10-Q 1 d10q.txt FORM 10-Q FOR FIRST AMERICAN CORPORATION 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, 2001 --------------------------------------------- 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 - 65,159,669 shares as of May 10, 2001 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 6. Exhibits and Reports on Form 8-K Items 1-5 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 /s/ Max O. Valdes --------------------------------- Max O. Valdes Vice President Chief Accounting Officer Date: May 17, 2001 2 Part I: Financial Information --------------------- Item 1: Financial Statements -------------------- THE FIRST AMERICAN CORPORATION AND SUBSIDIARY COMPANIES ------------------------ Condensed Consolidated Balance Sheets -------------------------------------
March 31, 2001 December 31, 2000 ---------------- ------------------ (unaudited) Assets Cash and cash equivalents $ 265,847,000 $ 300,905,000 -------------- -------------- Accounts and accrued income receivable, net 237,689,000 204,177,000 -------------- -------------- Income tax receivable 19,472,000 -------------- Investments: Deposits with savings and loan associations and banks 37,097,000 31,900,000 Debt securities 202,078,000 209,407,000 Equity securities 54,525,000 58,720,000 Other long-term investments 100,191,000 92,703,000 -------------- -------------- 393,891,000 392,730,000 -------------- -------------- Loans receivable 98,709,000 94,452,000 -------------- -------------- Property and equipment, at cost 687,239,000 662,198,000 Less- accumulated depreciation (243,981,000) (227,110,000) -------------- -------------- 443,258,000 435,088,000 -------------- -------------- Title plants and other indexes 294,718,000 290,072,000 -------------- -------------- Assets acquired in connection with claim settlements (net of valuation reserves of $1,115,000 and $1,000,000) 28,527,000 27,846,000 -------------- -------------- Deferred income taxes 12,695,000 11,519,000 -------------- -------------- Goodwill and other intangibles, net 349,074,000 346,156,000 -------------- -------------- Other assets 96,001,000 77,320,000 -------------- -------------- $2,220,409,000 $2,199,737,000 ============== ============== Liabilities and Stockholders' Equity Demand deposits $ 86,172,000 $ 81,289,000 -------------- -------------- Accounts payable and accrued liabilities 245,423,000 267,567,000 -------------- -------------- Deferred revenue 260,294,000 261,673,000 -------------- -------------- Reserve for known and incurred but not reported claims 284,097,000 284,607,000 -------------- -------------- Income taxes payable 9,113,000 -------------- -------------- Notes and contracts payable 212,892,000 219,838,000 -------------- -------------- Minority interests in consolidated subsidiaries 119,931,000 114,526,000 -------------- -------------- 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 - 64,873,000 and 63,887,000 shares 64,873,000 63,887,000 Additional paid-in capital 190,926,000 172,468,000 Retained earnings 643,797,000 628,913,000 Accumulated other comprehensive income 2,891,000 4,969,000 -------------- -------------- 902,487,000 870,237,000 -------------- -------------- $2,220,409,000 $2,199,737,000 ============== ==============
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 March 31 -------------------------- 2001 2000 ------------ ------------ Revenues Operating revenues $750,184,000 $635,865,000 Investment and other income 16,557,000 10,309,000 ------------ ------------ 766,741,000 646,174,000 ------------ ------------ Expenses Salaries and other personnel costs 274,819,000 250,204,000 Premiums retained by agents 189,407,000 167,122,000 Other operating expenses 191,088,000 166,360,000 Provision for title losses and other claims 36,490,000 30,123,000 Depreciation and amortization 24,433,000 17,416,000 Premium taxes 5,008,000 5,288,000 Interest 6,298,000 5,776,000 ------------ ------------ 727,543,000 642,289,000 ------------ ------------ Income before income taxes and minority interests 39,198,000 3,885,000 Income taxes 13,500,000 800,000 ------------ ------------ Income before minority interests 25,698,000 3,085,000 Minority interests 6,922,000 2,083,000 ------------ ------------ Net income 18,776,000 1,002,000 ------------ ------------ Other comprehensive income (loss) net of tax Unrealized gain (loss) on securities (1,878,000) 863,000 Minimum pension liability adjustment (200,000) (100,000) ------------ ------------ (2,078,000) 763,000 ------------ ------------ Comprehensive income $ 16,698,000 $ 1,765,000 ============ ============ Net income per share: Basic $ 0.29 $ 0.02 ============ ============ Diluted $ 0.27 $ 0.02 ============ ============ Cash dividends per share $ .06 $ .06 ============ ============ Weighted average number of shares: Basic 64,165,000 64,138,000 ============ ============ Diluted 68,797,000 65,322,000 ============ ============ See notes to condensed consolidated financial statements. 4 THE FIRST AMERICAN CORPORATION AND SUBSIDIARY COMPANIES ------------------------ Condensed Consolidated Statements of Cash Flows ----------------------------------------------- (Unaudited)
