10-Q 1 0001.txt FORM 10-Q FOR PERIOD ENDED 06/30/2000 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 June 30, 2000 ------------- 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 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.) 1 First American Way, Santa Ana, California 92707-5913 ------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (714)800-3000 ------------- (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 - 63,518,623 shares as of August 1, 2000 1 INFORMATION INCLUDED IN REPORT ------------------------------ Part I: Financial Information Item 1. Financial Statements A. Condensed Consolidated Balance Sheets B. Condensed Consolidated Statements of Income and Comprehensive 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 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: August 9, 2000 2 Part I: Financial Information --------------------- Item 1: Financial Statements -------------------- THE FIRST AMERICAN CORPORATION AND SUBSIDIARY COMPANIES ------------------------ Condensed Consolidated Balance Sheets -------------------------------------
June 30, 2000 December 31, 1999 ---------------------- --------------------- Assets Cash and cash equivalents $ 272,838,000 $ 350,010,000 ---------------------- ---------------------- Accounts and accrued income receivable, net 200,183,000 180,824,000 ---------------------- ---------------------- Income tax receivable 8,606,000 ---------------------- Investments: Deposits with savings and loan associations and banks 35,256,000 32,225,000 Debt securities 209,026,000 226,369,000 Equity securities 45,243,000 39,266,000 Other long-term investments 92,386,000 86,686,000 ---------------------- ---------------------- 381,911,000 384,546,000 ---------------------- ---------------------- Loans receivable 90,416,000 87,338,000 ---------------------- ---------------------- Property and equipment, at cost 634,559,000 566,841,000 Less- accumulated depreciation (203,385,000) (173,527,000) ---------------------- ---------------------- 431,174,000 393,314,000 ---------------------- ---------------------- Title plants and other indexes 267,522,000 250,723,000 ---------------------- ---------------------- Assets acquired in connection with claim settlements (net of valuation reserves of $4,973,000 and $4,856,000) 24,284,000 24,196,000 ---------------------- ---------------------- Deferred income taxes 43,823,000 48,284,000 ---------------------- ---------------------- Goodwill and other intangibles, net 299,454,000 284,390,000 ---------------------- ---------------------- Other assets 102,845,000 104,183,000 ---------------------- ---------------------- $2,114,450,000 $2,116,414,000 ====================== ====================== Liabilities and Stockholders' Equity Demand deposits $ 81,689,000 $ 80,843,000 ---------------------- ---------------------- Accounts payable and accrued liabilities 259,546,000 280,698,000 ---------------------- ---------------------- Deferred revenue 274,796,000 279,766,000 ---------------------- ---------------------- Reserve for known and incurred but not reported claims 277,669,000 273,724,000 ---------------------- ---------------------- Income taxes payable 12,486,000 ---------------------- Notes and contracts payable 215,310,000 196,815,000 ---------------------- ---------------------- Minority interests in consolidated subsidiaries 78,148,000 88,577,000 ---------------------- ---------------------- Mandatorily redeemable preferred securities of the Company's subsidiary trust whose sole assets are the Company's $100,000,000 8.5% deferrable interest subordinated notes due 2012 100,000,000 100,000,000 ---------------------- ---------------------- Stockholders' equity: Preferred stock, $1 par value Authorized - 500,000 shares; outstanding - none Common stock, $1 par value Authorized - 180,000,000 shares Outstanding - 63,486,000 and 65,068,000 shares 63,486,000 65,068,000 Additional paid-in capital 166,809,000 184,759,000 Retained earnings 580,370,000 561,946,000 Accumulated other comprehensive income 4,141,000 4,218,000 ---------------------- ---------------------- 814,806,000 815,991,000 ---------------------- ---------------------- $2,114,450,000 $2,116,414,000 ====================== ======================
See notes to condensed consolidated financial statements. 3 THE FIRST AMERICAN CORPORATION AND SUBSIDIARY COMPANIES ------------------------ Condensed Consolidated Statements of Income and Comprehensive Income -------------------------------------------------------------------- (Unaudited)
