-----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, LKOm78rl6CVKo/1TM10L6+5PmcOiXao5h2UrXFzX5V0zZ7cH7W/yr56NxrqvyJ21 PoLuw0DFYRoPgekREaw5WQ== 0001017062-99-000865.txt : 19990514 0001017062-99-000865.hdr.sgml : 19990514 ACCESSION NUMBER: 0001017062-99-000865 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 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: 99620133 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 03/31/1999 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 March 31, 1999 -------------- 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 [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 - 61,748,280 as of May 10, 1999 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 Item 3. Quantitative and Qualitative Disclosures About Market Risk Part II: Other Information Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Items 1-3, and 5 have been omitted because they are not applicable with respect to the current reporting period. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE FIRST AMERICAN 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: May 13, 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, 1999 December 31, 1998 -------------- ----------------- Assets Cash and cash equivalents $ 306,651,000 $ 375,440,000 -------------- ---------------- Accounts and accrued income receivable, net 209,731,000 191,122,000 -------------- ---------------- Investments: Deposits with savings and loan associations and banks 20,529,000 32,974,000 Debt securities 231,005,000 227,685,000 Equity securities 29,496,000 27,338,000 Other long-term investments 73,196,000 63,244,000 -------------- ---------------- 354,226,000 351,241,000 -------------- ---------------- Loans receivable 74,679,000 72,035,000 -------------- ---------------- Property and equipment, at cost 527,411,000 480,053,000 Less- accumulated depreciation (178,300,000) (166,414,000 -------------- ---------------- 349,111,000 313,639,000 -------------- ---------------- Title plants and other indexes 220,045,000 216,711,000 -------------- ---------------- Assets acquired in connection with claim settlements (net of valuation reserves of $10,127,000 and $11,135,000) 16,668,000 17,051,000 -------------- ---------------- Deferred income taxes 17,677,000 12,859,000 -------------- ---------------- Goodwill and other intangibles, net 174,639,000 171,790,000 -------------- ---------------- Other assets 78,947,000 62,902,000 -------------- ---------------- $1,802,374,000 $1,784,790,000 ============== ================ Liabilities and Stockholders' Equity Demand deposits $ 68,946,000 $ 67,404,000 -------------- ---------------- Accounts payable and accrued liabilities 220,631,000 256,707,000 -------------- ---------------- Deferred revenue 125,108,000 105,496,000 -------------- ---------------- Reserve for known and incurred but not reported claims 260,291,000 270,436,000 -------------- ---------------- Income taxes payable 25,468,000 22,734,000 -------------- ---------------- Notes and contracts payable 126,001,000 130,193,000 -------------- ---------------- Minority interests in consolidated subsidiaries 98,616,000 99,905,000 -------------- ---------------- 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 - 108,000,000 shares Outstanding - 61,345,000 and 60,332,000 shares 61,345,000 60,332,000 Additional paid-in capital 152,742,000 129,664,000 Retained earnings 555,492,000 534,297,000 Accumulated other comprehensive income 7,734,000 7,622,000 -------------- ---------------- 777,313,000 731,915,000 -------------- ---------------- $1,802,374,000 $1,784,790,000 ============== ================
2 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES ------------------------ Condensed Consolidated Statements of Income ------------------------------------------- (Unaudited)
For the Three Months Ended March 31 ---------------------------- 1999 1998 ------------ ------------ Revenues Operating revenues $695,545,000 $568,802,000 Investment and other income 11,381,000 43,435,000 ------------ ------------ 706,926,000 612,237,000 ------------ ------------ Expenses Salaries and other personnel costs 246,841,000 202,846,000 Premiums retained by agents 210,568,000 140,045,000 Other operating expenses 152,065,000 138,587,000 Provision for title losses and other 25,770,000 27,328,000 claims Depreciation and amortization 16,574,000 13,809,000 Premium taxes 5,211,000 4,154,000 Interest 4,532,000 3,582,000 ------------ ------------ 661,561,000 530,351,000 ------------ ------------ Income before income taxes and minority interests 45,365,000 