<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 March 31, 1999
--------------
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 Identification No.)
incorporation or organization)
114 East Fifth Street, Santa Ana, California 92701-4699
---------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(714)558-3211
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(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 - 61,748,280 as of May 10, 1999
<PAGE>
INFORMATION INCLUDED IN REPORT
------------------------------
Part I: Financial Information
Item 1. Financial Statements
A. Condensed Consolidated Balance Sheets
B. Condensed Consolidated Statements of Income
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
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II: Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Items 1-3, and 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: May 13, 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>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 306,651,000 $ 375,440,000
-------------- ----------------
Accounts and accrued income receivable, net 209,731,000 191,122,000
-------------- ----------------
Investments:
Deposits with savings and loan associations and banks 20,529,000 32,974,000
Debt securities 231,005,000 227,685,000
Equity securities 29,496,000 27,338,000
Other long-term investments 73,196,000 63,244,000
-------------- ----------------
354,226,000 351,241,000
-------------- ----------------
Loans receivable 74,679,000 72,035,000
-------------- ----------------
Property and equipment, at cost 527,411,000 480,053,000
Less- accumulated depreciation (178,300,000) (166,414,000
-------------- ----------------
349,111,000 313,639,000
-------------- ----------------
Title plants and other indexes 220,045,000 216,711,000
-------------- ----------------
Assets acquired in connection with claim settlements
(net of valuation reserves of $10,127,000 and $11,135,000) 16,668,000 17,051,000
-------------- ----------------
Deferred income taxes 17,677,000 12,859,000
-------------- ----------------
Goodwill and other intangibles, net 174,639,000 171,790,000
-------------- ----------------
Other assets 78,947,000 62,902,000
-------------- ----------------
$1,802,374,000 $1,784,790,000
============== ================
Liabilities and Stockholders' Equity
Demand deposits $ 68,946,000 $ 67,404,000
-------------- ----------------
Accounts payable and accrued liabilities 220,631,000 256,707,000
-------------- ----------------
Deferred revenue 125,108,000 105,496,000
-------------- ----------------
Reserve for known and incurred but not reported claims 260,291,000 270,436,000
-------------- ----------------
Income taxes payable 25,468,000 22,734,000
-------------- ----------------
Notes and contracts payable 126,001,000 130,193,000
-------------- ----------------
Minority interests in consolidated subsidiaries 98,616,000 99,905,000
-------------- ----------------
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
Authorized - 108,000,000 shares
Outstanding - 61,345,000 and 60,332,000 shares 61,345,000 60,332,000
Additional paid-in capital 152,742,000 129,664,000
Retained earnings 555,492,000 534,297,000
Accumulated other comprehensive income 7,734,000 7,622,000
-------------- ----------------
777,313,000 731,915,000
-------------- ----------------
$1,802,374,000 $1,784,790,000
============== ================
</TABLE>
2
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Condensed Consolidated Statements of Income
-------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues
Operating revenues $695,545,000 $568,802,000
Investment and other income 11,381,000 43,435,000
------------ ------------
706,926,000 612,237,000
------------ ------------
Expenses
Salaries and other personnel costs 246,841,000 202,846,000
Premiums retained by agents 210,568,000 140,045,000
Other operating expenses 152,065,000 138,587,000
Provision for title losses and other 25,770,000 27,328,000
claims
Depreciation and amortization 16,574,000 13,809,000
Premium taxes 5,211,000 4,154,000
Interest 4,532,000 3,582,000
------------ ------------
661,561,000 530,351,000
------------ ------------
Income before income taxes and
minority interests 45,365,000 81,886,000
Income taxes 15,400,000 29,400,000
------------ ------------
Income before minority interests 29,965,000 52,486,000
Minority interests 5,088,000 7,753,000
------------ ------------
Net income 24,877,000 44,733,000
------------ ------------
Other comprehensive income (loss), net of tax:
Unrealized gain on securities 362,000 400,000
