-----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, E0L+mJujlj0qoXBM0giv+wLRQQ4f1h+ZQk6x2YS94b8Cqc8vjlCsJBwN2xzAhxxH 0YWoiYQEpZRdzAlAPlWuZw== 0001017062-99-000216.txt : 19990215 0001017062-99-000216.hdr.sgml : 19990215 ACCESSION NUMBER: 0001017062-99-000216 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980930 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: 99537074 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 09-30-98 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 September 30, 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 (I.R.S. Employer Identification No.) incorporation or organization) 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 ___________ 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 - 60,025,471 as of November 10, 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 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: 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)
September 30, 1998 December 31, 1997 ------------------- ------------------- Assets Cash and cash equivalents $ 336,630,000 $ 181,531,000 ------------------- ------------------- Accounts and accrued income receivable, net 187,983,000 128,017,000 ------------------- ------------------- Investments: Deposits with savings and loan associations and banks 23,654,000 29,029,000 Debt securities 221,893,000 151,503,000 Equity securities 23,677,000 13,904,000 Other long-term investments 46,057,000 35,047,000 ------------------- ------------------- 315,281,000 229,483,000 ------------------- ------------------- Loans receivable 68,294,000 63,378,000 ------------------- ------------------- Property and equipment, at cost 449,808,000 323,065,000 Less- accumulated depreciation (155,476,000) (122,688,000) ------------------- ------------------- 294,332,000 200,377,000 ------------------- ------------------- Title plants and other indexes 203,911,000 100,626,000 ------------------- ------------------- Assets acquired in connection with claim settlements (net of valuation reserves of $10,127,000 and $11,135,000) 19,989,000 21,119,000 ------------------- ------------------- Deferred income taxes 14,493,000 31,563,000 ------------------- ------------------- Goodwill and other intangibles, net 169,648,000 132,361,000 ------------------- ------------------- Deferred policy acquisition costs 28,349,000 25,016,000 ------------------- ------------------- Other assets 69,984,000 54,673,000 ------------------- ------------------- $ 1,708,894,000 $ 1,168,144,000 =================== =================== Liabilities and Stockholders' Equity Demand deposits $ 64,285,000 $ 62,475,000 ------------------- ------------------- Accounts payable and accrued liabilities 236,344,000 168,133,000 ------------------- ------------------- Deferred revenue 127,733,000 104,124,000 ------------------- ------------------- Reserve for known and incurred but not reported claims 267,476,000 250,826,000 ------------------- ------------------- Income taxes payable 32,507,000 3,987,000 ------------------- ------------------- Notes and contracts payable (Note 4) 132,215,000 41,973,000 ------------------- ------------------- Minority interests in consolidated subsidiaries 97,092,000 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 (Note 5) Authorized - 108,000,000 shares Outstanding - 58,296,000 and 52,122,000 shares 58,296,000 52,122,000 Additional paid-in capital (Note 5) 106,739,000 9,205,000 Retained earnings 479,179,000 344,645,000 Net unrealized gain on securities 7,028,000 5,440,000 ------------------- ------------------- 651,242,000 411,412,000 ------------------- ------------------- $ 1,708,894,000 $ 1,168,144,000 =================== ===================
2 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES ------------------------ Condensed Consolidated Statements of Income ------------------------------------------- (Unaudited)
For the Three Months Ended For the Nine Months Ended September 30 September 30 ------------------------------- --------------------------------- 1998 1997 1998 1997 --------------- --------------- ---------------- ---------------- Revenues Operating revenues $742,978,000 $495,181,000 $2,000,055,000 $1,315,053,000 Investment and other income 10,323,000 6,667,000 62,578,000 20,046,000 ------------ ------------ -------------- -------------- 753,301,000 501,848,000 2,062,633,000 1,335,099,000 ------------ ------------ -------------- -------------- Expenses Salaries and other personnel costs 231,893,000 168,434,000 650,082,000 467,033,000 Premiums retained by agents 217,587,000 144,959,000 552,614,000 396,114,000 Other operating expenses 148,878,000 114,768,000 433,214,000 290,417,000 Provision for title losses and other claims 29,358,000 24,540,000 88,889,000 65,589,000 Depreciation and amortization 14,020,000 7,437,000 42,323,000 25,578,000 Premium taxes 5,632,000 3,833,000 15,017,000 12,555,000 Interest 4,393,000 3,312,000 13,412,000 6,972,000 ------------ ------------ -------------- -------------- 651,761,000 467,283,000 1,795,551,000 1,264,258,000 ------------ ------------ -------------- -------------- Income before income taxes and minority interests 101,540,000 34,565,000 267,082,000 70,841,000 Income taxes 35,700,000 13,000,000 95,000,000 26,600,000 ------------ ------------ -------------- -------------- Income before minority interests 65,840,000 21,565,000 172,082,000 44,241,000 Minority interests 9,992,000 993,000 26,163,000 2,287,000 ------------ ------------ -------------- -------------- Net income $ 55,848,000 $ 20,572,000 $ 145,919,000 $ 41,954,000 ============ ============ ============== ============== Net income per share (Note 5): Basic $ .97 $ .40 $ 2.67 $ .81 ============ ============ ============== ============== Diluted $ .93 $ .39 $ 2.56 $ .79 ============ ============ ============== ============== Cash dividends per share (Note 5) $ .06 $ .04 $ .16 $ .12 ============ ============ ============== ============== Weighted average number of shares (Note 5): Basic 57,387,000 52,038,000 54,694,000 52,088,000 ============ ============ ============== ============== Diluted 60,300,000 53,241,000 56,936,000 53,106,000 ============ ============ ============== ==============
3 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES ------------------------ Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30 ------------------------------ 1998 1997 ------------- ------------- Cash flows from operating activities: Net income $ 145,919,000 $ 41,954,000 Adjustments to reconcile net income to cash provided by operating activities- Provision for title losses and other claims 88,889,000 65,589,000 Depreciation and amortization 42,323,000 20,098,000 Minority interests in net income 26,163,000 2,287,000 Investment gain (Note 2) (32,449,000) Other, net (3,125,000) (494,000) Changes in assets and liabilities excluding effects of company acquisitions and noncash transactions- Claims paid, including assets acquired, net of recoveries (71,464,000) (56,276,000) Net change in income tax accounts 41,450,000 12,373,000 Increase in accounts and accrued income receivable (42,453,000) (20,565,000) Increase in accounts payable and accrued liabilities 51,971,000 2,081,000 Increase (decrease) in deferred revenue 13,426,000 (731,000) Other, net (10,207,000) (5,723,000) ------------- ------------- Cash provided by operating activities 250,443,000 60,593,000 ------------- ------------- Cash flows from investing activities: Net cash effect of company acquisitions 18,753,000 (39,519,000) Net decrease (increase) in deposits with banks 5,579,000 (10,792,000) Net increase in loans receivable (4,916,000) (7,864,000) Purchases of debt and equity securities (116,841,000) (53,345,000) Proceeds from sales of debt and equity securities 25,334,000 35,014,000 Proceeds from maturities of debt securities 13,787,000 14,070,000 Net decrease (increase) in other investments 229,000 (1,706,000) Capital expenditures (110,243,000) (60,845,000) Proceeds from sale of property and equipment 879,000 992,000 ------------- ------------- Cash used for investing activities (167,439,000) (123,995,000) ------------- ------------- Cash flows from financing activities: Net change in demand deposits 1,810,000 8,610,000 Proceeds from issuance of junior subordinated deferrable interest debentures 100,000,000 Proceeds from issuance of senior debentures 99,456,000 Repayment of debt (23,277,000) (39,098,000) Purchase of Company shares (3,903,000) Proceeds from excercise of stock options 2,242,000 1,397,000 Proceeds from issuance of stock to employee savings plan 14,440,000 Distributions to minority shareholders (11,191,000) Cash dividends (11,385,000) (6,482,000) ------------- ------------- Cash provided by financing activities 72,095,000 60,524,000 ------------- ------------- Net increase (decrease) in cash and cash equivalents 155,099,000 (2,878,000) Cash and cash equivalents- Beginning of year 181,531,000 173,439,000 ------------- ------------- - End of third quarter $ 336,630,000 $ 170,561,000 ============= ============= Supplemental information: Cash paid during the first three quarters for: Interest $ 6,792,000 $ 3,364,000 Premium taxes $ 14,497,000 $ 14,915,000 Income taxes $ 57,640,000 $ 15,469,000 Noncash investing and financing activities: Shares issued for stock bonus plan $ 2,637,000 $ 2,185,000 Liabilities incurred in connection with company acquisitions $ 117,821,000 $ 46,330,000 Net unrealized gain on securities $ 1,588,000 $ 2,239,000 Company acquisitions in exchange for common stock $ 84,389,000 $ 192,000
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. Certain 1997 interim amounts have been reclassified to conform with the current period presentation. This report should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 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 and net income per diluted share would have been $1,403.4 million, $38.2 million and $0.72, respectively, for the nine months ended September 30, 1997. Pro forma results for the current nine-month period are not presented because the combination occurred January 1, 1998. In addition, during the nine months ended September 30, 1998, the Company also acquired 21 companies. The purchase method of accounting was used for 19 of the acquisitions and the pooling of interests method was used for two. The 19 acquisitions accounted for under the purchase method of accounting were individually not material and all in the title insurance or real estate information services business. Their aggregate purchase price was $7.6 million in cash, $2.3 million in notes and 2,790,109 shares