For the Three Months Ended For the Six Months Ended June 30 June 30 ---------------------------------- ---------------------------------- 2000 1999 2000 1999 --------------- --------------- --------------- --------------- Revenues Operating revenues $ 760,216,000 $ 769,610,000 $ 1,396,081,000 $ 1,488,797,000 Investment and other income 15,709,000 12,245,000 26,018,000 23,925,000 --------------- --------------- --------------- --------------- 775,925,000 781,855,000 1,422,099,000 1,512,722,000 --------------- --------------- --------------- --------------- Expenses Salaries and other personnel costs 263,059,000 259,603,000 513,263,000 515,015,000 Premiums retained by agents 225,473,000 228,212,000 392,595,000 438,780,000 Other operating expenses 168,789,000 174,443,000 335,149,000 332,606,000 Provision for title losses and other claims 37,440,000 28,420,000 67,563,000 55,441,000 Depreciation and amortization 20,906,000 19,148,000 38,322,000 36,067,000 Premium taxes 5,634,000 5,987,000 10,922,000 11,296,000 Interest 6,278,000 3,032,000 12,054,000 7,821,000 --------------- --------------- --------------- --------------- 727,579,000 718,845,000 1,369,868,000 1,397,026,000 --------------- --------------- --------------- --------------- Income before income taxes, minority interests and cumulative effect of a change in accounting principle 48,346,000 63,010,000 52,231,000 115,696,000 Income taxes 19,400,000 21,994,000 20,200,000 39,700,000 --------------- --------------- --------------- --------------- Income before minority interests and cumulative effect of a change in accounting principle 28,946,000 41,016,000 32,031,000 75,996,000 Minority interests 3,914,000 6,205,000 5,997,000 13,102,000 --------------- --------------- --------------- --------------- Income before cumulative effect of a change in accounting principle 25,032,000 34,811,000 26,034,000 62,894,000 Cumulative effect of a change in accounting for tax service contracts, net of income taxes and minority interests -- -- -- (55,640,000) --------------- --------------- --------------- --------------- Net income 25,032,000 34,811,000 26,034,000 7,254,000 --------------- --------------- --------------- --------------- Other comprehensive income, net of tax Unrealized gain (loss) on securities (765,000) (923,000) 98,000 (615,000) Minimum pension liability adjustment (75,000) 19,000 (175,000) (231,000) --------------- --------------- --------------- --------------- (840,000) (904,000) (77,000) (846,000) --------------- --------------- --------------- --------------- Comprehensive income $ 24,192,000 $ 33,907,000 $ 25,957,000 $ 6,408,000 =============== =============== =============== =============== Per share amounts: Basic: Income before cumulative effect of a change in accounting for tax service contracts $ 0.39 $ 0.54 $ 0.41 $ 0.98 Cumulative effect of a change in accounting for tax service contracts ($ 0.87) --------------- --------------- --------------- --------------- Net income $ 0.39 $ 0.54 $ 0.41 $ 0.11 ================ =============== =============== =============== Diluted: Income before cumulative effect of a change in accounting for tax service contracts $ 0.38 $ 0.52 $ 0.40 $ 0.95 Cumulative effect of a change in accounting for tax service contracts ($ 0.84) --------------- --------------- --------------- --------------- Net income $ 0.38 $ 0.52 $ 0.40 $ 0.11 =============== =============== =============== =============== Cash dividends per share $ .06 $ .06 $ .12 $ .12 =============== =============== =============== =============== Weighted average number of shares: Basic 63,403,000 64,763,000 63,771,000 64,202,000 =============== =============== =============== =============== Diluted 65,682,000 66,325,000 65,508,000 66,322,000 =============== =============== =============== ===============
See notes to condensed consolidated financial statements. 4 THE FIRST AMERICAN CORPORATION AND SUBSIDIARY COMPANIES ------------------------ Condensed Consolidated Statements of Cash Flows ----------------------------------------------- (Unaudited)
For the Six Months Ended June 30 ----------------------------------------------------- 2000 1999 ---------------------- --------------------- Cash flows from operating activities: Net income $ 26,034,000 $ 7,254,000 Adjustments to reconcile net income to cash provided by operating activities- Provision for title losses and other claims 67,563,000 55,441,000 Depreciation and amortization 38,322,000 36,067,000 Minority interests in net income 5,997,000 13,102,000 Cumulative effect of a change in accounting for tax service contracts 55,640,000 Other, net (1,355,000) 707,000 Changes in assets and liabilities excluding effects of company acquisitions and noncash transactions- Claims paid, including assets acquired, net of recoveries (64,706,000) (53,195,000) Net change in income tax accounts 25,594,000 (21,437,000) Increase in accounts and accrued income receivable (19,359,000) (20,326,000) Decrease in accounts payable and accrued liabilities (25,249,000) (30,958,000) (Decrease) increase in deferred revenue (4,970,000) 24,436,000 Other, net (323,000) (15,164,000) ---------------------- --------------------- Cash provided by operating activities 47,548,000 51,567,000 ---------------------- --------------------- Cash flows from investing activities: Net cash effect of company acquisitions/dispositions (8,958,000) (34,047,000) Net (increase) decrease in deposits with banks (3,031,000) 8,188,000 Net increase in loans receivable (3,078,000) (5,981,000) Purchases of debt and equity securities (30,836,000) (29,397,000) Proceeds from sales of debt and equity securities 32,998,000 43,945,000 Proceeds from maturities of debt securities 9,985,000 9,421,000 Net (increase) decrease in other investments (2,547,000) 4,048,000 Capital expenditures (79,645,000) (116,956,000) Proceeds from sale of property and equipment 1,290,000 3,203,000 ---------------------- --------------------- Cash used for investing activities (83,822,000) (117,576,000) ---------------------- --------------------- Cash flows from financing activities: Net change in demand deposits 846,000 1,895,000 Proceeds from issuance of debt 421,000 630,000 Repayment of debt (11,411,000) (10,841,000) Proceeds from exercise of stock options 1,000,000 3,165,000 Proceeds from issuance of stock to employee savings plan 4,794,000 Repurchase of company shares (20,758,000) Distributions to minority shareholders (3,386,000) (6,189,000) Cash dividends (7,610,000) (8,015,000) ---------------------- --------------------- Cash used for financing activities (40,898,000) (14,561,000) ---------------------- --------------------- Net decrease in cash and cash equivalents (77,172,000) (80,570,000) Cash and cash equivalents - Beginning of year 350,010,000 381,293,000 ---------------------- --------------------- - End of first half $272,838,000 $ 300,723,000 ====================== ===================== Supplemental information: Cash paid during the first half for: Interest $ 11,780,000 $ 8,000,000 Premium taxes $ 12,021,000 $ 14,740,000 Income taxes $ 5,370,000 $ 62,694,000 Noncash investing and financing activities: Shares issued for stock bonus plan $ 226,000 $ 3,369,000 Liabilities incurred in connection with company acquisitions $ 34,670,000 $ 11,755,000 Purchase of minority interest $ 12,804,000 $ 2,642,000 Company acquisitions in exchange for common stock $ 28,594,000
See notes to condensed consolidated financial statements. 5 THE FIRST AMERICAN CORPORATION AND SUBSIDIARY COMPANIES ------------------------ Notes to Condensed Consolidated Financial Statements ---------------------------------------------------- (Unaudited) Note 1 - Basis of Condensed Consolidated Financial Statements ------------------------------------------------------------- The condensed consolidated financial information included in this report has been prepared in conformity with the accounting principles and practices reflected in the consolidated financial statements included in the annual report filed with the Securities and Exchange Commission for the preceding calendar year. All adjustments are of a normal recurring nature and are, in the opinion of management, necessary to a fair statement of the consolidated results for the interim periods. This report should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1999. The results for the three and six months ended June 30, 1999, have been restated to reflect the adoption of Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." (See Note 2). The Company's only potential dilutive common shares are stock options which are reflected in diluted earnings per share by application of the treasure stock method. Note 2 - Revenue Recognition Accounting Policy ---------------------------------------------- In December 1999, the Company adopted SAB 101 which applies to the Company's tax service operations. SAB 101 requires the deferral of the tax service fee and the recognition of that fee as revenue ratably over the expected service period. As a result of adopting SAB 101, the Company reported a charge of $55.6 million, net of income taxes and minority interests, as a cumulative change in accounting principle and restated its results for the three and six months ended June 30, 1999. The restatement increased revenues, net income and net income per diluted share (before the cumulative effect of a change in accounting principle) by $11.5 million, $5.6 and $.08 million for the three months ended June 30, 1999, respectively, and $20.3 million, $9.8 million and $.15 for the six months ended June 30, 1999, respectively. During the three and six months ended June 30, 2000, the Company