<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, 2000
--------------------------------------------------
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 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.)
1 First American Way, Santa Ana, California 92707-5913
--------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(714)800-3000
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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 - 63,600,983 shares as of November 7, 2000
<PAGE>
INFORMATION INCLUDED IN REPORT
------------------------------
Part I: Financial Information
Item 1. Financial Statements
A. Condensed Consolidated Balance Sheets
B. Condensed Consolidated Statements of Income and Comprehensive
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 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Items 2-5 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 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 10, 2000
2
<PAGE>
Part I: Financial Information
----------------------
Item 1: Financial Statements
--------------------
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Condensed Consolidated Balance Sheets
-------------------------------------
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 268,227,000 $ 350,010,000
-------------- --------------
Accounts and accrued income receivable, net 201,723,000 180,824,000
-------------- --------------
Income tax receivable 8,606,000
--------------
Investments:
Deposits with savings and loan associations and banks 36,279,000 32,225,000
Debt securities 207,867,000 226,369,000
Equity securities 43,567,000 39,266,000
Other long-term investments 94,659,000 86,686,000
-------------- --------------
382,372,000 384,546,000
-------------- --------------
Loans receivable 91,932,000 87,338,000
-------------- --------------
Property and equipment, at cost 689,445,000 566,841,000
Less- accumulated depreciation (242,893,000) (173,527,000)
-------------- --------------
446,552,000 393,314,000
-------------- --------------
Title plants and other indexes 276,535,000 250,723,000
-------------- --------------
Assets acquired in connection with claim settlements
(net of valuation reserves of $3,743,000 and $4,856,000) 25,051,000 24,196,000
-------------- --------------
Deferred income taxes 37,901,000 48,284,000
-------------- --------------
Goodwill and other intangibles, net 345,832,000 284,390,000
-------------- --------------
Other assets 108,374,000 104,183,000
-------------- --------------
$2,184,499,000 $2,116,414,000
============== ==============
Liabilities and Stockholders' Equity
Demand deposits $ 78,880,000 $ 80,843,000
-------------- --------------
Accounts payable and accrued liabilities 274,254,000 280,698,000
-------------- --------------
Deferred revenue 273,521,000 279,766,000
-------------- --------------
Reserve for known and incurred but not reported claims 281,324,000 273,724,000
-------------- --------------
Income taxes payable 10,820,000
--------------
Notes and contracts payable 216,720,000 196,815,000
-------------- --------------
Minority interests in consolidated subsidiaries 111,752,000 88,577,000
-------------- --------------
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 - 180,000,000 shares
Outstanding - 63,552,000 and 65,068,000 shares 63,552,000 65,068,000
Additional paid-in capital 167,289,000 184,759,000
Retained earnings 600,956,000 561,946,000
Accumulated other comprehensive income 5,431,000 4,218,000
-------------- --------------
837,228,000 815,991,000
-------------- --------------
$2,184,499,000 $2,116,414,000
============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Condensed Consolidated Statements of Income and Comprehensive Income
--------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30 September 30
--------------------------- ------------------------------
2000 1999 2000 1999
------------- ------------ -------------- --------------
<S> <C> <C> <C>
Revenues
Operating revenues $730,490,000 $757,729,000 $2,126,571,000 $2,246,526,000
Investment and other income 19,770,000 17,325,000 45,788,000 41,250,000
------------- ------------ -------------- --------------
750,260,000 775,054,000 2,172,359,000 2,287,776,000
------------- ------------ -------------- --------------
Expenses
Salaries and other personnel costs 260,250,000 264,809,000 773,513,000 779,824,000
Premiums retained by agents 192,803,000 229,966,000 585,398,000 668,746,000
Other operating expenses 176,845,000 169,994,000 511,994,000 502,600,000
Provision for title losses and other claims 36,764,000 30,108,000 104,327,000 85,549,000
Depreciation and amortization 22,790,000 19,507,000 61,112,000 55,574,000