81,886,000 Income taxes 15,400,000 29,400,000 ------------ ------------ Income before minority interests 29,965,000 52,486,000 Minority interests 5,088,000 7,753,000 ------------ ------------ Net income 24,877,000 44,733,000 ------------ ------------ Other comprehensive income (loss), net of tax: Unrealized gain on securities 362,000 400,000 Minimum pension liability adjustment (250,000) ------------ ------------ 112,000 400,000 ------------ ------------ Comprehensive income $ 24,989,000 $ 45,133,000 ============ ============ Net income per share: Basic $0.41 $0.82 ============ ============ Diluted $0.40 $0.79 ============ ============ Cash dividends per share $.06 $.05 ============ ============ Weighted average number of shares: Basic 60,590,000 54,760,000 ============ ============ Diluted 62,907,000 56,578,000 ============ ============
3 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES ------------------------ Condensed Consolidated Statements of Cash Flows ----------------------------------------------- (Unaudited)
For the Three Months Ended March 31 -------------------------- 1999 1998 ------------ ------------ Cash flows from operating activities: Net income $ 24,877,000 $ 44,733,000 Adjustments to reconcile net income to cash provided by (used for) operating activities- Provision for title losses and other claims 25,770,000 27,328,000 Depreciation and amortization 16,574,000 13,809,000 Minority interests in net income 5,088,000 7,753,000 Investment gain (32,449,000) Other, net 297,000 (2,287,000) Changes in assets and liabilities excluding effects of company acquisitions and noncash transactions- Claims paid, including assets acquired, net of recoveries (25,800,000) (24,336,000) Net change in income tax accounts (6,553,000) 28,829,000 Increase in accounts and accrued income receivable (19,296,000) (25,877,000) (Decrease) increase in accounts payable and accrued liabilities (39,885,000) 15,909,000 Increase (decrease) in deferred revenue 19,612,000 (5,954,000) Other, net (10,956,000) 5,495,000 ------------ ------------ Cash (used for) provided by operating activities (10,272,000) 52,953,000 ------------ ------------ Cash flows from investing activities: Net cash effect of company acquisitions/ dispositions (6,528,000) (3,396,000) Net decrease in deposits with banks 12,445,000 2,601,000 Net increase in loans receivable (2,644,000) (3,195,000) Purchases of debt and equity securities (10,674,000) (15,625,000) Proceeds from sales of debt and equity securities 2,562,000 14,679,000 Proceeds from maturities of debt securities 1,950,000 5,594,000 Net decrease in other investments 595,000 1,001,000 Capital expenditures (53,761,000) (21,548,000) Proceeds from sale of property and equipment 69,000 204,000 ------------ ------------ Cash used for investing activities (55,986,000) (19,685,000) ------------ ------------ Cash flows from financing activities: Net change in demand deposits 1,542,000 (482,000) Repayment of debt (4,191,000) (4,659,000) Proceeds from excercise of stock options 170,000 700,000 Proceeds from issuance of stock to employee savings plan 4,679,000 4,096,000 Distributions to minority shareholders (1,049,000) Cash dividends (3,682,000) (2,987,000) ------------ ------------ Cash used for financing activities (2,531,000) (2,987,000) ------------ ------------ Net (decrease) increase in cash and cash equivalents (68,789,000) 30,281,000 Cash and cash equivalents - Beginning of year 375,440,000 181,531,000 ------------ ------------ - End of first quarter $306,651,000 $211,812,000 ============ ============ Supplemental information: Cash paid during the first quarter for: Interest $ 366,000 $ 1,132,000 Premium taxes $ 9,448,000 $ 4,223,000 Income taxes $ 23,583,000 $ 5,097,000 Noncash investing and financing activities: Shares issued for stock bonus plan $ 3,287,000 $ 2,623,000 Liabilities incurred in connection with company acquisitions $ 2,580,000 $ 66,078,000 Company acquisitions in exchange for common stock $ 15,955,000 $ 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, 1998. All consolidated results have been restated to reflect the 1998 acquisitions accounted for under the pooling-of- interests method of accounting. Certain 1998 interim amounts have been reclassified to conform with the 1999 presentation. Note 2 - Revenue Recognition Accounting Policy - ---------------------------------------------- Effective January 1, 1999, the Company implemented a change to the accounting policy for tax service contracts. The new accounting policy was adopted prospectively and applies to all new loans serviced