Prepared by R.R. Donnelley Financial -- Form 10-Q for Quarter End March 31, 2002

10-Q 1 d10q.htm FORM 10-Q FOR QUARTER END MARCH 31, 2002 Prepared by R.R. Donnelley Financial -- Form 10-Q for Quarter End March 31, 2002

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2002

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 or organization)		(I.R.S. Employer 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—71,455,978 shares as of May 8, 2002

INFORMATION INCLUDED IN REPORT

Part I:	FINANCIAL INFORMATION

Item 1.	Financial Statements
	A. Condensed Consolidated Balance Sheets	3
	B. Condensed Consolidated Statements of Income and Comprehensive Income	4
	C. Condensed Consolidated Statements of Cash Flows	5
	D. Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	12

Part II:	OTHER INFORMATION

Item 6.	Exhibits and Reports on Form 8-K	12
	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 13, 2002

Part I: Financial Information

Item 1: Financial Statements

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Balance Sheets

	March 31, 2002 (Unaudited)			December 31, 2001
Assets
Cash and cash equivalents	$	631,896,000		$	645,240,000

Accounts and accrued income receivable, net		295,190,000			273,090,000

Investments:
Deposits with savings and loan associations and banks		40,398,000			27,597,000
Debt securities		270,709,000			257,045,000
Equity securities		53,010,000			52,014,000
Other long-term investments		123,414,000			113,995,000

		487,531,000			450,651,000

Loans receivable, net		105,267,000			104,264,000

Property and equipment, at cost:
Land		43,468,000			43,018,000
Buildings		174,674,000			173,878,000
Furniture and equipment		250,230,000			237,354,000
Capitalized software		261,490,000			251,072,000

		729,862,000			705,322,000
Less—accumulated depreciation and amortization		(292,439,000	)		(269,237,000	)

		437,423,000			436,085,000

Title plants and other indexes		347,915,000			344,947,000

Deferred income taxes		23,445,000			22,221,000

Goodwill and other intangibles, net		470,767,000			432,823,000

Other assets		152,731,000			127,942,000

	$	2,952,165,000		$	2,837,263,000

Liabilities and Stockholders’ Equity
Demand deposits	$	92,018,000		$	91,285,000

Accounts payable and accrued liabilities		347,468,000			373,170,000

Deferred revenue		307,137,000			294,227,000

Reserve for known and incurred but not reported claims		325,355,000			314,777,000

Income taxes payable		28,888,000			13,342,000

Notes and contracts payable		425,014,000			415,341,000

Minority interests in consolidated subsidiaries		137,729,000			130,669,000

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—71,275,000 and 68,694,000 shares		71,275,000			68,694,000
Additional paid-in capital		317,363,000			271,403,000
Retained earnings		816,344,000			777,971,000
Accumulated other comprehensive loss		(16,426,000	)		(13,616,000	)

		1,188,556,000			1,104,452,000

	$	2,952,165,000		$	2,837,263,000

See notes to condensed consolidated financial statements.

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Income and Comprehensive Income

(Unaudited)

	For the Three Months Ended March 31
	2002			2001
Revenues
Operating revenues	$	1,024,119,000		$	750,184,000
Investment and other income		18,862,000			16,557,000

		1,042,981,000			766,741,000

Expenses
Salaries and other personnel costs		345,325,000			274,819,000
Premiums retained by agents		284,294,000			189,407,000
Other operating expenses		238,137,000			191,088,000
Provision for policy losses and other claims		47,099,000			36,490,000
Depreciation and amortization		24,148,000			24,433,000
Premium taxes		7,199,000			5,008,000
Interest		8,220,000			6,298,000

		954,422,000			727,543,000

Income before income taxes and minority interests		88,559,000			39,198,000
Income taxes		31,000,000			13,500,000

Income before minority interests		57,559,000			25,698,000
Minority interests		13,484,000			6,922,000

Net income		44,075,000			18,776,000

Other comprehensive loss, net of tax
Unrealized loss on securities		(535,000	)		(1,878,000	)
Minimum pension liability adjustment		(2,275,000	)		(200,000	)

		(2,810,000	)		(2,078,000	)

Comprehensive income	$	41,265,000		$	16,698,000

Net income per share (Note 2):
Basic	$	0.63		$	0.29

Diluted	$	0.57		$	0.27

Cash dividends per share	$	.07		$	.06

Weighted average number of shares (Note 2):
Basic		69,995,000			64,165,000

Diluted		80,985,000			68,797,000

See notes to condensed consolidated financial statements.

