-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SVqZiIytuKZYvcWspc4idqcO4LfwEb0ITcaZ73/F6J0zkYWczeaE370vQdujT961 E+d5s9q2FOldANklreVumw== 0001017062-97-002061.txt : 19971117 0001017062-97-002061.hdr.sgml : 19971117 ACCESSION NUMBER: 0001017062-97-002061 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST AMERICAN FINANCIAL CORP CENTRAL INDEX KEY: 0000036047 STANDARD INDUSTRIAL CLASSIFICATION: TITLE INSURANCE [6361] IRS NUMBER: 951068610 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13585 FILM NUMBER: 97719093 BUSINESS ADDRESS: STREET 1: 114 E FIFTH ST CITY: SANTA ANA STATE: CA ZIP: 92701-4699 BUSINESS PHONE: 7145583211 MAIL ADDRESS: STREET 1: 114 E FIFTH STREET CITY: SANTA ANA STATE: CA ZIP: 92701 FORMER COMPANY: FORMER CONFORMED NAME: FIRST AMERICAN TITLE INSURANCE & TRUST C DATE OF NAME CHANGE: 19690515 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 ------------------ 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.) 114 East Fifth Street, Santa Ana, California 92701-4699 ------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (714)558-3211 ------------------------------------------------------------------- (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 - 11,571,748 as of November 10, 1997 INFORMATION INCLUDED IN REPORT ------------------------------ Part I: Financial Information Item 1. Financial Statements A. Condensed Consolidated Statements of Income B. Condensed Consolidated Balance Sheets 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 Part II: Other Information Item 2. Changes in Securities and Use of Proceeds Item 6. Exhibits and Reports on Form 8-K Items 1, 3-5 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: November 13, 1997 1 Part I: Financial Information --------------------- Item 1. Financial Statements -------------------- THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES ------------------------ Condensed Consolidated Statements of Income ------------------------------------------- (Unaudited)
For the Three Months Ended For the Nine Months Ended September 30 September 30 ----------------------------- ------------------------------- 1997 1996 1997 1996 ------------- ------------ -------------- -------------- Revenues Operating revenues $495,181,000 $405,522,000 $1,315,053,000 $1,151,279,000 Investment and other income 6,667,000 5,782,000 20,046,000 20,775,000 ------------ ------------ -------------- -------------- 501,848,000 411,304,000 1,335,099,000 1,172,054,000 ------------ ------------ -------------- -------------- Expenses Salaries and other personnel costs 168,434,000 132,887,000 467,033,000 385,869,000 Premiums retained by agents 144,959,000 134,766,000 396,114,000 372,856,000 Other operating expenses 115,229,000 82,786,000 295,897,000 240,261,000 Provision for title losses and other claims 24,540,000 25,025,000 65,589,000 67,488,000 Depreciation and amortization 6,976,000 5,879,000 20,098,000 15,886,000 Interest 3,312,000 1,273,000 6,972,000 3,783,000 Minority interests 993,000 667,000 2,287,000 2,151,000 ------------ ------------ -------------- -------------- 464,443,000 383,283,000 1,253,990,000 1,088,294,000 ------------ ------------ -------------- -------------- Income before premium and income taxes 37,405,000 28,021,000 81,109,000 83,760,000 Premium taxes 3,833,000 4,452,000 12,555,000 12,382,000 ------------ ------------ -------------- -------------- Income before income taxes 33,572,000 23,569,000 68,554,000 71,378,000 Income taxes 13,000,000 9,800,000 26,600,000 29,600,000 ------------ ------------ -------------- -------------- Net income $ 20,572,000 $ 13,769,000 $ 41,954,000 $ 41,778,000 ============ ============ ============== ============== Net income per share $ 1.77 $ 1.20 $ 3.62 $ 3.65 ============ ============ ============== ============== Cash dividends per share $ .20 $ .18 $ .56 $ .51 ============ ============ ============== ============== Weighted average number of shares 11,564,000 11,443,000 11,575,000 11,440,000 ============ ============ ============== ==============
2 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES ------------------------ Condensed Consolidated Balance Sheets ------------------------------------- (Unaudited)
September 30, 1997 December 31, 1996 ------------------ ----------------- Assets Cash and cash equivalents $ 170,561,000 $173,439,000 -------------- ------------ Accounts and accrued income receivable, net 122,395,000 89,355,000 -------------- ------------ Investments: Deposits with savings and loan associations and banks 32,466,000 21,674,000 Debt securities 135,895,000 130,576,000 Equity securities 10,900,000 8,517,000 Other long-term investments 35,078,000 30,414,000 -------------- ------------ 214,339,000 191,181,000 -------------- ------------ Loans receivable 61,926,000 54,256,000 -------------- ------------ Property and equipment, at cost 261,319,000 222,917,000 Less- accumulated depreciation (101,770,000) (92,451,000) -------------- ------------ 159,549,000 130,466,000 -------------- ------------ Title plants and other indexes 98,736,000 94,226,000 -------------- ------------ Assets acquired in connection with claim settlements (net of valuation reserves of $10,443,000 and $10,278,000) 22,252,000 24,270,000 -------------- ------------ Deferred income taxes 35,300,000 38,401,000 -------------- ------------ Goodwill and other intangibles, net 132,261,000 87,189,000 -------------- ------------ Deferred policy acquisition costs 24,755,000 24,753,000 -------------- ------------ Other assets 97,870,000 72,258,000 -------------- ------------ $1,139,944,000 $979,794,000 ============== ============ Liabilities and Stockholders' Equity Demand deposits $ 59,931,000 $ 51,321,000 -------------- ------------ Accounts payable and accrued liabilities 158,060,000 130,325,000 -------------- ------------ Deferred revenue 103,402,000 104,133,000 -------------- ------------ Reserve for known and incurred but not reported claims 252,552,000 245,245,000 -------------- ------------ Income taxes payable 7,890,000 2,554,000 -------------- ------------ Notes and contracts payable 43,870,000 71,257,000 -------------- ------------ Minority interests in consolidated subsidiaries 24,192,000 22,494,000 -------------- ------------ Commitments and contingencies Guaranteed preferred beneficial interests in Company's junior subordinated deferrable interest debentures 100,000,000 -------------- Stockholders' equity: Preferred stock, $1 par value Authorized - 500,000 shares; outstanding - none Common stock, $1 par value Authorized - 24,000,000 shares Outstanding - 11,571,000 and 11,554,000 shares 11,571,000 11,554,000 Additional paid-in capital 49,274,000 49,420,000 Retained earnings 324,226,000 288,754,000 Net unrealized gain on securities 4,976,000 2,737,000 -------------- ------------ 390,047,000 352,465,000 -------------- ------------ $1,139,944,000 $979,794,000 ============== ============
3 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES ------------------------ Condensed Consolidated Statements of Cash Flows ----------------------------------------------- (Unaudited)
For the Nine Months Ended September 30 -------------------------------------- 1997 1996 ------------ ----------- Cash flows from operating activities: Net income $ 41,954,000 $41,778,000 Adjustments to reconcile net income to cash provided by operating activities- Provision for title losses and other claims 65,589,000 67,488,000 Depreciation and amortization 20,098,000 15,886,000 Minority interests in net income 2,287,000 2,151,000 Other, net (494,000) (542,000) Changes in assets and liabilities excluding effects of company acquisitions and noncash transactions- Claims paid, including assets acquired, net of recoveries (56,276,000) (57,874,000) Net change in income tax accounts 12,373,000 11,606,000 Increase in accounts and accrued income receivable (20,565,000) (22,259,000) (Decrease) increase in accounts payable and accrued liabilities (7,766,000) 21,248,000 (Decrease) increase in deferred revenue (731,000) 640,000 Other, net (23,548,000) (11,897,000) ------------ ------------ Cash provided by operating activities 32,921,000 68,225,000 ------------ ------------ Cash flows from investing activities: Net cash effect of company acquisitions (29,672,000) (6,057,000) Net increase in deposits with banks (10,792,000) (4,826,000) Net increase in loans receivable (7,864,000) (6,350,000) Purchases of debt and equity securities (53,345,000) (54,660,000) Proceeds from sales of debt and equity securities 35,014,000 37,236,000 Proceeds from maturities of debt securities 14,070,000 21,522,000 Net increase in other investments (1,706,000) (1,532,000) Capital expenditures (43,020,000) (20,022,000) Proceeds from sale of property and equipment 992,000 1,092,000 ------------ ------------ Cash used for investing activities (96,323,000) (33,597,000) ------------ ------------ Cash flows from financing activities: Net change in demand deposits 8,610,000 4,893,000 Proceeds from the issuance of junior subordinated deferrable interest debentures 100,000,000 Repayment of debt (39,098,000) (15,174,000) Purchase of Company shares (3,903,000) (2,045,000) Cash dividends (6,482,000) (5,849,000) Proceeds from exercise of employee stock options 1,397,000 ------------ ------------ Cash provided by (used for) financing activities 60,524,000 (18,175,000) ------------ ------------ Net (decrease) increase in cash and cash equivalents (2,878,000) 16,453,000 Cash and cash equivalents- Beginning of year 173,439,000 145,902,000 ------------ ------------ - End of third quarter $170,561,000 $162,355,000 ============ ============ Supplemental information: Cash paid during the first three quarters for: Interest $ 3,364,000 $ 4,017,000 Premium taxes $ 14,915,000 $ 10,449,000 Income taxes $ 15,469,000 $ 18,635,000 Noncash investing and financing activities: Shares issued for stock bonus plan $ 2,185,000 $ 1,287,000 Liabilities incurred in connection with company acquisitions $ 46,330,000 $ 20,939,000 Net unrealized gain (loss) on securities $ 2,239,000 $ (2,279,000) Company acquisitions in exchange for common stock $ 192,000 $ 2,100,000
4 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. Any statements in this report looking forward in time involve risks and uncertainties, including but not limited to the following risks: the effect of interest rate fluctuations; changes in the performance of the real estate markets; the effect of changing economic conditions; and the demand for and acceptance of the Company's products. This report should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1996. Note 2 - Junior Subordinated Deferrable Interest Debentures - ----------------------------------------------------------- On April 22, 1997, the Company issued and sold $100 million of 8.5% trust preferred securities, due in 2012, through its wholly owned subsidiary, First American Capital Trust I. For financial reporting purposes, the securities are presented in the consolidated balance sheet of the Company as a separate line item directly above stockholders' equity under the caption "Guaranteed Preferred Beneficial Interests in Company's Junior Subordinated Deferrable Interest Debentures." Distributions payable on the securities are included as interest expense in the Company's consolidated income statement. The Company used the proceeds from the sale of these 15-year securities to repay in full the variable rate indebtedness portion of its amended credit agreement, to finance certain acquisitions and for general corporate purposes. Note 3 - Company Acquisition - ---------------------------- On May 13, 1997, the Company acquired all of the operations of Strategic Mortgage Services, Inc. (SMS) other than SMS' flood zone certification business. This acquisition was accounted for by the purchase method of accounting and, accordingly, the assets acquired and liabilities assumed were recorded at their estimated fair values at the date of acquisition. SMS is a leading provider of real estate information services to the U.S. mortgage and title industries. The acquired business includes SMS' credit division, property appraisal division, title division, settlement services business and a controlling interest in a document preparation firm. Note 4 - Bank Credit Facility - ----------------------------- The Company amended its credit facility to provide for a more favorable pricing option, an increased line of credit and the elimination or relaxation of certain covenants and restrictions. The line of credit has been increased from $30.0 million to $75.0 million and is currently unused. Note 5 - Joint Venture - ---------------------- In September 1997, the Company announced that it had reached agreement with Experian Information Solutions, Inc. ("Experian") to form a joint venture. This joint venture transaction has been approved by the board of directors of the Company and Experian, but remains subject to satisfactory documentation, satisfactory due diligence and receipt of required consents and approvals. The purpose of the joint venture is to combine the Company's subsidiary, First American Real Estate Information Services, Inc., with Experian's Real Estate Solution's division ("RES"). The joint venture vehicle will be 80% owned by the Company and 20% owned by Experian, subject to certain put and call arrangements. RES is believed to be the nation's foremost supplier of core real estate data, providing, among other things, property valuation information, title information, tax information and imaged title documents. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- RESULTS OF OPERATIONS Three and nine months ended September 30: OVERVIEW Mortgage interest rates, which peaked in January of 1995, decreased throughout the remainder of that year and into 1996, helped by an easing of monetary policy by the Federal Reserve Board. This, together with an improved real estate economy (including the beginnings of a modest recovery in California), contributed to strong revenues and earnings for 1996. These favorable conditions continued into 1997, and coupled with market share gains in all of the Company's primary segments, resulted in record revenues and net income for the third quarter and nine months ended September 30, 1997. However, profit margins for the first nine months of 1997 were adversely affected by the need for title operations to increase staffing levels in order to service the record new orders opened during the period. Furthermore, the Company's information services operations experienced higher overhead as they integrated recent acquisitions, consolidated facilities, and transitioned new accounts to their systems. Net income for the three and nine months ended September 30, 1997 was $20.6 million, or $1.77 per share, and $42.0 million, or $3.62 per share, respectively, compared with net income of $13.8 million, or $1.20 per share, and $41.8 million, or $3.65 per share, for the same periods of the prior year. OPERATING REVENUES Set forth below is a summary of operating revenues for each of the Company's segments.
