<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 March 31, 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 FINANCIAL CORPORATION
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Incorporated in California 95-1068610
--------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1 First American Way, Santa Ana, California 92707-5913
--------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(714) 800-3000
----------------------------------------------------
(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 - 63,366,856 as of May 8, 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
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 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: August 3, 2000
1
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Condensed Consolidated Balance Sheets
-------------------------------------
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C>
Assets
Cash and cash equivalents $ 275,323,000 $ 350,010,000
-------------- --------------
Accounts and accrued income receivable, net 184,089,000 180,824,000
-------------- --------------
Income tax receivable 11,589,000 8,606,000
-------------- --------------
Investments:
Deposits with savings and loan associations
and banks 32,217,000 32,225,000
Debt securities 215,017,000 226,369,000
Equity securities 45,190,000 39,266,000
Other long-term investments 90,155,000 86,686,000
-------------- --------------
382,579,000 384,546,000
-------------- --------------
Loans receivable 87,099,000 87,338,000
-------------- --------------
Property and equipment, at cost 587,096,000 566,841,000
Less-accumulated depreciation (183,023,000) (173,527,000)
-------------- --------------
404,073,000 393,314,000
-------------- --------------
Title plants and other indexes 264,349,000 250,723,000
-------------- --------------
Assets acquired in connection with claim
settlements (net of valuation reserves
of $4,345,000 and $4,856,000) 24,996,000 24,196,000
-------------- --------------
Deferred income taxes 43,042,000 48,284,000
-------------- --------------
Goodwill and other intangibles, net 290,379,000 284,390,000
-------------- --------------
Other assets 93,181,000 104,183,000
-------------- --------------
$2,060,699,000 $2,116,414,000
============== ==============
Liabilities and Stockholders' Equity
Demand deposits $ 76,920,000 $ 80,843,000
-------------- --------------
Accounts payable and accrued liabilities 253,834,000 280,698,000
-------------- --------------
Deferred revenue 277,763,000 279,766,000
-------------- --------------
Reserve for known and incurred but not
reported claims 270,520,000 273,724,000
-------------- --------------
Notes and contracts payable 199,932,000 196,815,000
-------------- --------------
Minority interests in consolidated
subsidiaries 88,125,000 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 - 63,347,000 and 65,068,000
shares 63,347,000 65,068,000
Additional paid-in capital 166,030,000 184,759,000
Retained earnings 559,147,000 561,946,000
Accumulated other comprehensive income 5,081,000 4,218,000
-------------- --------------
793,605,000 815,991,000
-------------- --------------
$2,060,699,000 $2,116,414,000
============== ==============
</TABLE>
See notes to condensed consolidated financial statements
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
-----------------------------
2000 1999
------------ -------------
<S> <C> <C>
Revenues
Operating revenues $635,865,000 $ 719,187,000
Investment and other income 10,309,000 11,680,000
------------ -------------
646,174,000 730,867,000
------------ -------------
Expenses
Salaries and other personnel costs 250,204,000 255,412,000
Premiums retained by agents 167,122,000 210,568,000
Other operating expenses 166,360,000 158,163,000
Provision for title losses and other claims 30,123,000 27,021,000
Depreciation and amortization 17,416,000 16,919,000
Premium taxes 5,288,000 5,309,000
Interest 5,776,000 4,789,000
------------ -------------
642,289,000 678,181,000
------------ -------------
Income before income taxes,
minority interests and cumulative effect
of a change in accounting principle 3,885,000 52,686,000
Income taxes 800,000 17,706,000
------------ -------------
Income before minority interests and cumulative
effect of a change in accounting principle 3,085,000 34,980,000
Minority interests 2,083,000 6,897,000
------------ -------------
Income before cumulative effect of a
change in accounting principle 1,002,000 28,083,000
Cumulative effect of a change in accounting for
tax service contracts, net of income taxes
and minority interests (55,640,000)
------------ -------------