recognized $7.7 million and $14.8 million, respectively, in revenues that were included in the cumulative effect adjustment. Note 3 - Business Combinations ------------------------------ During the six months ended June 30, 2000, the Company acquired twelve companies, all in the title insurance segment, accounted for under the purchase method of accounting. These acquisitions were not material either individually or in the aggregate. Note 4 - Litigation ------------------- On May 19, 1999, The People of the State of California, by the Attorney General of the State of California, filed a class action suit in the Sacramento Superior Court. The action seeks to certify as a class of defendants all "title insurers," all "underwritten title companies" and all "controlled escrow companies" (as those terms are defined in the California Insurance Code) and all "independent escrow companies" (as the term is defined in the California Financial Code) doing business in the State of California from 1970 to the present who (i) hold dormant, unclaimed escrow funds; (ii) charged California home buyers and other escrow customers $10.00 or more for delivery services or administrative fees; (iii) charged California home buyers and other escrow customers reconveyance fees and/or (iv) earned interest (or its equivalent) from financial institutions and on customers' deposited escrow funds. The plaintiffs allege that the defendants unlawfully (i) failed to escheat unclaimed property to the Controller of the State of California on a timely basis; (ii) charged California homebuyers and other escrow customers fees for services that were never performed or which cost less than the amount charged; and (iii) devised and carried out schemes with financial institutions to receive interest, or monies in lieu of interest, on escrow funds deposited by defendants with financial institutions in demand deposits. Subsequent to the filing of the action by the State of California, two private class actions were served against the title insurance industry in California. The allegations in the complaints include some, but not all, of the allegations contained in the complaint filed by the State of California. The private class actions were stayed by court orders pending settlement negotiations relating to the class action filed by the State of California. The Company has 6 entered into a series of negotiations with the Attorney General's office to discuss possible settlement of the claims made by the State of California. The Company does not believe that the ultimate resolution of these actions will have a materially adverse effect on its financial condition or results of operations. Note 5 - Segment Information ---------------------------- The Company's operations include three reportable segments. Selected financial information about the Company's operations by segment is as follows: Operating revenues:
Three Months Ended Six Months Ended June 30 June 30 ------------------------------------------ ---------------------------------------------- ($000) ($000) 2000 % 1999 % 2000 % 1999 % -------- --- -------- --- ---------- --- ---------- --- Title Insurance 558,714 73 564,859 73 1,005,260 72 1,085,844 73 Real Estate Information 137,893 18 155,539 20 266,650 19 308,008 21 Consumer Information 63,609 9 49,212 7 124,171 9 94,945 6 -------- --- -------- --- ---------- --- ---------- --- Total $760,216 100 $769,610 100 $1,396,081 100 $1,488,797 100 ======== === ======== === ========== === ========== ===
Income before income taxes, minority interests and cumulative effect of a change in accounting principle:
Three Months Ended Six Months Ended June 30 June 30 ------------------------------------------ -------------------------------------------- ($000) ($000) 2000 % 1999 % 2000 % 1999 % -------- --- -------- --- -------- --- -------- --- Title Insurance $ 36,957 63 $ 49,075 60 $ 43,209 55 $ 84,237 59 Real Estate Information 13,251 22 25,366 31 16,115 21 45,440 32 Consumer Information 8,935 15 6,973 9 18,529 24 13,223 9 -------- --- -------- --- -------- --- -------- --- Total before corporate expenses 59,143 100 81,414 100 77,853 100 142,900 100 === === === === Corporate expenses (10,797) (18,404) (25,622) (27,204) -------- -------- -------- -------- Total $ 48,346 $ 63,010 $ 52,231 $115,696 ======== ======== ======== ========