Premium taxes 5,396,000 5,829,000 16,318,000 17,125,000
Interest 6,655,000 4,001,000 18,709,000 11,822,000
------------- ------------ -------------- --------------
701,503,000 724,214,000 2,071,371,000 2,121,240,000
------------- ------------ -------------- --------------
Income before income taxes,
minority interests and cumulative effect
of a change in accounting principle 48,757,000 50,840,000 100,988,000 166,536,000
Income taxes 19,000,000 17,766,000 39,200,000 57,466,000
------------- ------------ -------------- --------------
Income before minority interests and cumulative
effect of a change in accounting principle 29,757,000 33,074,000 61,788,000 109,070,000
Minority interests 5,358,000 5,081,000 11,355,000 18,183,000
------------- ------------ -------------- --------------
Income before cumulative effect of a
change in accounting principle 24,399,000 27,993,000 50,433,000 90,887,000
Cumulative effect of a change in accounting for
tax service contracts, net of income taxes and
minority interests - - - (55,640,000)
------------- ------------ -------------- --------------
Net income 24,399,000 27,993,000 50,433,000 35,247,000
------------- ------------ -------------- --------------
Other comprehensive income, net of tax 1,115,000 (3,584,000) 1,213,000 (4,199,000)
Unrealized gain (loss) on securities 175,000 (172,000) - (403,000)
------------- ------------ -------------- --------------
Minimum pension liability adjustment 1,290,000 (3,756,000) 1,213,000 (4,602,000)
------------- ------------ -------------- --------------
$ 25,689,000 $ 24,237,000 $ 51,646,000 $ 30,645,000
Comprehensive income ------------- ------------ -------------- --------------
Per share amounts:
Basic:
Income before cumulative effect of a change
in accounting for tax service contracts $ 0.38 $ 0.43 $ 0.79 $ 1.41
Cumulative effect of a change in
accounting for tax service contracts ($ 0.86)
------------- ------------ -------------- --------------
Net income $ 0.38 $ 0.43 $ 0.79 $ 0.55
------------- ------------ -------------- --------------
Diluted:
Income before cumulative effect of a change
in accounting for tax service contracts $ 0.37 $ 0.42 $ 0.77 $ 1.37
Cumulative effect of a change in
accounting for tax service contracts ($ 0.84)
------------- ------------ -------------- --------------
Net income $ 0.37 $ 0.42 $ 0.77 $ 0.53
============= ============ ============== ==============
Cash dividends per share $ .06 $ .06 $ .18 $ .18
============= ============ ============== ==============
Weighted average number of shares:
Basic 63,526,000 65,213,000 63,689,000 64,564,000
============= ============ ============== ==============
Diluted 66,088,000 66,166,000 65,700,000 66,296,000
============= ============ ============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Condensed Consolidated Statements of Cash Flows
-----------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 50,433,000 $ 35,247,000
Adjustments to reconcile net income to cash
provided by operating activities-
Provision for title losses and other claims 104,327,000 85,549,000
Depreciation and amortization 61,112,000 55,574,000
Minority interests in net income 11,355,000 18,183,000
Cumulative effect of a change in accounting
for tax service contracts 55,640,000
Investment gain (5,160,000)
Other, net (201,000) (805,000)
Changes in assets and liabilities excluding effects of
company acquisitions and noncash transactions-
Claims paid, including assets acquired, net of recove (98,582,000) (82,328,000)
Net change in income tax accounts 29,351,000 (50,161,000)
Increase in accounts and accrued income receivable (14,031,000) (2,077,000)
Decrease in accounts payable and accrued liabilities (15,382,000) (18,185,000)
(Decrease) increase in deferred revenue (11,140,000) 51,883,000
Other, net (6,500,000) (17,025,000)
------------- -------------
Cash provided by operating activities 110,742,000 126,335,000
------------- -------------
Cash flows from investing activities:
Net cash effect of company acquisitions/dispositions (39,908,000) (37,436,000)
Net (increase) decrease in deposits with banks (3,997,000) 6,914,000
Net increase in loans receivable (4,594,000) (9,478,000)
Purchases of debt and equity securities (40,580,000) (41,130,000)
Proceeds from sales of debt and equity securities 46,426,000 51,409,000
Proceeds from maturities of debt securities 11,302,000 11,083,000
Net decrease in other investments 972,000 4,257,000
Capital expenditures (112,846,000) (173,067,000)
Proceeds from sale of property and equipment 1,509,000 4,008,000
------------- -------------
Cash used for investing activities (141,716,000) (183,440,000)
------------- -------------