For the Three Months Ended March 31 ---------------------------------- 2001 2000 ------------ ------------ Cash flows from operating activities: Net income $ 18,776,000 $ 1,002,000 Adjustments to reconcile net income to cash provided by (used for) operating activities- Provision for title losses and other claims 36,490,000 30,123,000 Depreciation and amortization 24,433,000 17,416,000 Minority interests in net income 6,922,000 2,083,000 Other, net (608,000) 2,980,000 Changes in assets and liabilities excluding effects of company acquisitions and noncash transactions- Claims paid, including assets acquired, net of recoveries (37,681,000) (35,757,000) Net change in income tax accounts 28,205,000 1,794,000 Increase in accounts and accrued income receivable (38,706,000) (3,245,000) Decrease in accounts payable and accrued liabilities (17,595,000) (31,368,000) Decrease in deferred revenue (874,000) (2,003,000) Other, net (14,464,000) 9,918,000 ------------ ------------ Cash provided by (used for) operating activities 4,898,000 (7,057,000) ------------ ------------ Cash flows from investing activities: Net cash effect of company acquisitions/dispositions 2,282,000 (4,338,000) Net (increase) decrease in deposits with banks (5,197,000) 8,000 Net (increase) decrease in loans receivable (4,257,000) 239,000 Purchases of debt and equity securities (6,677,000) (13,584,000) Proceeds from sales of debt and equity securities 5,848,000 15,752,000 Proceeds from maturities of debt securities 9,083,000 4,605,000 Net increase in other investments (1,569,000) (4,133,000) Capital expenditures (36,593,000) (32,132,000) Proceeds from sale of property and equipment 392,000 949,000 ------------ ------------ Cash used for investing activities (36,688,000) (32,634,000) ------------ ------------ Cash flows from financing activities: Net change in demand deposits 4,883,000 (3,923,000) Proceeds from issuance of debt 404,000 Repayment of debt (9,426,000) (4,950,000) Proceeds from exercise of stock options 6,168,000 79,000 Repurchase of company shares (20,755,000) Distributions to minority shareholders (1,001,000) (2,049,000) Cash dividends (3,892,000) (3,801,000) ------------ ------------ Cash used for financing activities (3,268,000) (34,995,000) ------------ ------------ Net decrease in cash and cash equivalents (35,058,000) (74,686,000) Cash and cash equivalents - Beginning of year 300,905,000 350,010,000 ------------ ------------ - End of first quarter $265,847,000 $275,324,000 ============ ============ Supplemental information: Cash paid during the first quarter for: Interest $ 5,777,000 $ 1,264,000 Premium taxes $ 4,368,000 $ 5,630,000 Income taxes $ 656,000 $ 4,504,000 Noncash investing and financing activities: Shares issued for benefit plans $ 8,020,000 $ 226,000 Liabilities incurred in connection with company acquisitions $ 12,000,000 $ 14,927,000 Purchase of minority interest $ 516,000 Company acquisitions in exchange for common stock $ 4,768,000
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, 2000. Note 2 - Earnings Per Share --------------------------- The Company's potential dilutive common shares are stock options, which are reflected in diluted earnings per share by application of the treasury-stock method, and convertible notes payable, which are reflected in diluted earnings per share by the if-converted method. Certain of the stock options and all of the convertible debt are antidilutive and have been excluded when calculating diluted earnings per share. The dilutive effect of the stock options was 4,632,000 and 1,184,000 for the three months ended March 31, 2001 and 2000, respectively. Note 3 - Business Combinations ------------------------------ In February 2001, the Company announced the sale of its subsidiary, Contour Software, Inc., to Ellie Mae(SM), Inc., in exchange for cash, notes and an interest in Ellie Mae. As a result of the transaction, the Company recognized a deferred gain of $14.2 million. Contour had been included in the Company's real estate information segment. During the three months ended March 31, 2001, the Company acquired three companies. The purchase method of accounting was used for each of the acquisitions. These acquisitions were individually not material and have been included in the Company's title insurance segment. The aggregate purchase price was $4.8 million in stock, $1.5 million in cash and $.2 million in forgiven notes receivable. In January 2001, the Company entered into a definitive agreement to acquire Credit Management Solutions, Inc. (CMSI), a provider of credit automation software and services that will be included in the Company's consumer information segment. This stock-for-stock