10-Q/A 1 d10qa.txt AMENDMENT #1 TO FORM 10-Q FORM 10-Q/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 to QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 ------------------------------------------------- THE FIRST AMERICAN CORPORATION -------------------------------------------------------------- (Exact name of registrant as specified in its charter) The undersigned registrant hereby amends Item 1 of Part 1 of its Quarterly Report on Form 10-Q for the period ended September 30, 2001, as set forth in the pages attached hereto. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned duly authorized officer. THE FIRST AMERICAN CORPORATION -------------------------------------- (Registrant) /s/ Thomas A. Klemens -------------------------------------- Thomas A. Klemens Executive Vice President Chief Financial Officer /s/ Max O. Valdes -------------------------------------- Max O Valdes Vice President Chief Accounting Officer Date: November 15, 2001 Part I: Financial Information --------------------- Item 1: Financial Statements -------------------- THE FIRST AMERICAN CORPORATION AND SUBSIDIARY COMPANIES ------------------------ Condensed Consolidated Balance Sheets -------------------------------------
September 30, 2001 (unaudited) December 31, 2000 ------------------ ----------------- Assets Cash and cash equivalents $ 596,733,000 $ 300,905,000 --------------- --------------- Accounts and accrued income receivable, net 281,158,000 204,177,000 --------------- --------------- Income tax receivable 19,472,000 --------------- Investments: Deposits with savings and loan associations and banks 33,087,000 31,900,000 Debt securities 253,766,000 209,407,000 Equity securities 52,162,000 58,720,000 Other long-term investments 110,423,000 92,703,000 --------------- --------------- 449,438,000 392,730,000 --------------- --------------- Loans receivable 105,089,000 94,452,000 --------------- --------------- Property and equipment, at cost 750,216,000 662,198,000 --------------- --------------- Less- accumulated depreciation (287,734,000) (227,110,000) --------------- --------------- 462,482,000 435,088,000 --------------- --------------- Title plants and other indexes 303,859,000 290,072,000 --------------- --------------- Assets acquired in connection with claim settlements (net of valuation reserves of $1,101,000 and $1,000,000) 30,126,000 27,846,000 --------------- --------------- Deferred income taxes 16,166,000 11,519,000 --------------- --------------- Goodwill and other intangibles, net 431,954,000 346,156,000 --------------- --------------- Other assets 102,367,000 77,320,000 --------------- --------------- $ 2,779,372,000 $ 2,199,737,000 =============== =============== Liabilities and Stockholders' Equity Demand deposits $ 92,018,000 $ 81,289,000 --------------- --------------- Accounts payable and accrued liabilities 334,508,000 267,567,000 --------------- --------------- Deferred revenue 279,112,000 261,673,000 --------------- --------------- Reserve for known and incurred but not reported claims 303,864,000 284,607,000 --------------- --------------- Income taxes payable 58,383,000 Notes and contracts payable (Note 5) 422,239,000 219,838,000 --------------- --------------- Minority interests in consolidated subsidiaries 126,628,000 114,526,000 --------------- --------------- 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 - 68,300,000 and 63,887,000 shares 68,300,000 63,887,000 Additional paid-in capital 264,112,000 172,468,000 Retained earnings 730,500,000 628,913,000 Accumulated other comprehensive income (292,000) 4,969,000 --------------- --------------- 1,062,620,000 870,237,000 --------------- --------------- $ 2,779,372,000 $ 2,199,737,000 =============== ===============
See notes to condensed consolidated financial statements. 2 THE FIRST AMERICAN CORPORATION AND SUBSIDIARY COMPANIES ------------------------ Condensed Consolidated Statements of Income and Comprehensive Income -------------------------------------------------------------------- (Unaudited)
For the Three Months Ended For the Nine Months Ended September 30 September 30 --------------------------------- ----------------------------------- 2001 2000 2001 2000 -------------- -------------- --------------- --------------- Revenues Operating revenues $ 952,776,000 $ 730,490,000 $ 2,610,969,000 $ 2,126,571,000 Investment and other income 30,232,000 19,770,000 66,822,000 45,788,000 -------------- -------------- --------------- --------------- 983,008,000 750,260,000 2,677,791,000 2,172,359,000 -------------- -------------- --------------- --------------- Expenses Salaries and other personnel costs 331,727,000 260,250,000 917,942,000 773,513,000 Premiums retained by agents 255,384,000 192,803,000 661,206,000 585,398,000 Other operating expenses 216,854,000 176,845,000 622,373,000 511,994,000 Provision for title losses and other claims 52,661,000 36,764,000 129,676,000 104,327,000 Depreciation and amortization 27,820,000 22,790,000 77,925,000 