Cash flows from financing activities:
Net change in demand deposits (1,963,000) 7,038,000
Proceeds from issuance of debt 3,575,000 734,000
Repayment of debt (16,661,000) (12,856,000)
Proceeds from exercise of stock options 1,546,000 3,739,000
Proceeds from issuance of stock to employee savings plan 4,794,000
Repurchase of company shares (20,758,000)
Distributions to minority shareholders (5,125,000) (8,467,000)
Cash dividends (11,423,000) (11,928,000)
------------- -------------
Cash used for financing activities (50,809,000) (16,946,000)
------------- -------------
Net decrease in cash and cash equivalents (81,783,000) (74,051,000)
Cash and cash equivalents - Beginning of year 350,010,000 381,293,000
------------- -------------
- End of third quarter $ 268,227,000 $ 307,242,000
------------- -------------
Supplemental information:
Cash paid during the three quarters for:
Interest $ 17,722,000 $ 8,731,000
Premium taxes $ 17,142,000 $ 20,471,000
Income taxes $ 21,931,000 $ 88,466,000
Noncash investing and financing activities:
Shares issued for stock bonus plan $ 226,000 $ 3,369,000
Liabilities incurred in connection with company
acquisitions $ 44,740,000 $ 10,795,000
Purchase of minority interest $ 12,804,000
Company acquisitions in exchange for common stock $ 28,594,000
See notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE>
THE FIRST AMERICAN 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 Securities and Exchange 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, 1999. The results for
the three and nine months ended September 30, 1999, have been restated to
reflect the adoption of Staff Accounting Bulletin No. 101 (SAB 101), "Revenue
Recognition in Financial Statements." (See Note 2).
The Company's only potential dilutive common shares are stock options which are
reflected in diluted earnings per share by application of the treasure stock
method.
Note 2 - Revenue Recognition Accounting Policy
----------------------------------------------
In December 1999, the Company adopted SAB 101 which applies to the Company's tax
service operations. SAB 101 requires the deferral of the tax service fee and the
recognition of that fee as revenue ratably over the expected service period. As
a result of adopting SAB 101, the Company reported a charge of $55.6 million,
net of income taxes and minority interests, as a cumulative change in accounting
principle and restated its results for the three and nine months ended September
30, 1999. The restatement increased revenues, net income and net income per
diluted share (before the cumulative effect of a change in accounting principle)
by $12.5 million, $6.1 million and $.09 for the three months ended September 30,
1999, respectively, and $32.7 million, $15.9 million and $.24 for the nine
months ended September 30, 1999, respectively. During the three and nine months
ended September 30, 2000, the Company recognized $10.7 million and $25.5
million, respectively, in revenues that were included in the cumulative effect
adjustment.
Note 3 - Business Combinations
------------------------------
On July 31, 2000, the Company announced that it entered into a joint venture
with LandAmerica Financial Group, Inc., creating an advanced title information
delivery system. Under the terms of the agreement, the Company contributed
certain assets and liabilities of its Smart Title Solutions subsidiary and
LandAmerica contributed certain assets and liabilities of its Datatrace
subsidiary to a newly formed limited liability company. The combined entity will
be called Data Trace Information Services and, as majority owner, the Company
will act as managing partner of the venture. On August 2, 2000, the Company
announced the combination of its Real Estate Solutions division with
Transamerica Corporation's Intellitech real estate information business. The
combination created a data repository that covers more that 85 percent of
nation's property sales and mortgage financing transactions. In the transaction,
the Company and Transamerica formed a new limited partnership, in which the
Company has an 80 percent interest and management control. Both of these
transactions will be accounted for under the purchase method of accounting.
During the nine months ended September 30, 2000, the Company acquired 15
companies. These acquisitions were not material either individually or in the
aggregate and are included in the following business segments: 11 in the title
insurance segment, two in the real estate information segment and two in the
consumer information segment. The aggregate purchase price was $7.6 million in
cash, $9.5 million in notes payable and $17.9 million in equity interests.