transaction is expected to close during the second quarter 2001. Note 4 - 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 March 31 ----------------------------------- ($000) 2001 % 2000 % -------- ------ -------- ------ Title Insurance $523,525 70 $446,546 70 Real Estate Information 162,233 22 128,757 20 Consumer Information 64,426 8 60,562 10 -------- ------ -------- ------ Total $750,184 100 $635,865 100 ======== ====== ======== ====== 6 Income before income taxes and minority interests: Three Months Ended March 31 ----------------------------------- ($000) 2001 % 2000 % -------- ------ -------- ------ Title Insurance $ 19,677 38 $ 6,252 34 Real Estate Information 27,514 54 2,864 15 Consumer Information 3,977 8 9,594 51 -------- ------ -------- ------ Total before corporate expenses 51,168 100 18,710 100 ======== ====== ======== ====== Corporate expenses (11,970) (14,825) -------- -------- Total $ 39,198 $ 3,885 ======== ======== Note 5 - Subsequent Event ------------------------- On April 24, 2001, the Company sold $175 million of its 4.5% senior convertible debentures due 2008. The Company also sold an additional $35 million of these debentures in connection with the exercise of an over-allotment option. This transaction was a private placement pursuant to Rule 144A and Regulation S under the Securities Act of 1933. The Company has agreed to file a shelf registration statement with the Securities and Exchange Commission covering resales of the senior convertible debentures and the common shares issuable upon the conversion within 90 days after the original issuance of the debentures. The debentures are convertible into common shares of the Company at $28 per share and can be converted, by the holders, at any time after the shelf registration statement is declared effective. The Company may redeem some or all of the senior convertible debentures at any time on or after April 15, 2004. The net proceeds of the offering will be used to finance acquisitions of businesses, repay outstanding indebtedness, buy out minority interests in existing subsidiaries and for general corporate purposes. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results -------------------------------------------------------------------------------- of Operations ------------- Certain statements made in this 10-Q, including those relating to the effects of eliminating high-cost contractors that are servicing claims in the Company's home warranty business and 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, 2000, 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 months ended March 31: OVERVIEW High mortgage interest rates and seasonal factors in the fourth quarter of 1999 resulted in a low inventory of open orders going into the first quarter of 2000. This, coupled with the relatively weak real estate economy present during the first half of 2000, resulted in a significant decrease in revenues and profits for the first half of 2000 when compared with the same period of the prior year. During the second half of 2000, real estate activity began to increase as a result of declining mortgage interest rates. New order counts in the latter part of the third quarter began to show favorable comparisons with the same period of 1999. This trend continued through the fourth quarter of 2000 and resulted in a significant increase in revenues and profits for the second half of 2000 when compared with the same period of the prior year, and in a high inventory of open orders going into the first quarter of 2001. During the first quarter of 2001, the continuation of lower mortgage interest rates resulted in a significant increase in refinance transactions, which, coupled with the relatively steady level of resale transactions, culminated in record-setting new title order volume for the quarter. These factors, together with the positive results of the Company's cost-containment programs, resulted in net income and diluted EPS for the first quarter of 2001 of $18.8 million and $0.27 per diluted share, respectively, which included a charge of $3.6 million, or $0.03 per diluted share, related to the exit of the lender-placed insurance business. Excluding this item, operational net income and diluted EPS for the first quarter of 2001 were $20.5 million and $0.30, respectively, compared with net income and diluted EPS for the first quarter of 2000 of $1.0 million and $0.02, respectively. OPERATING REVENUES A summary by segment of the Company's operating revenues is as follows: (in thousands, except percent) 2001 % 2000 % -------- ------ -------- ------ Title Insurance: Direct operations $289,271 39 $235,946 37 Agency operations 234,254 31 210,600 33 -------- ------ -------- ------ 523,525 70 446,546 70 Real Estate Information 162,233 22 128,757 20 Consumer Information 64,426 8 60,562 10 -------- ------ -------- ------ Total $750,184 100 $635,865 100 ======== ====== ======== ====== Title