro General common stock was exchanged for 0.696 shares of FNIS common stock. FNIS issued approximately 12.9 million shares of common stock to Micro General stockholders. As of June 30, 2003, the Company owned approximately 66% of the outstanding common stock of FNIS. In the Company’s Condensed Consolidated Financial Statements, this transaction is accounted for in accordance with SFAS No. 141 and FASB Technical Bulletin 85-5. Accordingly, FNIS’s acquisition of the minority stockholders’ interest in Micro General (the “noncontrolled equity interest”) was recognized by the Company as the acquisition of shares from a minority interest, which is accounted for by the purchase method under SFAS No. 141. FNIS’s acquisition of the Company’s interest in Micro General (the “controlled equity interest”) is not considered a business combination and, therefore, the Company recognized the related assets and liabilities transferred from the controlled equity interest in Micro General to FNIS at their historical carrying values. The market price per share of FNIS common stock that was issued to Micro General minority stockholders in this transaction exceeded the Company’s carrying amount per share of FNIS common stock, resulting in an increase of $98.7 million to the Company’s consolidated equity and an increase in net assets, the majority of which was goodwill.

Homebuilders Financial Network, Inc.

On May 23, 2002, the Company acquired a 75% interest in Homebuilders Financial Network, Inc., a provider of outsource mortgage loan fulfillment services to homebuilders, for approximately $21.0 million in cash. The acquisition was accounted for as a purchase.

Note D – Issuance of Notes

On March 11, 2003, the Company completed a public offering of $250.0 million aggregate principal amount of 5.25% notes due March 15, 2013. The notes were priced at 99.247% of par to yield 5.433% annual interest, and are unsecured. The Company received net proceeds of approximately $246.2 million, after expenses, which was used to pay a portion of the $1,069.6 million purchase price of FIS on April 1, 2003. See Note C.

Note E – Earnings Per Share

The Company presents “basic” earnings per share, representing net earnings divided by the weighted average shares outstanding (excluding all common stock equivalents), and “diluted” earnings per share, representing the dilutive effect of all common stock equivalents. The following table illustrates the computation of basic and diluted earnings per share: