-----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, GacHnHChn15kprvsh2Mt70RA8aQEbI2jB/og4nYbLPhxCgh+dmrcmeeckEIvxs4H w+d+Jy++17TCppiV9Bl07Q== 0001017062-99-000214.txt : 19990215 0001017062-99-000214.hdr.sgml : 19990215 ACCESSION NUMBER: 0001017062-99-000214 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19990212 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/A SEC ACT: SEC FILE NUMBER: 001-13585 FILM NUMBER: 99536882 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/A 1 AMENDMENT TO QUARTERLY REPORT FOR 03/31/98 FORM 10-Q/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 -------------- 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 - 17,965,313 as of May 12, 1998 INFORMATION INCLUDED IN REPORT ------------------------------ Part I: Financial Information Item 1. Financial Statements A. Condensed Consolidated Balance Sheets B. Condensed Consolidated Statements of Income C. Condensed Consolidated Statements of Cash Flows D. Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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: February 12, 1999 1 Part I: Financial Information --------------------- Item 1. Financial Statements -------------------- THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES ---------------------------------------- Condensed Consolidated Balance Sheets ------------------------------------- (Unaudited)
March 31, 1998 December 31, 1997 -------------- ----------------- Assets Cash and cash equivalents $ 211,687,000 $ 181,531,000 -------------- -------------- Accounts and accrued income receivable, net 169,159,000 128,017,000 -------------- -------------- Investments: Deposits with savings and loan associations and banks 26,428,000 29,029,000 Debt securities 140,933,000 151,503,000 Equity securities 20,481,000 13,904,000 Other long-term investments 36,419,000 35,047,000 -------------- -------------- 224,261,000 229,483,000 -------------- -------------- Loans receivable 66,573,000 63,378,000 -------------- -------------- Property and equipment, at cost 390,776,000 323,065,000 Less-accumulated depreciation (161,195,000) (122,688,000) -------------- -------------- 229,581,000 200,377,000 -------------- -------------- Title plants and other indexes 146,975,000 100,626,000 -------------- -------------- Assets acquired in connection with claim settlements (net of valuation reserves of $10,199,000 and $11,135,000) 20,228,000 21,119,000 -------------- -------------- Deferred income taxes 16,943,000 31,563,000 -------------- -------------- Goodwill and other intangibles, net 134,142,000 132,361,000 -------------- -------------- Deferred policy acquisition costs 25,171,000 25,016,000 -------------- -------------- Other assets 54,235,000 54,673,000 -------------- -------------- $1,298,955,000 $1,168,144,000 ============== ============== Liabilities and Stockholders' Equity Demand deposits $ 61,993,000 $ 62,475,000 -------------- -------------- Accounts payable and accrued liabilities 195,344,000 168,133,000 -------------- -------------- Deferred revenue 104,482,000 104,124,000 -------------- -------------- Reserve for known and incurred but not reported claims 252,927,000 250,826,000 -------------- -------------- Income taxes payable 18,425,000 3,987,000 -------------- -------------- Notes and contracts payable 39,149,000 41,973,000 -------------- -------------- Minority interests in consolidated subsidiaries 63,286,000 25,214,000 -------------- -------------- 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 - 36,000,000 shares; Outstanding - 17,581,000 and 17,374,000 shares 17,581,000 17,374,000 Additional paid-in capital 52,934,000 43,953,000 Retained earnings 386,968,000 344,645,000 Net unrealized gain on securities 5,866,000 5,440,000 -------------- -------------- 463,349,000 411,412,000 -------------- -------------- $1,298,955,000 $1,168,144,000 ============== ==============
2 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES ---------------------------------------- Condensed Consolidated Statements of Income ------------------------------------------- (Unaudited)
For the Three Months Ended March 31 ------------ ------------ 1998 1997 ------------ ------------ Revenues Operating revenues $561,614,000 $376,425,000 Investment and other income 43,435,000 6,452,000 ------------ ------------ 605,049,000 382,877,000 ------------ ------------ Expenses Salaries and other personnel costs 199,122,000 140,787,000 Premiums retained by agents 140,045,000 122,193,000 Other operating expenses 135,000,000 84,470,000 Provision for title losses and other claims 27,328,000 18,592,000 Depreciation and amortization 13,706,000 6,475,000 Premium taxes 4,154,000 4,161,000 Interest 3,576,000 1,122,000 ------------ ------------ 522,931,000 377,800,000 ------------ ------------ Income before income taxes and minority interests 82,118,000 5,077,000 Income taxes 29,400,000 1,900,000 ------------ ------------ Income before minority interests 52,718,000 3,177,000 Minority interests 7,753,000 311,000 ------------ ------------ Net income $ 44,965,000 $ 2,866,000 ============ ============ Net income per share: Basic $ 2.57 $ .17 ============ ============ Diluted $ 2.49 $ .16 ============ ============ Cash dividends per share $ .15 $ .12 ============ ============ Weighted average number of shares: Basic 17,466,000 17,351,000 ============ ============ Diluted 18,072,000 17,733,000 ============ ============
3 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES ---------------------------------------- Condensed Consolidated Statements of Cash Flows ----------------------------------------------- (Unaudited)
For the Three Months Ended March 31 --------------------------- 1998 1997 ------------ ------------ Cash flows from operating activities: Net income $ 44,965,000 $ 2,866,000 Adjustments to reconcile net income to cash provided by (used for) operating activities- Provision for title losses and other claims 27,328,000 18,592,000 Depreciation and amortization 13,706,000 6,475,000 Minority interests in net income 7,753,000 311,000 Investment gain (Note 2) (32,449,000) Other, net (2,287,000) (1,040,000) Changes in assets and liabilities excluding effects of company acquisitions and noncash transactions- Claims paid, including assets acquired, net of recoveries (24,336,000) (16,953,000) Net change in income tax accounts 28,829,000 (1,044,000) (Increase) decrease in accounts and accrued income receivable (25,765,000) 1,753,000 Increase (decrease) in accounts payable and accrued liabilities 15,522,000 (13,874,000) Decrease in deferred revenue (5,954,000) (1,344,000) Other, net 5,495,000 (2,556,000) ------------ ------------ Cash provided by (used for) operating activities 52,807,000 (6,814,000) ------------ ------------ Cash flows from investing activities: Net cash effect of company acquisitions (3,396,000) (10,884,000) Net decrease in deposits with banks 2,601,000 2,116,000 Net increase in loans receivable (3,195,000) (2,275,000) Purchases of debt and equity securities (15,625,000) (9,155,000) Proceeds from sales of debt and equity securities 14,679,000 8,624,000 Proceeds from maturities of debt securities 5,594,000 6,504,000 Net decrease in other investments 1,001,000 369,000 Capital expenditures (21,539,000) (16,448,000) Proceeds from sale of property and equipment 204,000 548,000 ------------ ------------ Cash used for investing activities (19,676,000) (20,601,000) ------------ ------------ Cash flows from financing activities: Net change in demand deposits (482,000) 3,213,000 Repayment of debt (4,954,000) (6,742,000) Proceeds from exercise of stock options 1,007,000 (268,000) Proceeds from issuance of stock to employee savings plan 4,096,000 Cash dividends (2,642,000) (2,088,000) ------------ ------------ Cash used for financing activities (2,975,000) (5,885,000) ------------ ------------ Net increase (decrease) in cash and cash equivalents 30,156,000 (33,300,000) Cash and cash equivalents - Beginning of year 181,531,000 173,439,000 ------------ ------------ - End of first quarter $211,687,000 $140,139,000 ============ ============ Supplemental information: Cash paid during the first quarter for: Interest $ 1,129,000 $ 1,056,000 Premium taxes $ 4,223,000 $ 6,505,000 Income taxes $ 5,097,000 $ 4,197,000 Noncash investing and financing activities: Shares issued for stock bonus plan $ 2,623,000 $ 2,185,000 Liabilities incurred in connection with company acquisitions $ 66,078,000 $ 3,011,000 Net unrealized gain (loss) on securities $ 426,000 $ (845,000) Company acquisitions in exchange for common stock $ 1,462,000
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. This report should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Certain 1997 interim amounts have been reclassified to conform with the 1998 presentation. Note 2 - Business Combinations - ------------------------------ On January 1, 1998, the Company formed a limited liability corporation (LLC) with Experian Group (Experian). The purpose of the LLC is to combine certain operations of the Company's subsidiary, First American Real Estate Information Services, Inc., with Experian's Real Estate Solutions division (RES). The LLC is 80% owned by the Company and 20% owned by Experian. RES is a supplier of core real estate data, providing, among other things, property valuation information, title and tax information and imaged title documents. This business combination has been accounted for under the purchase method of accounting, and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on the estimated fair values at January 1, 1998. In addition, as a result of the transaction, the Company recognized an investment gain of $32.4 million in the first quarter 1998. The operating results of the LLC are included in the Company's consolidated financial statements commencing January 1, 1998. Assuming the combination had occurred January 1, 1997, pro forma revenues, net income, net income per diluted share would have been $404.9 million, $2.1 million and $.12, respectively, for the three months ended March 31, 1997. Pro forma results for the current period are not presented because the combination occurred January 1, 1998. In addition, during the three months ended March 31, 1998, the Company also acquired 