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	For the Three Months Ended March 31
	2002			2001
Cash flows from operating activities:
Net income	$	44,075,000		$	18,776,000
Adjustments to reconcile net income to cash provided by operating activities-
Provision for policy losses and other claims		47,099,000			36,490,000
Depreciation and amortization		24,148,000			24,433,000
Minority interests in net income		13,484,000			6,922,000
Other, net		(7,967,000	)		(608,000	)
Changes in assets and liabilities excluding effects of company acquisitions and noncash transactions-
Claims paid, net of recoveries		(36,500,000	)		(36,852,000	)
Net change in income tax accounts		14,591,000			28,205,000
Increase in accounts and accrued income receivable		(17,662,000	)		(38,706,000	)
Decrease in accounts payable and accrued liabilities		(17,862,000	)		(17,595,000	)
Increase (decrease) in deferred revenue		12,910,000			(874,000	)
Other, net		(20,783,000	)		(15,293,000	)

Cash provided by operating activities		55,533,000			4,898,000

Cash flows from investing activities:
Net cash effect of company acquisitions/dispositions		(11,257,000	)		2,282,000
Net increase in deposits with banks		(9,496,000	)		(5,197,000	)
Net increase in loans receivable		(1,003,000	)		(4,257,000	)
Purchases of debt and equity securities		(57,978,000	)		(6,677,000	)
Proceeds from sales of debt and equity securities		7,314,000			5,848,000
Proceeds from maturities of debt securities		36,274,000			9,083,000
Net decrease (increase) in other investments		2,392,000			(1,569,000	)
Capital expenditures		(20,662,000	)		(33,468,000	)
Purchases of capitalized data		(3,477,000	)		(3,125,000	)
Proceeds from sale of property and equipment		134,000			392,000

Cash used for investing activities		(57,759,000	)		(36,688,000	)

Cash flows from financing activities:
Net change in demand deposits		733,000			4,883,000
Proceeds from issuance of debt		677,000
Repayment of debt		(5,072,000	)		(9,426,000	)
Proceeds from exercise of stock options		3,406,000			6,168,000
Proceeds from the issuance of stock to employee benefit plans		1,264,000
Distributions to minority shareholders		(6,424,000	)		(1,001,000	)
Cash dividends		(5,702,000	)		(3,892,000	)

Cash used for financing activities		(11,118,000	)		(3,268,000	)

Net decrease in cash and cash equivalents		(13,344,000	)		(35,058,000	)
Cash and cash equivalents—Beginning of year		645,240,000			300,905,000

—End of first quarter	$	631,896,000		$	265,847,000

Supplemental information:
Cash paid during the first quarter for:
Interest	$	1,452,000		$	5,777,000
Premium taxes	$	9,127,000		$	4,368,000
Income taxes	$	16,146,000		$	656,000
Noncash investing and financing activities:
Shares issued for employee benefits plans	$	17,491,000		$	8,508,000
Liabilities incurred in connection with company acquisitions	$	8,827,000		$	12,516,000
Company acquisitions in exchange for common stock	$	26,380,000		$	4,768,000

See notes to condensed consolidated financial statements.

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, 2001.

Note 2—Earnings Per Share

	For the Three Months Ended March 31
	2002		2001
Numerator:
Net Income-numerator for basic net income per share	$	44,075,000	$	18,776,000
Effect of dilutive securities Convertible debt—interest expense (net of tax)		1,773,000		—

Net Income–numerator for dilutive net income per share	$	45,848,000	$	18,776,000

Denominator
Weighted average shares-denominator
For basic net income per share		69,995,000		64,165,000
Effect of dilutive securities:
Employee stock options		2,396,000		4,632,000
Convertible debt		8,594,000		—

Denominator for diluted net income per share		80,985,000		68,797,000

Basic net income per share	$	0.63	$	0.29

Diluted net income per share	$	0.57	$	0.27

For the three months ended March 31, 2002 and 2001, respectively, 3,818,000 and 42,000 stock options were excluded from the computation of diluted earnings per share due to their antidilutive effect.

Note 3—Business Combinations

During the three months ended March 31, 2002, the Company acquired six companies. These acquisitions were individually not material and 5 have been included in the Company’s title insurance segment and 1 has been included in the Company’s screening information segment. The aggregate purchase price was $26.4 million in stock, $11.1 million in cash and $11.2 million in notes payable.

Note 4—Segment Information

In order to expand the disclosure of the Company’s business segments and to report financial results in a manner consistent with the reporting responsibilities of the Company’s management, the Company established seven reporting segments that fall within two primary business groups, Financial Services and Information Technology. The Financial Services Group includes Title Insurance and Services, Specialty Insurance and Trust and Other Services. The Information Technology Group includes Mortgage Information, Property Information, Credit Information and Screening Information.