Net income (loss) 1,002,000 (27,557,000)
------------ -------------
Other comprehensive income, net of tax
Unrealized gain on securities 863,000 308,000
Minimum pension liability adjustment (100,000) (250,000)
------------ -------------
763,000 58,000
------------ -------------
Comprehensive income (loss) $ 1,765,000 $ (27,499,000)
============ =============
Per share amounts:
Basic:
Income before cumulative effect of a change
in accounting for tax service contracts $ 0.02 $ 0.44
Cumulative effect of a change in
accounting for tax service contracts ($ 0.87)
------------ -------------
Net income (loss) $ 0.02 ($ 0.43)
------------ -------------
Diluted:
Income before cumulative effect of a change
in accounting for tax service contracts $ 0.02 $ 0.43
Cumulative effect of a change in
accounting for tax service contracts ($ 0.85)
------------ -------------
Net income (loss) $ 0.02 ($ 0.42)
------------ -------------
Cash dividends per share $ .06 $ .06
============ =============
Weighted average number of shares:
Basic 64,138,000 63,661,000
============ =============
Diluted 65,326,000 65,739,000
============ =============
</TABLE>
See notes to condensed consolidated financial statements
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
--------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,002,000 $(27,557,000)
Adjustments to reconcile net income to cash
used for operating activities-
Provision for title losses and other claims 30,123,000 27,021,000
Depreciation and amortization 17,416,000 16,919,000
Minority interests in net income 2,083,000 6,897,000
Cumulative effect of a change in accounting for tax service contracts 55,640,000
Other, net 2,980,000 297,000
Changes in assets and liabilities excluding effects of
company acquisitions and noncash transactions-
Claims paid, including assets acquired, net of recoveries (35,757,000) (26,537,000)
Net change in income tax accounts 1,794,000 (7,062,000)
Increase in accounts and accrued income receivable (3,245,000) (20,722,000)
Decrease in accounts payable and accrued liabilities (31,368,000) (40,772,000)
(Decrease) increase in deferred revenue (2,003,000) 20,639,000
Other, net 9,918,000 (16,969,000)
--------------- --------------
Cash used for operating activities (7,057,000) (12,206,000)
--------------- --------------
Cash flows from investing activities:
Net cash effect of company acquisitions/dispositions (4,338,000) (6,528,000)
Net decrease in deposits with banks 8,000 12,445,000
Net decrease (increase) in loans receivable 239,000 (2,644,000)
Purchases of debt and equity securities (13,584,000) (11,473,000)
Proceeds from sales of debt and equity securities 15,752,000 2,912,000
Proceeds from maturities of debt securities 4,605,000 2,334,000
Net (increase) decrease in other investments (4,133,000) 595,000
Capital expenditures (32,132,000) (54,542,000)
Proceeds from sale of property and equipment 949,000 69,000
--------------- --------------
Cash used for investing activities (32,634,000) (56,832,000)
--------------- --------------
Cash flows from financing activities:
Net change in demand deposits (3,923,000) 1,542,000
Proceeds from issuance of debt 404,000
Repayment of debt (4,950,000) (4,484,000)
Proceeds from exercise of stock options 79,000 768,000
Proceeds from issuance of stock to employee savings plan 4,679,000
Repurchase of company shares (20,755,000)
Distributions to minority shareholders (2,049,000) (1,049,000)
Cash dividends (3,801,000) (4,104,000)
--------------- --------------
Cash used for financing activities (34,995,000) (2,648,000)
--------------- --------------
Net decrease in cash and cash equivalents (74,686,000) (71,686,000)
Cash and cash equivalents - Beginning of year 350,010,000 381,293,000
--------------- --------------
- End of first quarter $275,324,000 $309,607,000
=============== ==============
Supplemental information:
Cash paid during the first quarter for:
Interest $ 1,264,000 $ 441,000
Premium taxes $ 5,630,000 $ 9,723,000
Income taxes $ 4,504,000 $ 23,583,000
Noncash investing and financing activities:
Shares issued for stock bonus plan $ 226,000 $ 3,287,000
Liabilities incurred in connection with company acquisitions $ 14,927,000 $ 2,580,000
Company acquisitions in exchange for common stock $ 15,955,000
</TABLE>
See notes to condensed consolidated financial statements
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, 1999. The results for the three months
ended March 31, 1999, have been restated to reflect a 1999 acquisition accounted
for under the pooling-of-interests method of accounting and the adoption of
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." (See Note 2).