Three Months Ended Nine Months Ended September 30 September 30 ---------------------------------- -------------------------------------- ($000) ($000) 1997 % 1996 % 1997 % 1996 % --------- --- -------- --- ---------- --- ---------- --- Title Insurance: Direct operations $205,882 42 $160,875 40 $ 540,432 41 $ 465,113 40 Agency operations 179,940 36 166,893 41 492,706 37 461,361 40 --------- --- -------- --- ---------- --- ---------- --- 385,822 78 327,768 81 1,033,138 78 926,474 80 Real Estate Information 91,620 18 63,685 16 233,323 18 184,344 16 Home Warranty 12,570 3 9,968 2 33,852 3 28,468 3 Trust and Banking 5,169 1 4,101 1 14,740 1 11,993 1 --------- --- -------- --- ---------- --- ---------- --- Total $495,181 100 $405,522 100 $1,315,053 100 $1,151,279 100 ========= === ======== === ========== === ========== ===
Title Insurance. Operating revenues from direct title operations increased 28.0% and 16.2% for the three and nine months ended September 30, 1997, respectively, when compared with the same periods of the prior year. These increases were attributable to an increase in the number of title orders closed by the Company's direct operations, as well as an increase in the average revenues per order closed. The Company's direct operations closed 235,900 and 646,700 title orders during the three and nine months ended September 30,1997, respectively, representing increases of 20.7% and 11.1% when compared with the same periods of the prior year. These increases were due in large part to the factors mentioned above, primarily the resurgence of real estate activity in California, a state heavily concentrated with direct operations, as well as increases in the Company's national market share. The average revenues per order closed were $873 and $836 for the three month and nine months ended September 30, 1997, respectively, as compared with $823 and $799 for the same periods of the prior year. These increases 6 were primarily due to an increased mix of residential resale and commercial activity, increases in the average prices of homes nationwide, as well as an increase in other related revenues, primarily property reports, profiles and settlement services associated with recent acquisitions. Operating revenues from agency operations increased 7.8% and 6.8% for the three and nine months ended September 30, 1997, respectively, when compared with the same periods of the prior year. These increases 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 increased 43.9% and 26.6% for the three and nine months ended September 30, 1997, respectively, when compared with the same periods of the prior year. These increases were primarily attributable to $21.7 million and $40.6 million of operating revenues contributed by new acquisitions for the respective periods, as well as the same economic factors affecting title insurance mentioned above. Home Warranty. Home warranty operating revenues increased 26.1% and 18.9% for the three and nine months ended September 30, 1997, respectively, when compared with the same periods of the prior year. These increases were primarily attributable to improvements in the residential resale markets in which this business segment operates (principally, increases in the California residential resale market). INVESTMENT AND OTHER INCOME Investment and other income increased 15.3% and decreased 3.5% for the three and nine months ended September 30, 1997, respectively, when compared with the same periods of the prior year. The increase for the current three-month period was primarily due to a 6.4% increase in the average investment portfolio balance, an increase in dividend income from the Company's stock portfolio and increased equity in earnings of unconsolidated subsidiaries. The decrease for the nine- month period was primarily due to the recognition of investment losses of $1.0 million, compared with investment gains of $2.8 million realized in the same period of the prior year. TOTAL OPERATING EXPENSES Title Insurance. Salaries and other personnel costs were $128.9 million and $358.0 million for the three and nine months ended September 30, 1997, respectively, increases of 25.5% and 19.0% when compared with the same periods of the prior year. These increases were primarily due to costs incurred servicing the high number of more labor intensive residential resale transactions processed during the current three and nine month periods. The Company's direct operations opened 309,500 and 874,500 title orders during the three and nine months ended September 30, 1997, respectively, representing increases of 21.0% and 11.1% when compared with the same periods of the prior year. Also contributing to the increases in salaries and other personnel costs were $5.3 million and $11.0 million of costs incurred for the three and nine months ended September 30, 1997, respectively, relating to acquisition activity, and modest salary increases. Agents retained $145.0 million and $396.1 million of title premiums generated by agency operations for the three and nine months ended September 30, 1997, respectively, which compares with $134.8 million and $372.9 million for the same periods of the prior year. The percentage of title premiums retained by agents ranged from 80.4% to 80.8% 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 $65.8 million and $178.0 million for the three and nine months ended September 30, 1997, respectively, increases of 17.7% and 10.5% when compared with the same periods of the prior year. These increases were primarily attributable to the impact of certain incremental costs associated with processing the increase in title order volume experienced during the respective periods. Also contributing to the increases were $4.5 million and $9.1 million of costs incurred for the three and nine months ended September 30, 1997, relating to acquisition activity. The provision for title losses as a percentage of title insurance operating revenues was 3.8% for the nine months ended September 30, 1997, and 5.2% for the same period of the prior year. The decrease for the current period was primarily due to an ongoing improvement in the Company's loss experience. 7 Real Estate Information. Real estate information personnel and other operating expenses were $75.1 million and $189.4 million for the three and nine months ended September 30, 1997, respectively, increases of 58.1% and 41.9% when compared with the same periods of the prior year. These increases were primarily due to $14.0 million and $37.9 million of costs associated with new acquisitions, as well as higher overhead costs attributable to the integration of new acquisitions, consolidation of facilities and transitioning new accounts to their systems. Home Warranty. Home warranty personnel and other operating expenses were $3.2 million and $9.6 million for the three and nine months ended September 30, 1997, respectively, increases of 41.7% 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. The provision for home warranty losses expressed as a percentage of home warranty operating revenues was 59.0% and 57.9% for the nine months ended September 30, 1997 and 1996, respectively. The increase in loss ratio was primarily due to an increase in the average number of claims per contract. PRETAX PROFITS Set forth below is a summary of pretax profits for each of the Company's segments.
Three Months Ended Nine Months Ended September 30 September 30 -------------------------------- ---------------------------------- ($000) ($000) 1997 % 1996 % 1997 % 1996 % ------- --- ------- --- -------- --- -------- --- Title Insurance $31,844 68 $17,112 50 $ 61,545 59 $ 48,852 48 Real Estate Information 11,672 25 13,844 41 32,639 31 44,254 43 Home Warranty 2,454 5 1,908 6 6,936 7 6,595 6 Trust and Banking 1,171 2 982 3 3,023 3 2,599 3 ------- --- ------- --- -------- --- -------- --- Total before corporate 47,141 100 33,846 100 104,143 100 102,300 100 === === === === Corporate (9,736) (5,825) (23,034) (18,540) ------- ------- -------- -------- Total $37,405 $28,021 $ 81,109 $ 83,760 ======= ======= ======== ========
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 the relatively high proportion of fixed costs, title insurance profit margins generally improve as closed order volumes increase. In addition, title insurance profit margins are affected by the composition (residential or commercial) and type (resale, refinancing or new construction) of real estate activity. Profit margins from resale and new construction transactions are generally higher than from refinancing transactions because in many states there are premium discounts on, and cancellation rates are higher for, refinance transactions. Title insurance profit margins are also affected by the percentage of operating revenues generated by agency operations. Profit margins from direct operations are generally higher than from agency operations due primarily to the large portion of the premium that is retained by the agent. Real estate information pretax profits are generally unaffected by the type of real estate activity but increase as the volume of residential real estate loan transactions increase. PREMIUM TAXES Premium taxes were $12.6 million and $12.4 million for the nine months ended September 30, 1997 and 1996, respectively. Premium taxes as a percentage of title insurance operating revenues remained relatively constant at approximately 1.2%. INCOME TAXES The effective income tax rate was 38.8% for the nine months ended September 30, 1997, and 41.5% for the same period of the prior year. The decrease in effective rate was primarily attributable to changes in the ratio of permanent differences to income before income taxes, as well as a decrease in state income taxes resulting from the Company's non-insurance subsidiaries decrease in pretax profits. 