<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-3658
------
THE FIRST AMERICAN FINANCIAL CORPORATION
-------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Incorporated in California 95-1068610
--------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
114 East Fifth Street, Santa Ana, California 92701-4699
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(Address of principal executive offices) (Zip Code)
(714)558-3211
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports to be filed by Section 12,13 or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a
court.
Yes [_] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
$1 par value - 11,571,748 as of November 10, 1997
<PAGE>
INFORMATION INCLUDED IN REPORT
------------------------------
Part I: Financial Information
Item 1. Financial Statements
A. Condensed Consolidated Statements of Income
B. Condensed Consolidated Balance Sheets
C. Condensed Consolidated Statements of Cash Flows
D. Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Part II: Other Information
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
Items 1, 3-5 have been omitted because they are not applicable with
respect to the current reporting period.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE FIRST AMERICAN FINANCIAL CORPORATION
-------------------------------------------------
(Registrant)
/s/ Thomas A. Klemens
-------------------------------------------------
Thomas A. Klemens
Executive Vice President, Chief Financial Officer
(Principal Financial Officer and Duly
Authorized to Sign on Behalf of Registrant)
Date: November 13, 1997
1
<PAGE>
Part I: Financial Information
---------------------
Item 1. Financial Statements
--------------------
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Condensed Consolidated Statements of Income
-------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30 September 30
----------------------------- -------------------------------
1997 1996 1997 1996
------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Revenues
Operating revenues $495,181,000 $405,522,000 $1,315,053,000 $1,151,279,000
Investment and other income 6,667,000 5,782,000 20,046,000 20,775,000
------------ ------------ -------------- --------------
501,848,000 411,304,000 1,335,099,000 1,172,054,000
------------ ------------ -------------- --------------
Expenses
Salaries and other personnel costs 168,434,000 132,887,000 467,033,000 385,869,000
Premiums retained by agents 144,959,000 134,766,000 396,114,000 372,856,000
Other operating expenses 115,229,000 82,786,000 295,897,000 240,261,000
Provision for title losses and other claims 24,540,000 25,025,000 65,589,000 67,488,000
Depreciation and amortization 6,976,000 5,879,000 20,098,000 15,886,000
Interest 3,312,000 1,273,000 6,972,000 3,783,000
Minority interests 993,000 667,000 2,287,000 2,151,000
------------ ------------ -------------- --------------
464,443,000 383,283,000 1,253,990,000 1,088,294,000
------------ ------------ -------------- --------------
Income before premium and income taxes 37,405,000 28,021,000 81,109,000 83,760,000
Premium taxes 3,833,000 4,452,000 12,555,000 12,382,000
------------ ------------ -------------- --------------
Income before income taxes 33,572,000 23,569,000 68,554,000 71,378,000
Income taxes 13,000,000 9,800,000 26,600,000 29,600,000
------------ ------------ -------------- --------------
Net income $ 20,572,000 $ 13,769,000 $ 41,954,000 $ 41,778,000
============ ============ ============== ==============
Net income per share $ 1.77 $ 1.20 $ 3.62 $ 3.65
============ ============ ============== ==============
Cash dividends per share $ .20 $ .18 $ .56 $ .51
============ ============ ============== ==============
Weighted average number of shares 11,564,000 11,443,000 11,575,000 11,440,000
============ ============ ============== ==============
</TABLE>
2
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Condensed Consolidated Balance Sheets
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 170,561,000 $173,439,000
-------------- ------------
Accounts and accrued income receivable, net 122,395,000 89,355,000
-------------- ------------
Investments:
Deposits with savings and loan associations and banks 32,466,000 21,674,000
Debt securities 135,895,000 130,576,000
Equity securities 10,900,000 8,517,000
Other long-term investments 35,078,000 30,414,000
-------------- ------------
214,339,000 191,181,000
-------------- ------------
Loans receivable 61,926,000 54,256,000
-------------- ------------
Property and equipment, at cost 261,319,000 222,917,000
Less- accumulated depreciation (101,770,000) (92,451,000)
-------------- ------------
159,549,000 130,466,000
-------------- ------------
Title plants and other indexes 98,736,000 94,226,000
-------------- ------------
Assets acquired in connection with claim settlements
(net of valuation reserves of $10,443,000 and
$10,278,000) 22,252,000 24,270,000
-------------- ------------
Deferred income taxes 35,300,000 38,401,000
-------------- ------------
Goodwill and other intangibles, net 132,261,000 87,189,000
-------------- ------------
Deferred policy acquisition costs 24,755,000 24,753,000
-------------- ------------
Other assets 97,870,000 72,258,000
-------------- ------------
$1,139,944,000 $979,794,000
============== ============
Liabilities and Stockholders' Equity
Demand deposits $ 59,931,000 $ 51,321,000
-------------- ------------