Minimum pension liability adjustment (250,000)
------------ ------------
112,000 400,000
------------ ------------
Comprehensive income $ 24,989,000 $ 45,133,000
============ ============
Net income per share:
Basic $0.41 $0.82
============ ============
Diluted $0.40 $0.79
============ ============
Cash dividends per share $.06 $.05
============ ============
Weighted average number of shares:
Basic 60,590,000 54,760,000
============ ============
Diluted 62,907,000 56,578,000
============ ============
</TABLE>
3
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Condensed Consolidated Statements of Cash Flows
-----------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 24,877,000 $ 44,733,000
Adjustments to reconcile net income to cash
provided by (used for) operating activities-
Provision for title losses and other claims 25,770,000 27,328,000
Depreciation and amortization 16,574,000 13,809,000
Minority interests in net income 5,088,000 7,753,000
Investment gain (32,449,000)
Other, net 297,000 (2,287,000)
Changes in assets and liabilities excluding
effects of company acquisitions and noncash
transactions-
Claims paid, including assets acquired,
net of recoveries (25,800,000) (24,336,000)
Net change in income tax accounts (6,553,000) 28,829,000
Increase in accounts and accrued income
receivable (19,296,000) (25,877,000)
(Decrease) increase in accounts payable and
accrued liabilities (39,885,000) 15,909,000
Increase (decrease) in deferred revenue 19,612,000 (5,954,000)
Other, net (10,956,000) 5,495,000
------------ ------------
Cash (used for) provided by operating activities (10,272,000) 52,953,000
------------ ------------
Cash flows from investing activities:
Net cash effect of company acquisitions/
dispositions (6,528,000) (3,396,000)
Net decrease in deposits with banks 12,445,000 2,601,000
Net increase in loans receivable (2,644,000) (3,195,000)
Purchases of debt and equity securities (10,674,000) (15,625,000)
Proceeds from sales of debt and equity securities 2,562,000 14,679,000
Proceeds from maturities of debt securities 1,950,000 5,594,000
Net decrease in other investments 595,000 1,001,000
Capital expenditures (53,761,000) (21,548,000)
Proceeds from sale of property and equipment 69,000 204,000
------------ ------------
Cash used for investing activities (55,986,000) (19,685,000)
------------ ------------
Cash flows from financing activities:
Net change in demand deposits 1,542,000 (482,000)
Repayment of debt (4,191,000) (4,659,000)
Proceeds from excercise of stock options 170,000 700,000
Proceeds from issuance of stock to employee
savings plan 4,679,000 4,096,000
Distributions to minority shareholders (1,049,000)
Cash dividends (3,682,000) (2,987,000)
------------ ------------
Cash used for financing activities (2,531,000) (2,987,000)
------------ ------------
Net (decrease) increase in cash and cash
equivalents (68,789,000) 30,281,000
Cash and cash equivalents - Beginning of year 375,440,000 181,531,000
------------ ------------
- End of first quarter $306,651,000 $211,812,000
============ ============
Supplemental information:
Cash paid during the first quarter for:
Interest $ 366,000 $ 1,132,000
Premium taxes $ 9,448,000 $ 4,223,000
Income taxes $ 23,583,000 $ 5,097,000
Noncash investing and financing activities:
Shares issued for stock bonus plan $ 3,287,000 $ 2,623,000
Liabilities incurred in connection with
company acquisitions $ 2,580,000 $ 66,078,000
Company acquisitions in exchange for
common stock $ 15,955,000 $ 1,462,000
</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. This
report should be read in conjunction with the Company's Annual Report on Form
10-K for the year ended December 31, 1998. All consolidated results have been
restated to reflect the 1998 acquisitions accounted for under the pooling-of-
interests method of accounting. Certain 1998 interim amounts have been
reclassified to conform with the 1999 presentation.
Note 2 - Revenue Recognition Accounting Policy
- ----------------------------------------------
Effective January 1, 1999, the Company implemented a change to the accounting
policy for tax service contracts. The new accounting policy was adopted
prospectively and applies to all new loans serviced beginning January 1, 1999.
The new policy provides for a more ratable recognition of revenues, reducing the
amount recognized at the inception of the contract and recognizing it over the
expected service period. The amortization rates applied to recognize the
revenues assume a 10-year contract life and are adjusted to reflect prepayments.