8 NET INCOME Net income for the three and nine months ended September 30, 1997, was $20.6 million, or $1.77 per share, and $42.0 million, or $3.62 per share, respectively. Net income for the three and nine months ended September 30, 1996, was $13.8 million, or $1.20 per share, and $41.8 million, or $3.65 per share, respectively. LIQUIDITY AND CAPITAL RESOURCES Total cash and cash equivalents decreased $2.9 million for the nine months ended September 30, 1997, and increased $16.5 million for the same period of the prior year. The decrease for the current year period was primarily attributable to capital expenditures, the net cash effect of company acquisitions and the repayment of debt, offset in part by the proceeds from the issuance of junior subordinated debentures and cash provided by operating activities. The increase for the prior year period was primarily due to cash provided by operating activities, offset in part by capital expenditures and the repayment of debt. Effective July 29, 1997, the Company amended its bank credit agreement (see Note 4). The amendment relaxes or eliminates certain covenants and provides for a $75.0 million line of credit which is currently unused. Notes and contracts payable as a percentage of total capitalization decreased to 7.9% at September 30, 1997, from 16.0% at December 31, 1996. This decrease was primarily due to a $100.0 million increase in total capitalization as a result of the Company's junior subordinated deferrable interest debentures (see Note 2), as well as $27.4 million net reduction in debt. Management believes that all of its anticipated cash requirements for the immediate future will be met from internally generated funds. 9 Part II: Other Information ----------------- Item 2. Changes in Securities and Use of Proceeds. ----------------------------------------- (b) On October 23, 1997, the Company declared a dividend distribution of one Right for each outstanding Common Share, $1.00 par value, of the Company, to shareholders of record at the close of business on November 15, 1997. Each Right entitles the holder thereof to buy a Preferred Share Fraction equal to 1/100,000 of a share of Series A Junior Participating Preferred Shares of the Company at an exercise price of $265.00 per Preferred Share Fraction. Each Preferred Share Fraction is designed to be equivalent in voting and dividend rights to one Common Share. The Rights will be exercisable and will trade separately from the Common Shares only if a person or group, with certain exceptions, acquires beneficial ownership of 15% or more of the Company's Common Shares or commences a tender or exchange offer that would result in such person or group beneficially owning 15% or more of the Common Shares then outstanding. Prior to this time, the Rights will not trade separately from the Common Shares. The Company may redeem the Rights at $0.001 per Right at any time prior to the occurrence of one of these events. All Rights expire on October 23, 2007. Each Right will entitle its holder to purchase, at the Right's then-current exercise price, Preferred Share Fractions (or other securities of the Company) having a value of twice the Right's exercise price. This amounts to the right to buy Preferred Share Fractions of the Company at half price. Rights owned by the party triggering the exercise of Rights will be void and therefore will not be exercisable. In addition, if, after any person has become a 15%-or-more stockholder, the Company is involved in a merger or other business combination transaction with another person in which the Company's Common Shares are changed or converted, or if the Company sells 50% or more of its assets or earning power to another person, each Right will entitle its holder to purchase, at the Right's then-current exercise price, common stock of such other person (or its parent) having a value of twice the Right's exercise price. (c) During the quarterly period covered by this report, the Company issued unregistered shares of its common stock to the sellers of the business in the acquisition listed below. Date of Sale Number of Shares Consideration Received ------------ ---------------- ---------------------- July 8, 1997 4,800 $192,000