61,112,000 Premium taxes 6,758,000 5,396,000 17,470,000 16,318,000 Interest 8,449,000 6,655,000 22,314,000 18,709,000 -------------- -------------- --------------- --------------- 899,653,000 701,503,000 2,448,906,000 2,071,371,000 -------------- -------------- --------------- --------------- Income before income taxes and minority interests 83,355,000 48,757,000 228,885,000 100,988,000 Income taxes 30,500,000 19,000,000 83,200,000 39,200,000 -------------- -------------- --------------- --------------- Income before minority interests 52,855,000 29,757,000 145,685,000 61,788,000 Minority interests 11,160,000 5,358,000 30,697,000 11,355,000 -------------- -------------- --------------- --------------- Net income 41,695,000 24,399,000 114,988,000 50,433,000 -------------- -------------- --------------- --------------- Other comprehensive income, net of tax Unrealized gain (loss) on securities (4,152,000) 1,115,000 (5,071,000) 1,213,000 Minimum pension liability adjustment (75,000) 175,000 (190,000) - -------------- -------------- --------------- --------------- (4,227,000) 1,290,000 (5,261,000) 1,213,000 -------------- -------------- --------------- --------------- Comprehensive income $ 37,468,000 $ 25,689,000 $ 109,727,000 $ 51,646,000 ============== ============== =============== =============== Net income per share (Note 2): Basic $ .61 $ .38 $ 1.75 $ 0.79 ============== ============== =============== =============== Diluted $ .55 $ .37 $ 1.59 $ 0.77 ============== ============== =============== =============== Cash dividends per share $ .07 $ .06 $ .20 $ .18 ============== ============== =============== =============== Weighted average number of shares (Note 2): Basic 67,844,000 63,526,000 65,877,000 63,689,000 ============== ============== =============== =============== Diluted 78,872,000 66,088,000 74,529,000 65,700,000 ============== ============== =============== ===============
See notes to condensed consolidated financial statements. 3 THE FIRST AMERICAN CORPORATION AND SUBSIDIARY COMPANIES ------------------------ Condensed Consolidated Statements of Cash Flows ----------------------------------------------- (Unaudited)
For the Nine Months Ended September 30 -------------------------------------- 2001 2000 --------------- --------------- Cash flows from operating activities: Net income $ 114,988,000 $ 50,433,000 Adjustments to reconcile net income to cash provided by operating activities- Provision for title losses and other claims 129,676,000 104,327,000 Depreciation and amortization 77,925,000 61,112,000 Minority interests in net income 30,697,000 11,355,000 Other, net (14,189,000) (201,000) Changes in assets and liabilities excluding effects of company acquisitions and noncash transactions- Claims paid, including assets acquired, net of recoveries (113,069,000) (98,582,000) Net change in income tax accounts 75,253,000 29,351,000 Increase in accounts and accrued income receivable (71,788,000) (14,031,000) Increase (decrease) in accounts payable and accrued liabilities 56,561,000 (15,382,000) Increase (decrease) in deferred revenue 15,269,000 (11,140,000) Other, net (19,115,000) (6,500,000) --------------- --------------- Cash provided by operating activities 282,208,000 110,742,000 --------------- --------------- Cash flows from investing activities: Net cash effect of company acquisitions/dispositions (15,407,000) (39,908,000) Net increase in deposits with banks (1,063,000) (3,997,000) Net increase in loans receivable (10,637,000) (4,594,000) Purchases of debt and equity securities (154,974,000) (40,580,000) Proceeds from sales of debt and equity securities 53,397,000 46,426,000 Proceeds from maturities of debt securities 55,537,000 11,302,000 Net decrease in other investments 4,560,000 972,000 Capital expenditures (96,311,000) (112,846,000) Proceeds from sale of property and equipment 1,766,000 1,509,000 --------------- --------------- Cash used for investing activities (163,132,000) (141,716,000) --------------- --------------- Cash flows from financing activities: Net change in demand deposits 10,729,000 (1,963,000) Proceeds from issuance of debt 210,000,000 3,575,000 Repayment of debt (22,357,000) (16,661,000) Proceeds from exercise of stock options 9,173,000 1,546,000 Repurchase of company shares (20,758,000) Distributions to minority shareholders (17,392,000) (5,125,000) Cash dividends (13,401,000) (11,423,000) --------------- --------------- Cash provided by (used for) financing activities 176,752,000 (50,809,000) --------------- --------------- Net increase (decrease) in cash and cash equivalents 295,828,000 (81,783,000) Cash and cash equivalents - Beginning of year 300,905,000 350,010,000 --------------- --------------- - End of third quarter $ 596,733,000 $ 268,227,000 =============== =============== Supplemental information: Cash paid during the three quarters for: Interest $ 18,525,000 $ 17,722,000 Premium taxes $ 14,353,000 $ 17,142,000 Income taxes $ 22,622,000 $ 21,931,000 Noncash investing and financing activities: Shares issued for stock bonus plan $ 225,000 $ 226,000 Shares issued for employee savings plan $ 8,283,000 Liabilities incurred in connection with company acquisitions $ 36,750,000 $ 44,740,000 Purchase of minority interest $ 1,203,000 $ 12,804,000 Company acquisitions in exchange for common stock $ 78,376,000