The resulting rates by year (starting with year one) are 32%, 24%, 14%, 9%, 7%,
5%, 4%, 2%, 2% and 1%. The Company periodically reviews its tax service
contract portfolio to determine if there have been changes in contract lives
and/or changes in the number and/or timing of prepayments; accordingly, the
Company may adjust the rates to reflect current trends. Adoption of this new
policy resulted in an after tax earnings decrease of $7.4 million, or $0.12 per
diluted share, for the first quarter 1999.
Note 3 - Business Combination
- -----------------------------
During the three months ended March 31, 1999, the Company acquired three
companies accounted for under the purchase method of accounting. These
acquisitions, individually, and in the aggregate, were not material.
In November 1998 the Company entered into a definitive merger agreement with
National Information Group (NAIG). Under the terms of the agreement, which the
boards of directors of both companies unanimously approved, the NAIG
shareholders will receive .67 of a share of the Company's common stock for each
NAIG common share they own. In the merger, the Company expects to issue
approximately 3.2 million shares of its common stock. This business combination
will be accounted for under the pooling of interests method of accounting and is
expected to close by the end of May 1999. NAIG provides insurance tracking
services for mortgage and auto lenders and auto leasing companies. NAIG also
provides outsourcing services, lender-placed insurance products, flood zone
determinations and real estate tax services.
Note 4 - New Accounting Pronouncements
- --------------------------------------
Effective January 1, 1999, the Company adopted Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires the Company to capitalize interest costs
incurred and certain payroll-related costs of employees directly associated with
developing software. The adoption of SOP 98-1 did not have a material effect on
the Company's financial condition or results of operations.
5
<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; general volatility in the
capital markets; the demand for and the acceptance of the Company's products;
changes in applicable government regulations; consolidation among the Company's
customers; and contingencies associated with the Year 2000 issue. The Company's
actual results, performance or achievement could differ materially from those
expressed in or implied by forward looking statements, and, accordingly, no
assurances can be given that any of the events anticipated by the forward
looking statements will transpire or occur or, if any of them do so, what impact
they will have on the results of operations and financial condition of the
Company.
RESULTS OF OPERATIONS
Three months ended March 31:
OVERVIEW
Low mortgage interest rates and high consumer confidence, coupled with the
particularly strong California real estate market, resulted in strong revenues
and net income for the Company in the first quarter 1998. These conditions
continued throughout 1998 and into 1999, resulting in record-setting first
quarter revenues for the first quarter 1999. However, first quarter 1999
operating results were impacted by the previously announced change to the
revenue recognition policy for tax service contracts. This change, which became
effective January 1, 1999, on a prospective basis, resulted in an after tax
earnings decrease of $7.4 million, or 12 cents per diluted share. The new
policy provides for a more ratable recognition of revenues, reducing the amount
recognized at the inception of the contract and recognizing it over the expected
service period. Although this accounting change will cause a reduction in tax
service revenues and earnings recognized in the early years of each tax service
contract, the Company anticipates that commencing in the second year following
adoption, this method will begin to reduce the volatility in reported financial
results arising from the inherent cyclicality of the Company's tax service
business. Net income and net income per diluted share for the first quarter
1999 was $24.9 million and $0.40, respectively.
OPERATING REVENUES
Set forth below is a summary of operating revenues for each of the Company's
segments.
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------------------------
(in thousands, except percent)
1999 % 1998 %
--------- -------- ---------- -------
<S> <C> <C> <C> <C>
Title Insurance:
Direct operations $260,323 37 $225,719 40
Agency operations 260,661 38 176,536 31
--------- -------- ---------- -------
520,984 75 402,255 71
--------- -------- ---------- -------
Real Estate Information 136,738 20 134,320 24
Home Warranty 15,224 2 13,173 2
Consumer Risk 15,770 2 13,228 2
Trust and Banking 6,829 1 5,826 1
--------- -------- ---------- -------
Total $695,545 100 $568,802 100
========= ======== ========== =======
</TABLE>
Title Insurance. Operating revenues from direct title operations increased
15.3% when compared with the same period of the prior year. This increase was
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 295,100 title orders
during the current quarter, an increase of 13.2% when compared with 260,600
title orders closed during the same period of the prior year. This increase was
primarily due to the factors mentioned above, in particular, the strong real
estate market in California, a state heavily concentrated with direct
operations, as well as an increase in the Company's national market share. The
average revenues per order closed were $882 for the current three month period,
as compared with $866 for the same period of the prior year. This increase was
primarily due to appreciating residential real estate values. Operating revenues
from agency operations increased 47.7% when compared with the same period of the
prior year. This increase was primarily due to the high volume of orders
processed by agents during the fourth quarter of 1998 and not reported to the
Company until the current quarter, as well as the same factors affecting direct
operations mentioned above.