of the Company's stock. The purchase price for each was allocated to the assets acquired and liabilities assumed based on estimated fair values and approximately $38.2 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 companies were included in the Company's consolidated financial statements from their respective acquisition dates. Assuming these acquisitions had occurred January 1, 1997, pro forma revenues, net income and net income per diluted share would have been $2,095.5 million, $146.7 million and $2.54, respectively, for the nine months ended September 30, 1998, and $1,429.7 million, $40.0 million and $0.71, respectively, for the nine months ended September 30, 1997 (the 1997 pro forma results include the business combination with Experian 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. The two acquisitions accounted for under the pooling of interests method of accounting were individually and in the aggregate not material; accordingly, prior year results have not been restated. 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 a net unrealized gain of $1.6 million and $2.2 million for the nine-month period ended September 1998 and 1997, respectively. Accordingly, comprehensive income for the two respective periods was $147.5 million and $44.2 million. Note 4 - Senior Debentures - -------------------------- 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. The Company has used a portion of the net proceeds from the sale of these 30-year securities to repay certain debt obligations and purchase land for the Company's new corporate facilities. The remaining proceeds will be used for general corporate purposes. 5 Note 5 - Stock Split - -------------------- On July 17, 1998, the Company distributed, to shareholders of record on July 7, 1998, a 3-for-1 common stock split in the form of a 200% stock dividend. This resulted in an increase of 37,895,936 common shares outstanding with the par value of these additional shares being capitalized by a transfer from additional paid-in-capital to the common stock account. In order to effect the stock split, the Company increased its authorized shares from 36,000,000 to 108,000,000. All references in the consolidated financial statements with regards to common stock, additional paid-in-capital, number of shares of common stock and per share amounts have been restated to reflect the stock split. Note 6 - Subsequent Event - ------------------------- In October 1998 the Company acquired The Registry, Inc., Southcoast Industries, Inc., Trans Registry Corporation, Crim Check America, Inc. and Trans Registry Limited (the "Registry Entities"). This business combination will be recorded by the Company in the fourth quarter 1998 and will be accounted for under the pooling of interests method of accounting. The Company issued 1,113,580 shares of its common stock in exchange for 100% of the outstanding stock of the Registry Entities. The Registry Entities provide landlords with data on prospective tenants in order to allow them to make a more informed screening decision; such data typically includes a report of prior unlawful detainer actions against the prospective tenant, employment verification, a credit report and rental payment history. Assuming this business combination had occurred on September 30, 1998, the Company would have reported the following operating results:
Three months ended Nine months ended September 30 September 30 ------------------- ------------------------ 1998 1997 1998 1997 -------- -------- ----------- ---------- Revenues $756,790 $504,566 $2,0771,881 $1,342,356 Net income $ 55,512 $ 20,742 $ 145,978 $ 42,625 Net income per diluted share $ 0.90 $ 0.38 $ 2.51 $ 0.77
6 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 and nine months ended September 30: OVERVIEW Low mortgage interest rates and an improving national real estate economy resulted in strong revenues and income for the three and nine months ended September 30, 1997. However, profits for the nine months ended September 30, 1997 were adversely affected by the need for title operations to increase staffing levels in order to service the relatively high number of title orders opened during the period. Furthermore, the Company's information services operations experienced higher overhead 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 continuing to date, lower mortgage interest rates and higher consumer confidence have led 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 and net income for the three and nine months ended September 30, 1998. Net income and net income per diluted share for the third quarter 1998 was $55.8 million and $0.93, respectively. Net income and net income per diluted share for the nine months ended September 30, 1998, (excluding a previously announced first quarter investment gain of $19.6 million on an after-tax basis, or $0.34 per diluted share, relating to the joint venture with Experian) was $126.3 million and $2.22 per diluted share, respectively. 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) 1998 % 1997 % 1998 % 1997 % ---------- ------- ---------- ------ ----------- ------- ------------ ----- Title Insurance: Direct operations $286,264 39 $205,882 42 $ 786,810 39 $ 540,432 41 Agency operations 269,983 36 179,940 36 690,038 35 492,706 37 -------- ----- -------- ----- ---------- ----- ---------- ----- 556,247 75 385,822 78 1,476,848 74 1,033,138 78 Real Estate Information 164,828 22 91,620 18 461,683 23 233,323 18 Home Warranty 15,580 2 12,570 3 43,027 2 33,852 3 Trust and Banking 6,323 1 5,169 1 18,497 1 14,740 1 -------- ----- -------- ----- ---------- ----- ---------- ----- Total $742,978 100 $495,181 100 $2,000,055 100 $1,315,053 100 ======== ===== ======== ===== ========== ===== ========== =====
