<PAGE>
FORM 10-Q/A
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 June 30, 1998
-----------------
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 (I.R.S. Employer
incorporation or organization) Identification No.)
114 East Fifth Street, Santa Ana, California 92701-4699
-------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(714) 558-3211
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(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 - 57,287,968 as of August 7, 1998
<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 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Items 1-4 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: February 12, 1999
1
<PAGE>
Part I: Financial Information
---------------------
Item 1. Financial Statements
--------------------
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Condensed Consolidated Balance Sheets
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 297,975,000 $ 181,531,000
-------------- --------------
Accounts and accrued income receivable, net 165,093,000 128,017,000
-------------- --------------
Investments:
Deposits with savings and loan associations and banks 31,422,000 29,029,000
Debt securities 199,946,000 151,503,000
Equity securities 24,851,000 13,904,000
Other long-term investments 56,508,000 35,047,000
-------------- --------------
312,727,000 229,483,000
-------------- --------------
Loans receivable 68,641,000 63,378,000
-------------- --------------
Property and equipment, at cost 422,932,000 323,065,000
Less- accumulated depreciation (145,554,000) (122,688,000)
-------------- --------------
277,378,000 200,377,000
-------------- --------------
Title plants and other indexes 198,431,000 100,626,000
-------------- --------------
Assets acquired in connection with claim settlements
(net of valuation reserves of $11,056,000 and $11,135,000) 19,132,000 21,119,000
-------------- --------------
Deferred income taxes 19,806,000 31,563,000
-------------- --------------
Goodwill and other intangibles, net 147,342,000 132,361,000
-------------- --------------
Deferred policy acquisition costs 26,759,000 25,016,000
-------------- --------------
Other assets 64,998,000 54,673,000
-------------- --------------
$1,598,282,000 $1,168,144,000
============== ==============
Liabilities and Stockholders' Equity
Demand deposits $ 63,379,000 $ 62,475,000
-------------- --------------
Accounts payable and accrued liabilities 219,554,000 168,133,000
-------------- --------------
Deferred revenue 119,706,000 104,124,000
-------------- --------------
Reserve for known and incurred but not reported claims 262,824,000 250,826,000
-------------- --------------
Income taxes payable 24,126,000 3,987,000
-------------- --------------
Notes and contracts payable (Note 4) 145,032,000 41,973,000
-------------- --------------
Minority interests in consolidated subsidiaries 86,735,000 25,214,000
-------------- --------------
Mandatorily redeemable preferred securities of the Company's
subsidiary trust whose sole assets are the Company's
$100,000,000 8.5% deferrable interest subordinated notes
due 2012 100,000,000 100,000,000
-------------- --------------
Stockholders' equity:
Preferred stock, $1 par value
Authorized - 500,000 shares; outstanding - none
Common stock, $1 par value (Note 5)
Authorized - 108,000,000 shares
Outstanding - 56,820,000 and 52,122,000 shares 56,820,000 52,122,000
Additional paid-in capital (Note 5) 84,116,000 9,205,000
Retained earnings 429,278,000 344,645,000
Net unrealized gain on securities 6,712,000 5,440,000
-------------- --------------
576,926,000 411,412,000
-------------- --------------
$1,598,282,000 $1,168,144,000
============== ==============
</TABLE>
2
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Condensed Consolidated Statements of Income
-------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30 June 30
----------------------------- -----------------------------
1998 1997 1998 1997
------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Revenues
Operating revenues $695,463,000 $443,447,000 $1,257,077,000 $819,872,000
Investment and other income 8,820,000 6,927,000 52,255,000 13,379,000
------------ ------------ -------------- ------------
704,283,000 450,374,000 1,309,332,000 833,251,000
------------ ------------ -------------- ------------
Expenses
Salaries and other personnel costs 219,067,000 157,812,000 418,189,000 298,599,000
Premiums retained by agents 194,982,000 128,962,000 335,027,000 251,155,000
Other operating expenses 149,336,000 93,689,000 284,336,000 175,649,000
Provision for title losses and other claims 32,203,000 22,457,000 59,531,000 41,049,000
Depreciation and amortization 14,597,000 9,156,000 28,303,000 18,141,000
Premium taxes 5,231,000 4,561,000 9,385,000 8,722,000
Interest 5,443,000 2,538,000 9,019,000 3,660,000
------------ ------------ -------------- ------------
620,859,000 419,175,000 1,143,790,000 796,975,000
------------- ------------ -------------- ------------
Income before income taxes and