6
<PAGE>
Real Estate Information. Real estate information operating revenues increased
1.8% when compared with the same period of the prior year. This increase was
primarily attributable to the same economic factors affecting title insurance
mentioned above, as well as $7.4 million of operating revenues contributed by
new acquisitions, offset in part by a $15.0 million decrease in tax service
operating revenues attributable to the change in revenue recognition policy.
This amount will be recognized as revenues over the expected service period of
the tax service contracts.
Home Warranty. Home warranty operating revenues increased 15.6% when compared
with the same period of the prior year. This increase was primarily
attributable to improvements in the residential resale markets in which this
business segment operates.
Consumer Risk. Consumer risk management operating revenues increased 19.2%
when compared with the same period of the prior year. This increase was
primarily attributable to an increased awareness and acceptance of this business
segment's products, as well as increased market share.
INVESTMENT AND OTHER INCOME
Investment and other income totaled $11.4 million and $43.4 million for the
first quarter 1999 and 1998, respectively. This decrease was primarily
attributable to an investment gain of $32.4 million recognized in the first
quarter 1998 relating to the joint venture agreement with Experian.
TOTAL OPERATING EXPENSES
Title Insurance. Salaries and other personnel costs were $177.0 million, an
increase of 22.1% when compared with the same period of the prior year. This
increase was primarily due to costs incurred processing and closing the high
number of orders opened during the latter part of the fourth quarter 1998 and
the first quarter 1999 as well as $5.4 million of costs associated with new
acquisitions. Agents retained $210.6 million, or 80.8%, and $140.0 million, or
79.3%, of the title premiums generated by agency operations for the first
quarter 1999 and 1998, respectively. The percentage of title premiums retained
by agents varies from region to region. Accordingly, the geographical mix of
revenues from agency operations accounts for the variation in the percentage
amount of title premiums retained by agents.
Other operating expenses were $76.0 million, an increase of 11.8% when compared
with the same period of the prior year. This increase was primarily
attributable to the impact of certain incremental costs associated with
processing the high title order volume, as well as marginal price level
increases.
The provision for title losses as a percentage of title insurance operating
revenues was 3.0% for the current period and 3.9% for the same period of the
prior year. The decrease in loss percentage was due to an improvement in the
Company's claims experience.
Premium taxes for title insurance were $5.0 million for the current quarter and
$4.0 million for the same quarter of the prior year. Expressed as a percentage
of title insurance operating revenues, premium taxes were 1.0% for both periods.
Real Estate Information. Real estate information personnel and other operating
expenses were $118.3 million, an increase of 15.5% when compared with the same
period of the prior year. This increase was primarily due to $5.4 million of
costs associated with new acquisitions, costs incurred servicing the increased
business volume and slightly higher overhead costs attributable to the
integration of the new acquisitions.
Home Warranty. Home warranty personnel and other operating expenses were $5.1
million, an increase of 22.8% when compared with the same period of the prior
year. This increase was primarily attributable to costs incurred servicing the
increased business volume as well as increased expansion costs. The provision
for home warranty losses expressed as a percentage of home warranty operating
revenues was 47.9% and 51.4% for the first quarter 1999 and 1998, respectively.
The decrease in loss ratio was primarily due to a decrease in the average number
of claims per contract.
7
<PAGE>
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
March 31
---------------------------------------------------
(in thousands, except percent)
1999 % 1998 %
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Title Insurance $ 35,161 65 $ 30,261 52
Real Estate Information 9,773 18 20,873 36
Home Warranty 3,736 7 3,026 5
Consumer Risk 3,282 6 2,430 4
Trust and Banking 2,212 4 1,588 3
-------- -------- -------- ---------
Total before corporate 54,164 100 58,178 100
======== =========
Corporate (8,799) 23,708
-------- --------
Total $ 45,365 $ 81,886
======== ========
</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. As previously noted, real estate information pretax profits for the
first quarter 1999 were adversely impacted by the change to the revenue
recognition policy for tax service contracts. Included in Corporate for the
first quarter 1998 was an investment gain of $32.4 million relating to the joint
venture with Experian.