beginning January 1, 1999. The new policy provides for a more ratable recognition of revenues, reducing the amount recognized at the inception of the contract and recognizing it over the expected service period. The amortization rates applied to recognize the revenues assume a 10-year contract life and are adjusted to reflect prepayments. The resulting rates by year (starting with year one) are 32%, 24%, 14%, 9%, 7%, 5%, 4%, 2%, 2% and 1%. The Company periodically reviews its tax service contract portfolio to determine if there have been changes in contract lives and/or changes in the number and/or timing of prepayments; accordingly, the Company may adjust the rates to reflect current trends. Adoption of this new policy resulted in an after tax earnings decrease of $7.4 million, or $0.12 per diluted share, for the first quarter 1999. Note 3 - Business Combination - ----------------------------- During the three months ended March 31, 1999, the Company acquired three companies accounted for under the purchase method of accounting. These acquisitions, individually, and in the aggregate, were not material. In November 1998 the Company entered into a definitive merger agreement with National Information Group (NAIG). Under the terms of the agreement, which the boards of directors of both companies unanimously approved, the NAIG shareholders will receive .67 of a share of the Company's common stock for each NAIG common share they own. In the merger, the Company expects to issue approximately 3.2 million shares of its common stock. This business combination will be accounted for under the pooling of interests method of accounting and is expected to close by the end of May 1999. NAIG provides insurance tracking services for mortgage and auto lenders and auto leasing companies. NAIG also provides outsourcing services, lender-placed insurance products, flood zone determinations and real estate tax services. Note 4 - New Accounting Pronouncements - -------------------------------------- Effective January 1, 1999, the Company adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires the Company to capitalize interest costs incurred and certain payroll-related costs of employees directly associated with developing software. The adoption of SOP 98-1 did not have a material effect on the Company's financial condition or results of operations. 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; general volatility in the capital markets; the demand for and the acceptance of the Company's products; changes in applicable government regulations; consolidation among the Company's customers; and contingencies associated with the Year 2000 issue. The Company's actual results, performance or achievement could differ materially from those expressed in or implied by forward looking statements, and, accordingly, no assurances can be given that any of the events anticipated by the forward looking statements will transpire or occur or, if any of them do so, what impact they will have on the results of operations and financial condition of the Company. RESULTS OF OPERATIONS Three months ended March 31: OVERVIEW Low mortgage interest rates and high consumer confidence, coupled with the particularly strong California real estate market, resulted in strong revenues and net income for the Company in the first quarter 1998. These conditions continued throughout 1998 and into 1999, resulting in record-setting first quarter revenues for the first quarter 1999. However, first quarter 1999 operating results were impacted by the previously announced change to the revenue recognition policy for tax service contracts. This change, which became effective January 1, 1999, on a prospective basis, resulted in an after tax earnings decrease of $7.4 million, or 12 cents per diluted share. The new policy provides for a more ratable recognition of revenues, reducing the amount recognized at the inception of the contract and recognizing it over the expected service period. Although this accounting change will cause a reduction in tax service revenues and earnings recognized in the early years of each tax service contract, the Company anticipates that commencing in the second year following adoption, this method will begin to reduce the volatility in reported financial results arising from the inherent cyclicality of the Company's tax service business. Net income and net income per diluted share for the first quarter 1999 was $24.9 million and $0.40, respectively. OPERATING REVENUES Set forth below is a summary of operating revenues for each of the Company's segments.