Item 6. Exhibits and Reports on Form 8-K. -------------------------------- (a) Exhibits (4.1) Amendment No. 1 dated as of November 10, 1997 to the Amended and Restated Credit Agreement dated as of July 29, 1997. (27) Financial Data Schedule. (b) Reports on Form 8-K The Company filed a report on Form 8-K dated November 7, 1997 (the "Form 8-K"), subsequent to the quarterly period covered by this report. The Form 8-K contains Item 5, describing the Company's shareholder rights plan adopted by the Company on October 23, 1997. 10 EXHIBIT INDEX Exhibit No. Description ----------- ----------- (4.1) Amendment No. 1 as of November 10, 1997 to the Amended and Restated Credit Agreement dated as of July 29, 1997 of Credit Agreement dated as of April 21, 1992. (27) Financial Data Schedule 11 EX-4.1 2 AMENDMENT NO. 1 AS OF NOVEMBER 10, 1997 Exhibit (4.1) Composite Conformed Copy AMENDMENT NO. 1 AMENDMENT NO. 1 dated as of November 10, 1997 between THE FIRST AMERICAN FINANCIAL CORPORATION, a corporation duly organized and validly existing under the laws of the State of California (the "Company"); each of the lenders that is ------- a signatory hereto (individually, a "Lender" and, collectively, the "Lenders"); ------ ------- and THE CHASE MANHATTAN BANK, as agent for the Lenders (in such capacity, together with its successors in such capacity, the "Administrative Agent"). -------------------- The Company, the Lenders and the Administrative Agent are parties to an Amended and Restated Credit Agreement dated as of July 29, 1997 (the "Credit ------ Agreement"), pursuant to which certain term loans and a revolving credit - --------- facility were continued and/or made available to the Company. The Company, the Lenders and the Administrative Agent wish to amend the Credit Agreement in certain respects, and accordingly, the parties hereto hereby agree as follows: Section 1. Definitions. Except as otherwise defined in this Amendment ----------- No. 1, terms defined in the Credit Agreement (as amended hereby) are used herein as defined therein. Section 2. Amendments. Subject to the satisfaction of the conditions ---------- precedent specified in Section 4 below, but effective as of the date hereof, the Credit Agreement shall be amended as follows: 2.01. References in the Credit Agreement (including references to the Credit Agreement as amended hereby) to "this Agreement" (and indirect references such as "hereunder", "hereby", "herein" and "hereof") shall be deemed to be references to the Credit Agreement as amended hereby. 2.02. Section 1.01 of the Credit Agreement shall be amended by adding the following new definitions (to the extent not already included in said Section 1.01) and inserting the same in the appropriate alphabetical locations and amending the following definitions (to the extent already included in said Section 1.01), as follows: "Majority Lenders" shall mean Lenders holding at least 66-2/3% of the ---------------- aggregate unpaid principal amount of the Revolving Credit Loans and the unused Revolving Credit Commitments. "Fixed Rate Lender Letter of Credit" shall mean the standby letter of ---------------------------------- credit issued by The Chase Manhattan Bank for the benefit of the Fixed Rate Lender, securing certain obligations of the Company to the Fixed Rate Lender under the Credit Agreement. 2.03. Section 4.07(b) of the Credit Agreement is hereby amended by adding the following clause immediately after the word "herein" in the first sentence of such Section: "or other than payment to the Fixed Rate Lender pursuant to the Fixed Rate Lender Letter of Credit" 2.04. The last paragraph of Section 6 of the Credit Agreement shall be amended in its entirety to read as follows: "The effectiveness of the Amendment and Restatement (except for Sections 11.03 and 11.07 hereof and the definitions ancillary thereto) and the obligation of any Lender to make its Loan hereunder is subject to the further conditions precedent that, both immediately prior to and on the Effective Date and on the date of the making of such Loan: (a) no Default shall have occurred and be continuing; and (b) the representations and warranties made by the Company in Section 7 hereof, and in each of the other Basic Documents, shall be true and complete on and as of the Effective Date and the date of the making of such Loan with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been as of a specific date, as of such specific date)." Amendment No. 1 --------------- 2 2.05. Section 10.09 of the Credit Agreement shall be amended in its entirety to read as follows: "10.09 Consents under Basic Documents. Except as otherwise provided in ------------------------------ Section 11.04 hereof, the Administrative Agent may, with the prior consent of the Majority Lenders (but not otherwise), consent to any modification, supplement or waiver under any of the Basic Documents." Section 3. Representations and Warranties. The Company represents and ------------------------------ warrants to the Lenders that the representations and warranties set forth in Section 7 of the Credit Agreement are true and complete on the date hereof as if made on and as of the date hereof and as if each reference in said Section 7 to "this Agreement" included references to this Amendment No. 1. Section 4. Conditions Precedent to Effectiveness. The amendments to the ------------------------------------- Credit Agreement set forth in Section 2 hereof, the termination of the Pledge Agreement and release of collateral thereunder set forth in Section 5 hereof, and the waiver of Section 8.05 of the Credit Agreement set forth in Section 6 hereof, shall become effective, as of the date hereof, upon the satisfaction of the following conditions precedent: 4.01. Execution by All Parties. This Amendment No. 1 shall have been ------------------------ executed and delivered by each of the parties hereto. 4.02. Letter of Credit. The Fixed Rate Lender Letter of Credit shall ---------------- have been issued. 4.03. Documents. The Administrative Agent shall have received such --------- documents as the Administrative Agent or any Lender or special New York counsel to the Chase Manhattan Bank may reasonably request. Section 5. Termination and Release. The Lenders and the Administrative ----------------------- Agent hereby agree to terminate the Pledge Agreement, and to release any and all collateral held thereunder. Section 6. Waiver. The Lenders and the Administrative Agent hereby ------ agree to waive Section 8.05 of the Credit Agreement to the extent required to enable the Company and First American Real Estate Information Services, Inc., a Wholly Owned Subsidiary of the Company, to enter into a transaction with Experian Information Solutions, Inc. an Ohio corporation (or its successor), with respect to certain businesses operated by its Real Estate Solutions division, as more fully described in Annex 1 hereto. Section 7. Miscellaneous. ------------- 7.01. Binding Effect. Except as herein provided, the Credit Agreement -------------- shall remain unchanged and in full force and effect. 7.02. Counterparts. This Amendment No. 1 may be executed in any number ------------ of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Amendment No. 1 by signing any such counterpart. 7.03. Governing Law. This Amendment No. 1 shall be governed by, and ------------- construed in accordance with, the law of the State of New York. Amendment No. 1 --------------- 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be duly executed and delivered as of the day and year first above written. THE FIRST AMERICAN FINANCIAL CORPORATION By /s/ D.P. Kennedy -------------------- Title: Chairman By /s/ Mark R Arnesen ---------------------- Title: Secretary THE CHASE MANHATTAN BANK, as Administrative Agent By /s/ Lawrence Karp --------------------- Title: Associate Amendment No. 1 --------------- 4 LENDERS ------- THE CHASE MANHATTAN BANK By /s/ Lawrence Karp --------------------- Title: Associate SANWA BANK CALIFORNIA By /s/ Rita Raychaudhuri ------------------------- Title: Vice President UNION BANK OF CALIFORNIA, N.A. By /s/ Douglas S. Lambell -------------------------- Title: Vice President COMERICA BANK By /s/ Emmanuel M. Skerofilax ------------------------------ Title: Corporate Banking Officer CHASE MANHATTAN BANK, AS NOMINEE FOR THE CANADA LIFE ASSURANCE COMPANY By /s/ Kenneth Peters ---------------------- Title: Vice President Amendment No. 1 --------------- Annex 1 [LOGO OF THE FIRST AMERICAN FINANCIAL CORPORATION] Under the currently contemplated structure of the transaction referenced in Section 6 of Amendment No. 1, the direct subsidiaries of First American Real Estate Information Services, Inc., other than Excelis, Inc. (such subsidiaries, the "FAREIS Subsidiaries"), and Experian Information Solutions, Inc. (or its successor, "Experian"), will enter into a joint venture transaction pursuant to which (i) the FAREIS Subsidiaries will transfer their respective assets and liabilities to a new formed limited liability company ("Newco") in exchange for 80% of the membership interests of Newco and (ii) Experian will transfer the assets and liabilities of its Real Estate Solutions Division plus additional cash to Newco in exchange for 20% of the membership interests of Newco. Amendment No. 1 --------------- EX-27 3 FINANCIAL DATA SCHEDULE
7 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 135,895,000 0 0 10,900,000 0 0 214,339,000 170,561,000 0 24,755,000 1,139,944,000 252,552,000 0 0 0 43,870,000 0 0 11,571,000 378,474,000 1,139,944,000 1,315,053,000 20,046,000 4,293,000 0 65,589,000 0 0 68,554,000 26,600,000 41,954,000 0 0 0 41,954,000 3.62 0 0 0 0 0 0 0 0
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