Note 4 - Litigation
-------------------
On May 19, 1999, The People of the State of California, by the Attorney General
of the State of California, filed a class action suit in the Sacramento Superior
Court. The action seeks to certify as a class of defendants all "title
insurers," all "underwritten title companies" and all "controlled escrow
companies" (as those terms are defined in the California Insurance Code) and all
"independent escrow companies" (as the term is defined in the California
Financial Code) doing business in the State of California from 1970 to the
present who (i) hold dormant, unclaimed escrow funds; (ii) charged California
home buyers and other escrow customers $10.00 or more for delivery services or
administrative fees; (iii) charged California home buyers and
6
<PAGE>
other escrow customers reconveyance fees and/or (iv) earned interest (or its
equivalent) from financial institutions and on customers' deposited escrow
funds.
The plaintiffs allege that the defendants unlawfully (i) failed to escheat
unclaimed property to the Controller of the State of California on a timely
basis; (ii) charged California homebuyers and other escrow customers fees for
services that were never performed or which cost less than the amount charged;
and (iii) devised and carried out schemes with financial institutions to receive
interest, or monies in lieu of interest, on escrow funds deposited by defendants
with financial institutions in demand deposits.
Subsequent to the filing of the action by the State of California, two private
class actions were served against the title insurance industry in California.
The allegations in the complaints include some, but not all, of the allegations
contained in the complaint filed by the State of California. The private class
actions were stayed by court orders pending settlement negotiations relating to
the class action filed by the State of California. The Company has entered into
a series of negotiations with the Attorney General's office to discuss possible
settlement of the claims made by the State of California.
The Company does not believe that the ultimate resolution of these actions will
have a materially adverse effect on its financial condition or results of
operations.
Note 5 - Segment Information
----------------------------
The Company's operations include three reportable segments. Selected financial
information about the Company's operations by segment is as follows:
Operating revenues:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-----------------------------------------------------------------------------------------
($000) ($000)
2000 % 1999 % 2000 % 1999 %
----------- --------- ------------- -------- --------------- -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Title Insurance 521,998 71 559,387 74 1,527,258 72 1,645,230 73
Real Estate Information 141,501 20 143,220 19 408,151 19 451,228 20
Consumer Information 66,991 9 55,122 7 191,162 9 150,068 7
----------- --------- ------------- -------- --------------- -------- ------------- -----
Total $730,490 100 $757,729 100 $2,126,571 100 $2,246,526 100
=========== ========= ============= ======== =============== ======== ============= =====
</TABLE>
Income before income taxes, minority interests and cumulative effect of a change
in accounting principle:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-----------------------------------------------------------------------------------------
($000) ($000)
2000 % 1999 % 2000 % 1999 %
----------- -------- ------------ -------- -------------- -------- --------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Title Insurance $ 30,543 50 $ 31,946 55 $ 73,752 53 $116,183 58
Real Estate Information 19,915 33 17,574 30 36,030 26 63,014 31
Consumer Information 10,347 17 8,955 15 28,876 21 22,178 11
----------- -------- ------------ -------- -------------- -------- --------------- ------
Total before corporate expenses 60,805 100 58,475 100 138,658 100 201,375 100
======== ======== ======== ======
Corporate expenses (12,048) (7,635) (37,670) (34,839)
----------- ------------ -------------- ---------------
Total $ 48,757 $ 50,840 $100,988 $166,536
=========== ============ ============== ===============
</TABLE>
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Certain statements made in this 10Q, including those relating to anticipated
cash requirements, are forward looking. Risks and uncertainties exist which may
cause results to differ materially from those set forth in these forward-looking
statements. Factors that could cause the anticipated results to differ from
those described in the forward-looking statements include: interest rate
fluctuations; changes in the performance of the real estate markets; general
volatility in the capital markets; changes in applicable government regulations;
consolidation among the Company's significant customers and competitors; legal
proceedings commenced by the California attorney general and related litigation;
the Company's continued ability to identify businesses to be acquired; changes
in the Company's ability to integrate businesses which it acquires; and other
factors described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999, filed with the Securities and Exchange Commission. The
forward-looking statements speak only as of the date they are made. The Company
does not undertake to update forward-looking statements to reflect circumstances
or events that occur after the date the forward-looking statements are made.