INCOME TAXES
The effective income tax rate was 33.9% for the current quarter and 35.9% for
the same period of the prior year. The decrease in effective rate was primarily
attributable to a decrease in state income and franchise taxes which resulted
from the Company's non-insurance subsidiaries contribution to pretax profits.
MINORITY INTERESTS
Minority interest expense was $5.1 million and $7.8 million for the first
quarter 1999 and 1998, respectively. This decrease was primarily attributable
to a decline in the operating results of the Company's joint venture with
Experian. The decline in operating results of the joint venture was primarily
due to the change in revenue recognition policy for tax service contracts.
NET INCOME
Net income for the current quarter was $24.9 million, or $0.40 per diluted
share, compared with net income of $44.7 million, or $0.79 per diluted share,
for the same period of the prior year. The net income for the prior year period
included an investment gain of $19.6 million, or $0.35 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
Total cash and cash equivalents decreased $68.8 million for the three months
ended March 31, 1999, and increased $30.3 million for the same period of the
prior year. The decrease for the current period was primarily due to cash used
for operating activities, capital expenditures
8
<PAGE>
and purchases of debt and equity securities. The increase for the prior year
period was primarily attributable to cash generated by operating activities,
offset in part by capital expenditures and repayment of debt.
Notes and contracts payable as a percentage of total capitalization decreased to
11.4% at March 31, 1999, from 12.3% at December 31, 1998. The decrease was
primarily attributable to net income for the period as well as increased
stockholders' equity resulting from the issuance of common stock in connection
with Company acquisitions.
Management believes that all of its anticipated cash requirements for the
immediate future will be met from internally generated funds.
Year 2000 Issue Update
- ----------------------
Overview - With the help of an outside consulting firm, in January 1997 the
Company created a Year 2000 Program Management Office and adopted a five-step
plan to address the Year 2000 Problem. The five steps of the plan are: (1)
awareness, (2) inventory/assessment, (3) renovation, (4) testing, and (5)
implementation. To implement the plan, the Company was divided into business
units comprised of: (a) the reporting regions of the title insurance
subsidiaries, (b) the subsidiary companies of the real estate information
services business, (c) the home warranty subsidiaries, (d) the trust and banking
subsidiaries and (e) various other subsidiaries.
The awareness phase involves communicating the nature and scope of the Year
2000 Problem to the management of the business units in order to engender strong
management support for its resolution. The inventory/assessment phase involves
the identification of information systems and non-information systems that
require renovation or replacement to become Year 2000 compliant. The renovation
phase involves the repair and/or replacement of the systems identified in the
prior phase. The testing phase involves the testing of repaired and replaced
systems. The implementation phase involves the integration of tested systems
into daily operations.
Substantially all of the phases of the plan, with the exception of the
implementation phase, have been completed. The implementation phase is expected
to be completed by June 30, 1999. However, all of the phases of the plan must be
revisited each time the Company acquires a new business. Accordingly, all
phases of the plan are still active.
The Company's efforts to survey the Year 2000 readiness of its significant
vendors, suppliers and customers continues. To date, the Company has not
received sufficient information from these parties about their Year 2000 plans
to predict the outcome of their efforts. Even after responses are received,
there can be no assurance that the systems of significant vendors, suppliers and
customers will be timely renovated.
Costs for the year 2000 problem - To date the Company has spent approximately
$17.2 million in implementing the Year 2000 plan. The Company expects to incur
an additional $10 million to $20 million in completing the Year 2000 plan.
About half the costs will be for hardware and software replacement and about
half will be for labor. The costs for hardware and software will be capitalized
and amortized over their estimated useful lives. Labor costs will be expensed
as incurred. Year 2000 plan costs are being funded through operating cash flow.
Contingency plans - Contingency plans for unexpected systems failures as a
result of the Year 2000 problem have been completed by approximately 90% of the
Company's business units.