minority interests 83,424,000 31,199,000 165,542,000 36,276,000
Income taxes 29,900,000 11,700,000 59,300,000 13,600,000
------------- ------------ -------------- ------------
Income before minority interests 53,524,000 19,499,000 106,242,000 22,676,000
Minority interests 8,418,000 983,000 16,171,000 1,294,000
------------- ------------ -------------- ------------
Net income $ 45,106,000 $ 18,516,000 $ 90,071,000 $ 21,382,000
============= ============ ============== ============
Net income per share (Note 5):
Basic $ 0.83 $ .35 $ 1.69 $ .41
============= ============ ============== ============
Diluted $ 0.80 $ .35 $ 1.63 $ .40
============= ============ ============== ============
Cash dividends per share (Note 5) $ .05 $ .04 $ .10 $ .08
============= ============ ============== ============
Weighted average number of shares (Note 5):
Basic 54,297,000 52,179,000 53,346,000 52,116,000
============= ============ ============== ============
Diluted 56,292,000 52,968,000 55,254,000 53,088,000
============= ============ ============== ============
</TABLE>
3
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Condensed Consolidated Statements of Cash Flows
-----------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30
----------------------------
1998 1997
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 90,071,000 $ 21,382,000
Adjustments to reconcile net income to cash
provided by operating activities-
Provision for title losses and other claims 59,531,000 41,049,000
Depreciation and amortization 28,303,000 18,141,000
Minority interests in net income 16,171,000 1,294,000
Investment gain (Note 2) (32,449,000)
Other, net (496,000) (434,000)
Changes in assets and liabilities excluding effects of
company acquisitions and noncash transactions-
Claims paid, including assets acquired, net of recoveries (45,653,000) (36,775,000)
Net change in income tax accounts 27,927,000 7,677,000
Increase in accounts and accrued income receivable (20,486,000) (4,405,000)
Increase (decrease) in accounts payable and accrued liabilities 37,011,000 (12,503,000)
Increase (decrease) in deferred revenue 5,399,000 (1,459,000)
Other, net (4,137,000) (10,251,000)
------------- ------------
Cash provided by operating activities 161,192,000 23,716,000
------------- ------------
Cash flows from investing activities:
Net cash effect of company acquisitions 5,031,000 (37,977,000)
Net increase in deposits with banks (2,197,000) (8,201,000)
Net increase in loans receivable (5,263,000) (5,525,000)
Purchases of debt and equity securities (87,840,000) (40,963,000)
Proceeds from sales of debt and equity securities 19,815,000 21,691,000
Proceeds from maturities of debt securities 10,592,000 10,427,000
Net decrease in other investments 271,000 366,000
Capital expenditures (74,780,000) (33,265,000)
Proceeds from sale of property and equipment 254,000 569,000
------------- ------------
Cash used for investing activities (134,117,000) (92,878,000)
------------- ------------
Cash flows from financing activities:
Net change in demand deposits 904,000 4,847,000
Proceeds from issuance of junior subordinated
deferrable interest debentures 100,000,000
Proceeds from issuance of debt 99,456,000
Repayment of debt (9,519,000) (37,337,000)
Purchase of Company shares (2,245,000)
Proceeds from exercise of stock options 1,994,000 282,000
Proceeds from issuance of stock to employee savings plan 8,531,000
Distributions to minority shareholders (6,559,000) (219,000)
Cash dividends (5,438,000) (4,176,000)
------------- ------------
Cash provided by financing activities 89,369,000 61,152,000
------------- ------------
Net increase (decrease) in cash and cash equivalents 116,444,000 (8,010,000)
Cash and cash equivalents- Beginning of year 181,531,000 173,439,000
------------- ------------
- End of first half $ 297,975,000 $165,429,000
============= ============
Supplemental information:
Cash paid during the first half for:
Interest $ 6,267,000 $ 2,088,000
Premium taxes $ 10,421,000 $ 10,243,000
Income taxes $ 36,302,000 $ 7,197,000
Noncash investing and financing activities:
Shares issued for stock bonus plan $ 2,637,000 $ 2,185,000
Liabilities incurred in connection with company acquisitions $ 89,779,000 $ 40,184,000
Net unrealized gain on securities $ 1,272,000 $ 701,000
Company acquisitions in exchange for common stock $ 66,447,000
</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. Certain
1997 interim amounts have been reclassified to conform with the current period
presentation. This report should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
Note 2 - Business Combinations
- ------------------------------
On January 1, 1998, the Company formed a limited liability corporation (LLC)
with Experian Group (Experian). The purpose of the LLC is to combine certain
operations of the Company's subsidiary, First American Real Estate Information
Services, Inc., with Experian's Real Estate Solutions division (RES). The LLC is
80% owned by the Company and 20% owned by Experian. RES is a supplier of core
