<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 June 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
-------------
(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 - 63,518,623 shares as of August 1, 2000
1
<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 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 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 9, 2000
2
<PAGE>
Part I: Financial Information
---------------------
Item 1: Financial Statements
--------------------
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Condensed Consolidated Balance Sheets
-------------------------------------
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
---------------------- ---------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 272,838,000 $ 350,010,000
---------------------- ----------------------
Accounts and accrued income receivable, net 200,183,000 180,824,000
---------------------- ----------------------
Income tax receivable 8,606,000
----------------------
Investments:
Deposits with savings and loan associations and banks 35,256,000 32,225,000
Debt securities 209,026,000 226,369,000
Equity securities 45,243,000 39,266,000
Other long-term investments 92,386,000 86,686,000
---------------------- ----------------------
381,911,000 384,546,000
---------------------- ----------------------
Loans receivable 90,416,000 87,338,000
---------------------- ----------------------
Property and equipment, at cost 634,559,000 566,841,000
Less- accumulated depreciation (203,385,000) (173,527,000)
---------------------- ----------------------
431,174,000 393,314,000
---------------------- ----------------------
Title plants and other indexes 267,522,000 250,723,000
---------------------- ----------------------
Assets acquired in connection with claim settlements
(net of valuation reserves of $4,973,000 and $4,856,000) 24,284,000 24,196,000
---------------------- ----------------------
Deferred income taxes 43,823,000 48,284,000
---------------------- ----------------------
Goodwill and other intangibles, net 299,454,000 284,390,000
---------------------- ----------------------
Other assets 102,845,000 104,183,000
---------------------- ----------------------
$2,114,450,000 $2,116,414,000
====================== ======================
Liabilities and Stockholders' Equity
Demand deposits $ 81,689,000 $ 80,843,000
---------------------- ----------------------
Accounts payable and accrued liabilities 259,546,000 280,698,000
---------------------- ----------------------
Deferred revenue 274,796,000 279,766,000
---------------------- ----------------------
Reserve for known and incurred but not reported claims 277,669,000 273,724,000
---------------------- ----------------------
Income taxes payable 12,486,000
----------------------
Notes and contracts payable 215,310,000 196,815,000
---------------------- ----------------------
Minority interests in consolidated subsidiaries 78,148,000 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 - 63,486,000 and 65,068,000 shares 63,486,000 65,068,000
Additional paid-in capital 166,809,000 184,759,000
Retained earnings 580,370,000 561,946,000
Accumulated other comprehensive income 4,141,000 4,218,000
---------------------- ----------------------
814,806,000 815,991,000
---------------------- ----------------------
$2,114,450,000 $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 Six Months Ended
June 30 June 30
---------------------------------- ----------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues
Operating revenues $ 760,216,000 $ 769,610,000 $ 1,396,081,000 $ 1,488,797,000
Investment and other income 15,709,000 12,245,000 26,018,000 23,925,000
--------------- --------------- --------------- ---------------
775,925,000 781,855,000 1,422,099,000 1,512,722,000
--------------- --------------- --------------- ---------------
Expenses
Salaries and other personnel costs 263,059,000 259,603,000 513,263,000 515,015,000
Premiums retained by agents 225,473,000 228,212,000 392,595,000 438,780,000
Other operating expenses 168,789,000 174,443,000 335,149,000 332,606,000
Provision for title losses and other claims 37,440,000 28,420,000 67,563,000 55,441,000
Depreciation and amortization 20,906,000 19,148,000 38,322,000 36,067,000
Premium taxes 5,634,000 5,987,000 10,922,000 11,296,000
Interest 6,278,000 3,032,000 12,054,000 7,821,000
--------------- --------------- --------------- ---------------
727,579,000 718,845,000 1,369,868,000 1,397,026,000