Three Months Ended March 31 ------------------------------------------- (in thousands, except percent) 1999 % 1998 % --------- -------- ---------- ------- Title Insurance: Direct operations $260,323 37 $225,719 40 Agency operations 260,661 38 176,536 31 --------- -------- ---------- ------- 520,984 75 402,255 71 --------- -------- ---------- ------- Real Estate Information 136,738 20 134,320 24 Home Warranty 15,224 2 13,173 2 Consumer Risk 15,770 2 13,228 2 Trust and Banking 6,829 1 5,826 1 --------- -------- ---------- ------- Total $695,545 100 $568,802 100 ========= ======== ========== =======
Title Insurance. Operating revenues from direct title operations increased 15.3% 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 295,100 title orders during the current quarter, an increase of 13.2% when compared with 260,600 title orders closed during the same period of the prior year. This increase was primarily due to the factors mentioned above, in particular, 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 $882 for the current three month period, as compared with $866 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 47.7% when compared with the same period of the prior year. This increase was primarily due to the high volume of orders processed by agents during the fourth quarter of 1998 and not reported to the Company until the current quarter, as well as the same factors affecting direct operations mentioned above. 6 Real Estate Information. Real estate information operating revenues increased 1.8% 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 $7.4 million of operating revenues contributed by new acquisitions, offset in part by a $15.0 million decrease in tax service operating revenues attributable to the change in revenue recognition policy. This amount will be recognized as revenues over the expected service period of the tax service contracts. Home Warranty. Home warranty operating revenues increased 15.6% 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. Consumer Risk. Consumer risk management operating revenues increased 19.2% when compared with the same period of the prior year. This increase was primarily attributable to an increased awareness and acceptance of this business segment's products, as well as increased market share. INVESTMENT AND OTHER INCOME Investment and other income totaled $11.4 million and $43.4 million for the first quarter 1999 and 1998, respectively. This decrease was primarily attributable to an investment gain of $32.4 million recognized in the first quarter 1998 relating to the joint venture agreement with Experian. TOTAL OPERATING EXPENSES Title Insurance. Salaries and other personnel costs were $177.0 million, an increase of 22.1% when compared with the same period of the prior year. This increase was primarily due to costs incurred processing and closing the high number of orders opened during the latter part of the fourth quarter 1998 and the first quarter 1999 as well as $5.4 million of costs associated with new acquisitions. Agents retained $210.6 million, or 80.8%, and $140.0 million, or 79.3%, of the title premiums generated by agency operations for the first quarter 1999 and 1998, 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 $76.0 million, an increase of 11.8% 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 high title order volume, as well as marginal price level increases. The provision for title losses as a percentage of title insurance operating revenues was 3.0% for the current period and 3.9% for the same period of the prior year. The decrease in loss percentage was due to an improvement in the Company's claims experience. Premium taxes for title insurance were $5.0 million for the current quarter and $4.0 million for the same quarter of the prior year. Expressed as a percentage of title insurance operating revenues, premium taxes were 1.0% for both periods. Real Estate Information. Real estate information personnel and other operating expenses were $118.3 million, an increase of 15.5% when compared with the same period of the prior year. This increase was primarily due to $5.4 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. Home Warranty. Home warranty personnel and other operating expenses were $5.1 million, an increase of 22.8% when compared with the same period of the prior year. This increase was primarily attributable to costs incurred servicing the increased business volume as well as increased expansion costs. The provision for home warranty losses expressed as a percentage of home warranty operating revenues was 47.9% and 51.4% for the first quarter 1999 and 1998, respectively. The decrease in loss ratio was primarily due to a decrease in the average number of claims per contract. 7 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 --------------------------------------------------- (in thousands, except percent) 1999 % 1998 % -------- -------- -------- --------- Title Insurance $ 35,161 65 $ 30,261 52 Real Estate Information 9,773 18 20,873 36 Home Warranty 3,736 7 3,026 5 Consumer Risk 3,282 6 2,430 4 Trust and Banking 2,212 4 1,588 3 -------- -------- -------- --------- Total before corporate 54,164 100 58,178 100 ======== ========= Corporate (8,799) 23,708 -------- -------- Total $ 45,365 $ 81,886 ======== ========