Accounts payable and accrued liabilities 158,060,000 130,325,000
-------------- ------------
Deferred revenue 103,402,000 104,133,000
-------------- ------------
Reserve for known and incurred but not reported claims 252,552,000 245,245,000
-------------- ------------
Income taxes payable 7,890,000 2,554,000
-------------- ------------
Notes and contracts payable 43,870,000 71,257,000
-------------- ------------
Minority interests in consolidated subsidiaries 24,192,000 22,494,000
-------------- ------------
Commitments and contingencies
Guaranteed preferred beneficial interests in Company's
junior subordinated deferrable interest debentures 100,000,000
--------------
Stockholders' equity:
Preferred stock, $1 par value
Authorized - 500,000 shares; outstanding - none
Common stock, $1 par value
Authorized - 24,000,000 shares
Outstanding - 11,571,000 and 11,554,000 shares 11,571,000 11,554,000
Additional paid-in capital 49,274,000 49,420,000
Retained earnings 324,226,000 288,754,000
Net unrealized gain on securities 4,976,000 2,737,000
-------------- ------------
390,047,000 352,465,000
-------------- ------------
$1,139,944,000 $979,794,000
============== ============
</TABLE>
3
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Condensed Consolidated Statements of Cash Flows
-----------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30
--------------------------------------
1997 1996
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 41,954,000 $41,778,000
Adjustments to reconcile net income to cash provided by operating
activities-
Provision for title losses and other claims 65,589,000 67,488,000
Depreciation and amortization 20,098,000 15,886,000
Minority interests in net income 2,287,000 2,151,000
Other, net (494,000) (542,000)
Changes in assets and liabilities excluding effects of company
acquisitions and noncash transactions-
Claims paid, including assets acquired, net of recoveries (56,276,000) (57,874,000)
Net change in income tax accounts 12,373,000 11,606,000
Increase in accounts and accrued income receivable (20,565,000) (22,259,000)
(Decrease) increase in accounts payable and accrued liabilities (7,766,000) 21,248,000
(Decrease) increase in deferred revenue (731,000) 640,000
Other, net (23,548,000) (11,897,000)
------------ ------------
Cash provided by operating activities 32,921,000 68,225,000
------------ ------------
Cash flows from investing activities:
Net cash effect of company acquisitions (29,672,000) (6,057,000)
Net increase in deposits with banks (10,792,000) (4,826,000)
Net increase in loans receivable (7,864,000) (6,350,000)
Purchases of debt and equity securities (53,345,000) (54,660,000)
Proceeds from sales of debt and equity securities 35,014,000 37,236,000
Proceeds from maturities of debt securities 14,070,000 21,522,000
Net increase in other investments (1,706,000) (1,532,000)
Capital expenditures (43,020,000) (20,022,000)
Proceeds from sale of property and equipment 992,000 1,092,000
------------ ------------
Cash used for investing activities (96,323,000) (33,597,000)
------------ ------------
Cash flows from financing activities:
Net change in demand deposits 8,610,000 4,893,000
Proceeds from the issuance of junior subordinated
deferrable interest debentures 100,000,000
Repayment of debt (39,098,000) (15,174,000)
Purchase of Company shares (3,903,000) (2,045,000)
Cash dividends (6,482,000) (5,849,000)
Proceeds from exercise of employee stock options 1,397,000
------------ ------------
Cash provided by (used for) financing activities 60,524,000 (18,175,000)
------------ ------------
Net (decrease) increase in cash and cash equivalents (2,878,000) 16,453,000
Cash and cash equivalents- Beginning of year 173,439,000 145,902,000
------------ ------------
- End of third quarter $170,561,000 $162,355,000
============ ============
Supplemental information:
Cash paid during the first three quarters for:
Interest $ 3,364,000 $ 4,017,000
Premium taxes $ 14,915,000 $ 10,449,000
Income taxes $ 15,469,000 $ 18,635,000
Noncash investing and financing activities:
Shares issued for stock bonus plan $ 2,185,000 $ 1,287,000
Liabilities incurred in connection with company acquisitions $ 46,330,000 $ 20,939,000
Net unrealized gain (loss) on securities $ 2,239,000 $ (2,279,000)
Company acquisitions in exchange for common stock $ 192,000 $ 2,100,000
</TABLE>
4
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
(Unaudited)
Note 1 - Basis of Condensed Consolidated Financial Statements
- -------------------------------------------------------------
The condensed consolidated financial information included in this report has
been prepared in conformity with the accounting principles and practices
reflected in the consolidated financial statements included in the annual report
filed with the Commission for the preceding calendar year. All adjustments are
of a normal recurring nature and are, in the opinion of management, necessary to
a fair statement of the consolidated results for the interim periods. Any
statements in this report looking forward in time involve risks and
uncertainties, including but not limited to the following risks: the effect of
interest rate fluctuations; changes in the performance of the real estate
markets; the effect of changing economic conditions; and the demand for and
acceptance of the Company's products. This report should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
1996.