real estate data, providing, among other things, property valuation information,
title and tax information and imaged title documents. This business combination
has been accounted for under the purchase method of accounting, and accordingly,
the purchase price was allocated to the assets acquired and liabilities assumed
based on the estimated fair values at January 1, 1998. In addition, as a result
of the transaction, the Company recognized an investment gain of $32.4 million
in the first quarter 1998. The operating results of the LLC are included in the
Company's consolidated financial statements commencing January 1, 1998. Assuming
the combination had occurred January 1, 1997, pro forma revenues, net income,
net income per diluted share would have been $878.2 million, $19.0 million and
$.36, respectively, for the six months ended June 30, 1997. Pro forma results
for the current six-month period are not presented because the combination
occurred January 1, 1998.
In addition, during the six months ended June 30, 1998, the Company also
acquired 6 companies, all of which were in the title insurance or real estate
information services business, for an aggregate of $3.8 million in cash and
2,946,801 shares of the Company's common stock. Five of these acquisitions were
accounted for under the purchase method of accounting and one was accounted for
under the pooling of interests method of accounting.
The 5 acquisitions accounted for under the purchase method of accounting were
individually not material. The purchase price for each was allocated to the
assets acquired and liabilities assumed based on estimated fair values and
approximately $9.5 million in goodwill was recorded. Goodwill is amortized on a
straight-line basis over its estimated useful life of 20-30 years. The operating
results of these acquired companies were included in the Company's consolidated
financial statements from their respective acquisition dates. Assuming these
acquisitions had occurred January 1, 1997, pro forma revenues, net income, net
income per diluted share would have been $1,319.0 million, $91.2 million and
$1.59, respectively, for the six months ended June 30, 1998, and $889.1 million,
$20.1 million and $0.36, respectively, for the six months ended June 30, 1997
(the 1997 pro forma results include the business combination mentioned above).
All pro forma results include amortization of goodwill and interest expense on
acquisition debt. The pro forma results are not necessarily indicative of the
operating results that would have been obtained had the acquisitions occurred at
the beginning of the periods presented, nor are they necessarily indicative of
future operating results.
The acquisition accounted for under the pooling of interests method of
accounting was not material; accordingly, prior year results have not been
restated.
Note 3 - Other Comprehensive Income
- -----------------------------------
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement requires
the reporting of comprehensive income in addition to net income. Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net income. Currently, the only comprehensive
income item that affects the Company is unrealized gains and losses on debt and
equity securities.
The Company reported a net unrealized gain of $1.3 million and $0.7 million for
the six-month period ended June 30, 1998 and 1997, respectively. Accordingly,
comprehensive income for the two respective periods was $91.4 million and $22.1
million.
Note 4 - Senior Debentures
- --------------------------
On April 7, 1998, the Company issued and sold $100.0 million of 7.55% senior
debentures, due April 1, 2028. The 30-year bonds were issued at 99.456% of the
principal amount. The Company has used a portion of the net proceeds from the
sale of these 30-year securities to repay certain debt obligations and purchase
land for the Company's new corporate facilities. The remaining proceeds will be
used for general corporate purposes.
5
<PAGE>
Note 5 - Stock Split
- --------------------
On July 17, 1998, the Company distributed, to shareholders of record on July 7,
1998, a 3-for-1 common stock split in the form of a 200% stock dividend. This
resulted in an increase of 37,895,936 common shares outstanding with the par
value of these additional shares being capitalized by a transfer from additional
paid-in-capital to the common stock account. In order to effect the stock split,
the Company increased its authorized shares from 36,000,000 to 108,000,000. All
references in the consolidated financial statements with regards to common
stock, additional paid-in-capital, number of shares of common stock and per
share amounts have been restated to reflect the stock split.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
- -------------
Any statements in this document 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; the demand for and the
acceptance of the Company's products; and contingencies associated with the Year
2000 issue.