Note 2 - Revenue Recognition Accounting Policy
----------------------------------------------
In December 1999, the Company adopted SAB 101, which became effective January 1,
1999, and 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
quarterly results for the three months ended March 31, 1999. The restatement
increased revenues, net income and net income per diluted share (before the
cumulative effect of a change in accounting principle) by $8.8 million, $4.2
million and $.05, respectively. During the three months ended March 31, 2000,
the Company recognized $7.1 million in revenues that were included in the
cumulative effect adjustment.
Note 3 - Business Combinations
------------------------------
During the three months ended March 31, 2000, the Company acquired five
companies, all in the title insurance segment, accounted for under the purchase
method of accounting. These acquisitions were not material either individually
or in the aggregate.
Note 4 - Litigation
-------------------
On May 19, 1999, The People of the State of California, Kathleen Connell,
Controller of the State of California, and Chuck Quackenbush, Insurance
Commissioner 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 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.
In February 2000, the company entered into an administrative settlement with the
California Department of Insurance (DOI), whereby the DOI released the company
from any further claim of liability as to the company's receipt of earnings
credits or any alleged overcharges for various miscellaneous escrow fee items,
such as courier, Federal Express or wire service fees. The DOI further agreed
to direct the attorney general to dismiss it as a plaintiff from the action
brought by the State of California. In the settlement with the DOI, the company
agreed to (i) make a contribution to a consumer education fund and (ii) accept a
5
<PAGE>
new regulation to be promulgated by the DOI, whereby earnings credit programs
will be authorized and regulated by the DOI and rate filings will be required
for escrow fees including several specified miscellaneous fee items.
Subsequent to the filing of the action by the State of California, First
American Title Insurance Company was named and served as a defendant in two
private class actions. 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 have been stayed by court orders pending
settlement negotiations relating to the class action filed 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.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
Any statements in this document that look forward in time involve risks and
uncertainties, including but not limited to the following: 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; continued consolidation among the
Company's significant customers; consolidation among significant competitors;
the impact of legal proceedings commenced by the California attorney general and
related litigation; the continued ability to identify businesses to be acquired;
and changes in the Company's ability to integrate businesses which it acquires.
The Company's actual results, performance or achievement could differ materially
from those expressed in, or implied by, any forward-looking statements.
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,
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 a record-setting
first quarter 1999. These conditions continued into the second quarter 1999 and
resulted in record-setting first half of the year revenues 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 in the first quarter 2000 decreased 22% when compared with the first
quarter of 1999. This resulted in decreased revenues and profits for the
current quarter. However, the decrease in revenues was mitigated in part by the
results of the cost-containment programs that were established in the latter
part of 1999 and have continued into the current quarter. Net income and net
income per diluted share for the first quarter 2000 was $1.0 million and $0.02,
respectively. Net income and net income per diluted share for the first quarter
1999 (excluding the cumulative effect of a change in accounting for tax service
contracts) was $28.1 million and $0.43, 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)
2000 % 1999 %
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Title Insurance:
Direct operations $235,946 37 $260,323 36
Agency operations 210,600 33 260,661 36
------------ -------- ------------ --------
446,546 70 520,984 72
Real Estate Information 128,757 20 152,470 21
Consumer Information 60,562 10 45,733 7
------------ -------- ------------ --------
Total $635,865 100 $719,187 100
============ ======== ============ ========
</TABLE>
Title Insurance. Operating revenues from direct title operations decreased 9.4%
when compared with the same period of the prior year. This decrease was
primarily attributable to a decline in the number of title orders closed by the
Company's direct operations, offset in part by an increase in the average
revenues per order closed. The Company's direct operations closed 230,300 title
orders during the current quarter, a decrease of 22.0% when compared with
295,100 title orders closed during the same period of the prior year. This
decrease was primarily due to the factors mentioned above. The average revenues
per order closed were $1,025 for the current three-month period, as compared
with $882 for the same period of the prior year. This increase was primarily
due to the shift in the mix of business from refinance to resale, appreciating
residential real estate values
7
<PAGE>
and an increase in commercial activity. Operating revenues from agency
operations decreased 19.2% when compared with the same period of the prior year.