Note 2 - Junior Subordinated Deferrable Interest Debentures
- -----------------------------------------------------------
On April 22, 1997, the Company issued and sold $100 million of 8.5% trust
preferred securities, due in 2012, through its wholly owned subsidiary, First
American Capital Trust I. For financial reporting purposes, the securities are
presented in the consolidated balance sheet of the Company as a separate line
item directly above stockholders' equity under the caption "Guaranteed Preferred
Beneficial Interests in Company's Junior Subordinated Deferrable Interest
Debentures." Distributions payable on the securities are included as interest
expense in the Company's consolidated income statement. The Company used the
proceeds from the sale of these 15-year securities to repay in full the variable
rate indebtedness portion of its amended credit agreement, to finance certain
acquisitions and for general corporate purposes.
Note 3 - Company Acquisition
- ----------------------------
On May 13, 1997, the Company acquired all of the operations of Strategic
Mortgage Services, Inc. (SMS) other than SMS' flood zone certification business.
This acquisition was accounted for by the purchase method of accounting and,
accordingly, the assets acquired and liabilities assumed were recorded at their
estimated fair values at the date of acquisition.
SMS is a leading provider of real estate information services to the U.S.
mortgage and title industries. The acquired business includes SMS' credit
division, property appraisal division, title division, settlement services
business and a controlling interest in a document preparation firm.
Note 4 - Bank Credit Facility
- -----------------------------
The Company amended its credit facility to provide for a more favorable pricing
option, an increased line of credit and the elimination or relaxation of certain
covenants and restrictions. The line of credit has been increased from $30.0
million to $75.0 million and is currently unused.
Note 5 - Joint Venture
- ----------------------
In September 1997, the Company announced that it had reached agreement with
Experian Information Solutions, Inc. ("Experian") to form a joint venture. This
joint venture transaction has been approved by the board of directors of the
Company and Experian, but remains subject to satisfactory documentation,
satisfactory due diligence and receipt of required consents and approvals.
The purpose of the joint venture is to combine the Company's subsidiary, First
American Real Estate Information Services, Inc., with Experian's Real Estate
Solution's division ("RES"). The joint venture vehicle will be 80% owned by the
Company and 20% owned by Experian, subject to certain put and call arrangements.
RES is believed to be the nation's foremost supplier of core real estate data,
providing, among other things, property valuation information, title
information, tax information and imaged title documents.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
RESULTS OF OPERATIONS
Three and nine months ended September 30:
OVERVIEW
Mortgage interest rates, which peaked in January of 1995, decreased throughout
the remainder of that year and into 1996, helped by an easing of monetary policy
by the Federal Reserve Board. This, together with an improved real estate
economy (including the beginnings of a modest recovery in California),
contributed to strong revenues and earnings for 1996. These favorable
conditions continued into 1997, and coupled with market share gains in all of
the Company's primary segments, resulted in record revenues and net income for
the third quarter and nine months ended September 30, 1997. However, profit
margins for the first nine months of 1997 were adversely affected by the need
for title operations to increase staffing levels in order to service the record
new orders opened during the period. Furthermore, the Company's information
services operations experienced higher overhead as they integrated recent
acquisitions, consolidated facilities, and transitioned new accounts to their
systems. Net income for the three and nine months ended September 30, 1997 was
$20.6 million, or $1.77 per share, and $42.0 million, or $3.62 per share,
respectively, compared with net income of $13.8 million, or $1.20 per share, and
$41.8 million, or $3.65 per share, for the same periods of the prior year.