Note 6 - Subsequent Events -------------------------- On July 31, 2000, the Company announced that it entered into a joint venture with LandAmerica Financial Group, Inc., creating an advanced title information delivery system. Under the terms of the agreement, the Company contributed its Smart Title Solutions division and LandAmerica contributed its Datatrace division to a newly formed limited liability company. The combined entity will be called Data Trace Information Services and, as majority owner, the Company will act as managing partner of the venture. On August 2, 2000, the Company announced the combination of its Real Estate Solutions division with Transamerica Corporation's Intellitech real estate information business. The combination created a data repository that covers more than 85 percent of nation's property sales and mortgage financing transactions. In the transaction, the Company and Transamerica formed a new limited partnership, in which the Company has an 80 percent interest and management control. Both of these transactions will be accounted for under the purchase method of accounting and the Company does not believe that the accounting for either of these transactions will have a material impact on its financial condition or results of operations. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- Any statements in this document that look forward in time involve risks and uncertainties, including but not limited to the following: 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; continued consolidation among the Company's significant customers; consolidation among significant competitors; the impact of legal proceedings commenced by the California attorney general and related litigation; the continued ability to identify businesses to be acquired; and changes in the Company's ability to integrate businesses which it acquires. The Company's actual results, performance or achievement could differ materially from those expressed in, or implied by, any forward-looking statements. 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 and six months ended June 30: OVERVIEW Low mortgage interest rates and high consumer confidence, coupled with the particularly strong California real estate market, resulted in record-setting first half of the year revenues for the Company for the six months ended June 30, 1999. However, commencing in the second quarter 1999, new orders began to soften as rising interest rates led to a significant decline in refinance transactions, although residential resale and commercial activity remained relatively strong. During the second half of 1999, the trend of higher interest rates continued. New orders, including residential resale orders, continued to decline. This, coupled with fourth quarter seasonal factors, decreased operating revenues for the fourth quarter 1999 and resulted in a low inventory of open orders going into the first quarter 2000. Accordingly, orders closed and operating revenues for the first quarter 2000 decreased when compared with the first quarter 1999. The trend of higher interest rates and low refinancings continued into the second quarter 2000 and resulted in a decrease in orders closed and operating revenues for the second quarter 2000 when compared with the second quarter 1999. Net income and net income per diluted share for the second quarter 2000 was $25.0 million and $0.38, respectively. Net income and net income per diluted share for the first half of 2000 was $26.0 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 Six Months Ended June 30 June 30 ------------------------------------------ ---------------------------------------------- ($000) ($000) 2000 % 1999 % 2000 % 1999 % -------- --- -------- --- ---------- --- ---------- --- Title Insurance: Direct operations $283,487 37 $280,007 36 $ 519,433 37 $ 540,331 36 Agency operations 275,227 36 284,852 37 485,827 35 545,513 37 -------- --- -------- --- ---------- --- ---------- --- 558,714 73 564,859 73 1,005,260 72 1,085,844 73 Real Estate Information 137,893 18 155,539 20 266,650 19 308,008 21 Consumer Information 63,609 9 49,212 7 124,171 9 94,945 6 -------- --- -------- --- ---------- --- ---------- --- Total $760,216 100 $769,610 100 $1,396,081 100 $1,488,797 100 ======== === ======== === ========== === ========== ===
Title Insurance. Operating revenues from direct title operations increased 1.2% and decreased 3.9% for the three and six months ended June 30, 2000, respectively, when compared with the same periods of the prior year. The increase for the three-month period was attributable to an increase in the average revenues per order closed, offset in part by a decrease in the number of orders closed by the Company's direct operations. The decrease for the six-month period was due to a decrease in the number of orders closed, offset in part by an increase in the average revenues per order closed. The average revenues per order closed were $1,087 and $1,057 for the three and six months ended June 30, 2000, respectively, as compared with $878 and $880 for the same periods of the prior year. These increases were primarily due to the