RESULTS OF OPERATIONS
Three and nine months ended September 30:
OVERVIEW
Low mortgage interest rates and high consumer confidence, coupled with the
particularly strong California real estate market, resulted in record-setting
first half of the year revenues for the Company for the six months ended June
30, 1999. However, commencing in the second quarter 1999, new orders began to
soften as rising interest rates led to a significant decline in refinance
transactions, although residential resale and commercial activity remained
relatively strong. During the second half of 1999, the trend of higher interest
rates continued. New orders, including residential resale orders, continued to
decline. This, coupled with fourth quarter seasonal factors, decreased operating
revenues for the fourth quarter 1999 and resulted in a low inventory of open
orders going into the first quarter 2000. Accordingly, orders closed and
operating revenues for the first quarter 2000 decreased when compared with the
first quarter 1999. The trend of higher interest rates and low refinancings
continued into the second quarter 2000 and resulted in a decrease in orders
closed and operating revenues for the second quarter 2000 when compared with the
second quarter 1999. During the third quarter 2000, mortgage interest rates
decreased and order counts in the latter part of the quarter began to show
favorable comparisons when compared with the same period of the prior year.
This, coupled with the results of the Company's cost-containment programs,
resulted in net income and net income per diluted share for the third quarter
2000 of $24.4 million and $0.37, respectively.
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)
2000 % 1999 % 2000 % 1999 %
-------------- ---------- -------------- --------- ---------------- -------- ----------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Title Insurance:
Direct operations $280,152 38 $273,310 36 $ 799,585 38 $ 813,640 36
Agency operations 241,846 33 286,077 38 727,673 34 831,590 37
-------------- ---------- -------------- --------- ---------------- -------- ----------------- -----
521,998 71 559,387 74 1,527,258 72 1,645,230 73
Real Estate Information 141,501 20 143,220 19 408,151 19 451,228 20
Consumer Information 66,991 9 55,122 7 191,162 9 150,068 7
-------------- --------- --------------- --------- ---------------- -------- ----------------- -----
Total $730,490 100 $757,729 100 $2,126,571 100 $2,246,526 100
============== ========= =============== ========= ================ ======== ================= =====
</TABLE>
Title Insurance. Operating revenues from direct title operations increased 2.5%
and decreased 1.7% for the three and nine months ended September 30, 2000,
respectively, when compared with the same periods of the prior year. The
increase for the three-month period was attributable to an increase in the
average revenues per order closed, offset in part by a decrease in the number of
orders closed by the Company's direct operations. The decrease for the
nine-month period was due to a decrease in the number of orders closed, offset
in part by an increase in the average revenues per order closed. The average
revenues per order closed were $1,137 and $1,084 for the three and nine months
ended September 30, 2000, respectively, as compared with $988 and $913 for the
same periods of the prior year. These increases were primarily due to the shift
in the mix of business
8
<PAGE>
from refinance to resale, appreciating residential real estate values and an
increase in commercial activity. The Company's direct operations closed 246,500
and 737,700 title orders during the current three and nine month periods,
respectively, decreases of 10.9% and 17.2% when compared with 276,700 and
890,800 closed during the same periods of the prior year. These decreases were
primarily due to the factors mentioned above in the Overview section. Operating
revenues from agency operations decreased 15.5% and 12.5% for the three and nine
months ended September 30, 2000, respectively, when compared with the same
periods of the prior year. These decreases were primarily due to the same
factors affecting direct operations mentioned above, compounded by the inherent
delay in reporting by agents, which reflects the relatively high agency revenues
for the third quarter of the prior year due to the strong operating results
experienced by the agents during the second quarter of 1999.
Real Estate Information. Real estate information operating revenues decreased
1.2% and 9.5% for the three and nine months ended September 30, 2000,
respectively, when compared with the same periods of the prior year. These
decreases were primarily due to the decrease in refinance activity, offset in
part by $10.8 million and $20.6 million of operating revenues contributed by new
acquisitions for the respective periods.
Consumer Information. Consumer information operating revenues increased 21.5%
and 27.4% for the three and nine months ended September 30, 2000, respectively,
when compared with the same periods of the prior year. These increases were
primarily attributable to an increased awareness and acceptance of this business
segment's products, as well as $4.7 million and $14.6 million of operating
revenues contributed by new acquisitions for the respective periods.