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. As previously noted, real estate information pretax profits for the first quarter 1999 were adversely impacted by the change to the revenue recognition policy for tax service contracts. Included in Corporate for the first quarter 1998 was an investment gain of $32.4 million relating to the joint venture with Experian. INCOME TAXES The effective income tax rate was 33.9% for the current quarter and 35.9% for the same period of the prior year. The decrease in effective rate was primarily attributable to a decrease in state income and franchise taxes which resulted from the Company's non-insurance subsidiaries contribution to pretax profits. MINORITY INTERESTS Minority interest expense was $5.1 million and $7.8 million for the first quarter 1999 and 1998, respectively. This decrease was primarily attributable to a decline in the operating results of the Company's joint venture with Experian. The decline in operating results of the joint venture was primarily due to the change in revenue recognition policy for tax service contracts. NET INCOME Net income for the current quarter was $24.9 million, or $0.40 per diluted share, compared with net income of $44.7 million, or $0.79 per diluted share, for the same period of the prior year. The net income for the prior year period included an investment gain of $19.6 million, or $0.35 per diluted share. LIQUIDITY AND CAPITAL RESOURCES Total cash and cash equivalents decreased $68.8 million for the three months ended March 31, 1999, and increased $30.3 million for the same period of the prior year. The decrease for the current period was primarily due to cash used for operating activities, capital expenditures 8 and purchases of debt and equity securities. The increase for the prior year period was primarily attributable to cash generated by operating activities, offset in part by capital expenditures and repayment of debt. Notes and contracts payable as a percentage of total capitalization decreased to 11.4% at March 31, 1999, from 12.3% at December 31, 1998. The decrease was primarily attributable to net income for the period as well as increased stockholders' equity resulting from the issuance of common stock in connection with Company acquisitions. Management believes that all of its anticipated cash requirements for the immediate future will be met from internally generated funds. Year 2000 Issue Update - ---------------------- Overview - With the help of an outside consulting firm, in January 1997 the Company 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 that 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. Substantially all of the phases of the plan, with the exception of the implementation phase, have been completed. The implementation phase is expected to be completed by June 30, 1999. However, all of the phases of the plan must be revisited each time the Company acquires a new business. Accordingly, all phases of the plan are still active. 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 significant vendors, suppliers and customers will be timely renovated. Costs for the year 2000 problem - To date the Company has spent approximately $17.2 million in implementing the Year 2000 plan. The Company expects to incur an additional $10 million to $20 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 - Contingency plans for unexpected systems failures as a result of the Year 2000 problem have been completed by approximately 90% of the Company's business units. 9 The Company is currently working to complete the balance of the business unit contingency plans. Review of the year 2000 plan - The Company engaged a consultant to review its Year 2000 plan. Under the terms of this engagement, the consultant (1) reviewed the operations of the Year 2000 Program Management Office, (2) reviewed the Company's Year 2000 plan, and (3) reviewed the implementation of the Year 2000 plan at selected locations. From time to time during the review, the consultant reported its findings to the Audit Committee of the Company's Board of Directors and appropriate actions were taken by the Company in response. 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. Item 3 - Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- The Company's primary exposure to market risk relates to interest rate risk associated with certain other financial instruments. Although the Company monitors its risk associated with fluctuations in interest rates, it does not currently use derivative financial instruments to hedge these risks. The Company is also subject to equity price risk as related to its equity securities. Although the Company has operations in certain foreign countries, these operations, in the aggregate, are not material to the Company's financial condition or results of operations. There have been no material changes in the Company's risk since filing its Form 10K for the year ended December 31, 1998. 10 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 22, 1999. (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 J. Argyros 40,662,904 9,067,049 Gary J. Beban 48,485,270 1,244,683 J. David Chatham 48,485,133 1,244,820 William G. Davis 48,482,966 1,246,987 James L. Doti 48,486,049 1,243,904 Lewis W. Douglas, Jr. 48,218,167 1,511,786 Paul B. Fay, Jr. 48,215,652 1,514,301 D. P. Kennedy 48,479,355 1,250,598 Parker S. Kennedy 48,484,158 1,245,795 Anthony R. Moiso 40,718,218 9,011,735 Frank O'Bryan 48,486,042 1,243,911 Roslyn B. Payne 48,212,439 1,517,514 D. Van Skilling 48,481,253 1,248,700 Virginia Ueberroth 48,484,774 1,245,179
(c) At the Meeting, the proposal to amend the Restated Articles of Incorporation to increase the number of authorized Common shares from 108,000,000 to 180,000,000 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 --------- ------------- -------------- 46,372,489 3,044,646 312,817