shift in the mix of business from refinance to resale, appreciating residential real estate values and an increase in commercial activity. The Company's direct operations closed 260,900 and 491,200 title orders during the current three and six month periods, respectively, decreases of 18.2% and 20.0% when compared with 319,000 and 614,100 closed during the same periods of the prior year. These decreases were primarily due to the factors mentioned above in the Overview section. Operating revenues from agency operations decreased 8 3.4% and 10.9% for the three and six months ended June 30, 2000, respectively, when compared with the same periods of the prior year. These decreases were primarily due to the same factors affecting direct operations mentioned above, compounded by the inherent delay in reporting by agents. Real Estate Information. Real estate information operating revenues decreased 11.3% and 13.4% for the three and six months ended June 30, 2000, respectively, when compared with the same periods of the prior year. These decreases were primarily due to the decrease in refinance activity, offset in part by $5.3 million and $9.8 million of operating revenues contributed by new acquisitions for the respective periods. Consumer Information. Consumer information operating revenues increased 29.3% and 30.8% for the three and six months ended June 30, 2000, respectively, when compared with the same periods of the prior year. These increases were primarily attributable to an increased awareness and acceptance of this business segment's products, as well as $4.3 million and $9.9 million of operating revenues contributed by new acquisitions for the three and six months ended June 30, 2000, respectively. INVESTMENT AND OTHER INCOME Investment and other income totaled $15.7 million and $26.0 million for the three and six months ended June 30, 2000, respectively, representing increases of $3.5 million, or 28.3%, and $2.1 million, or 8.7%, when compared with the same periods of the prior year. These increases primarily reflect an increase in investment income, increased earnings of unconsolidated subsidiaries and realized investment gains of approximately $0.7 million. TOTAL OPERATING EXPENSES Title Insurance. Salaries and other personnel costs were $182.7 million and $355.9 million for the three and six months ended June 30, 2000, respectively, decreases of 0.9% and 1.5% when compared with the same periods of the prior year. Excluding acquisitions, the decreases were $7.5 million, or 4.1%, and $18.2 million, or 5.0%, respectively. These decreases were primarily due to personnel reductions and the results of cost-containment programs that were started by the Company in the latter part of 1999 and have continued into the current quarter. Agents retained $225.5 million and $392.6 million of title premiums generated by agency operations for the three and six months ended June 30, 2000, respectively, which compares with $228.2 million and $438.8 million for the same periods of the prior year. The percentage of title premiums retained by agents ranged from 80.1% to 81.9% 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 $88.5 million and $169.8 million for the three and six months ended June 30, 2000, respectively, increases of $10.3 million, or 13.2%, and $14.9 million, or 9.6%, when compared with the same periods of the prior year. These increases were primarily attributable to approximately $3.7 million and $7.4 million of expense related to leased equipment, and approximately $2.0 million and $5.8 million of expenses related to new acquisitions for the three and six months ended June 30, 2000, respectively. Contributing to the increase for both periods were costs incurred to update and maintain the Company's expanding databases and increased technology costs, partially offset by the results of the Company's cost-containment programs. The provision for title losses as a percentage of title insurance operating revenues was 3.6% for the six months ended June 30, 2000 and 3.0% for the same period of the prior year. The increase in loss percentage reflects the shift in business mix from refinance, which is typically associated with low claims experience, to resale, which tends to have a slightly higher claims experience. Premium taxes for title insurance were $9.8 million and $10.5 million for the six months ended June 30, 2000 and 1999, respectively. Expressed as a percentage of title insurance operating revenues, premium taxes were approximately 1.0% for both periods. Real Estate Information. Real estate information personnel and other operating expenses were $114.6 million and $229.8 million for the three and six months ended June 30, 2000, respectively, decreases of 5.5% and 