INVESTMENT AND OTHER INCOME
Investment and other income totaled $19.8 million and $45.8 million for the
three and nine months ended September 30, 2000, respectively, representing
increases of $2.4 million, or 14.1%, and $4.5 million, or 11.0%, when compared
with the same periods of the prior year. These increases primarily reflect an
increase in investment income and increased earnings of unconsolidated
subsidiaries, which are accounted for under the equity method of accounting,
offset in part by a reduction in realized investment gains. Included in the
prior year quarter is an investment gain of $5.2 million resulting from stock
received in the demutualization of a life insurance company which insures a
large portion of the Company's corporate-owned life insurance portfolio.
Included in the current year quarter is an investment gain of $2.7 million
relating to the previously announced joint ventures with LandAmerica and
Transamerica.
TOTAL OPERATING EXPENSES
Title Insurance. Salaries and other personnel costs were $179.7 million and
$535.6 million for the three and nine months ended September 30, 2000,
respectively, decreases of 4.9% and 2.7% when compared with the same periods of
the prior year. Excluding acquisitions, the decreases were $19.9 million, or
10.5%, and $38.1 million, or 6.9%, respectively. These decreases were primarily
due to cost containment measures which included staff reductions in the
production area (consistent with the decrease in orders) and the consolidation
of certain administrative functions within the Company's regional structure. In
addition, as part of the cost containment measures, the Company began to
restructure certain components of its employee benefit programs, contributing
approximately $6 million to the expense reduction for the quarter ended
September 30, 2000.
Agents retained $192.8 million and $585.4 million of title premiums generated by
agency operations for the three and nine months ended September 30, 2000,
respectively, which compares with $230.0 million and $668.7 million for the same
periods of the prior year. The percentage of title premiums retained by agents
ranged from 79.7% to 80.4% 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 $93.8 million and $263.6 million for the three and
nine months ended September 30, 2000, respectively, increases of $10.4 million,
or 12.5%, and $25.3 million, or 10.6%, when compared with the same periods of
the prior year. These increases were primarily attributable to approximately
$3.7 million and $11.1 million of expense related to leased equipment, and
approximately $7.0 million and $12.8 million of expenses related to new
acquisitions for the three and nine months ended September 30, 2000,
respectively. Contributing to the increase for both periods were costs incurred
to update and maintain the Company's expanding databases and increased
technology costs, partially offset by the results of the Company's cost-
containment programs.
The provision for title losses as a percentage of title insurance operating
revenues was 3.7% for the nine months ended September 30, 2000 and 3.0% for the
same period of the prior year. The increase in loss percentage reflects the
shift in business mix from refinance, which is typically associated with low
claims experience, to resale, which tends to have a slightly higher claims
experience.
Premium taxes for title insurance were $14.6 million and $15.9 million for the
nine months ended September 30, 2000 and 1999, respectively. Expressed as a
percentage of title insurance operating revenues, premium taxes were
approximately 1.0% for both periods.
9
<PAGE>
Real Estate Information. Real estate information personnel and other operating
expenses were $116.1 million and $345.8 million for the three and nine months
ended September 30, 2000, respectively, an increase of 0.2% and a decrease of
4.1% when compared with the same periods of the prior year. Excluding
acquisitions, real estate information personnel and other operating expenses
decreased $9.5 million, or 8.2%, and $35.6 million, or 9.9%, for the three and
nine months ended September 30, 2000, respectively, when compared with the same
periods of the prior year. These decreases were primarily attributable to the
results of the Company's cost-containment programs.
Consumer Information. Consumer information personnel and other operating
expenses were $41.6 million and $121.5 million for the three and nine months
ended September 30, 2000, respectively, increases of 11.0% and 19.4% when
compared with the same periods of the prior year. These increases were
primarily attributable to costs incurred servicing the increased business volume
as well as $3.5 million and $8.4 million of costs associated with new
acquisitions for the three and nine months ended September 30, 2000,
respectively. The provision for consumer information losses principally
reflects home warranty claims and, to a lesser extent, property and casualty
insurance claims. The provision for home warranty losses, expressed as a
percentage of home warranty operating revenues, was 52.0% for the nine months
ended September 30, 2000, and 49.9% for the same period of the prior year. This
increase was primarily due to an increase in the average number of claims per
contract. The provision for property and casualty losses, expressed as a
percentage of property and casualty operating revenues is averaging 42%.