2 companies in the title insurance business for an aggregate of $0.3 million in cash, $0.7 million in notes and 86,000 shares of the Company's common stock. These acquisitions were individually not material. Each of these acquisitions was accounted for under the purchase method of accounting and, accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on estimated fair values. As a result of the acquisitions, the Company recorded approximately $1.7 million in goodwill. Goodwill is amortized on a straight-line basis over its estimated useful life of 20-30 years. The operating results of the acquired companies were included in the Company's consolidated financial statements from their respective acquisitions dates. Assuming these acquisitions had occurred January 1, 1997, pro forma revenues, net income, net income per diluted share would have been $606.3 million, $45.0 million and $2.49 respectively, for the three months ended March 31, 1998, and $406.3 million, $2.2 million and $.13, respectively, for the three months ended March 31, 1997 (the 1997 pro forma results include the business combination mentioned above). All pro forma results include amortization of goodwill and interest expense on acquisition debt. The pro forma results 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 necessarily indicative of future operating results. Note 3 - Other Comprehensive Income - ----------------------------------- On January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This statement requires the reporting of comprehensive income in addition to net income. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. Currently, the only comprehensive income item that affects the Company is unrealized gains and losses on debt and equity securities. The Company reported net unrealized gains of $0.4 million and net unrealized losses of $0.8 million for the three month period ended March 31, 1998 and 1997, respectively. Accordingly, comprehensive income for the two respective periods was $45.4 million and $2.0 million. Note 4 - Subsequent Events - -------------------------- On March 31, 1998, the Company entered into an agreement to acquire Data Tree Corporation, a California company in the business of providing database management and document imaging systems to county recorders, governmental agencies and the title industry. This transaction is expected to close during the second quarter 1998 and will be accounted for using the purchase method of accounting. On April 7, 1998, the Company issued and sold $100.0 million of 7.55% debentures, due April 1, 2028. The 30-year bonds were issued at 99.456% of the principal amount. Net proceeds will be used for general corporate purposes, including, without limitation, repayment of certain debt and the financing of the construction of new corporate facilities. On April 16, 1998, the Company acquired California-based Contour Software, a supplier of mortgage origination software and services to the mortgage loan industry. This acquisition was not material and will be reflected in the Company's second quarter 1998 financial statements and will be accounted for using the pooling of interests method of accounting. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations ------------- Any statements in this document 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; the demand for and the acceptance of the Company's products; and contingencies associated with the Year 2000 issue. RESULTS OF OPERATIONS Three months ended March 31: OVERVIEW Low mortgage interest rates and an improving national real estate economy resulted in relatively strong revenues for the first quarter 1997. However, first quarter 1997 profits were adversely affected by the need for title operations to increase staffing levels in order to service the substantial increase in residential orders which subsequently closed in the second quarter 1997. Furthermore, the Company's information services operations experienced higher overhead in the quarter as they integrated acquisitions and transitioned new accounts to their systems. Favorable real estate conditions continued throughout 1997 and, coupled with market share increases in all of the Company's primary business segments, culminated in the best year overall in the Company's history. Starting in the fourth quarter 1997 and into the first quarter 1998, lower mortgage interest rates and higher consumer confidence lead to record-setting residential resale activity as well as a substantial increase in refinance transactions nationwide. This, coupled with the particularly strong California real estate market, contributed to record-setting revenues, net income and net income per share for the first quarter 1998. Net income and net income per diluted share for the first quarter 1998 (excluding an investment gain of $19.6 million on an after-tax basis) was $25.4 million and $1.40, respectively. See Note 2 to the condensed consolidated financial statements for a description of the investment gain. OPERATING REVENUES Set forth below is a summary of operating revenues for each of the Company's segments.