--------------- --------------- --------------- ---------------
Income before income
taxes, minority interests and cumulative effect
of a change in accounting principle 48,346,000 63,010,000 52,231,000 115,696,000
Income taxes 19,400,000 21,994,000 20,200,000 39,700,000
--------------- --------------- --------------- ---------------
Income before minority interests and
cumulative effect of a change in accounting
principle 28,946,000 41,016,000 32,031,000 75,996,000
Minority interests 3,914,000 6,205,000 5,997,000 13,102,000
--------------- --------------- --------------- ---------------
Income before cumulative effect of a
change in accounting principle 25,032,000 34,811,000 26,034,000 62,894,000
Cumulative effect of a change in accounting
for tax service contracts, net of income
taxes and minority interests -- -- -- (55,640,000)
--------------- --------------- --------------- ---------------
Net income 25,032,000 34,811,000 26,034,000 7,254,000
--------------- --------------- --------------- ---------------
Other comprehensive income, net of tax
Unrealized gain (loss) on securities (765,000) (923,000) 98,000 (615,000)
Minimum pension liability adjustment (75,000) 19,000 (175,000) (231,000)
--------------- --------------- --------------- ---------------
(840,000) (904,000) (77,000) (846,000)
--------------- --------------- --------------- ---------------
Comprehensive income $ 24,192,000 $ 33,907,000 $ 25,957,000 $ 6,408,000
=============== =============== =============== ===============
Per share amounts:
Basic:
Income before cumulative effect of a change
in accounting for tax service contracts $ 0.39 $ 0.54 $ 0.41 $ 0.98
Cumulative effect of a change in
accounting for tax service contracts ($ 0.87)
--------------- --------------- --------------- ---------------
Net income $ 0.39 $ 0.54 $ 0.41 $ 0.11
================ =============== =============== ===============
Diluted:
Income before cumulative effect of a change
in accounting for tax service contracts $ 0.38 $ 0.52 $ 0.40 $ 0.95
Cumulative effect of a change in
accounting for tax service contracts ($ 0.84)
--------------- --------------- --------------- ---------------
Net income $ 0.38 $ 0.52 $ 0.40 $ 0.11
=============== =============== =============== ===============
Cash dividends per share $ .06 $ .06 $ .12 $ .12
=============== =============== =============== ===============
Weighted average number of shares:
Basic 63,403,000 64,763,000 63,771,000 64,202,000
=============== =============== =============== ===============
Diluted 65,682,000 66,325,000 65,508,000 66,322,000
=============== =============== =============== ===============
</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 Six Months Ended
June 30
-----------------------------------------------------
2000 1999
---------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 26,034,000 $ 7,254,000
Adjustments to reconcile net income to cash
provided by operating activities-
Provision for title losses and other claims 67,563,000 55,441,000
Depreciation and amortization 38,322,000 36,067,000
Minority interests in net income 5,997,000 13,102,000
Cumulative effect of a change in accounting for tax
service contracts 55,640,000
Other, net (1,355,000) 707,000
Changes in assets and liabilities excluding effects of
company acquisitions and noncash transactions-
Claims paid, including assets acquired, net of recoveries (64,706,000) (53,195,000)
Net change in income tax accounts 25,594,000 (21,437,000)
Increase in accounts and accrued income receivable (19,359,000) (20,326,000)
Decrease in accounts payable and accrued liabilities (25,249,000) (30,958,000)
(Decrease) increase in deferred revenue (4,970,000) 24,436,000
Other, net (323,000) (15,164,000)
---------------------- ---------------------
Cash provided by operating activities 47,548,000 51,567,000
---------------------- ---------------------
Cash flows from investing activities:
Net cash effect of company acquisitions/dispositions (8,958,000) (34,047,000)
Net (increase) decrease in deposits with banks (3,031,000) 8,188,000
Net increase in loans receivable (3,078,000) (5,981,000)
Purchases of debt and equity securities (30,836,000) (29,397,000)
Proceeds from sales of debt and equity securities 32,998,000 43,945,000
Proceeds from maturities of debt securities 9,985,000 9,421,000
Net (increase) decrease in other investments (2,547,000) 4,048,000
Capital expenditures (79,645,000) (116,956,000)
Proceeds from sale of property and equipment 1,290,000 3,203,000