9
<PAGE>
The Company is currently working to complete the balance of the business unit
contingency plans.
Review of the year 2000 plan - The Company engaged a consultant to review its
Year 2000 plan. Under the terms of this engagement, the consultant (1) reviewed
the operations of the Year 2000 Program Management Office, (2) reviewed the
Company's Year 2000 plan, and (3) reviewed the implementation of the Year 2000
plan at selected locations. From time to time during the review, the consultant
reported its findings to the Audit Committee of the Company's Board of Directors
and appropriate actions were taken by the Company in response.
Assurances - The costs to implement the Year 2000 plan and the target dates for
completion of the various phases of the Year 2000 plan are based on current
estimates. These estimates reflect numerous assumptions about future events,
including the continued availability of certain resources, the timing and
effectiveness of third party renovation plans and other factors. The Company
can give no assurance that these estimates will be achieved, and actual results
could differ materially from these estimates.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The Company's primary exposure to market risk relates to interest rate risk
associated with certain other financial instruments. Although the Company
monitors its risk associated with fluctuations in interest rates, it does not
currently use derivative financial instruments to hedge these risks.
The Company is also subject to equity price risk as related to its equity
securities. Although the Company has operations in certain foreign countries,
these operations, in the aggregate, are not material to the Company's financial
condition or results of operations.
There have been no material changes in the Company's risk since filing its Form
10K for the year ended December 31, 1998.
10
<PAGE>
Part II: Other Information
-----------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The annual meeting of shareholders (the "Meeting") of The First
American Financial Corporation (the "Company") was held on
Thursday, April 22, 1999.
(b) The names of the persons who were nominated to serve as directors
of the Company for the ensuing year are listed below, together with
a tabulation of the results of the voting with respect to each
nominee. Each of the persons named was nominated by management of
the Company and all such nominees were elected.
<TABLE>
<CAPTION>
Name of Nominee Votes For Votes Withheld
--------------- ---------- --------------
<S> <C> <C>
George J. Argyros 40,662,904 9,067,049
Gary J. Beban 48,485,270 1,244,683
J. David Chatham 48,485,133 1,244,820
William G. Davis 48,482,966 1,246,987
James L. Doti 48,486,049 1,243,904
Lewis W. Douglas, Jr. 48,218,167 1,511,786
Paul B. Fay, Jr. 48,215,652 1,514,301
D. P. Kennedy 48,479,355 1,250,598
Parker S. Kennedy 48,484,158 1,245,795
Anthony R. Moiso 40,718,218 9,011,735
Frank O'Bryan 48,486,042 1,243,911
Roslyn B. Payne 48,212,439 1,517,514
D. Van Skilling 48,481,253 1,248,700
Virginia Ueberroth 48,484,774 1,245,179
</TABLE>
(c) At the Meeting, the proposal to amend the Restated Articles of
Incorporation to increase the number of authorized Common shares
from 108,000,000 to 180,000,000 was approved by the holders of a
majority of the Company's Common shares represented at the Meeting
and entitled to vote.
<TABLE>
<CAPTION>
Votes For Votes Against Votes Withheld
--------- ------------- --------------
<S> <C> <C>
46,372,489 3,044,646 312,817
</TABLE>
(d) Also at the Meeting, the proposal to amend the Company's 1996
Stock Option Plan (to increase by 3,000,000 the number of Common
shares available for grant thereunder) was approved by the holders
of a majority of the Company's Common shares represented at the
Meeting and entitled to vote.
<TABLE>
<CAPTION>
Votes For Votes Against Votes Withheld
--------- ------------- --------------
<S> <C> <C>
32,010,991 17,329,732 389,229
</TABLE>
No other matters were voted upon at the Meeting or during the
quarter for which this report is filed.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
(3) Certificate of Amendment of Restated Articles of
Incorporation of The First American Financial Corporation
dated April 23, 1999.
(18) Accountant's Preferability Letter dated May 13, 1999
(27) Financial Data Schedule.
(b) Reports on Form 8-K
During the quarterly period covered by this report, the Company
filed a report on Form 8-K dated February 10, 1999, reporting on a
change in the Company's method of recognizing revenues from tax
service contracts.