6.1% when compared with the same periods of the prior year. Excluding acquisitions, the decreases were $13.0 million, or 10.7%, and $26.1 million, or 10.7%, respectively. These decreases were primarily attributable to the results of the Company's cost- containment programs. Consumer Information. Consumer information personnel and other operating expenses were $40.6 million and $79.9 million for the three and six months ended June 30, 2000, respectively, increases of 23.8% and 24.3% when compared with the same periods of the prior year. These increases were primarily attributable to costs incurred servicing the increased business volume as well as $1.8 million and $4.9 million of costs associated with new acquisitions for the three and six months ended June 30, 2000, respectively. The provision for consumer information losses principally reflects home warranty claims and, to a lesser extent, property and 9 casualty insurance claims. The provision for home warranty losses, expressed as a percentage of home warranty operating revenues, was 51.2% for the six months ended June 30, 2000, and 49.0% for the same period of the prior year. This increase was primarily due to an increase in the average number of claims per contract. The provision for property and casualty losses, expressed as a percentage of property and casualty operating revenues was approximately 40% for both the six months ended June 30, 2000 and 1999. 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 Six Months Ended June 30 June 30 ------------------------------------------ -------------------------------------------- ($000) ($000) 2000 % 1999 % 2000 % 1999 % -------- --- -------- --- -------- --- -------- --- Title Insurance $ 36,957 63 $ 49,075 60 $ 43,209 55 $ 84,237 59 Real Estate Information 13,251 22 25,366 31 16,115 21 45,440 32 Consumer Information 8,935 15 6,973 9 18,529 24 13,223 9 -------- --- -------- --- -------- --- -------- --- Total before corporate expenses 59,143 100 81,414 100 77,853 100 142,900 100 === === === === Corporate expenses (10,797) (18,404) (25,622) (27,204) -------- -------- -------- -------- Total $ 48,346 $ 63,010 $ 52,231 $115,696 ======== ======== ======== ========
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 or decrease based on the volume of residential real estate loan transactions. Consumer information profits are unaffected by real estate or mortgage interest rate activity and increase as the level of business volume increases. Corporate expenses decreased $7.6 million for the three months ended June 30, 2000, when compared with the same period of the prior year. This decrease was primarily due to $10.8 million of merger-related charges incurred in the NAIG acquisition, which were included in the prior year period, offset in part by a $1.0 million reduction in corporate investment income and increased technology costs at the corporate level. INCOME TAXES The effective income tax rate (income tax expense as a percentage of pretax income after minority interest expense) was 43.7% for the six months ended June 30, 2000, and 38.7% for the same period of the prior year. The increase in effective rate was primarily attributable to an increase in state income and franchise taxes which resulted from the Company's non-insurance subsidiaries contribution to pretax profits and changes in the ratio of permanent differences to pretax profits. A large portion of the Company's minority interest expense is attributable to a limited liability company subsidiary, which for tax purposes, is treated as a partnership. Accordingly, no income taxes have been provided for that portion of the minority interest expense. MINORITY INTERESTS Minority interest expense was $3.9 million for the three months ended June 30, 2000, a decrease of $2.3 million when compared with the same period of the prior year. Minority interest expense was $6.0 million for the six months ended June 30, 2000, a decrease of $7.1 million when compared with the same period of the prior year. These decreases were primarily attributable to the decrease in operating results of the Company's joint venture with Experian caused primarily by the previously noted decline in refinance activity. NET INCOME 10 Net income for the three and six months ended June 30, 2000, was $25.0 million, or $0.38 per diluted share, and $26.0 million, or $0.40 per diluted share, respectively. Net income for the three and six months ended June 30, 1999, was $34.8 million, or $0.52 per diluted share, and $62.9 million, or $0.95 per diluted share, respectively. Net income for the six months ended June 30, 1999, excludes the cumulative effect of a change in accounting for tax service contracts. LIQUIDITY AND CAPITAL RESOURCES Total cash and