Three Months Ended March 31 ------------------------------- ($000) 1998 % 1997 % -------- --- -------- --- Title Insurance: Direct operations $225,719 40 $147,674 39 Agency operations 176,536 32 152,106 40 -------- --- --------- --- 402,255 72 299,780 79 Real Estate Information 140,360 25 62,047 17 Home Warranty 13,173 2 10,068 3 Trust and Banking 5,826 1 4,530 1 -------- --- -------- --- Total $561,614 100 $376,425 100 ======== === ======== ===
Title Insurance. Operating revenues from direct title operations increased 52.8% when compared with the same period of the prior year. This increase was primarily 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 260,600 title orders during the current quarter, an increase of 43.6% when compared with 181,500 title orders closed during the same period of the prior year. This increase was primarily due to the factors mentioned above, primarily the strong real estate market in California, a state heavily concentrated with direct operations, as well as an increase in the Company's national market share. The average revenues per order closed were $866 for the current three month period, as compared with $814 for the same period of the prior year. This increase was primarily due to appreciating residential real estate values. Operating revenues from agency operations increased 16.1% when compared with the same period of the prior year. This increase was primarily due to the same factors affecting direct operations mentioned above, offset in part by the inherent delay in reporting by agents. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations (Continued) ------------------------- Real Estate Information. Real estate information operating revenues increased 126.2% when compared with the same period of the prior year. This increase was primarily attributable to the same economic factors affecting title insurance mentioned above, as well as $38.2 million of operating revenues contributed by new acquisitions. Home Warranty. Home warranty operating revenues increased 30.8% when compared with the same period of the prior year. This increase was primarily attributable to improvements in the residential resale markets in which this business segment operates. INVESTMENT AND OTHER INCOME Investment and other income totaled $43.4 million and $6.5 million for the first quarter 1998 and 1997, respectively. The increase of $36.9 was primarily attributable to an investment gain of $32.4 million relating to the joint venture agreement with Experian (see Note 2 to the condensed consolidated financial statements), other investment gains of $3.4 million, and $1.0 million increase in equity in earnings of unconsolidated subsidiaries. TOTAL OPERATING EXPENSES Title Insurance. Salaries and other personnel costs were $144.9 million, an increase of 33.2% when compared with the same period of the prior year. This increase was primarily due to costs incurred servicing the record-setting number of orders opened during the period, offset in part by personnel efficiencies. The Company's direct operations opened 397,800 title orders during the current period, an increase of 53.9% when compared with the same period of the prior year. Agents retained $140.0 million, or 79.3%, and $122.2 million, or 80.3%, of the title premiums generated by agency operations for the first quarter 1998 and 1997, respectively. The percentage of title premiums retained by agents varies from region to region. Accordingly, the geographical mix of revenues from agency operations accounts for the variation in the percentage amount of title premiums retained by agents. Other operating expenses were $68.0 million, an increase of 28.1% when compared with the same period of the prior year. This increase was primarily attributable to the impact of certain incremental costs associated with processing the record-setting title order volume, as well as marginal price level increases. The provision for title losses as a percentage of title insurance operating revenues was 3.9% for the current period and 3.8% for the same period of the prior year. This relatively constant loss percentage was due to stable claims experience. Premium taxes for title insurance were $4.0 million for both the first quarter 1998 and 1997. Expressed as a percentage of title insurance operating revenues, premium taxes were 1.0% for the first quarter 1998 and 1.3% for the first quarter 1997. The decrease in percentage was primarily due to changes in the geographical mix of title insurance operating revenues, as well as changes in the Company's non-insurance title subsidiaries' contribution to revenues. Real Estate Information. Real estate information personnel and other operating expenses were $105.8 million, an increase of 110.1% when compared with the same period of the prior year. This increase was primarily due to $33.2 million of costs associated with new acquisitions, costs incurred servicing the increased business volume and slightly higher overhead costs attributable to the integration of the new acquisitions. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations (Continued) ------------------------- Home Warranty. Home warranty personnel and other operating expenses were $4.2 million, an increase of 29.6% when compared with the same period of the prior year. This increase was primarily attributable to costs incurred servicing the increased business volume and expansion into other states. The provision for home warranty losses expressed as a percentage of home warranty operating revenues was 51.4% and 58.2% for the first quarter 1998 and 1997, respectively. The decrease in loss ratio was primarily due to a decrease in the average number of claims per contract. 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.