See notes to condensed consolidated financial statements. 4 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, 2000. Note 2 - Earnings Per Share ---------------------------
For the Three Months Ended For the Nine Months Ended September 30 September 30 --------------------------------------------------------------- 2001 2000 2001 2000 --------------------------------------------------------------- Numerator: Net Income-numerator for basic net income per share $ 41,695,000 $ 24,399,000 $114,988,000 $ 50,433,000 Effect of dilutive securities Convertible debt - interest expense (net of tax) 1,783,000 -- 3,441,000 -- --------------------------------------------------------------- Net Income-numerator for dilutive net income per share $ 43,478,000 $ 24,399,000 $118,429,000 $ 50,433,000 =============================================================== Denominator Weighted average shares-denominator For basic net income per share 67,844,000 63,526,000 65,877,000 63,689,000 Effect of dilutive securities: Employee stock options 2,418,000 2,562,000 3,320,000 2,011,000 Convertible debt 8,610,000 -- 5,332,000 -- --------------------------------------------------------------- Denominator for diluted net income per share 78,872,000 66,088,000 74,529,000 65,700,000 =============================================================== Basic net income per share $ 0.61 $ 0.38 $ 1.75 $ 0.79 =============================================================== Diluted net income per share $ 0.55 $ 0.37 $ 1.59 $ 0.77 ===============================================================
For the three and nine months ended September 30, 2001, 4,000,398 and 2,564,285 stock options, respectively, were excluded from the computation of diluted earnings per share due to their antidilutive effect. Note 3 - Business Combinations ------------------------------ In May 2001, the Company acquired Credit Management Solutions, Inc (CMSI), a provider of credit automation software and services in a stock-for-stock transaction. As a result of the acquisition, CMSI shareholders received 0.2841 newly issued shares of the Company's common stock for each CMSI share. The Company issued 2,272,542 shares of common stock and accounted for this transaction under the purchase method of accounting. Goodwill of $46.9 million was recorded and is being amortized on a straight-line basis over its estimated useful life of 25 years. The Company has included CMSI in its consumer information segment. Assuming the acquisition had occurred on January 1, 2000, pro forma revenues, net income and net income per diluted share would have been $2.69 billion, $112.4 million and $1.48 respectively for the nine months ended September 30, 2001; and $2.19 billion, $47.6 million and $.70, respectively for the nine months ended September 30, 2000. The pro forma results include amortization of goodwill. The pro forma results exclude certain merger-related costs and are not necessarily indicative of the operating results that would have been obtained had the acquisition occurred at the beginning of the period, nor are they indicative of future operating results. 5 In addition, during the nine months ended September 30, 2001, the Company acquired twelve companies. The purchase method of accounting was used for all of the acquisitions. The twelve acquisitions accounted for under the purchase method of accounting were individually not material and are included in the following business segments: ten in the title insurance segment, one in the real estate information segment and one in the consumer information segment. The aggregate purchase price was $17.4 million in cash, $12.5 million in notes payable and forgiven notes receivable and 976,235 shares of the Company's common stock. The purchase price of each was allocated to the assets acquired and liabilities assumed based on estimated fair values and approximately $44.4 million in goodwill was recorded. Goodwill is being amortized on a straight-line basis over its estimated useful life ranging from 20 to 30 years. The operating results of these acquired entities were included in the Company's consolidated financial statements from their respective acquisition dates. Assuming all of the current-year acquisitions (including CMSI) had occurred January 1, 2000, pro forma revenues, net income and net income per diluted share would have been $2.71 billion, $111.7 million and $1.46, respectively for the nine months ended September 30, 2001 and $2.21 billion, $48.8 million and $.71, respectively for the nine months ended September 30, 2000. All pro forma results include amortization of goodwill and interest expense on acquisition debt. The