10-Q 1 0001.txt FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 September 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 - 63,600,983 shares as of November 7, 2000 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 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K Items 2-5 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: November 10, 2000 2 Part I: Financial Information ---------------------- Item 1: Financial Statements -------------------- THE FIRST AMERICAN CORPORATION AND SUBSIDIARY COMPANIES ------------------------ Condensed Consolidated Balance Sheets -------------------------------------
September 30, 2000 December 31, 1999 ------------------ ----------------- Assets Cash and cash equivalents $ 268,227,000 $ 350,010,000 -------------- -------------- Accounts and accrued income receivable, net 201,723,000 180,824,000 -------------- -------------- Income tax receivable 8,606,000 -------------- Investments: Deposits with savings and loan associations and banks 36,279,000 32,225,000 Debt securities 207,867,000 226,369,000 Equity securities 43,567,000 39,266,000 Other long-term investments 94,659,000 86,686,000 -------------- -------------- 382,372,000 384,546,000 -------------- -------------- Loans receivable 91,932,000 87,338,000 -------------- -------------- Property and equipment, at cost 689,445,000 566,841,000 Less- accumulated depreciation (242,893,000) (173,527,000) -------------- -------------- 446,552,000 393,314,000 -------------- -------------- Title plants and other indexes 276,535,000 250,723,000 -------------- -------------- Assets acquired in connection with claim settlements (net of valuation reserves of $3,743,000 and $4,856,000) 25,051,000 24,196,000 -------------- -------------- Deferred income taxes 37,901,000 48,284,000 -------------- -------------- Goodwill and other intangibles, net 345,832,000 284,390,000 -------------- -------------- Other assets 108,374,000 104,183,000 -------------- -------------- $2,184,499,000 $2,116,414,000 ============== ============== Liabilities and Stockholders' Equity Demand deposits $ 78,880,000 $ 80,843,000 -------------- -------------- Accounts payable and accrued liabilities 274,254,000 280,698,000 -------------- -------------- Deferred revenue 273,521,000 279,766,000 -------------- -------------- Reserve for known and incurred but not reported claims 281,324,000 273,724,000 -------------- -------------- Income taxes payable 10,820,000 -------------- Notes and contracts payable 216,720,000 196,815,000 -------------- -------------- Minority interests in consolidated subsidiaries 111,752,000 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 - 63,552,000 and 65,068,000 shares 63,552,000 65,068,000 Additional paid-in capital 167,289,000 184,759,000 Retained earnings 600,956,000 561,946,000 Accumulated other comprehensive income 5,431,000 4,218,000 -------------- -------------- 837,228,000 815,991,000 -------------- -------------- $2,184,499,000 $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 Nine Months Ended September 30 September 30 --------------------------- ------------------------------ 2000 1999 2000 1999 ------------- ------------ -------------- -------------- Revenues Operating revenues $730,490,000 $757,729,000 $2,126,571,000 $2,246,526,000 Investment and other income 19,770,000 17,325,000 45,788,000 41,250,000 ------------- ------------ -------------- -------------- 750,260,000 775,054,000 2,172,359,000 2,287,776,000 ------------- ------------ -------------- -------------- Expenses Salaries and other personnel costs 260,250,000 264,809,000 773,513,000 779,824,000 Premiums retained by agents 192,803,000 229,966,000 585,398,000 668,746,000 Other operating expenses 176,845,000 169,994,000 511,994,000 502,600,000 Provision for title losses and other claims 36,764,000 30,108,000 104,327,000 85,549,000 Depreciation and amortization 22,790,000 19,507,000 61,112,000 55,574,000 Premium taxes 5,396,000 5,829,000 16,318,000 17,125,000 Interest 6,655,000 4,001,000 18,709,000 11,822,000 ------------- ------------ -------------- -------------- 701,503,000 724,214,000 2,071,371,000 2,121,240,000 ------------- ------------ -------------- -------------- Income before income taxes, minority interests and cumulative effect of a change in accounting principle 48,757,000 50,840,000 100,988,000 166,536,000 Income taxes 19,000,000 17,766,000 39,200,000 57,466,000 ------------- ------------ -------------- -------------- Income before minority interests and cumulative effect of a change in accounting principle 29,757,000 33,074,000 61,788,000 109,070,000 Minority interests 5,358,000 5,081,000 11,355,000 18,183,000 ------------- ------------ -------------- -------------- Income before cumulative effect of a change in accounting principle 24,399,000 27,993,000 50,433,000 90,887,000 Cumulative effect of a change in accounting for tax service contracts, net of income taxes and minority interests - - - (55,640,000) ------------- ------------ -------------- -------------- Net income 24,399,000 27,993,000 50,433,000 35,247,000 ------------- ------------ -------------- -------------- Other