For the three months ended March 31, 2002:

	Revenues		Income before income taxes and minority interests			Depreciation and amortization		Capital expenditures
Financial Services
Title Insurance and Services	$	751,140,000	$	39,652,000		$	11,801,000	$	9,444,000
Specialty Insurances		31,568,000		5,682,000			293,000		509,000
Trust and Other Services		11,136,000		4,225,000			291,000		13,000

		793,844,000		49,559,000			12,385,000		9,966,000

Information Technology
Mortgage Information		112,880,000		34,833,000			2,136,000		1,832,000
Property Information		55,145,000		8,317,000			4,374,000		2,775,000
Credit Information		56,632,000		12,653,000			2,809,000		3,199,000
Screening Information		23,533,000		782,000			558,000		919,000

		248,190,000		56,585,000			9,877,000		8,725,000

		1,042,034,000		106,144,000			22,262,000		18,691,000

Corporate		947,000		(17,585,000	)		1,886,000		1,971,000

	$	1,042,981,000	$	88,559,000		$	24,148,000	$	20,662,000

For the three months ended March 31, 2001:

	Revenues		Income (loss) before income taxes and minority interests			Depreciation and amortization		Capital expenditures
Financial Services
Title Insurance and Services	$	532,372,000	$	18,866,000		$	10,615,000	$	13,210,000
Specialty Insurances		28,880,000		(488,000	)		657,000		926,000
Trust and Other Services		8,818,000		2,147,000			292,000		76,000

		570,070,000		20,525,000			11,564,000		14,212,000

Information Technology
Mortgage Information		89,688,000		20,996,000			2,888,000		6,711,000
Property Information		50,691,000		3,252,000			5,682,000		4,469,000
Credit Information		45,882,000		6,261,000			2,346,000		4,234,000
Screening Information		10,313,000		(165,000	)		388,000		1,090,000

		196,574,000		30,344,000			11,304,000		16,504,000

		766,644,000		50,869,000			22,868,000		30,716,000

Corporate		97,000		(11,671,000	)		1,565,000		2,752,000

	$	766,741,000	$	39,198,000		$	24,433,000	$	33,468,000

Note 5—New Accounting Pronouncements

On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 141, “Business Combinations” (SFAS 141). This statement addresses financial accounting and reporting for business combinations and supercedes Accounting Principles Board (APB) Opinion No. 16, “Business Combinations.” SFAS 141 requires that all business combinations be accounted for under the purchase method of accounting. The adoption of SFAS 141 did not have a material effect on the Company’s financial condition or results of operations.

On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). This statement addresses financial accounting and reporting for goodwill and other intangibles and supersedes APB Opinion No. 17, “Intangible Assets.” SFAS 142 addresses how goodwill and other intangible assets should be accounted for in the financial statements. Goodwill and other intangible assets that have indefinite lives will not be amortized but rather will be tested at least annually for impairment. Accordingly, the Company recorded no goodwill amortization expense for the three months ended March 31, 2002. Goodwill amortization expense for the three months ended March 31, 2001 was $3.6 million, or $0.05 per diluted share. The Company will test goodwill for impairment using the two-step process prescribed in SFAS 142. The first step is a screen for potential impairment, while the second step measures the amount of impairment, if any. The Company expects to perform the first of the required impairment tests of goodwill as of January 1, 2002 by the end of the second quarter of 2002. Any impairment charge resulting from the transitional impairment test will be reflected as the cumulative effect of a change in accounting principle. The Company is in the process of assessing the impact of the impairment provisions of SFAS 142 on its financial condition and results of operations.

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 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, 2001, 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

OVERVIEW

During the first quarter of 2002, refinance transactions, although down from the record-setting volumes experienced in 2001, continued at a healthy level. This, coupled with seasonally high levels of new home sales and resale activity, as well as the high inventory of title insurance open orders present at the beginning of the quarter, resulted in net income for the first quarter of 2002 of $44.1 million, the highest first quarter net income in the Company’s history, or $0.57 per diluted share. This compares with net income for the first quarter of 2001 of $18.8 million, or $0.27 per diluted share.