11
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit No. Description Numbered Page
- ----------- ----------- -------------
(3) Certificate of Amendment of Restated Articles
of Incorporation of The First American
Financial Corporation dated April 23, 1999.
(18) Accountant's Preferability Letter dated May 13, 1999
(27) Financial Data Schedule
12
<PAGE>
EXHIBIT (3)
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
THE FIRST AMERICAN FINANCIAL CORPORATION
A California corporation
The undersigned certify that:
1. They are the president and secretary, respectively, of The First American
Financial Corporation, a California corporation.
2. The first paragraph of article SIXTH of the Restated Articles of
Incorporation of this corporation is amended to read in full as follows:
"SIXTH: This Corporation is authorized to issue two classes
of shares, to be designated Common and Preferred,
respectively. The number of Common Shares authorized to be
issued is 180,000,000. The aggregate par value of such Common
Shares is $180,000,000 and the par value of each such share
is $1.00. Each Common share shall have one vote per share.
The number of Preferred shares authorized to be issued is
500,000. The aggregate par value of such Preferred shares is
$500,000 and the par value of each such share is $1.00. The
Board of Directors may fix by resolution the rights,
preferences, privileges and restrictions of any wholly unissued
class or series of shares other than the Common shares, and the
series designation and number of shares to constitute any
series (which number may thereafter in the same manner be
increased or decreased), and a certificate of determination
shall then be filed with the California Secretary of State."
3. The foregoing amendment has been approved by the board of directors of this
corporation.
4. The foregoing amendment was approved by the required vote of shareholders
in accordance with sections 902 and 903 of the California Corporations Code. The
total number of outstanding shares entitled to vote with respect to the
1
<PAGE>
foregoing amendment was 60,250,455 Common shares. The number of such Common
shares voting in favor of the foregoing amendment equaled or exceeded the
vote required. The percentage vote required was more than 50 percent. No
Preferred shares are outstanding.
Each of the undersigned declares under penalty of perjury that the statements
set forth in the foregoing certificate are true and correct of his own knowledge
and that this declaration was executed at Santa Ana, California, on April 23,
1999.
/s/ PARKER S. KENNEDY
------------------------------
Parker S. Kennedy
President
/s/ MARK R. ARNESEN
------------------------------
Mark R. Arnesen
Secretary
2
<PAGE>
EXHIBIT (18)
May 13, 1999
To the Board of Directors
of The First American Financial Corporation
Dear Directors:
We have been furnished with a copy of The First American Financial Corporation's
(the Company) Form 10-Q for the quarter ended March 31, 1999. Note 2 therein
describes a change in the method of recognizing revenue on tax service
contracts. It should be understood that the preferability of one acceptable
method of revenue recognition over another has not been addressed in any
authoritative accounting literature and in arriving at our opinion expressed
below, we have relied on management's business planning and judgment. Based upon
our discussions with management and the stated reasons for the change, we
believe that such change represents, in your circumstances, the adoption of a
preferable alternative accounting principle for revenue recognition for tax
service contracts in conformity with Accounting Principles Board Opinion No. 20.
We have not made an audit in accordance with generally accepted auditing
standards of the financial statements of The First American Financial
Corporation for the three-month periods ended March 31, 1999 and 1998 and,
accordingly, we express no opinion thereon or on the financial information filed
as part of the Form 10-Q of which this letter is to be an exhibit.
Yours very truly,
PricewaterhouseCoopers LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 231,005,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 29,496,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 354,226,000
<CASH> 306,651,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 5,353,000
<TOTAL-ASSETS> 1,802,374,000
<POLICY-LOSSES> 260,291,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 126,001,000
0
0
<COMMON> 61,345,000
<OTHER-SE> 715,968,000
<TOTAL-LIABILITY-AND-EQUITY> 1,802,374,000
659,545,000
<INVESTMENT-INCOME> 10,611,000
<INVESTMENT-GAINS> 770,000
<OTHER-INCOME> 0
<BENEFITS> 25,770,000
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 40,277,000
<INCOME-TAX> 15,400,000
<INCOME-CONTINUING> 24,877,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,877,000
<EPS-PRIMARY> .41
<EPS-DILUTED> .40
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