comprehensive income, net of tax 1,115,000 (3,584,000) 1,213,000 (4,199,000) Unrealized gain (loss) on securities 175,000 (172,000) - (403,000) ------------- ------------ -------------- -------------- Minimum pension liability adjustment 1,290,000 (3,756,000) 1,213,000 (4,602,000) ------------- ------------ -------------- -------------- $ 25,689,000 $ 24,237,000 $ 51,646,000 $ 30,645,000 Comprehensive income ------------- ------------ -------------- -------------- Per share amounts: Basic: Income before cumulative effect of a change in accounting for tax service contracts $ 0.38 $ 0.43 $ 0.79 $ 1.41 Cumulative effect of a change in accounting for tax service contracts ($ 0.86) ------------- ------------ -------------- -------------- Net income $ 0.38 $ 0.43 $ 0.79 $ 0.55 ------------- ------------ -------------- -------------- Diluted: Income before cumulative effect of a change in accounting for tax service contracts $ 0.37 $ 0.42 $ 0.77 $ 1.37 Cumulative effect of a change in accounting for tax service contracts ($ 0.84) ------------- ------------ -------------- -------------- Net income $ 0.37 $ 0.42 $ 0.77 $ 0.53 ============= ============ ============== ============== Cash dividends per share $ .06 $ .06 $ .18 $ .18 ============= ============ ============== ============== Weighted average number of shares: Basic 63,526,000 65,213,000 63,689,000 64,564,000 ============= ============ ============== ============== Diluted 66,088,000 66,166,000 65,700,000 66,296,000 ============= ============ ============== ==============
See notes to condensed consolidated financial statements. 4 THE FIRST AMERICAN CORPORATION AND SUBSIDIARY COMPANIES ------------------------ Condensed Consolidated Statements of Cash Flows ----------------------------------------------- (Unaudited)
For the Nine Months Ended September 30 ----------------------------- 2000 1999 ------------- ------------- Cash flows from operating activities: Net income $ 50,433,000 $ 35,247,000 Adjustments to reconcile net income to cash provided by operating activities- Provision for title losses and other claims 104,327,000 85,549,000 Depreciation and amortization 61,112,000 55,574,000 Minority interests in net income 11,355,000 18,183,000 Cumulative effect of a change in accounting for tax service contracts 55,640,000 Investment gain (5,160,000) Other, net (201,000) (805,000) Changes in assets and liabilities excluding effects of company acquisitions and noncash transactions- Claims paid, including assets acquired, net of recove (98,582,000) (82,328,000) Net change in income tax accounts 29,351,000 (50,161,000) Increase in accounts and accrued income receivable (14,031,000) (2,077,000) Decrease in accounts payable and accrued liabilities (15,382,000) (18,185,000) (Decrease) increase in deferred revenue (11,140,000) 51,883,000 Other, net (6,500,000) (17,025,000) ------------- ------------- Cash provided by operating activities 110,742,000 126,335,000 ------------- ------------- Cash flows from investing activities: Net cash effect of company acquisitions/dispositions (39,908,000) (37,436,000) Net (increase) decrease in deposits with banks (3,997,000) 6,914,000 Net increase in loans receivable (4,594,000) (9,478,000) Purchases of debt and equity securities (40,580,000) (41,130,000) Proceeds from sales of debt and equity securities 46,426,000 51,409,000 Proceeds from maturities of debt securities 11,302,000 11,083,000 Net decrease in other investments 972,000 4,257,000 Capital expenditures (112,846,000) (173,067,000) Proceeds from sale of property and equipment 1,509,000 4,008,000 ------------- ------------- Cash used for investing activities (141,716,000) (183,440,000) ------------- ------------- Cash flows from financing activities: Net change in demand deposits (1,963,000) 7,038,000 Proceeds from issuance of debt 3,575,000 734,000 Repayment of debt (16,661,000) (12,856,000) Proceeds from exercise of stock options 1,546,000 3,739,000 Proceeds from issuance of stock to employee savings plan 4,794,000 Repurchase of company shares (20,758,000) Distributions to minority shareholders (5,125,000) (8,467,000) Cash dividends (11,423,000) (11,928,000) ------------- ------------- Cash used for financing activities (50,809,000) (16,946,000) ------------- ------------- Net decrease in cash and cash equivalents (81,783,000) (74,051,000) Cash and cash equivalents - Beginning of year 350,010,000 381,293,000 ------------- ------------- - End of third quarter $ 268,227,000 $ 307,242,000 ------------- ------------- Supplemental information: Cash paid during the three quarters for: Interest $ 17,722,000 $ 8,731,000 Premium taxes $ 17,142,000 $ 20,471,000 Income taxes $ 21,931,000 $ 88,466,000 Noncash investing and financing activities: Shares issued for stock bonus plan $ 226,000 $ 3,369,000 Liabilities incurred in connection with company acquisitions $ 44,740,000 $ 10,795,000 Purchase of minority interest $ 12,804,000 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 nine months ended September 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 nine months ended September 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 $12.5 