OPERATING REVENUES

A summary by segment of the Company’s operating revenues is as follows:

	Three Months Ended March 31
	2002		%	2001		%
	(in thousands, except percent)
Financial Services:
Title Insurance:
Direct operations	$	387,174	38	$	289,270	39
Agency operations		356,797	35		234,254	31

		743,971	73		523,524	70
Specialty Insurance		29,312	3		26,755	4
Trust and Other Services		11,156	1		8,994	1

		784,439	77		559,273	75

Information Technology:
Mortgage Information		108,130	11		85,641	11
Property Information		55,110	5		50,501	7
Credit Information		52,999	5		44,509	6
Screening Information		23,441	2		10,260	1

		239,680	23		190,911	25

Total Operating Revenues	$	1,024,119	100	$	750,184	100

Financial Services. Operating revenues from direct title operations increased 33.8% 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, offset in part by a decrease in the average revenues per order closed. The Company’s direct operations closed 393,000 title orders during the current quarter, an increase of 45.5% when compared with 270,100 title orders closed during the same period of the prior year. This increase was primarily due to the factors mentioned in the “Overview” section. The average revenues per order closed were $985 for the current three-month period, as compared with $1,071 for the same period of the prior year. This decrease was primarily due to the heavy mix of refinance orders, offset in part by appreciating residential real estate values. Operating revenues from agency operations increased 52.3% when compared with the same period of the prior year. This increase was primarily due to the same conditions that affected direct operations, compounded by the time lag in the reporting of agency remittances. Specialty insurance operating revenues increased 9.6% when compared with the same period of the prior year. This increase was primarily due to geographic expansion at the Company’s home warranty division and market share growth at the property and casualty insurance division. Trust and other services operating revenues increased 24.0% when compared with the same period of the prior year. This increase was primarily due to an increase in investment advisory and trust fees.

Information Technology. Operating revenues for the Company’s mortgage information and property information segments increased 26.3% and 9.1%, respectively, when compared with the first quarter of 2001. Included in mortgage information operating revenues were $11.9 million of revenues contributed by new acquisitions. Excluding the affects of new acquisitions, the increase for the mortgage information segment was 12.3%. The increases in operating revenues for the mortgage and property information segments were primarily due to the same factors affecting the title insurance segment mentioned above. Credit information operating revenues increased 19.1% when compared with the same period of the prior year. This increase included $5.4 million of operating revenues contributed by new acquisitions. Excluding the affects of the new acquisitions, credit information operating revenues increased 6.9%. This increase was primarily due to the growth in demand for credit information in the housing and automobile sectors. Operating revenues for the screening information segment increased 128.5% when compared with the same period of the prior year. This increase was primarily due to $13.2 million of operating revenues contributed by new acquisitions.

INVESTMENT AND OTHER INCOME

Investment and other income totaled $18.9 million, an increase of $2.3 million when compared with $16.6 million for the first quarter 2001. This increase was primarily due to increased equity in earnings of $4.1 million from the Company’s affiliated companies and increased realized gains of $1.5 million, offset in part by a $3.3 million reduction in interest income as a result of decreasing yields.

TOTAL OPERATING EXPENSES

Financial Services. Salaries and other personnel costs for the Financial Services group, which primarily reflects the title insurance segment, totaled $255.2 million for the current quarter, an increase of $56.5 million, or 28.5% when compared with the same period of the prior year. This increase was primarily attributable to an increase in title insurance staff costs in the production area, caused primarily by the 22.5% increase in total title order volume, increased commissions associated with the 45.5% increase in closed title orders, and $3.2 million of personnel costs associated with new acquisitions. Title insurance personnel costs as a percentage of net operating revenues were 53.0% for the current quarter and 56.3% for the same period of the prior year.

Agents retained $284.3 million, or 79.7%, and $189.4 million, or 80.1%, of the title premiums generated by agency operations for the first quarter 2002 and 2001, 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 for the Financial Services group, which primarily reflect the title insurance segment, were $139.6 million for the current quarter, an increase of $29.4 million, or 26.7% when compared with the same period of the prior year. This increase was primarily due to incremental costs incurred at the title insurance segment to service the increase in title orders processed. Other operating expenses for the title insurance segment as a percentage of net operating revenues were 29.2% for the current quarter and 30.0% for the same quarter of the prior year.

The provision for policy losses and other claims primarily represents title insurance claims and home warranty claims. For the title insurance segment, the claims provision as a percentage of title insurance operating revenues was 4.0% for the current period and 3.7% for the same period of the prior year. This increase reflected adverse claims development, offset in part by the shift in current quarter revenue mix from resale to refinance, which is generally less claims intensive. The rate of 4.0% for the current quarter is consistent with the rate applied for the full year of 2001. For the home warranty segment, the claims provision as a percentage of home warranty operating revenues was 47.5% for the current quarter and 56.2% for the same period of the prior year. This decrease was primarily due to a reduction in the average number of claims per contract, which was primarily due to the elimination of higher-cost vendor contractors that were servicing claims in new geographic areas.