This decrease was primarily due to the same conditions that affected direct
operations and the time lag in the reporting of agency remittances, which
reflects the weak fourth quarter 1999 closings experienced by the Company's
agents.
Real Estate Information. Real estate information operating revenues decreased
15.6% when compared with the same period of the prior year. This decrease was
primarily attributable to the same economic factors affecting title insurance
mentioned above, primarily the decrease in refinance transactions, which
decreased 70% in the current quarter when compared with the same quarter of the
prior year, and had a direct impact on this business segment's mortgage
origination products.
Consumer Information. Consumer information operating revenues increased 32.4%
when compared with the same period of the prior year. This increase was
primarily attributable to new acquisitions and an increased awareness and
acceptance of this business segment's products. New acquisitions accounted for
12.3% of the increase.
INVESTMENT AND OTHER INCOME
Investment and other income totaled $10.3 million and $11.7 million for the
first quarter 2000 and 1999, respectively. This decrease was primarily due to
the lower earnings of our affiliated companies, which are accounted for under
the equity method of accounting.
TOTAL OPERATING EXPENSES
Title Insurance. Salaries and other personnel costs were $173.2 million, a
decrease of 2.2% when compared with the same period of the prior year.
Excluding acquisitions, the decrease was $10.7 million, or 6.1%. This decrease
was primarily due to personnel reductions and the results of cost-containment
programs that were started by the Company in the latter part of 1999 and have
continued into the first quarter of the current year. Title insurance staffing
levels were reduced 5.0% during the current quarter in addition to a 7.3%
cut in the third quarter 1999 and a 6.3% cut in the fourth quarter 1999). The
Company's management continues to monitor new orders to employee ratios. The
Company's direct operations opened 311,200 orders during the first quarter 2000,
a decrease of 15.3% when compared with the 367,400 orders opened during the same
period of the prior year.
Agents retained $167.1 million, or 79.4%, and $210.6 million, or 80.8%, of the
title premiums generated by agency operations for the first quarter 2000 and
1999, 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 $81.3 million for the current quarter. This total
included $3.8 million related to new acquisitions and approximately $3.7 million
in lease expense related to a sale-leaseback transaction entered into by the
Company in December 1999. Excluding these items, other operating expenses
decreased $2.2 million, or 2.9%, when compared with the same period of the prior
year. This decrease was primarily attributable to the results of the Company's
cost-containment programs.
The provision for title losses as a percentage of title insurance operating
revenues was 3.3% for the current period 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 typically is associated with low claims experience, to
resale, which tends to have a slightly higher claims experience.
Premium taxes for title insurance were $4.7 million for the current quarter and
$5.0 million for the same quarter of the prior year. Expressed as a percentage
of title insurance operating revenues, premium taxes were approximately 1.0% for
both periods.
Real Estate Information. Real estate information personnel and other operating
expenses were $115.2 million, a decrease of $10.2 million, or 8.1% when compared
with the same period of the prior year. Excluding acquisitions, the decrease
was $15.1 million, or 12.0%. This decrease was primarily due to the results of
the Company's cost-containment programs
Consumer Information. Consumer information personnel and other operating
expenses were $39.2 million, an increase of $9.8 million, or 33.2% when
compared with the same period of the prior year. Excluding acquisitions, the
increase was $5.1 million, or 17.2%. This increase was primarily attributable
to costs incurred servicing the increased business volume.