RESULTS OF OPERATIONS
Three and six months ended June 30:
OVERVIEW
Low mortgage interest rates and an improving national real estate economy
resulted in relatively strong revenues for the first half of 1997. However,
profits for the first half of 1997 were adversely affected by the need for title
operations to increase staffing levels in order to service the relatively high
number of title orders opened during the period. Furthermore, the Company's
information services operations experienced higher overhead during the first
half of 1997 as they integrated acquisitions and transitioned new accounts to
their systems. Favorable real estate conditions continued throughout 1997 and,
coupled with market share increases in all of the Company's primary business
segments, culminated in the best year overall in the Company's history.
Starting in the fourth quarter 1997 and into 1998, lower mortgage interest rates
and higher consumer confidence lead to record-setting residential resale
activity as well as a substantial increase in refinance transactions nationwide.
This, coupled with the particularly strong California real estate market,
contributed to record-setting revenues and net income for the second quarter and
first half of 1998. Net income and net income per diluted share for the second
quarter 1998 was $45.1 million and $0.80, respectively. Net income and net
income per diluted share for the first half of 1998 (excluding a previously
announced first quarter investment gain of $19.6 million on an after-tax basis,
or $0.36 per diluted share, relating to the joint venture with Experian) was
$70.4 million and $1.27 per diluted share, respectively.
OPERATING REVENUES
Set forth below is a summary of operating revenues for each of the Company's
segments.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------------------- ----------------------------------
($000) ($000)
1998 % 1997 % 1998 % 1997 %
--------- ---- -------- ---- ---------- ---- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Title Insurance:
Direct operations $274,827 40 $186,876 42 $ 500,546 40 $334,550 41
Agency operations 243,519 35 160,660 36 420,055 33 312,766 38
--------- ---- -------- ---- ---------- ---- -------- ---
518,346 75 347,536 78 920,601 73 647,316 79
Real Estate Information 156,495 22 79,656 18 296,855 24 141,703 17
Home Warranty 14,274 2 11,214 3 27,447 2 21,282 3
Trust and Banking 6,348 1 5,041 1 12,174 1 9,571 1
--------- ---- -------- ---- ---------- ---- -------- ---
Total $695,463 100 $443,447 100 $1,257,077 100 $819,872 100
--------- ---- -------- ---- ---------- ---- -------- ---
</TABLE>
Title Insurance. Operating revenues from direct title operations increased
47.1% and 49.6% for the three and six months ended June 30, 1998, respectively,
when compared with the same periods of the prior year. These increases were
primarily 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 302,000 and 562,600
title orders during the three and six months ended June 30,1998, respectively,
representing increases of 31.7% and 37.0% 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 $910
and $890 for the three and six months ended June 30, 1998, respectively,
increases of 11.7% and 9.3% when compared with $815 and $814 for the same
periods of the prior year.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (continued)
- -------------------------
These increases were primarily due to appreciating residential real estate
values. Operating revenues from agency operations increased 51.6% and 34.3% for
the three and six months ended June 30, 1998, 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
96.5% and 109.5% for the three and six months ended June 30, 1998, respectively,
when compared with the same periods of the prior year. These increases were
primarily attributable to the same economic factors affecting title insurance
mentioned above, as well as $35.9 million and $74.1 million of operating
revenues contributed by new acquisitions for the respective periods.
Home Warranty. Home warranty operating revenues increased 27.3% and 29.0% for
the three and six months ended June 30, 1998, 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.
INVESTMENT AND OTHER INCOME
Investment and other income totaled $8.8 million and $52.3 million for the three
and six months ended June 30, 1998, respectively, increases of $1.9 million and
$38.9 million when compared with the same periods of the prior year. The
increase for the current three-month period was primarily due to a 28.4%
increase in the average investment portfolio balance due in large part to the
investment of a portion of the proceeds from the Company's $100 million senior
debentures (see Note 4 to the condensed consolidated financial statements). The
increase for the current six-month period was primarily attributable to an
investment gain of $32.4 million recognized in the first quarter relating to the
joint venture agreement with Experian.