Insurance. Operating revenues from direct title operations increased 22.6% 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, and to a lesser extent, an increase in the average revenues per order closed. The Company's direct operations closed 270,100 title orders during the current quarter, an increase of 17.3% when compared with 230,300 title orders closed during the 8 same period of the prior year. This increase was primarily due to the factors mentioned above. The average revenues per order closed were $1,071 for the current three-month period, as compared with $1,025 for the same period of the prior year. This increase was primarily due to appreciating residential real estate values, offset in part by a shift in closings from resale to refinance. Operating revenues from agency operations increased 11.2% when compared with the same period of the prior year. This increase was primarily due to the same conditions that affected direct operations, offset in part the time lag in the reporting of agency remittances. Real Estate Information. Real estate information operating revenues increased 26.0% 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, and $8.2 million of operating revenues contributed by new acquisitions. Consumer Information. Consumer information operating revenues increased 6.4% when compared with the same period of the prior year. This increase was primarily attributable to operating revenues of $1.0 million contributed by new acquisitions and an increased awareness and acceptance of this business segment's products, offset in part by a $4.4 million reduction in operating revenues at the Company's property and casualty division as a result of exiting the lender-placed insurance business. INVESTMENT AND OTHER INCOME Investment and other income totaled $16.6 million and $10.3 million for the first quarter 2001 and 2000, respectively. This increase was primarily due to an increase of $2.2 million in interest and dividend income and increased earnings of $4.6 million from the Company's affiliated companies, which are accounted for under the equity method of accounting. TOTAL OPERATING EXPENSES Title Insurance. Salaries and other personnel costs were $188.2 million, an increase of 8.7% when compared with the same period of the prior year. Excluding new acquisitions, the increase was $10.3 million, or 5.9%. This increase was primarily due to an increase in staff costs in the production area caused by the significant increase in new orders. The Company's direct operations opened a record-setting 434,700 orders during the first quarter of 2001, an increase of 39.7% when compared with the 311,200 orders opened during the same period of the prior year. Agents retained $189.4 million, or 80.9%, and $167.1 million, or 79.4%, of the title premiums generated by agency operations for the first quarter 2001 and 2000, 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 $100.2 million for the current quarter, an increase of 23.3% when compared with the same period of the prior year. Excluding new acquisitions, the increase was $16.4 million, or 20.2%. This increase was primarily attributable to the incremental costs associated with processing the significant increase in new orders during the current quarter. The provision for title losses as a percentage of title insurance operating revenues was 3.7% for the current period and 3.3% for the same period of the prior year. The increase in loss percentage reflects the slight increase in claims experience due to the continued strength in resale closings, which are generally more claims intensive. Premium taxes for title insurance were $4.6 million for the current quarter and $4.7 million for the same quarter of the prior year. Expressed as a percentage of title insurance operating revenues, premium taxes were approximately 0.9% for the current quarter and 1.1% for the same quarter of the prior year. Premium tax rates vary from state to state. Accordingly, the geographical mix of title insurance premiums accounts for the fluctuation in rate. Real Estate Information. Real estate information personnel and other operating expenses were $126.2 million, an increase of $11.1 million, or 9.6% when compared with the same period of the prior year. Excluding acquisitions, the increase was $6.5 million, or 5.6%. This increase was primarily due to the significant increase in business volume. Consumer Information. Consumer information personnel and other operating expenses were $45.9 million, an increase of $6.6 million, or 16.9% when compared with the same period of the prior year. Excluding acquisitions, the increase was $5.6 million, or 14.3%. This increase was primarily attributable to a $3.6 million charge related to the exit of the Company's lender-placed insurance business, an increase of $0.7 million associated with the opening of a new service center in the state of Texas required to support the expansion of the Company' home warranty business. 