Three Months Ended March 31 -------------------------------- ($000) 1998 % 1997 % ------- --- ------- --- Title Insurance $30,261 52 $ (57) (1) Real Estate Information 23,535 40 7,823 76 Home Warranty 3,026 5 1,636 16 Trust and Banking 1,588 3 915 9 ------- --- ------- --- Total before corporate 58,410 100 10,317 100 === === Corporate 23,708 (5,240) ------- ------- Total $82,118 $ 5,077 ======= =======
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 as the volume of residential real estate loan transactions increase. Included in corporate for the three months ended March 31, 1998 was an investment gain of $32.4 million (See Note 2 to the condensed consolidated financial statements). INCOME TAXES The effective income tax rate was 35.8% for the current quarter and 37.4% 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. MINORITY INTERESTS Minority interest expense was $7.8 million and $0.3 million for the first quarter 1998 and 1997, respectively. The increase of $7.5 million was primarily attributable to the strong operating results of the Company's recently formed 80% joint venture with Experian, as well as the strong operating results of other less than 100% owned subsidiaries 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations (Continued) ------------------------- NET INCOME Net income for the current quarter was $45.0 million, or $2.49 per diluted share, which included an investment gain of $32.4 million, or $1.09 per diluted share, compared with net income of $2.9 million, or $0.16 per diluted share. LIQUIDITY AND CAPITAL RESOURCES Total cash and cash equivalents increased $30.2 million for the three months ended March 31, 1998, and decreased $33.3 million for the same period of the prior year. The increase for the current period was primarily due to cash generated by operating activities, offset in part by capital expenditures and repayment of debt. The decrease for the prior year period was primarily attributable to cash used for operating activities, capital expenditures and repayment of debt. Notes and contracts payable as a percentage of total capitalization decreased to 5.9% at March 31, 1998, from 7.3% at December 31, 1997. The decrease was primarily attributable to net income for the period and an increase in minority interest in consolidated subsidiaries (primarily due to the joint venture with Experian). The Company's management has initiated a program to evaluate the Year 2000 issue as it relates to its internal computer systems and third party computer systems with which the Company interacts. The Company is currently in the inventory and assessment phase of the program, with the remaining phases (renovation, testing and implementation) expected to be completed by midyear 1999. The Company has incurred to date nominal costs related to this issue. The majority of the costs are expected to be incurred in the final three phases of the program. These costs, which include internal staff costs as well as consulting and other expenses, will be expensed as incurred. At this time, the Company is unable to reasonably estimate the total costs for the Year 2000 issue. On April 7, 1998, the Company issued and sold $100.0 million of 7.55% senior debentures, due April 1, 2028. The 30-year bonds were issued at 99.456% of the principal amount. Net proceeds will be used for general corporate purposes, including, without limitation, repayment of certain debt and the financing of the construction of new corporate facilities. Management believes that all of its anticipated cash requirements for the immediate future will be met from internally generated funds and proceeds from the issuance and sale of its 30-year bonds. 9 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, April 23, 1998. (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 13,117,545 166,772 Gary J. Beban 13,124,129 160,188 J. David Chatham 13,124,134 160,183 William G. Davis 13,123,593 160,724 James L. Doti 13,123,279 161,038 Lewis W. Douglas, Jr. 13,099,469 184,848 Paul B. Fay, Jr. 13,098,509 185,808 Dale F. Frey 13,125,084 159,233 D. P. Kennedy 13,123,346 160,971 Parker S. Kennedy 13,122,961 161,356 Anthony R. Moiso 13,124,408 159,909 R. J. Munzer 13,088,940 195,377 Frank E. O'Bryan 11,696,790 1,587,527 Roslyn B. Payne 13,105,818 178,499 D. Van Skilling 13,124,554 159,763 Virginia M. Ueberroth 13,124,408 159,909
(c) At the Meeting, the proposal to amend the Company's 1996 Stock Option Plan (to increase by 1,000,000 the number of Common shares available for grant thereunder) was approved by the holders of a majority of the Company's Common shares represented at the Meeting and entitled to vote.