million, $6.1 million and $.09 for the three months ended September 30, 1999, respectively, and $32.7 million, $15.9 million and $.24 for the nine months ended September 30, 1999, respectively. During the three and nine months ended September 30, 2000, the Company recognized $10.7 million and $25.5 million, respectively, in revenues that were included in the cumulative effect adjustment. Note 3 - Business Combinations ------------------------------ 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 certain assets and liabilities of its Smart Title Solutions subsidiary and LandAmerica contributed certain assets and liabilities of its Datatrace subsidiary 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 that 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. During the nine months ended September 30, 2000, the Company acquired 15 companies. These acquisitions were not material either individually or in the aggregate and are included in the following business segments: 11 in the title insurance segment, two in the real estate information segment and two in the consumer information segment. The aggregate purchase price was $7.6 million in cash, $9.5 million in notes payable and $17.9 million in equity interests. 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 6 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 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 Nine Months Ended September 30 September 30 ----------------------------------------------------------------------------------------- ($000) ($000) 2000 % 1999 % 2000 % 1999 % ----------- --------- ------------- -------- --------------- -------- ------------- ----- Title Insurance 521,998 71 559,387 74 1,527,258 72 1,645,230 73 Real Estate Information 141,501 20 143,220 19 408,151 19 451,228 20 Consumer Information 66,991 9 55,122 7 191,162 9 150,068 7 ----------- --------- ------------- -------- --------------- -------- ------------- ----- Total $730,490 100 $757,729 100 $2,126,571 100 $2,246,526 100 =========== ========= ============= ======== =============== ======== ============= =====
Income before income taxes, minority interests and cumulative effect of a change in accounting principle:
Three Months Ended Nine Months Ended September 30 September 30 ----------------------------------------------------------------------------------------- ($000) ($000) 2000 % 1999 % 2000 % 1999 % ----------- -------- ------------ -------- -------------- -------- --------------- ------ Title Insurance $ 30,543 50 $ 31,946 55 $ 73,752 53 $116,183 58 Real Estate Information 19,915 33 17,574 30 36,030 26 63,014 31 Consumer Information 10,347 17 8,955 15 28,876 21 22,178 11 ----------- -------- ------------ -------- -------------- -------- --------------- ------ Total before corporate expenses 60,805 100 58,475 100 138,658 100 201,375 100 ======== ======== ======== ====== Corporate expenses (12,048) (7,635) (37,670) (34,839) ----------- ------------ -------------- --------------- Total $ 48,757 $ 50,840 $100,988 $166,536 =========== ============ ============== ===============
7 Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- Certain statements made in this 10Q, including those relating to anticipated cash requirements, are forward looking. Risks and uncertainties exist which may cause results to differ materially from those set forth in these forward-looking statements. Factors that could cause the anticipated results to differ from those described in the forward-looking statements include: interest rate fluctuations; changes in the performance of the real estate markets; general volatility in the capital markets; changes in applicable government regulations; consolidation among the Company's significant customers and competitors; legal proceedings commenced by the California attorney general and related litigation; the Company's continued ability to identify businesses to be acquired; changes in the Company's ability to integrate businesses which it acquires; and other factors described in the Company's Annual Report on Form 10-K for the year ended December 31, 1999, filed with the Securities and Exchange Commission. The forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. RESULTS OF OPERATIONS Three and nine months ended September 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. During the third quarter 2000, mortgage interest rates decreased and order counts in the latter part of the quarter began to show favorable comparisons when compared with the same period of the prior year. This, coupled with the results of the Company's cost-containment programs, resulted in net income and net income per diluted share for the third quarter 2000 of $24.4 million and $0.37, 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) 2000 % 1999 % 2000 % 1999 % -------------- ---------- -------------- --------- ---------------- -------- ----------------- ----- Title Insurance: Direct operations $280,152 38 $273,310 36 $ 799,585 38 $ 813,640 36 Agency operations 241,846 33 286,077 38 727,673 34 831,590 37 -------------- ---------- -------------- --------- ---------------- -------- ----------------- ----- 521,998 71 559,387 74 1,527,258 72 1,645,230 73 Real Estate Information 141,501 20 143,220 19 408,151 19 451,228 20 Consumer Information 66,991 9 55,122 7 191,162 9 150,068 7 -------------- --------- --------------- --------- ---------------- -------- ----------------- ----- Total $730,490 100 $757,729 100 $2,126,571 100 $2,246,526 100 ============== ========= =============== ========= ================ ======== ================= =====