OPERATING REVENUES
Set forth below is a summary of operating revenues for each of the Company's
segments.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------- --------------------------------------
($000) ($000)
1997 % 1996 % 1997 % 1996 %
--------- --- -------- --- ---------- --- ---------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Title Insurance:
Direct operations $205,882 42 $160,875 40 $ 540,432 41 $ 465,113 40
Agency operations 179,940 36 166,893 41 492,706 37 461,361 40
--------- --- -------- --- ---------- --- ---------- ---
385,822 78 327,768 81 1,033,138 78 926,474 80
Real Estate Information 91,620 18 63,685 16 233,323 18 184,344 16
Home Warranty 12,570 3 9,968 2 33,852 3 28,468 3
Trust and Banking 5,169 1 4,101 1 14,740 1 11,993 1
--------- --- -------- --- ---------- --- ---------- ---
Total $495,181 100 $405,522 100 $1,315,053 100 $1,151,279 100
========= === ======== === ========== === ========== ===
</TABLE>
Title Insurance. Operating revenues from direct title operations increased
28.0% and 16.2% for the three and nine months ended September 30, 1997,
respectively, when compared with the same periods of the prior year. These
increases were attributable to an increase in the number of title orders closed
by the Company's direct operations, as well as an increase in the average
revenues per order closed. The Company's direct operations closed 235,900 and
646,700 title orders during the three and nine months ended September 30,1997,
respectively, representing increases of 20.7% and 11.1% when compared with the
same periods of the prior year. These increases were due in large part to the
factors mentioned above, primarily the resurgence of real estate activity in
California, a state heavily concentrated with direct operations, as well as
increases in the Company's national market share. The average revenues per
order closed were $873 and $836 for the three month and nine months ended
September 30, 1997, respectively, as compared with $823 and $799 for the same
periods of the prior year. These increases
6
<PAGE>
were primarily due to an increased mix of residential resale and commercial
activity, increases in the average prices of homes nationwide, as well as an
increase in other related revenues, primarily property reports, profiles and
settlement services associated with recent acquisitions. Operating revenues
from agency operations increased 7.8% and 6.8% for the three and nine months
ended September 30, 1997, respectively, when compared with the same periods of
the prior year. These increases were primarily due to the same factors
affecting direct operations mentioned above, compounded by the inherent delay in
reporting by agents.
Real Estate Information. Real estate information operating revenues increased
43.9% and 26.6% for the three and nine months ended September 30, 1997,
respectively, when compared with the same periods of the prior year. These
increases were primarily attributable to $21.7 million and $40.6 million of
operating revenues contributed by new acquisitions for the respective periods,
as well as the same economic factors affecting title insurance mentioned above.
Home Warranty. Home warranty operating revenues increased 26.1% and 18.9% for
the three and nine months ended September 30, 1997, respectively, when compared
with the same periods of the prior year. These increases were primarily
attributable to improvements in the residential resale markets in which this
business segment operates (principally, increases in the California residential
resale market).
INVESTMENT AND OTHER INCOME
Investment and other income increased 15.3% and decreased 3.5% for the three and
nine months ended September 30, 1997, respectively, when compared with the same
periods of the prior year. The increase for the current three-month period was
primarily due to a 6.4% increase in the average investment portfolio balance, an
increase in dividend income from the Company's stock portfolio and increased
equity in earnings of unconsolidated subsidiaries. The decrease for the nine-
month period was primarily due to the recognition of investment losses of $1.0
million, compared with investment gains of $2.8 million realized in the same
period of the prior year.
TOTAL OPERATING EXPENSES
Title Insurance. Salaries and other personnel costs were $128.9 million and
$358.0 million for the three and nine months ended September 30, 1997,
respectively, increases of 25.5% and 19.0% when compared with the same periods
of the prior year. These increases were primarily due to costs incurred
servicing the high number of more labor intensive residential resale
transactions processed during the current three and nine month periods. The
Company's direct operations opened 309,500 and 874,500 title orders during the
three and nine months ended September 30, 1997, respectively, representing
increases of 21.0% and 11.1% when compared with the same periods of the prior
year. Also contributing to the increases in salaries and other personnel costs
were $5.3 million and $11.0 million of costs incurred for the three and nine
months ended September 30, 1997, respectively, relating to acquisition activity,
and modest salary increases.