cash equivalents decreased $77.2 million and $80.6 million for the six months ended June 30, 2000 and 1999, respectively. The decrease for the current year period was primarily attributable to capital expenditures and the repurchase of Company shares. The decrease for the prior year period was primarily due to capital expenditures and company acquisitions. Notes and contracts payable as a percentage of total capitalization increased to 17.8% at June 30, 2000, from 16.4% at December 31, 1999. This increase was primarily due to the repurchase of Company shares and new debt issued for company acquisitions during the first half of the year. Management believes that all of its anticipated operating cash requirements for the immediate future will be met from internally generated funds. 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, 1999. 11 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, May 11, 2000. (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 57,821,430 322,292 Gary J. Beban 57,823,148 320,148 J. David Chatham 57,841,922 301,148 William G. Davis 57,818,619 325,103 James L. Doti 57,836,993 306,729 Lewis W. Douglas, Jr. 57,752,120 391,602 Paul B. Fay, Jr. 57,746,833 396,889 D. P. Kennedy 57,749,274 394,448 Parker S. Kennedy 57,833,331 310,391 Frank O'Bryan 57,275,998 867,724 Roslyn B. Payne 57,857,051 286,671 D. Van Skilling 57,269,397 874,325 Virginia Ueberroth 57,864,185 279,537 (c) At the Meeting, the proposal to amend the Restated Articles of Incorporation to change the Company's name to "The First American Corporation." Votes For Votes Against Votes Withheld ---------- ------------- -------------- 57,747,837 267,541 120,344 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 executed May 11, 2000, incorporated by reference herein from the Company's report on Form 8-K dated June 12, 2000. (10)(a) Amendment No. 1, dated July 19, 2000, to Pension Restoration Plan. (10)(b) Amendment No. 6, dated July 19, 2000, to 1996 Stock Option Plan. (10)(c) Amendment No. 3, dated July 19, 2000, to 1997 Directors' Stock Plan. (10)(d) Amendment No. 1, dated July 19, 2000, to Deferred Compensation Plan. (10)(e) Amendment No. 5, dated July 19, 2000, to Executive Supplemental Benefit Plan. (10)(f) Amendment No. 3, dated July 19, 2000, to Management Supplemental Benefit Plan. (10)(g) Master Lease Agreement, dated as of December 27, 1999, between FATICO 1999 TRUST, as lessor, and First American Title Insurance Company, as Lessee. 12 (10)(h) Agreement of Amendment No. 1, dated as of May 5, 2000, to Master Lease Agreement and Equipment Schedule No. 1. (10)(i) Amendment No. 1, dated as of May 15, 2000, to Credit Agreement dated as of July 2, 1999. (10)(j) Amendment No. 2, dated as of May 15, 2000, to Amended and Restated Credit Agreement dated as of July 29, 1997. (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 June 12, 2000 (reporting on the change of the Company's name to "The First American Corporation"). Subsequent to such quarterly period, the Company filed reports on Form 8-K dated August 3, 2000 (reporting on the Company's second quarter earnings), August 3, 2000 (reporting on the Company's agreement with LandAmerica Financial Group, Inc. creating a joint title information delivery system) and August 4, 2000 (reporting on the Company's agreement with Transamerica Corporation creating the nation's largest database of property characteristic information). 13 EXHIBIT INDEX Sequentially Exhibit No. Description Numbered Page ----------- ----------- ------------- (3) Certificate of Amendment of Restated Articles of Incorporation of The First American Financial Corporation executed May 11, 2000, incorporated by reference herein from the Company's report on Form 8-K dated June 12, 2000. (10)(a) Amendment No. 1, dated July 19, 2000, to Pension Restoration Plan. (10)(b) Amendment No. 6, dated July 19, 2000, to 1996 Stock Option Plan. (10)(c) Amendment No. 3, dated July 19, 2000, to 1997 Directors' Stock Plan. (10)(d) Amendment No. 1, dated July 19, 2000, to Deferred Compensation Plan. (10)(e) Amendment No. 5, dated July 19, 2000, to Executive Supplemental Benefit Plan. (10)(f) Amendment No. 3, dated July 19, 2000, to Management Supplemental Benefit Plan. (10)(g) Master Lease Agreement, dated as of December 27, 1999, between FATICO 1999 TRUST, as lessor, and First American Title Insurance Company, as Lessee. (10)(h) Agreement of Amendment No. 1, dated as of May 5, 2000, to Master Lease Agreement and Equipment Schedule No. 1. (10)(i) Amendment No. 1, dated as of May 15, 2000, to Credit Agreement dated as of July 2, 1999. (10)(j) Amendment No. 2, dated as of May 15, 2000, to Amended and Restated Credit Agreement dated as of July 29, 1997. (27) Financial Data Schedule 14