---------------------- ---------------------
Cash used for investing activities (83,822,000) (117,576,000)
---------------------- ---------------------
Cash flows from financing activities:
Net change in demand deposits 846,000 1,895,000
Proceeds from issuance of debt 421,000 630,000
Repayment of debt (11,411,000) (10,841,000)
Proceeds from exercise of stock options 1,000,000 3,165,000
Proceeds from issuance of stock to employee savings plan 4,794,000
Repurchase of company shares (20,758,000)
Distributions to minority shareholders (3,386,000) (6,189,000)
Cash dividends (7,610,000) (8,015,000)
---------------------- ---------------------
Cash used for financing activities (40,898,000) (14,561,000)
---------------------- ---------------------
Net decrease in cash and cash equivalents (77,172,000) (80,570,000)
Cash and cash equivalents - Beginning of year 350,010,000 381,293,000
---------------------- ---------------------
- End of first half $272,838,000 $ 300,723,000
====================== =====================
Supplemental information:
Cash paid during the first half for:
Interest $ 11,780,000 $ 8,000,000
Premium taxes $ 12,021,000 $ 14,740,000
Income taxes $ 5,370,000 $ 62,694,000
Noncash investing and financing activities:
Shares issued for stock bonus plan $ 226,000 $ 3,369,000
Liabilities incurred in connection with company acquisitions $ 34,670,000 $ 11,755,000
Purchase of minority interest $ 12,804,000 $ 2,642,000
Company acquisitions in exchange for common stock $ 28,594,000
</TABLE>
See notes to condensed consolidated financial statements.
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 six months ended June 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 six months ended June 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
$11.5 million, $5.6 and $.08 million for the three months ended June 30, 1999,
respectively, and $20.3 million, $9.8 million and $.15 for the six months ended
June 30, 1999, respectively. During the three and six months ended June 30,
2000, the Company recognized $7.7 million and $14.8 million, respectively, in
revenues that were included in the cumulative effect adjustment.
Note 3 - Business Combinations
------------------------------
During the six months ended June 30, 2000, the Company acquired twelve
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, 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 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
6
<PAGE>
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 Six Months Ended
June 30 June 30
------------------------------------------ ----------------------------------------------
($000) ($000)
2000 % 1999 % 2000 % 1999 %
-------- --- -------- --- ---------- --- ---------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Title Insurance 558,714 73 564,859 73 1,005,260 72 1,085,844 73
Real Estate Information 137,893 18 155,539 20 266,650 19 308,008 21
Consumer Information 63,609 9 49,212 7 124,171 9 94,945 6
-------- --- -------- --- ---------- --- ---------- ---
Total $760,216 100 $769,610 100 $1,396,081 100 $1,488,797 100
======== === ======== === ========== === ========== ===
</TABLE>
Income before income taxes, minority interests and cumulative effect of a change
in accounting principle:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------------------------ --------------------------------------------
($000) ($000)
2000 % 1999 % 2000 % 1999 %
-------- --- -------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Title Insurance $ 36,957 63 $ 49,075 60 $ 43,209 55 $ 84,237 59
Real Estate Information 13,251 22 25,366 31 16,115 21 45,440 32
Consumer Information 8,935 15 6,973 9 18,529 24 13,223 9
-------- --- -------- --- -------- --- -------- ---
Total before corporate expenses 59,143 100 81,414 100 77,853 100 142,900 100
=== === === ===
Corporate expenses (10,797) (18,404) (25,622) (27,204)
-------- -------- -------- --------
Total $ 48,346 $ 63,010 $ 52,231 $115,696
======== ======== ======== ========
</TABLE>
Note 6 - Subsequent Events
--------------------------
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 its
Smart Title Solutions division and LandAmerica contributed its Datatrace
division 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 than 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 and
the Company does not believe that the accounting for either of these
transactions will have a material impact on its financial condition or results
of operations.