8
<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)
2000 % 1999 %
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Title Insurance $ 6,252 34 $35,161 57
Real Estate Information 2,864 15 18,114 30
Consumer Information 9,594 51 8,211 13
----------- ------- ----------- -------
Total before corporate 18,710 100 61,486 100
======= =======
Corporate (14,825) (8,800)
----------- -----------
Total $ 3,885 $52,686
=========== ===========
</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. Corporate expenses increased $6.0 million for the first quarter 2000
when compared with the same period of the prior year. This increase was
primarily due to a $2.8 million reduction in the equity in earnings of
affiliated companies, $1.3 million in increased technology costs at the
corporate level, and a $0.8 million reduction in corporate investment income.
INCOME TAXES
The effective income tax rate (income tax expense as a percentage of pretax
income after minority interest expense) was 44.4% for the current quarter and
38.7% 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 income. A
large portion of the Company's minority interest expense is attributable to a
limited liability company subsidiary, which for tax purposes, is treated as a
partnership. Accordingly, no income taxes have been provided for that portion of
the minority interest expense.
MINORITY INTERESTS
Minority interest expense was $2.1 million and $6.9 million for the first
quarter 2000 and 1999, respectively. This decrease was primarily attributable
to a decline in the operating results of the Company's joint venture with
Experian. This decline was due in large part to the significant decrease in
refinance activity.
NET INCOME
Net income for the current quarter was $1.0 million, or $0.02 per diluted share,
compared with net income of $28.1 million, or $0.43 per diluted share, for the
same period of the prior year. The net income for the prior year period
excludes the cumulative effect of a change in accounting for tax service
contracts.
LIQUIDITY AND CAPITAL RESOURCES
Total cash and cash equivalents decreased $74.7 million and $71.7 million for
the three months ended March 31, 2000, and 1999, respectively. The decrease for
the current period was primarily due to capital expenditures and repurchases of
company
9
<PAGE>
shares. Under the previously announced stock repurchase program, during the
three months ended March 31, 2000, the Company repurchased 1,614,400 shares of
its common stock at a total purchase price of $19.1 million. In addition, the
Company has purchased shares of Company stock from terminating 401k and ESOP
participants. The decrease for the prior year period was primarily due to
capital expenditures, purchases of debt and equity securities and cash used by
operating activities.
Notes and contracts payable as a percentage of total capitalization increased to
16.9% at March 31, 2000, from 16.4% at December 31, 1999. The increase was
primarily due to the repurchase of Company stock in the three months ended March
31, 2000, which decreased stockholder's equity and new debt issued for company
acquisitions during the quarter.
Management believes that all of its operational 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.
10
<PAGE>
Part II: Other Information
-----------------
Item 1. Legal Proceedings
-----------------
On May 19, 1999, The People of the State of California, Kathleen
Connell, Controller of the State of California, and Chuck Quackenbush,
Insurance Commissioner 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 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.
In February 2000, the company entered into an administrative
settlement with the California Department of Insurance (DOI), whereby
the DOI released the company from any further claim of liability as to
the company's receipt of earnings credits or any alleged overcharges
for various miscellaneous escrow fee items, such as courier, Federal
Express or wire service fees. The DOI further agreed to direct the
attorney general to dismiss it as a plaintiff from the action brought
by the State of California. In the settlement with the DOI, the
company agreed to (i) make a contribution to a consumer education fund
and (ii) accept a new regulation to be promulgated by the DOI, whereby
earnings credit programs will be authorized and regulated by the DOI
and rate filings will be required for escrow fees including several
specified miscellaneous fee items.
Subsequent to the filing of the action by the State of California,
First American Title Insurance Company was named and served as a
defendant in two private class actions. 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 have been stayed by court orders pending settlement
negotiations relating to the class action filed 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.
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 two reports on Form 8-K dated January 18, 2000 (reporting on
the Company's accounting for tax service contracts) and February
18, 2000 (reporting on the Company's 1999 earnings).
11
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit No. Description Numbered Page
----------- ----------- -------------
(27) Financial Data Schedule
12