pro forma results exclude certain merger-related costs and are not necessarily indicative of the operating results that would have been obtained had the acquisitions occurred at the beginning of the periods presented, nor are they indicative of future operating results. In February 2001, the Company announced the sale of its subsidiary, Contour Software, Inc., to Ellie Mae(SM), Inc., in exchange for cash, notes and an interest in Ellie Mae. As a result of the transaction, the Company recorded a deferred gain of $14.2 million. Contour had been included in the Company's real estate information segment. On July 20, 2001, the Financial Accounting Standards Board ("the FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"). This statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, "Business Combinations". All business combinations in the scope of SFAS 141 are to be accounted for using one method, the purchase method. The provisions of SFAS 141 apply to all business combinations initiated or closed after June 30, 2001. Management of the Company anticipates that the adoption of SFAS 141 will not have a significant effect on the Company's earnings or financial position. On July 20, 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). This statement addresses financial accounting and reporting for goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets". SFAS 142 addresses how goodwill and other intangible assets should be accounted for in the financial statements. Goodwill and intangible assets that have indefinite useful lives will not be amortized, but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, but without the constraint of an arbitrary ceiling. The provisions of SFAS 142 are required to be applied starting with fiscal years beginning after December 15, 2001, and apply to all goodwill and other intangible assets recognized in the financial statements at that date. Goodwill and intangible assets acquired after June 30, 2001, will be subject immediately to the nonamortization and amortization provisions of SFAS 142. Management is in the process of assessing the impact of implementing SFAS 142 on the Company's earnings and financial position. Management estimates the adoption of the nonamortization provision of SFAS 142 will increase income before income taxes and minority interests in 2002 by $18.0 million, or $.20 per diluted share, excluding the effects of impairment, if any. Note 4 - 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:
Three Months Ended Nine Months Ended September 30 September 30 ---------------------------------------- -------------------------------------------- ($000) ($000) 2001 % 2000 % 2001 % 2000 % ---------- ------- ---------- ------- ------------ ------- ------------ ------- Title Insurance 693,235 73 521,998 71 1,870,045 72 1,527,258 72 Real Estate Information 181,042 19 141,501 20 527,736 20 408,151 19 Consumer Information 78,499 8 66,991 9 213,188 8 191,162 9 ---------- ------- ---------- ------- ------------ ------- ------------ ------- Total $ 952,776 100 $ 730,490 100 $ 2,610,969 100 $ 2,126,571 100 ========== ======= ========== ======= ============ ======= ============ =======
6 Income before income taxes and minority interests:
Three Months Ended Nine Months Ended September 30 September 30 ---------------------------------------- -------------------------------------------- ($000) ($000) 2001 % 2000 % 2001 % 2000 % ---------- ------- ---------- ------- ------------ ------- ------------ ------- Title Insurance $ 38,004 38 $ 30,543 50 $ 120,185 44 $ 73,752 53 Real Estate Information 50,112 51 19,915 33 126,298 47 36,030 26 Consumer Information 10,742 11 10,347 17 24,278 9 28,876 21 ---------- ------- ---------- ------- ------------ ------- ------------ ------- Total before corporate expenses 98,858 100 60,805 100 270,761 100 138,658 100 ======= ======= ======= ======= Corporate expenses (15,503) (12,048) (41,876) (37,670) ---------- ---------- ------------ ------------ Total $ 83,355 $ 48,757 $ 228,885 $ 100,988 ========== ========== ============ ============
Note 5 - Senior Convertible Debentures --------------------------------------- On April 24, 2001, the Company sold $175 million of 4.5% senior convertible debentures due 2008. The Company also sold an additional $35 million of these debentures in connection with the exercise of an over-allotment option. This transaction was a private placement pursuant to Rule 144A and Regulation S under the Securities Act of 1933. The Company registered the debentures and any common shares issued upon conversion on August 8, 2001. The debentures are convertible into common shares of the Company at $28 per share. The Company may redeem some or all of the senior convertible debentures at any time on or after April 15, 2004. The net proceeds of the offering will be used to finance acquisitions of businesses, repay outstanding indebtedness, buy out minority interests in existing subsidiaries and for general corporate purposes. 7