7
<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 so,
what impact they will have on the results of operations and financial condition
of the Company.
RESULTS OF OPERATIONS
Three and six months ended June 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. Net income and net income per diluted share for the second
quarter 2000 was $25.0 million and $0.38, respectively. Net income and net
income per diluted share for the first half of 2000 was $26.0 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 Six Months Ended
June 30 June 30
------------------------------------------ ----------------------------------------------
($000) ($000)
2000 % 1999 % 2000 % 1999 %
-------- --- -------- --- ---------- --- ---------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Title Insurance:
Direct operations $283,487 37 $280,007 36 $ 519,433 37 $ 540,331 36
Agency operations 275,227 36 284,852 37 485,827 35 545,513 37
-------- --- -------- --- ---------- --- ---------- ---
558,714 73 564,859 73 1,005,260 72 1,085,844 73
Real Estate Information 137,893 18 155,539 20 266,650 19 308,008 21
Consumer Information 63,609 9 49,212 7 124,171 9 94,945 6
-------- --- -------- --- ---------- --- ---------- ---
Total $760,216 100 $769,610 100 $1,396,081 100 $1,488,797 100
======== === ======== === ========== === ========== ===
</TABLE>
Title Insurance. Operating revenues from direct title operations increased 1.2%
and decreased 3.9% for the three and six months ended June 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 six-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 $1,087 and $1,057 for the three and six months ended June 30,
2000, respectively, as compared with $878 and $880 for the same periods of the
prior year. These increases were primarily due to the shift in the mix of
business from refinance to resale, appreciating residential real estate values
and an increase in commercial activity. The Company's direct operations closed
260,900 and 491,200 title orders during the current three and six month periods,
respectively, decreases of 18.2% and 20.0% when compared with 319,000 and
614,100 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
8
<PAGE>
3.4% and 10.9% for the three and six months ended June 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.
Real Estate Information. Real estate information operating revenues decreased
11.3% and 13.4% for the three and six months ended June 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 $5.3
million and $9.8 million of operating revenues contributed by new acquisitions
for the respective periods.
Consumer Information. Consumer information operating revenues increased 29.3%
and 30.8% for the three and six months ended June 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 $4.3 million and $9.9 million of operating revenues
contributed by new acquisitions for the three and six months ended June 30,
2000, respectively.
INVESTMENT AND OTHER INCOME
Investment and other income totaled $15.7 million and $26.0 million for the
three and six months ended June 30, 2000, respectively, representing increases
of $3.5 million, or 28.3%, and $2.1 million, or 8.7%, when compared with the
same periods of the prior year. These increases primarily reflect an increase in
investment income, increased earnings of unconsolidated subsidiaries and
realized investment gains of approximately $0.7 million.
TOTAL OPERATING EXPENSES
Title Insurance. Salaries and other personnel costs were $182.7 million and
$355.9 million for the three and six months ended June 30, 2000, respectively,
decreases of 0.9% and 1.5% when compared with the same periods of the prior
year. Excluding acquisitions, the decreases were $7.5 million, or 4.1%, and
$18.2 million, or 5.0%, respectively. These decreases were 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
current quarter.