Agents retained $145.0 million and $396.1 million of title premiums generated
by agency operations for the three and nine months ended September 30, 1997,
respectively, which compares with $134.8 million and $372.9 million for the same
periods of the prior year. The percentage of title premiums retained by agents
ranged from 80.4% to 80.8% due to regional variances (i.e., the agency share
varies from region to region and thus the geographical mix of agency revenues
causes this variation).
Other operating expenses were $65.8 million and $178.0 million for the three and
nine months ended September 30, 1997, respectively, increases of 17.7% and 10.5%
when compared with the same periods of the prior year. These increases were
primarily attributable to the impact of certain incremental costs associated
with processing the increase in title order volume experienced during the
respective periods. Also contributing to the increases were $4.5 million and
$9.1 million of costs incurred for the three and nine months ended September 30,
1997, relating to acquisition activity.
The provision for title losses as a percentage of title insurance operating
revenues was 3.8% for the nine months ended September 30, 1997, and 5.2% for the
same period of the prior year. The decrease for the current period was
primarily due to an ongoing improvement in the Company's loss experience.
7
<PAGE>
Real Estate Information. Real estate information personnel and other operating
expenses were $75.1 million and $189.4 million for the three and nine months
ended September 30, 1997, respectively, increases of 58.1% and 41.9% when
compared with the same periods of the prior year. These increases were
primarily due to $14.0 million and $37.9 million of costs associated with new
acquisitions, as well as higher overhead costs attributable to the integration
of new acquisitions, consolidation of facilities and transitioning new accounts
to their systems.
Home Warranty. Home warranty personnel and other operating expenses were $3.2
million and $9.6 million for the three and nine months ended September 30, 1997,
respectively, increases of 41.7% and 24.3% when compared with the same periods
of the prior year. These increases were primarily attributable to costs
incurred servicing the increased business volume. The provision for home
warranty losses expressed as a percentage of home warranty operating revenues
was 59.0% and 57.9% for the nine months ended September 30, 1997 and 1996,
respectively. The increase in loss ratio was primarily due to an increase in
the average number of claims per contract.
PRETAX PROFITS
Set forth below is a summary of pretax profits for each of the Company's
segments.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------- ----------------------------------
($000) ($000)
1997 % 1996 % 1997 % 1996 %
------- --- ------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Title Insurance $31,844 68 $17,112 50 $ 61,545 59 $ 48,852 48
Real Estate Information 11,672 25 13,844 41 32,639 31 44,254 43
Home Warranty 2,454 5 1,908 6 6,936 7 6,595 6
Trust and Banking 1,171 2 982 3 3,023 3 2,599 3
------- --- ------- --- -------- --- -------- ---
Total before corporate 47,141 100 33,846 100 104,143 100 102,300 100
=== === === ===
Corporate (9,736) (5,825) (23,034) (18,540)
------- ------- -------- --------
Total $37,405 $28,021 $ 81,109 $ 83,760
======= ======= ======== ========
</TABLE>
In general, the title insurance business is a lower profit margin business
when compared to the Company's other segments. The lower profit margins reflect
the high cost of producing title evidence whereas the corresponding revenues are
subject to regulatory and competitive pricing restraints. Due to the
relatively high proportion of fixed costs, title insurance profit margins
generally improve as closed order volumes increase. In addition, title
insurance profit margins are affected by the composition (residential or
commercial) and type (resale, refinancing or new construction) of real estate
activity. Profit margins from resale and new construction transactions are
generally higher than from refinancing transactions because in many states there
are premium discounts on, and cancellation rates are higher for, refinance
transactions. Title insurance profit margins are also affected by the
percentage of operating revenues generated by agency operations. Profit margins
from direct operations are generally higher than from agency operations due
primarily to the large portion of the premium that is retained by the agent.
Real estate information pretax profits are generally unaffected by the type of
real estate activity but increase as the volume of residential real estate loan
transactions increase.
PREMIUM TAXES
Premium taxes were $12.6 million and $12.4 million for the nine months ended
September 30, 1997 and 1996, respectively. Premium taxes as a percentage of
title insurance operating revenues remained relatively constant at approximately
1.2%.