Votes For Votes Against Votes Withheld Broker Nonvotes --------- ------------- -------------- --------------- 7,342,100 3,343,215 107,741 2,491,261
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 (2) Agreement and Plan of Merger, dated as of March 27, 1998, by and among The First American Financial Corporation, Image Acquisition Corp., Data Tree Corporation and Harish Chopra, incorporated by reference herein from Exhibit 2.1 of Registration Statement on Form S-4 dated May 7, 1998. 10 Item 6. Exhibits and Reports on Form 8-K (Continued). --------------------------------------------- (10)(a) Contribution and Joint Venture Agreement By and Among The First American Financial Corporation and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(a) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (10)(b) Operating Agreement for First American Real Estate Solutions LLC, a California Limited Liability Company, By and Among The First American Real Estate Information Services, Inc. and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(b) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (10)(c) FAREISI Transition Agreement, incorporated by reference herein from Exhibit (10)(c) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (10)(d) Data License Agreement, incorporated by reference herein from Exhibit (10)(d) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (10)(e) Interim Operating Agreement By and Among The First American Financial Corporation and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(e) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (10)(f) Experian Transition Agreement, incorporated by reference herein from Exhibit (10)(f) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (10)(g) Reseller Services Agreement, incorporated by reference herein from Exhibit (10)(g) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (10)(h) Amendment to Reseller Services Agreement For Resales to Consumers, incorporated by reference herein from Exhibit (10)(h) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (10)(i) Trademark License Agreement, incorporated by reference herein from Exhibit (10)(i) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (10)(j) Amendment to Section 5.1 of The First American Financial Corporation 1996 Stock Option Plan, incorporated by reference herein from definitive Proxy Statement dated March 23, 1998. (27) Financial Data Schedule, incorporated by reference herein from Exhibit (27) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (b) Reports on Form 8-K During the quarterly period covered by this report, the Company filed reports on Form 8-K dated January 23, 1998 (reporting on the declaration and payment of a "3 for 2" stock split and amendment of the Company's articles of incorporation to increase the authorized number of Common shares in connection therewith), January 27, 1998 (reporting on the formation of a joint venture between the Company and Experian Information Solutions, Inc.), March 18, 1998 (reporting on the Company's having entered into a definitive agreement to acquire Contour Software, Inc.), and March 31, 1998 (reporting on the Company's having entered into a definitive agreement to acquire Data Tree Corporation). Subsequent to such quarterly period, the Company filed a report on Form 8-K dated April 7, 1998 (reporting on the Company's issuance of $100,000,000 aggregate principal amount of 7.55% senior debentures due 2028). 11 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- (2) Agreement and Plan of Merger, dated as of March 27, 1998, By and Among The First American Financial Corporation, Image Acquisition Corp., Data Tree Corporation and Harish Chopra, incorporated by reference herein from Exhibit 2.1 of Registration Statement on Form S-4 dated May 7, 1998, incorporated by reference herein from Exhibit (2) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (10)(a) Contribution and Joint Venture Agreement By and Among The First American Financial Corporation and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(a) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (10)(b) Operating Agreement for First American Real Estate Solutions LLC, a California Limited Liability Company, By and Among The First American Real Estate Information Services, Inc. and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(b) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (10)(c) FAREISI Transition Agreement, incorporated by reference herein from Exhibit (10)(c) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (10)(d) Data License Agreement, incorporated by reference herein from Exhibit (10)(d) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (10)(e) Interim Operating Agreement By and Among The First American Financial Corporation and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(e) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (10)(f) Experian Transition Agreement, incorporated by reference herein from Exhibit (10)(f) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (10)(g) Reseller Services Agreement, incorporated by reference herein from Exhibit (10)(g) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (10)(h) Amendment to Reseller Services Agreement For Resales to Consumers, incorporated by reference herein from Exhibit (10)(h) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (10)(i) Trademark License Agreement, incorporated by reference herein from Exhibit (10)(i) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (10)(j) Amendment to Section 5.1 of The First American Financial Corporation 1996 Stock Option Plan, incorporated by reference herein from definitive Proxy Statement dated March 23, 1998, incorporated by reference herein from Exhibit (10)(j) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. (27) Financial Data Schedule, incorporated by reference herein from Exhibit (27) from Quarterly Report on Form 10Q for the quarter ended March 31, 1998. 12 -----END PRIVACY-ENHANCED MESSAGE-----