Agents retained $225.5 million and $392.6 million of title premiums generated by
agency operations for the three and six months ended June 30, 2000,
respectively, which compares with $228.2 million and $438.8 million for the same
periods of the prior year. The percentage of title premiums retained by agents
ranged from 80.1% to 81.9% 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 $88.5 million and $169.8 million for the three and
six months ended June 30, 2000, respectively, increases of $10.3 million, or
13.2%, and $14.9 million, or 9.6%, when compared with the same periods of the
prior year. These increases were primarily attributable to approximately $3.7
million and $7.4 million of expense related to leased equipment, and
approximately $2.0 million and $5.8 million of expenses related to new
acquisitions for the three and six months ended June 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 3.6% for the six months ended June 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 $9.8 million and $10.5 million for the
six months ended June 30, 2000 and 1999, respectively. 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 $114.6 million and $229.8 million for the three and six months
ended June 30, 2000, respectively, decreases of 5.5% and 6.1% when compared with
the same periods of the prior year. Excluding acquisitions, the decreases were
$13.0 million, or 10.7%, and $26.1 million, or 10.7%, respectively. 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 $40.6 million and $79.9 million for the three and six months ended
June 30, 2000, respectively, increases of 23.8% and 24.3% when compared with the
same periods of the prior year. These increases were primarily attributable to
costs incurred servicing the increased business volume as well as $1.8 million
and $4.9 million of costs associated with new acquisitions for the three and six
months ended June 30, 2000, respectively. The provision for consumer information
losses principally reflects home warranty claims and, to a lesser extent,
property and
9
<PAGE>
casualty insurance claims. The provision for home warranty losses, expressed as
a percentage of home warranty operating revenues, was 51.2% for the six months
ended June 30, 2000, and 49.0% 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 was approximately 40% for
both the six months ended June 30, 2000 and 1999.
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS
Set forth below is a summary of income before income taxes and minority
interests for each of the Company's segments.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------------------------ --------------------------------------------
($000) ($000)
2000 % 1999 % 2000 % 1999 %
-------- --- -------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Title Insurance $ 36,957 63 $ 49,075 60 $ 43,209 55 $ 84,237 59
Real Estate Information 13,251 22 25,366 31 16,115 21 45,440 32
Consumer Information 8,935 15 6,973 9 18,529 24 13,223 9
-------- --- -------- --- -------- --- -------- ---
Total before corporate expenses 59,143 100 81,414 100 77,853 100 142,900 100
=== === === ===
Corporate expenses (10,797) (18,404) (25,622) (27,204)
-------- -------- -------- --------
Total $ 48,346 $ 63,010 $ 52,231 $115,696
======== ======== ======== ========
</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 decreased $7.6 million for the
three months ended June 30, 2000, when compared with the same period of the
prior year. This decrease was primarily due to $10.8 million of merger-related
charges incurred in the NAIG acquisition, which were included in the prior year
period, offset in part by a $1.0 million reduction in corporate investment
income and increased technology costs at the corporate level.
INCOME TAXES
The effective income tax rate (income tax expense as a percentage of pretax
income after minority interest expense) was 43.7% for the six months ended June
30, 2000, 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 profits. 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 $3.9 million for the three months ended June 30,
2000, a decrease of $2.3 million when compared with the same period of the prior
year. Minority interest expense was $6.0 million for the six months ended June
30, 2000, a decrease of $7.1 million when compared with the same period of the
prior year. These decreases were primarily attributable to the decrease in
operating results of the Company's joint venture with Experian caused primarily
by the previously noted decline in refinance activity.
NET INCOME
10
<PAGE>
Net income for the three and six months ended June 30, 2000, was $25.0 million,
or $0.38 per diluted share, and $26.0 million, or $0.40 per diluted share,
respectively. Net income for the three and six months ended June 30, 1999, was
$34.8 million, or $0.52 per diluted share, and $62.9 million, or $0.95 per
diluted share, respectively. Net income for the six months ended June 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 $77.2 million and $80.6 million for
the six months ended June 30, 2000 and 1999, respectively. The decrease for the
current year period was primarily attributable to capital expenditures 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
17.8% at June 30, 2000, from 16.4% at December 31, 1999. This increase was
primarily due to the repurchase of Company shares and 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 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, May 11, 2000.
(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.