Title Insurance. Operating revenues from direct title operations increased 2.5% and decreased 1.7% for the three and nine months ended September 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 nine-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 $1,137 and $1,084 for the three and nine months ended September 30, 2000, respectively, as compared with $988 and $913 for the same periods of the prior year. These increases were primarily due to the shift in the mix of business 8 from refinance to resale, appreciating residential real estate values and an increase in commercial activity. The Company's direct operations closed 246,500 and 737,700 title orders during the current three and nine month periods, respectively, decreases of 10.9% and 17.2% when compared with 276,700 and 890,800 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 15.5% and 12.5% for the three and nine months ended September 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, which reflects the relatively high agency revenues for the third quarter of the prior year due to the strong operating results experienced by the agents during the second quarter of 1999. Real Estate Information. Real estate information operating revenues decreased 1.2% and 9.5% for the three and nine months ended September 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 $10.8 million and $20.6 million of operating revenues contributed by new acquisitions for the respective periods. Consumer Information. Consumer information operating revenues increased 21.5% and 27.4% for the three and nine months ended September 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 $4.7 million and $14.6 million of operating revenues contributed by new acquisitions for the respective periods. INVESTMENT AND OTHER INCOME Investment and other income totaled $19.8 million and $45.8 million for the three and nine months ended September 30, 2000, respectively, representing increases of $2.4 million, or 14.1%, and $4.5 million, or 11.0%, when compared with the same periods of the prior year. These increases primarily reflect an increase in investment income and increased earnings of unconsolidated subsidiaries, which are accounted for under the equity method of accounting, offset in part by a reduction in realized investment gains. Included in the prior year quarter is an investment gain of $5.2 million resulting from stock received in the demutualization of a life insurance company which insures a large portion of the Company's corporate-owned life insurance portfolio. Included in the current year quarter is an investment gain of $2.7 million relating to the previously announced joint ventures with LandAmerica and Transamerica. TOTAL OPERATING EXPENSES Title Insurance. Salaries and other personnel costs were $179.7 million and $535.6 million for the three and nine months ended September 30, 2000, respectively, decreases of 4.9% and 2.7% when compared with the same periods of the prior year. Excluding acquisitions, the decreases were $19.9 million, or 10.5%, and $38.1 million, or 6.9%, respectively. These decreases were primarily due to cost containment measures which included staff reductions in the production area (consistent with the decrease in orders) and the consolidation of certain administrative functions within the Company's regional structure. In addition, as part of the cost containment measures, the Company began to restructure certain components of its employee benefit programs, contributing approximately $6 million to the expense reduction for the quarter ended September 30, 2000. Agents retained $192.8 million and $585.4 million of title premiums generated by agency operations for the three and nine months ended September 30, 2000, respectively, which compares with $230.0 million and $668.7 million for the same periods of the prior year. The percentage of title premiums retained by agents ranged from 79.7% to 80.4% 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 $93.8 million and $263.6 million for the three and nine months ended September 30, 2000, respectively, increases of $10.4 million, or 12.5%, and $25.3 million, or 10.6%, when compared with the same periods of the prior year. These increases were primarily attributable to approximately $3.7 million and $11.1 million of expense related to leased equipment, and approximately $7.0 million and $12.8 million of expenses related to new acquisitions for the three and nine months ended September 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 3.7% for the nine months ended September 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 $14.6 million and $15.9 million for the nine months ended September 30, 2000 and 1999, respectively. Expressed as a percentage of title insurance operating revenues, premium taxes were approximately 1.0% for both periods. 