INCOME TAXES
The effective income tax rate was 38.8% for the nine months ended September 30,
1997, and 41.5% for the same period of the prior year. The decrease in
effective rate was primarily attributable to changes in the ratio of permanent
differences to income before income taxes, as well as a decrease in state income
taxes resulting from the Company's non-insurance subsidiaries decrease in pretax
profits.
8
<PAGE>
NET INCOME
Net income for the three and nine months ended September 30, 1997, was $20.6
million, or $1.77 per share, and $42.0 million, or $3.62 per share,
respectively. Net income for the three and nine months ended September 30,
1996, was $13.8 million, or $1.20 per share, and $41.8 million, or $3.65 per
share, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Total cash and cash equivalents decreased $2.9 million for the nine months ended
September 30, 1997, and increased $16.5 million for the same period of the prior
year. The decrease for the current year period was primarily attributable to
capital expenditures, the net cash effect of company acquisitions and the
repayment of debt, offset in part by the proceeds from the issuance of junior
subordinated debentures and cash provided by operating activities. The increase
for the prior year period was primarily due to cash provided by operating
activities, offset in part by capital expenditures and the repayment of debt.
Effective July 29, 1997, the Company amended its bank credit agreement (see Note
4). The amendment relaxes or eliminates certain covenants and provides for a
$75.0 million line of credit which is currently unused.
Notes and contracts payable as a percentage of total capitalization decreased to
7.9% at September 30, 1997, from 16.0% at December 31, 1996. This decrease was
primarily due to a $100.0 million increase in total capitalization as a result
of the Company's junior subordinated deferrable interest debentures (see Note
2), as well as $27.4 million net reduction in debt.
Management believes that all of its anticipated cash requirements for the
immediate future will be met from internally generated funds.
9
<PAGE>
Part II: Other Information
-----------------
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
(b) On October 23, 1997, the Company declared a dividend distribution
of one Right for each outstanding Common Share, $1.00 par value,
of the Company, to shareholders of record at the close of
business on November 15, 1997. Each Right entitles the holder
thereof to buy a Preferred Share Fraction equal to 1/100,000 of a
share of Series A Junior Participating Preferred Shares of the
Company at an exercise price of $265.00 per Preferred Share
Fraction. Each Preferred Share Fraction is designed to be
equivalent in voting and dividend rights to one Common Share.
The Rights will be exercisable and will trade separately from the
Common Shares only if a person or group, with certain exceptions,
acquires beneficial ownership of 15% or more of the Company's
Common Shares or commences a tender or exchange offer that would
result in such person or group beneficially owning 15% or more of
the Common Shares then outstanding. Prior to this time, the
Rights will not trade separately from the Common Shares. The
Company may redeem the Rights at $0.001 per Right at any time
prior to the occurrence of one of these events. All Rights expire
on October 23, 2007.
Each Right will entitle its holder to purchase, at the Right's
then-current exercise price, Preferred Share Fractions (or other
securities of the Company) having a value of twice the Right's
exercise price. This amounts to the right to buy Preferred Share
Fractions of the Company at half price. Rights owned by the party
triggering the exercise of Rights will be void and therefore will
not be exercisable.
In addition, if, after any person has become a 15%-or-more
stockholder, the Company is involved in a merger or other
business combination transaction with another person in which the
Company's Common Shares are changed or converted, or if the
Company sells 50% or more of its assets or earning power to
another person, each Right will entitle its holder to purchase,
at the Right's then-current exercise price, common stock of such
other person (or its parent) having a value of twice the Right's
exercise price.
(c) During the quarterly period covered by this report, the Company
issued unregistered shares of its common stock to the sellers of
the business in the acquisition listed below.
<TABLE>
<S> <C> <C>
Date of Sale Number of Shares Consideration Received
------------ ---------------- ----------------------
July 8, 1997 4,800 $192,000
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
(4.1) Amendment No. 1 dated as of November 10, 1997 to the
Amended and Restated Credit Agreement dated as of July 29,
1997.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated November 7, 1997
(the "Form 8-K"), subsequent to the quarterly period covered by
this report. The Form 8-K contains Item 5, describing the
Company's shareholder rights plan adopted by the Company on
October 23, 1997.
10
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
(4.1) Amendment No. 1 as of November 10, 1997 to the Amended and
Restated Credit Agreement dated as of July 29, 1997 of
Credit Agreement dated as of April 21, 1992.