9 The provision for consumer information losses principally reflects home warranty claims. The provision for home warranty losses, expressed as a percentage of home warranty operating revenues, was 56.2% for the current quarter and 47.4% for the same period of the prior year. This increase was primarily attributable to an increase in the average number of claims per contract, which was primarily due to the expansion of this business into new geographical markets. The Company's management has embarked on a program of eliminating high-cost contractors that are servicing claims. These efforts are expected to result in lower claim costs per contract in future periods. INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS A summary by segment of the Company's income before income taxes and minority interests is as follows: Three Months Ended March 31 --------------------------------------- (in thousands, except percent) 2000 % 1999 % -------- ------ -------- ------ Title Insurance $ 19,677 38 $ 6,252 34 Real Estate Information 27,514 54 2,864 15 Consumer Information 3,977 8 9,594 51 -------- ------ -------- ------ Total before corporate 51,168 100 18,710 100 ====== ====== Corporate (11,970) (14,825) -------- -------- Total $ 39,198 $ 3,885 ======== ======== 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. INCOME TAXES The Company's effective income tax rate (income tax expense as a percentage of pretax income after minority interest expense) was 41.8% for the current quarter and 44.4% for the same period of the prior year. The decrease in effective rate was primarily attributable to changes in the ratio of permanent differences to pretax income. A large portion of the 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 $6.9 million and $2.1 million for the first quarter 2001 and 2000, respectively. This increase was primarily attributable to the increase in the operating results of the Company's joint venture with Experian. NET INCOME Net income for the current quarter was $18.8 million, or $0.27 per diluted share, compared with net income of $1.0 million, or $0.02 per diluted share, for the same period of the prior year. 10 LIQUIDITY AND CAPITAL RESOURCES Total cash and cash equivalents decreased $35.1 million and $74.7 million for the three months ended March 31, 2001, and 2000, respectively. The decrease for the current year period was primarily due to capital expenditures and the repayment of debt. The decrease for the prior year period was primarily due to capital expenditures and repurchases of company shares. Notes and contracts payable as a percentage of total capitalization decreased to 15.9% at March 31, 2001, from 16.9% at December 31, 2000. The decrease was primarily due to an increase in total equity due primarily to net income and shares issued in connection with company acquisitions and employee benefit plans during the current period. In April 2001, the Company completed the sale of $210 million aggregate principal amount of its 4.5% senior convertible debentures due 2008. The debentures will be convertible into common stock of the Company at a conversion price of $28 per share. The proceeds from the sale are expected to be used for company acquisitions, the repayment of outstanding indebtedness, to buy out minority interests in existing subsidiaries and for general corporate purposes. See footnote 5 to the condensed consolidated financial statements for additional information. Management believes that all of its operational cash requirements for the immediate future will be met from internally generated funds and from the proceeds from the sale of the senior convertible debentures. 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, 2000. 11 Part II: Other Information ----------------- Item 6. Exhibits and Reports on Form 8-K. --------------------------------- (b) Reports on Form 8-K During the quarterly period covered by this report, the Company filed a report on Form 8-K dated January 31, 2001 (disclosing Agreement and Plan of Merger dated as of January 30, 2001, among The First American Corporation, Rusti Corp. and Credit Management Solutions, Inc.) and a report on Form 8-K dated February 20, 2001 (reporting on fourth quarter and full year 2000 earnings). Subsequent to such quarterly period, the Company filed reports on Form 8-K dated April 11, 2001 (announcing the Company's earnings expectation for the first quarter 2001); April 16, 2001 (reporting on the Company's plan to offer senior convertible debentures); May 7, 2001 (reporting on the Company's having reached agreements to sell its senior convertible debentures), May 8, 2001 (reporting on first quarter 2001 earnings), May 10, 2001 (reporting on an increase in the Company's quarterly cash dividends) and May 17, 2000 (reporting on deferral of the gain on the sale of its Contour Software subsidiary). 12