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS
Set forth below is a summary of income before income taxes, minority interests
and cumulative effect of a change in accounting principle for each of the
Company's segments.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------- -----------------------------
($000) ($000)
2000 % 1999 % 2000 % 1999 %
---------- --- -------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Title Insurance $ 30,543 50 $31,946 55 $ 73,752 53 $116,183 58
Real Estate Information 19,915 33 17,574 30 36,030 26 63,014 31
Consumer Information 10,347 17 8,955 15 28,876 21 22,178 11
-------- --- ------- --- -------- --- -------- ---
Total before corporate expenses 60,805 100 58,475 100 138,658 100 201,375 100
=== === === ===
Corporate expenses (12,048) (7,635) (37,670) (34,839)
-------- ------- -------- --------
Total $ 48,757 $50,840 $100,988 $166,536
======== ======= ======== ========
</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 or decrease based on the volume of residential
real estate loan transactions. Consumer information profits are unaffected by
real estate or mortgage interest rate activity and increase as the level of
business volume increases. Net corporate expenses increased $4.4 million for the
three months ended September 30, 2000, when compared with the same period of the
prior year. This increase was primarily due to the previously mentioned $5.2
million gain recognized in the prior year quarter resulting from stock received
in the demutualization of a life insurance company.
INCOME TAXES
The effective income tax rate, which includes a provision for state income and
franchise taxes for non-insurance subsidiaries, was 38.8% for the nine months
ended September 30, 2000, and 34.5% for the same period of the prior year. The
increase in effective rate was primarily attributable to an increase in state
income and franchise taxes which resulted from the Company's non-insurance
subsidiaries' contribution to pretax profits and changes in the ratio of
permanent differences to pretax profits.
10
<PAGE>
MINORITY INTERESTS
Minority interest expense was $5.4 million for the three months ended September
30, 2000, an increase of $0.3 million when compared with the same period of the
prior year. Minority interest expense was $11.4 million for the nine months
ended September 30, 2000, a decrease of $6.8 million when compared with the same
period of the prior year. These changes were primarily attributable to the
relative changes in operating results of the Company's joint venture with
Experian caused primarily by the previously noted decline in refinance activity.
NET INCOME
Net income for the three and nine months ended September 30, 2000, was $24.4
million, or $0.37 per diluted share, and $50.4 million, or $0.77 per diluted
share, respectively. Net income for the three and nine months ended September
30, 1999, was $28.0 million, or $0.42 per diluted share, and $90.9 million, or
$1.37 per diluted share, respectively. Net income for the nine months ended
September 30, 1999, excludes the cumulative effect of a change in accounting for
tax service contracts.
LIQUIDITY AND CAPITAL RESOURCES
Total cash and cash equivalents decreased $81.8 million and $74.1 million for
the nine months ended September 30, 2000 and 1999, respectively. The decrease
for the current period was primarily due to capital expenditures, company
acquisitions and the repurchase of Company shares. The decrease for the
prior-year period was primarily due to capital expenditures and company
acquisitions.
Notes and contracts payable as a percentage of total capitalization increased to
17.1% at September 30, 2000, from 16.4% at December 31, 1999. This increase was
primarily due to new debt issued for company acquisitions during the first half
of the year.
Management believes that all of its anticipated operating cash requirements for
the immediate future will be met from internally generated funds.
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, 1999.
11
<PAGE>
Part II: Other Information
-----------------
Item 1. Legal Proceedings
-----------------
Certain developments in the legal proceedings initiated by The People
of the State of California, et al along with two private class actions
are reported in the Company's Quarterly Report on Form 10Q for the
first quarter ended March 31, 2000.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
(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 November 1, 2000 (reporting on
the Company's third quarter earnings).
12
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit No. Description Numbered Page
----------- ----------- -------------
(27) Financial Data Schedule
13