(27) Financial Data Schedule
11
<PAGE>
Exhibit (4.1)
Composite Conformed Copy
AMENDMENT NO. 1
AMENDMENT NO. 1 dated as of November 10, 1997 between THE FIRST AMERICAN
FINANCIAL CORPORATION, a corporation duly organized and validly existing under
the laws of the State of California (the "Company"); each of the lenders that is
-------
a signatory hereto (individually, a "Lender" and, collectively, the "Lenders");
------ -------
and THE CHASE MANHATTAN BANK, as agent for the Lenders (in such capacity,
together with its successors in such capacity, the "Administrative Agent").
--------------------
The Company, the Lenders and the Administrative Agent are parties to an
Amended and Restated Credit Agreement dated as of July 29, 1997 (the "Credit
------
Agreement"), pursuant to which certain term loans and a revolving credit
- ---------
facility were continued and/or made available to the Company. The Company, the
Lenders and the Administrative Agent wish to amend the Credit Agreement in
certain respects, and accordingly, the parties hereto hereby agree as follows:
Section 1. Definitions. Except as otherwise defined in this Amendment
-----------
No. 1, terms defined in the Credit Agreement (as amended hereby) are used herein
as defined therein.
Section 2. Amendments. Subject to the satisfaction of the conditions
----------
precedent specified in Section 4 below, but effective as of the date hereof, the
Credit Agreement shall be amended as follows:
2.01. References in the Credit Agreement (including references to the
Credit Agreement as amended hereby) to "this Agreement" (and indirect references
such as "hereunder", "hereby", "herein" and "hereof") shall be deemed to be
references to the Credit Agreement as amended hereby.
2.02. Section 1.01 of the Credit Agreement shall be amended by adding
the following new definitions (to the extent not already included in said
Section 1.01) and inserting the same in the appropriate alphabetical locations
and amending the following definitions (to the extent already included in said
Section 1.01), as follows:
"Majority Lenders" shall mean Lenders holding at least 66-2/3% of the
----------------
aggregate unpaid principal amount of the Revolving Credit Loans and the
unused Revolving Credit Commitments.
"Fixed Rate Lender Letter of Credit" shall mean the standby letter of
----------------------------------
credit issued by The Chase Manhattan Bank for the benefit of the Fixed Rate
Lender, securing certain obligations of the Company to the Fixed Rate
Lender under the Credit Agreement.
2.03. Section 4.07(b) of the Credit Agreement is hereby amended by
adding the following clause immediately after the word "herein" in the first
sentence of such Section:
"or other than payment to the Fixed Rate Lender pursuant to the Fixed Rate
Lender Letter of Credit"
2.04. The last paragraph of Section 6 of the Credit Agreement shall be
amended in its entirety to read as follows:
"The effectiveness of the Amendment and Restatement (except for Sections
11.03 and 11.07 hereof and the definitions ancillary thereto) and the obligation
of any Lender to make its Loan hereunder is subject to the further conditions
precedent that, both immediately prior to and on the Effective Date and on the
date of the making of such Loan: (a) no Default shall have occurred and be
continuing; and (b) the representations and warranties made by the Company in
Section 7 hereof, and in each of the other Basic Documents, shall be true and
complete on and as of the Effective Date and the date of the making of such Loan
with the same force and effect as if made on and as of such date (or, if any
such representation or warranty is expressly stated to have been as of a
specific date, as of such specific date)."
Amendment No. 1
---------------
<PAGE>
2
2.05. Section 10.09 of the Credit Agreement shall be amended in its
entirety to read as follows:
"10.09 Consents under Basic Documents. Except as otherwise provided in
------------------------------
Section 11.04 hereof, the Administrative Agent may, with the prior consent of
the Majority Lenders (but not otherwise), consent to any modification,
supplement or waiver under any of the Basic Documents."
Section 3. Representations and Warranties. The Company represents and
------------------------------
warrants to the Lenders that the representations and warranties set forth in
Section 7 of the Credit Agreement are true and complete on the date hereof as if
made on and as of the date hereof and as if each reference in said Section 7 to
"this Agreement" included references to this Amendment No. 1.
Section 4. Conditions Precedent to Effectiveness. The amendments to the
-------------------------------------
Credit Agreement set forth in Section 2 hereof, the termination of the Pledge
Agreement and release of collateral thereunder set forth in Section 5 hereof,
and the waiver of Section 8.05 of the Credit Agreement set forth in Section 6
hereof, shall become effective, as of the date hereof, upon the satisfaction of
the following conditions precedent:
4.01. Execution by All Parties. This Amendment No. 1 shall have been
------------------------
executed and delivered by each of the parties hereto.