7 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations (continued) - ------------------------- Title Insurance. Operating revenues from direct title operations increased 39.0% and 45.6% for the three and nine months ended September 30, 1998, respectively, when compared with the same periods of the prior year. These increases were 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 310,900 and 873,500 title orders during the three and nine months ended September 30,1998, respectively, representing increases of 31.8% and 35.1% when compared with the same periods of the prior year. These increases were due in large part to the factors mentioned above in the overview, 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 $921 and $901 for the three and nine months ended September 30, 1998, respectively, increases of 5.5% and 7.8% when compared with $873 and $836 for the same periods of the prior year. These increases were primarily due to appreciating residential real estate values. Operating revenues from agency operations increased 50.0% and 40.1% for the three and nine months ended September 30, 1998, respectively, when compared with the same periods of the prior year. These increases were primarily due to the same factors mentioned above, compounded by the inherent delay in reporting by agents. Real Estate Information. Real estate information operating revenues increased 79.9% and 97.9% for the three and nine months ended September 30, 1998, respectively, when compared with the same periods of the prior year. These increases were primarily attributable to the same economic factors affecting title insurance mentioned above, as well as $36.1 million and $110.2 million of operating revenues contributed by new acquisitions for the respective periods. Home Warranty. Home warranty operating revenues increased 23.9% and 27.1% for the three and nine months ended September 30, 1998, 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. INVESTMENT AND OTHER INCOME Investment and other income totaled $10.3 million and $62.6 million for the three and nine months ended September 30, 1998, respectively, increases of $3.7 million and $42.5 million when compared with the same periods of the prior year. The increase for the current three-month period was primarily due to a 44.6% increase in the average investment portfolio balance, a $0.3 million increase in equity in earnings of affiliates and a $0.5 million increase in realized investment gains. The increase for the current nine-month period was primarily attributable to an investment gain of $32.4 million recognized in the first quarter relating to the joint venture agreement with Experian. TOTAL OPERATING EXPENSES Title Insurance. Salaries and other personnel costs were $169.1 million and $474.2 million for the three and nine months ended September 30, 1998, respectively, increases of 31.1% and 32.5% when compared with the same periods of the prior year. These increases were primarily due to costs incurred servicing the record-setting number of transactions processed during the current three and nine month periods. Agents retained $217.6 million and $552.6 million of title premiums generated by agency operations for the three and nine months ended September 30, 1998, respectively, which compares with $145.0 million and $396.1 million for the same periods of the prior year. The percentage of title premiums retained by agents ranged from 80.1% to 80.6% 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 $77.6 million and $223.4 million for the three and nine months ended September 30, 1998, respectively, increases of 16.6% and 26.7% 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 record-setting title order volume during the respective periods. The provision for title losses as a percentage of title insurance operating revenues was 3.6% and 3.8% for the nine months ended September 30, 1998 and 1997, respectively. The decrease in rate was due to an improvement in the Company's claims experience. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations (continued) - ------------------------- Premium taxes for title insurance were $14.3 million and $11.9 million for the nine months ended September 30, 1998 and 1997, respectively. Expressed as a percentage of title insurance operating revenues, premium taxes were 1.0% for the nine months ended September 30, 1998 and 1.2% for the same period of the prior year. The decrease in percentage was primarily due to an increase in the Company's California underwritten title company subsidiary's contribution to revenues. Real Estate Information. Real estate information personnel and other operating expenses were $121.7 million and $339.7 million for the three and nine months ended September 30, 1998, respectively, increases of 64.8% and 83.0% when compared with the same