9 Real Estate Information. Real estate information personnel and other operating expenses were $116.1 million and $345.8 million for the three and nine months ended September 30, 2000, respectively, an increase of 0.2% and a decrease of 4.1% when compared with the same periods of the prior year. Excluding acquisitions, real estate information personnel and other operating expenses decreased $9.5 million, or 8.2%, and $35.6 million, or 9.9%, for the three and nine months ended September 30, 2000, respectively, when compared with the same periods of the prior year. 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 $41.6 million and $121.5 million for the three and nine months ended September 30, 2000, respectively, increases of 11.0% and 19.4% 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 $3.5 million and $8.4 million of costs associated with new acquisitions for the three and nine months ended September 30, 2000, respectively. The provision for consumer information losses principally reflects home warranty claims and, to a lesser extent, property and casualty insurance claims. The provision for home warranty losses, expressed as a percentage of home warranty operating revenues, was 52.0% for the nine months ended September 30, 2000, and 49.9% 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 is averaging 42%. INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS Set forth below is a summary of income before income taxes, minority interests and cumulative effect of a change in accounting principle for each of the Company's segments.
Three Months Ended Nine Months Ended September 30 September 30 --------------------------------- ----------------------------- ($000) ($000) 2000 % 1999 % 2000 % 1999 % ---------- --- -------- --- -------- --- -------- --- Title Insurance $ 30,543 50 $31,946 55 $ 73,752 53 $116,183 58 Real Estate Information 19,915 33 17,574 30 36,030 26 63,014 31 Consumer Information 10,347 17 8,955 15 28,876 21 22,178 11 -------- --- ------- --- -------- --- -------- --- Total before corporate expenses 60,805 100 58,475 100 138,658 100 201,375 100 === === === === Corporate expenses (12,048) (7,635) (37,670) (34,839) -------- ------- -------- -------- Total $ 48,757 $50,840 $100,988 $166,536 ======== ======= ======== ========
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. Net corporate expenses increased $4.4 million for the three months ended September 30, 2000, when compared with the same period of the prior year. This increase was primarily due to the previously mentioned $5.2 million gain recognized in the prior year quarter resulting from stock received in the demutualization of a life insurance company. INCOME TAXES The effective income tax rate, which includes a provision for state income and franchise taxes for non-insurance subsidiaries, was 38.8% for the nine months ended September 30, 2000, and 34.5% 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. 10 MINORITY INTERESTS Minority interest expense was $5.4 million for the three months ended September 30, 2000, an increase of $0.3 million when compared with the same period of the prior year. Minority interest expense was $11.4 million for the nine months ended September 30, 2000, a decrease of $6.8 million when compared with the same period of the prior year. These changes were primarily attributable to the relative changes in operating results of the Company's joint venture with Experian caused primarily by the previously noted decline in refinance activity. NET INCOME Net income for the three and nine months ended September 30, 2000, was $24.4 million, or $0.37 per diluted share, and $50.4 million, or $0.77 per diluted share, respectively. Net income for the three and nine months ended September 30, 1999, was $28.0 million, or $0.42 per diluted share, and $90.9 million, or $1.37 per diluted share, respectively. Net income for the nine months ended September 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 $81.8 million and $74.1 million for the nine months ended September 30, 2000 and 1999, respectively. The decrease for the current period was primarily due to capital expenditures, company acquisitions 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 17.1% at September 30, 2000, from 16.4% at December 31, 1999. This increase was primarily due to 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 1. Legal Proceedings ----------------- Certain developments in the legal proceedings initiated by The People of the State of California, et al along with two private class actions are reported in the Company's Quarterly Report on Form 10Q for the first quarter ended March 31, 2000. Item 6. Exhibits and Reports on Form 8-K. --------------------------------- (a) Exhibits (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 November 1, 2000 (reporting on the Company's third quarter earnings). 12 EXHIBIT INDEX Sequentially Exhibit No. Description Numbered Page ----------- ----------- ------------- (27) Financial Data Schedule 13