4.02. Letter of Credit. The Fixed Rate Lender Letter of Credit shall
----------------
have been issued.
4.03. Documents. The Administrative Agent shall have received such
---------
documents as the Administrative Agent or any Lender or special New York counsel
to the Chase Manhattan Bank may reasonably request.
Section 5. Termination and Release. The Lenders and the Administrative
-----------------------
Agent hereby agree to terminate the Pledge Agreement, and to release any and all
collateral held thereunder.
Section 6. Waiver. The Lenders and the Administrative Agent hereby
------
agree to waive Section 8.05 of the Credit Agreement to the extent required to
enable the Company and First American Real Estate Information Services, Inc., a
Wholly Owned Subsidiary of the Company, to enter into a transaction with
Experian Information Solutions, Inc. an Ohio corporation (or its successor),
with respect to certain businesses operated by its Real Estate Solutions
division, as more fully described in Annex 1 hereto.
Section 7. Miscellaneous.
-------------
7.01. Binding Effect. Except as herein provided, the Credit Agreement
--------------
shall remain unchanged and in full force and effect.
7.02. Counterparts. This Amendment No. 1 may be executed in any number
------------
of counterparts, all of which taken together shall constitute one and the same
amendatory instrument and any of the parties hereto may execute this Amendment
No. 1 by signing any such counterpart.
7.03. Governing Law. This Amendment No. 1 shall be governed by, and
-------------
construed in accordance with, the law of the State of New York.
Amendment No. 1
---------------
<PAGE>
3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to
be duly executed and delivered as of the day and year first above written.
THE FIRST AMERICAN FINANCIAL
CORPORATION
By /s/ D.P. Kennedy
--------------------
Title: Chairman
By /s/ Mark R Arnesen
----------------------
Title: Secretary
THE CHASE MANHATTAN BANK,
as Administrative Agent
By /s/ Lawrence Karp
---------------------
Title: Associate
Amendment No. 1
---------------
<PAGE>
4
LENDERS
-------
THE CHASE MANHATTAN BANK
By /s/ Lawrence Karp
---------------------
Title: Associate
SANWA BANK CALIFORNIA
By /s/ Rita Raychaudhuri
-------------------------
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.
By /s/ Douglas S. Lambell
--------------------------
Title: Vice President
COMERICA BANK
By /s/ Emmanuel M. Skerofilax
------------------------------
Title: Corporate Banking Officer
CHASE MANHATTAN BANK, AS NOMINEE FOR
THE CANADA LIFE ASSURANCE COMPANY
By /s/ Kenneth Peters
----------------------
Title: Vice President
Amendment No. 1
---------------
<PAGE>
Annex 1
[LOGO OF THE FIRST AMERICAN FINANCIAL CORPORATION]
Under the currently contemplated structure of the transaction referenced in
Section 6 of Amendment No. 1, the direct subsidiaries of First American Real
Estate Information Services, Inc., other than Excelis, Inc. (such subsidiaries,
the "FAREIS Subsidiaries"), and Experian Information Solutions, Inc. (or its
successor, "Experian"), will enter into a joint venture transaction pursuant to
which (i) the FAREIS Subsidiaries will transfer their respective assets and
liabilities to a new formed limited liability company ("Newco") in exchange for
80% of the membership interests of Newco and (ii) Experian will transfer the
assets and liabilities of its Real Estate Solutions Division plus additional
cash to Newco in exchange for 20% of the membership interests of Newco.
Amendment No. 1
---------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 135,895,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 10,900,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 214,339,000
<CASH> 170,561,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 24,755,000
<TOTAL-ASSETS> 1,139,944,000
<POLICY-LOSSES> 252,552,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 43,870,000
0
0
<COMMON> 11,571,000
<OTHER-SE> 378,474,000
<TOTAL-LIABILITY-AND-EQUITY> 1,139,944,000
1,315,053,000
<INVESTMENT-INCOME> 20,046,000
<INVESTMENT-GAINS> 4,293,000
<OTHER-INCOME> 0
<BENEFITS> 65,589,000
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 68,554,000
<INCOME-TAX> 26,600,000
<INCOME-CONTINUING> 41,954,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,954,000
<EPS-PRIMARY> 3.62
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