periods of the prior year. These increases were primarily due to costs incurred servicing the increased business volume, $29.8 million and $63.0 million of costs associated with new acquisitions for the respective periods, and higher overhead costs attributable to the integration of the new acquisitions and transitioning new accounts to their systems. Home Warranty. Home warranty personnel and other operating expenses were $4.4 million and $12.5 million for the three and nine months ended September 30, 1998, respectively, increases of 37.5% and 30.5% when compared with the same periods of the prior year. These increases were primarily attributable to costs incurred servicing the increased business volume and expansion into new territories. The provision for home warranty losses expressed as a percentage of home warranty operating revenues was 56.5% and 59.0% for the nine months ended September 30, 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 Nine Months Ended September 30 September 30 ----------------------------------------------- --------------------------------------------- ($000) ($000) 1998 % 1997 % 1998 % 1997 % ----------------------------------------------- --------------------------------------------- Title Insurance $ 67,703 63 $28,257 65 $154,359 59 $ 49,638 54 Real Estate Information 35,805 33 11,672 27 91,773 35 32,639 36 Home Warranty 2,270 2 2,208 5 8,607 4 6,288 7 Trust and Banking 2,037 2 1,171 3 5,647 2 3,023 3 -------- ---- ------- ---- -------- ---- -------- ---- Total before corporate 107,815 100 43,308 100 260,386 100 91,588 100 ---- ---- ---- ---- Corporate (6,275) (8,743) 6,696 (20,747) -------- ------- -------- -------- Total $101,540 $34,565 $267,082 $ 70,841 ======== ======= ======== ========
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 nine months ended September 30, 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 35.6% for the nine months ended September 30, 1998, and 37.5% 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, offset in part by an increase in state income and franchise taxes attributable to the increased profitability of the Company's non-insurance operations. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations (continued) - ------------------------- MINORITY INTERESTS Minority interest expense was $10.0 million for the three months ended September 30, 1998, an increase of $9.0 million when compared with the same period of the prior year. Minority interest expense was $26.2 million for the nine months ended September 30, 1998, an increase of $23.9 million when compared with the same period of the prior year. These increases were primarily attributable to the strong operating results of the Company's 80/20 joint venture with Experian. NET INCOME Net income for the three and nine months ended September 30, 1998, was $55.8 million, or $0.93 per diluted share, and $145.9 million, or $2.56 per diluted share, respectively. Net income for the nine months ended September 30, 1998, included an investment gain of $19.6 million on an after-tax basis, or $0.34 per diluted share, relating to the joint venture with Experian. Net income for the three and nine months ended September 30, 1997, was $20.6 million, or $0.39 per diluted share, and $42.0 million, or $0.79 per diluted share, respectively. LIQUIDITY AND CAPITAL RESOURCES Total cash and cash equivalents increased $155.1 million and decreased $2.9 million for the nine months ended September 30, 1998 and 1997, respectively. The increase for the current year period was primarily attributable to cash provided by operating activities and proceeds from the issuance and sale of senior debentures, offset in part by capital expenditures, net purchases of debt and equity securities and the repayment of debt. The decrease for the prior year period was primarily due to the cash effect of company acquisitions, the net purchases of debt and equity securities, capital expenditures and the repayment of debt, offset in part by the proceeds from the issuance of junior subordinated debentures. On April 7, 1998, the Company issued and sold $100.0 million of 7.55% senior debentures, due April 1, 2028. The Company has used a portion of the net proceeds from the sale to repay certain debt obligations and purchase land for the Company's new corporate facilities. The remaining proceeds will be used for general corporate purposes. Notes and contracts payable as a percentage of total capitalization increased to 13.5% at September 30, 1998, from 7.3% at December 31, 1997. This increase was primarily due to the issuance and sale of the $100.0 million senior debentures, offset in part by an increase in total capitalization due primarily to shares issued in connection with company acquisitions, increased minority interests and net income for the period. Management believes that all of its anticipated cash requirements for the immediate future will be met from internally generated funds and from the remaining proceeds of the senior debentures. Year 2000 Issue Overview. With the help of an outside consulting firm, the Company has created a Year 2000 Program Management Office and adopted a five-step plan to address the Year 2000 Problem. The five steps of the plan are: (1) awareness, (2) inventory/assessment, (3) renovation, (4) testing, and (5) implementation. To implement the plan, the Company was divided into "business units" comprised of: (a) the reporting regions of the title insurance subsidiaries, (b) the subsidiary companies of the real estate information services business, (c) the home warranty subsidiaries, (d) the trust and banking subsidiaries and (e) various other subsidiaries. The "awareness" phase involves communicating the nature and scope of the Year 2000 Problem to the management of the business units in order to engender strong management support for its resolution. The "inventory/assessment" phase involves the identification of information systems and non-information systems, which require renovation or replacement to become Year 2000 compliant. The "renovation" phase involves the repair and/or replacement of the systems identified in the prior phase. The "testing" phase involves the testing of repaired and replaced systems. The "implementation" phase involves the integration of tested systems into daily operations. All phases of the plan are currently active. The awareness phase will continue throughout 1998 and 1999. September 30, 1998 was the target date for completion of the inventory/assessment phase; that phase is substantially complete. However, all of the phases of the plan must be revisited each time the Company acquires a new business. Accordingly, the inventory/assessment phase remains active. The Company has established the following target dates: (1) December 31, 1998 for completion of renovation, (2) April 30, 1999 for completion of testing, and (3) June 30, 1999 for completion of implementation. In each case, completion of the applicable phase is subject to the limitation noted above for newly acquired businesses. The Company makes no assurance that it will be able to meet these target dates. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations (continued) - ------------------------- The Company's efforts to survey the Year 2000 readiness of its significant vendors, suppliers and customers continues. To date, the Company has not received sufficient information from these parties about their Year 2000 plans to predict the outcome of their efforts. Even after responses are received, there can be no assurance that the systems of the Company's significant vendors, suppliers and customers will be timely renovated. Costs for the year 2000 problem. To date the Company has spent approximately $5 million in implementing the Year 2000 plan. The Company expects to incur an additional $25 million to $35 million in completing the Year 2000 plan. About half the costs will be for hardware and software replacement and about half will be for labor. The costs for hardware and software will be capitalized and amortized over their estimated useful lives. Labor costs will be expensed as incurred. Year 2000 plan costs are being funded through operating cash flow. Contingency plans. With the help of a professional disaster planner, the Company is in the process of creating contingency plans for unexpected systems failures as a result of the Year 2000 Problem. The Company anticipates having the contingency plans in effect by the end of 1998. Review of the year 2000 plan. The Company has engaged a consultant to review its Year 2000 plan. Under the terms of this engagement, the consultant will (1) review the operations of the Year 2000 Program Management Office, (2) review the Company's Year 2000 plan, and (3) review the implementation of the Year 2000 plan at selected locations. From time to time during the review, the consultant will report its findings to the Audit Committee of the Company's Board of Directors. Assurances. The costs to implement the Year 2000 plan and the target dates for completion of the various phases of the Year 2000 plan are based on current estimates. These estimates reflect numerous assumptions about future events, including the continued availability of certain resources, the timing and effectiveness of third party renovation plans and other factors. The Company can give no assurance that these estimates will be achieved, and actual results could differ materially from these estimates. 11 Part II: Other Information ----------------- Item 2. Changes in Securities and Use of Proceeds ----------------------------------------- (c) During the period covered by this report, the Company has issued unregistered shares of its common stock listed below to sellers in business combinations.
Consideration Date of Sale Number of Shares Received ------------------- ---------------- ------------- April 15, 1998 242,188 $15,500,000 May 6, 1998 41,925 $ 2,587,167 May 7, 1998 9,030 $ 435,698 May 29, 1998 37,013 $ 2,850,000 September 15, 1998 17,925 $ 525,000
Item 6. Exhibits and Reports on Form 8-K. -------------------------------- (a) Exhibits (27) Financial Data Schedule. (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the quarterly period covered by this report. Subsequent to that period, the Company filed a report on Form 8-K dated October 22, 1998, reporting on certain information and issues involving the "Year 2000 Problem." 12 EXHIBIT INDEX Sequentially ------------ Exhibit No. Description Numbered Page - ----------- ----------- ------------- (27) Financial Data Schedule 13 -----END PRIVACY-ENHANCED MESSAGE-----