Name of Nominee Votes For Votes Withheld
--------------- ---------- --------------
George L. Argyros 57,821,430 322,292
Gary J. Beban 57,823,148 320,148
J. David Chatham 57,841,922 301,148
William G. Davis 57,818,619 325,103
James L. Doti 57,836,993 306,729
Lewis W. Douglas, Jr. 57,752,120 391,602
Paul B. Fay, Jr. 57,746,833 396,889
D. P. Kennedy 57,749,274 394,448
Parker S. Kennedy 57,833,331 310,391
Frank O'Bryan 57,275,998 867,724
Roslyn B. Payne 57,857,051 286,671
D. Van Skilling 57,269,397 874,325
Virginia Ueberroth 57,864,185 279,537
(c) At the Meeting, the proposal to amend the Restated Articles of
Incorporation to change the Company's name to "The First American
Corporation."
Votes For Votes Against Votes Withheld
---------- ------------- --------------
57,747,837 267,541 120,344
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
executed May 11, 2000, incorporated by reference herein
from the Company's report on Form 8-K dated June 12, 2000.
(10)(a) Amendment No. 1, dated July 19, 2000, to Pension
Restoration Plan.
(10)(b) Amendment No. 6, dated July 19, 2000, to 1996 Stock Option
Plan.
(10)(c) Amendment No. 3, dated July 19, 2000, to 1997 Directors'
Stock Plan.
(10)(d) Amendment No. 1, dated July 19, 2000, to Deferred
Compensation Plan.
(10)(e) Amendment No. 5, dated July 19, 2000, to Executive
Supplemental Benefit Plan.
(10)(f) Amendment No. 3, dated July 19, 2000, to Management
Supplemental Benefit Plan.
(10)(g) Master Lease Agreement, dated as of December 27, 1999,
between FATICO 1999 TRUST, as lessor, and First American
Title Insurance Company, as Lessee.
12
<PAGE>
(10)(h) Agreement of Amendment No. 1, dated as of May 5, 2000, to
Master Lease Agreement and Equipment Schedule No. 1.
(10)(i) Amendment No. 1, dated as of May 15, 2000, to Credit
Agreement dated as of July 2, 1999.
(10)(j) Amendment No. 2, dated as of May 15, 2000, to Amended and
Restated Credit Agreement dated as of July 29, 1997.
(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 June 12, 2000 (reporting on the
change of the Company's name to "The First American Corporation").
Subsequent to such quarterly period, the Company filed reports on
Form 8-K dated August 3, 2000 (reporting on the Company's second
quarter earnings), August 3, 2000 (reporting on the Company's
agreement with LandAmerica Financial Group, Inc. creating a joint
title information delivery system) and August 4, 2000 (reporting on
the Company's agreement with Transamerica Corporation creating the
nation's largest database of property characteristic information).
13
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit No. Description Numbered Page
----------- ----------- -------------
(3) Certificate of Amendment of Restated
Articles of Incorporation of The First
American Financial Corporation executed May
11, 2000, incorporated by reference herein
from the Company's report on Form 8-K dated
June 12, 2000.
(10)(a) Amendment No. 1, dated July 19, 2000, to
Pension Restoration Plan.
(10)(b) Amendment No. 6, dated July 19, 2000, to
1996 Stock Option Plan.
(10)(c) Amendment No. 3, dated July 19, 2000, to
1997 Directors' Stock Plan.
(10)(d) Amendment No. 1, dated July 19, 2000, to
Deferred Compensation Plan.
(10)(e) Amendment No. 5, dated July 19, 2000, to
Executive Supplemental Benefit Plan.
(10)(f) Amendment No. 3, dated July 19, 2000, to
Management Supplemental Benefit Plan.
(10)(g) Master Lease Agreement, dated as of
December 27, 1999, between FATICO 1999
TRUST, as lessor, and First American Title
Insurance Company, as Lessee.
(10)(h) Agreement of Amendment No. 1, dated as of
May 5, 2000, to Master Lease Agreement and
Equipment Schedule No. 1.
(10)(i) Amendment No. 1, dated as of May 15, 2000,
to Credit Agreement dated as of July 2,
1999.
(10)(j) Amendment No. 2, dated as of May 15, 2000,
to Amended and Restated Credit Agreement
dated as of July 29, 1997.
(27) Financial Data Schedule
14