Premium taxes, which relate to the title insurance and specialty insurance segments, were $7.2 million for the current quarter and $5.0 million for the same quarter of the prior year. Expressed as a percentage of title insurance and specialty insurance operating revenues, premium taxes were 0.9% for the current year first quarter and for the same quarter of the prior year.

Information Technology. The majority of the businesses that comprise the Information Technology group are database intensive with a high proportion of fixed costs. As such, business volume fluctuations generally have a significantly greater impact on revenues than on operating expenses.

Mortgage information personnel and other operating expenses were $73.3 million, an increase of $10.4 million, or 16.6% when compared with the same period of the prior year. Excluding acquisitions, mortgage information personnel and other operating expenses decreased $2.1 million, or 3.4%. This decrease was primarily due to the benefits derived from the restructuring of the Company’s field service operations as well as other cost-containment measures, offset in part by costs incurred to service the increase in business volume. Property information personnel and other operating expenses were $42.3 million, an increase of $0.9 million, or 2.2% when compared with the same period of the prior year. This increase was primarily due to certain costs incurred servicing the increase in business volume. Credit information personnel and other operating expenses increased $4.4 million, or 12.0% when compared with the same period of the prior year. Excluding acquisitions, credit information personnel and other operating expenses decreased $0.7 million, or 1.9%. This decrease was primarily attributable to cost-containment programs. Personnel and other operating expenses at the Company’s screening information segment were $21.9 million, an increase of $11.9 million, or 118.4% when compared with the same period of the prior year. This increase was primarily attributable to personnel and other operating expenses associated with new acquisitions.

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

	2002			%	2001			%
	(in thousands, except percent)
Financial Services:
Title Insurance	$	39,652		37	$	18,866		37
Specialty Insurance		5,682		5		(488	)	(1	)
Trust and Other Services		4,225		4		2,147		4

		49,559		46		20,525		40

Information Technology:
Mortgage Information		34,833		33		20,996		41
Credit Information		8,317		8		3,252		7
Property Information		12,653		12		6,261		12
Screening Information		782		1		(165	)	—

		56,585		54		30,344		60

Total before corporate		106,144		100		50,869		100

Corporate		(17,585	)			(11,671	)

Total	$	88,559			$	39,198

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. 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 Most of the businesses included in the Information Technology group are database intensive, with a relatively high proportion of fixed costs. As such, profit margins generally improve as revenues increase. Revenues for the mortgage and property information segments, like the title insurance segment, are primarily dependent on the level of real estate activity and the cost and availability of mortgage funds. Revenues for the credit information segment are in part impacted by real estate activity, but also by the consumer and automobile sectors. Corporate expenses increased $5.9 million when compared with the same period of the prior year. This increase was primarily due to a $2.4 million increase in interest expense due primarily to the issuance of the Company’s $210.0 million 4.5% senior convertible debentures in April 2001 and a $2.0 million increase in certain employee benefit plan costs.

INCOME TAXES

The Company’s effective income tax rate (income tax expense as a percentage of pretax income after minority interest expense) was 41.3% for the current quarter and 41.8% 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 majority 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 $13.5 million and $6.9 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 three months ended March 31, 2002, was $44.1 million, or $0.57 per diluted share. Net income for the three months ended March 31, 2001 was $18.8 million, or $0.27 per diluted share.

LIQUIDITY AND CAPITAL RESOURCES

Total cash and cash equivalents decreased $13.3 million and $35.1 million for the three months ended March 31, 2002, and 2001, respectively. The decrease for the current year period was primarily due to capital expenditures, net purchases of debt and equity securities and the net cash effect of company acquisitions, offset in part by cash provided by operating activities. The decrease for the prior year period was primarily due to capital expenditures and debt repayments.

Notes and contracts payable as a percentage of total capitalization decreased to 23.2% at March 31, 2001, from 23.7% at December 31, 2001. 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.

Management believes that all of its operational 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 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, 2001.

Part II: Other Information

Item 6.

Exhibits and Reports on Form 8-K.

(a)

Exhibits

None.

(b)

Reports on Form 8-K

During the quarterly period covered by this report, the Company filed a report on Form 8-K dated February 13, 2002 (reporting on fourth quarter and full year 2001 earnings). Subsequent to such quarterly period, the Company filed a report on Form 8-K dated April 25, 2002 (reporting on first quarter 2002 earnings and expansion of business segment data).