TOTAL OPERATING EXPENSES
Title Insurance. Salaries and other personnel costs were $160.2 million and
$305.1 million for the three and six months ended June 30, 1998, respectively,
increases of 33.1% and 33.2% when compared with the same periods of the prior
year. These increases were primarily due to costs incurred servicing the
record-setting number of transactions processed during the current three and six
month periods.
Agents retained $195.0 million and $335.0 million of title premiums generated by
agency operations for the three and six months ended June 30, 1998,
respectively, which compares with $129.0 million and $251.2 million for the same
periods of the prior year. The percentage of title premiums retained by agents
ranged from 79.8% to 80.3% 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 $77.9 million and $145.8 million for the three and
six months ended June 30, 1998, respectively, increases of 35.6% and 32.8% 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 record-setting title order volume during the respective
periods.
The provision for title losses as a percentage of title insurance operating
revenues was 3.9% for the six months ended June 30, 1998 and 1997, respectively.
This constant loss percentage was due to stable claims experience.
Premium taxes for title insurance were $8.9 million and $8.3 million for the six
months ended June 30, 1998 and 1997, respectively. Expressed as a percentage of
title insurance operating revenues, premium taxes were 1.0% for the six months
ended June 30, 1998 and 1.3% for the same period of the prior year. The
decrease in percentage was primarily due to changes in the Company's non-title
insurance subsidiaries' contribution to revenues as well as changes in the
geographical mix of title insurance operating revenues.
Real Estate Information. Real estate information personnel and other operating
expenses were $112.2 million and $218.0 million for the three and six months
ended June 30, 1998, respectively, increases of 82.6% and 95.0% when compared
with the same periods of the prior year. These increases were primarily due to
costs incurred servicing the increased business volume, $29.8 million and $63.0
million of costs associated with new acquisitions, and higher overhead costs
attributable to the integration of the new acquisitions and transitioning new
accounts to their systems.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations (continued)
- -------------------------
Home Warranty. Home warranty personnel and other operating expenses were $4.0
million and $8.1 million for the three and six months ended June 30, 1998,
respectively, increases of 24.4% and 27.0% when compared with the same periods
of the prior year. These increases were primarily attributable to costs
incurred servicing the increased business volume and expansion into new
territories. The provision for home warranty losses expressed as a percentage
of home warranty operating revenues was 53.0% and 56.9% for the six months ended
June 30, 1998 and 1997, respectively. The decrease in loss ratio was primarily
due to a decrease in the average number of claims per contract.
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS
Set forth below is a summary of income before income taxes and minority
interests for each of the Company's segments.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------------------- ------------------------------
($000) ($000)
1998 % 1997 % 1998 % 1997 %
-------- --- ------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Title Insurance $ 56,395 60 $21,438 56 $ 86,656 57 $ 21,381 44
Real Estate Information 32,433 34 13,144 35 55,968 37 20,967 43
Home Warranty 3,311 4 2,444 6 6,337 4 4,080 9
Trust and Banking 2,022 2 937 3 3,610 2 1,852 4
-------- --- ------- --- -------- --- --------
Total before corporate 94,161 100 37,963 100 152,571 100 48,280 100
=== === === ===
Corporate (10,737) (6,764) 12,971 (12,004)
-------- ------- -------- --------
Total $ 83,424 $31,199 $165,542 $ 36,276
======== ======= ======== ========
</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 this
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. Included in Corporate for the six months ended June 30,
1998 was an investment gain of $32.4 million (see Note 2 to the condensed
consolidated financial statements).
INCOME TAXES
The effective income tax rate was 35.8% for the six months ended June 30, 1998,
and 37.5% 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.