(d) Also at the Meeting, the proposal to amend the Company's 1996 Stock Option Plan (to increase by 3,000,000 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 --------- ------------- -------------- 32,010,991 17,329,732 389,229
No other matters were voted upon at the Meeting or during the quarter for which this report is filed. Item 6. Exhibits and Reports on Form 8-K. --------------------------------- (a) Exhibits (3) Certificate of Amendment of Restated Articles of Incorporation of The First American Financial Corporation dated April 23, 1999. (18) Accountant's Preferability Letter dated May 13, 1999 (27) Financial Data Schedule. (b) Reports on Form 8-K During the quarterly period covered by this report, the Company filed a report on Form 8-K dated February 10, 1999, reporting on a change in the Company's method of recognizing revenues from tax service contracts. 11 EXHIBIT INDEX Sequentially Exhibit No. Description Numbered Page - ----------- ----------- ------------- (3) Certificate of Amendment of Restated Articles of Incorporation of The First American Financial Corporation dated April 23, 1999. (18) Accountant's Preferability Letter dated May 13, 1999 (27) Financial Data Schedule 12 EX-3 2 CERT. OF AMENDMENT OF RESTATED ARTICLES 4/23/99 EXHIBIT (3) CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF THE FIRST AMERICAN FINANCIAL CORPORATION A California corporation The undersigned certify that: 1. They are the president and secretary, respectively, of The First American Financial Corporation, a California corporation. 2. The first paragraph of article SIXTH of the Restated Articles of Incorporation of this corporation is amended to read in full as follows: "SIXTH: This Corporation is authorized to issue two classes of shares, to be designated Common and Preferred, respectively. The number of Common Shares authorized to be issued is 180,000,000. The aggregate par value of such Common Shares is $180,000,000 and the par value of each such share is $1.00. Each Common share shall have one vote per share. The number of Preferred shares authorized to be issued is 500,000. The aggregate par value of such Preferred shares is $500,000 and the par value of each such share is $1.00. The Board of Directors may fix by resolution the rights, preferences, privileges and restrictions of any wholly unissued class or series of shares other than the Common shares, and the series designation and number of shares to constitute any series (which number may thereafter in the same manner be increased or decreased), and a certificate of determination shall then be filed with the California Secretary of State." 3. The foregoing amendment has been approved by the board of directors of this corporation. 4. The foregoing amendment was approved by the required vote of shareholders in accordance with sections 902 and 903 of the California Corporations Code. The total number of outstanding shares entitled to vote with respect to the 1 foregoing amendment was 60,250,455 Common shares. The number of such Common shares voting in favor of the foregoing amendment equaled or exceeded the vote required. The percentage vote required was more than 50 percent. No Preferred shares are outstanding. Each of the undersigned declares under penalty of perjury that the statements set forth in the foregoing certificate are true and correct of his own knowledge and that this declaration was executed at Santa Ana, California, on April 23, 1999. /s/ PARKER S. KENNEDY ------------------------------ Parker S. Kennedy President /s/ MARK R. ARNESEN ------------------------------ Mark R. Arnesen Secretary 2 EX-18 3 ACCOUNTANT'S PREFERABILITY LETTER DATED 5/13/99 EXHIBIT (18) May 13, 1999 To the Board of Directors of The First American Financial Corporation Dear Directors: We have been furnished with a copy of The First American Financial Corporation's (the Company) Form 10-Q for the quarter ended March 31, 1999. Note 2 therein describes a change in the method of recognizing revenue on tax service contracts. It should be understood that the preferability of one acceptable method of revenue recognition over another has not been addressed in any authoritative accounting literature and in arriving at our opinion expressed below, we have relied on management's business planning and judgment. Based upon our discussions with management and the stated reasons for the change, we believe that such change represents, in your circumstances, the adoption of a preferable alternative accounting principle for revenue recognition for tax service contracts in conformity with Accounting Principles Board Opinion No. 20. We have not made an audit in accordance with generally accepted auditing standards of the financial statements of The First American Financial Corporation for the three-month periods ended March 31, 1999 and 1998 and, accordingly, we express no opinion thereon or on the financial information filed as part of the Form 10-Q of which this letter is to be an exhibit. Yours very truly, PricewaterhouseCoopers LLP EX-27 4 FINANCIAL DATA SCHEDULE
7 3-MOS DEC-31-1998 JAN-01-1999 MAR-31-1999 231,005,000 0 0 29,496,000 0 0 354,226,000 306,651,000 0 5,353,000 1,802,374,000 260,291,000 0 0 0 126,001,000 0 0 61,345,000 715,968,000 1,802,374,000 659,545,000 10,611,000 770,000 0 25,770,000 0 0 40,277,000 15,400,000 24,877,000 0 0 0 24,877,000 .41 .40 0 0 0 0 0 0 0
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