MINORITY INTERESTS
Minority interest expense was $8.4 million for the three months ended June 30,
1998, an increase of $7.4 million when compared with the same period of the
prior year. Minority interest expense was $16.2 million for the six months
ended June 30, 1998, an increase of $14.9 million when compared with the same
period of the prior year. These increases were primarily attributable to the
strong operating results of the Company's joint venture with Experian.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations (continued)
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NET INCOME
Net income for the three and six months ended June 30, 1998, was $45.1 million,
or $0.80 per diluted share, and $90.1 million, or $1.63 per diluted share,
respectively. Net income for the six months ended June 30, 1998, included an
investment gain of $19.6 million on an after-tax basis, or $0.36 per diluted
share, relating to the joint venture with Experian. Net income for the three
and six months ended June 30, 1997, was $18.5 million, or $0.35 per diluted
share, and $21.4 million, or $0.40 per diluted share, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Total cash and cash equivalents increased $116.4 million and decreased $8.0
million for the six months ended June 30, 1998 and 1997, respectively. The
increase for the current year period was primarily attributable to cash provided
by operating activities and proceeds from the issuance and sale of senior
debentures, offset in part by capital expenditures, net purchases of debt and
equity securities and the repayment of debt. The decrease for the prior year
period was primarily due to the cash effect of company acquisitions, the net
purchases of debt and equity securities, capital expenditures and the repayment
of debt, offset in part by the proceeds from the issuance of junior subordinated
debentures.
On April 7, 1998, the Company issued and sold $100.0 million of 7.55% senior
debentures, due April 1, 2028. The Company has used a portion of the net
proceeds from the sale to repay certain debt obligations and purchase land for
the Company's new corporate facilities. The remaining proceeds will be used for
general corporate purposes.
Notes and contracts payable as a percentage of total capitalization increased to
16.0% at June 30, 1998, from 7.3% at December 31, 1997. This increase was
primarily due to the issuance and sale of the $100.0 million senior debentures,
offset in part by an increase in total capitalization due primarily to shares
issued in connection with company acquisitions, increased minority interests and
net income for the period.
The Company's management has initiated a program to evaluate the Year 2000 issue
as it relates to its internal computer systems and third party computer systems
with which the Company interacts. The Company is currently completing the
inventory and assessment phase of the program, with the remaining phases
(renovation, testing and implementation) expected to be completed by midyear
1999. The Company has incurred to date approximately $3.1 million of costs
related to this issue. The majority of the costs are expected to be incurred in
the final three phases of the program. These costs, which include internal
staff costs as well as consulting and other expenses, are being expensed as
incurred. At this time, the Company is unable to reasonably estimate the total
costs for the Year 2000 issue.
Management believes that all of its anticipated cash requirements for the
immediate future will be met from internally generated funds and from the
remaining proceeds of the senior debentures.
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Part II: Other Information
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Item 5. Other Information.
-----------------
Pursuant to newly adopted rules of the Securities and Exchange
Commission, any shareholder who intends to present a proposal at the
Company's next Annual Meeting of Shareholders without requesting the
Company to include such proposal in the Company's proxy statement
should be aware that he must notify the Company not later than
February 9, 1999 of his intention to present the proposal. Otherwise,
the Company may exercise discretionary voting with respect to such
shareholder proposal pursuant to authority conferred on the Company by
proxies to be solicited by the Board of Directors of the Company and
delivered to the Company in connection with the meeting.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
(3) Restated Articles of Incorporation of The First American
Financial Corporation (the "Company") dated July 14, 1998,
incorporated by reference herein from Exhibit 3.1 of the
Company's Registration Statement on Form S-4 dated July 28,
1998.
(4) Senior Indenture dated as of April 7, 1998, between The
First American Financial Corporation and Wilmington Trust
Company as Trustee, incorporated by reference herein from
Exhibit (4) from Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.
(27) Financial Data Schedule, incorporated by reference herein
from Exhibit (27) from Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998.
(b) Reports on Form 8-K
During the quarterly period covered by this report, the Company
filed reports on Form 8-K dated April 7, 1998 (reporting on the
Company's issuance of $100,000,000 aggregate principal amount of
7.55% senior debentures due 2028) and June 26, 1998 (reporting
on, among other matters, the declaration of a "3 for 1" stock and
amendment of the Company's articles of incorporation to increase
the authorized number of Common shares in connection therewith.
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EXHIBIT INDEX
Sequentially
------------
Exhibit No. Description Numbered Page
- ----------- ----------- -------------
(3) Restated Articles of Incorporation of The First
American Financial Corporation (the "Company"),
incorporated by reference herein from Exhibit
3.1 of the Company's Registration Statement on
Form S-4 dated July 28, 1998
(4) Senior Indenture dated as of April 7, 1998,
between The First American Financial Corporation
and Wilmington Trust Company as Trustee,
incorporated by reference herein from
Exhibit (4) from Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998.
(27) Financial Data Schedule, incorporated by
reference herein from Exhibit (27) from
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998.
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