10-K 1 d10k.htm 10-K YEAR ENDED 12-31-2004 10-K Year ended 12-31-2004
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2004

 

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 001-13585

 


 

LOGO

(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

 


 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Common   New York Stock Exchange

Rights to Purchase Series A Junior

Participating Preferred

  New York Stock Exchange
(Title of each class)   (Name of each exchange on which registered)

 

Securities registered pursuant to Section 12(g) of the Act:

None

 


 

Indicate by check mark whether 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  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R. § 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 

Indicate by check mark if the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨

 

The aggregate market value of voting stock held by non-affiliates of the Registrant as of June 30, 2004 was $2,208,646,893.

 

On March 14, 2005, there were 92,850,176 shares of Common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive proxy statement with respect to the 2005 annual meeting of the shareholders are incorporated by reference in Part III of this report. The definitive proxy statement will be filed no later than 120 days after the close of Registrant’s fiscal year.

 



Table of Contents

PART I

 

CERTAIN STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K, INCLUDING THOSE RELATING TO INCREASES IN THE COMPANY’S SHARE OF THE TITLE INSURANCE MARKET, THE COMPANY’S COMMERCIAL SALES PROGRAM, INTERNATIONAL SALES EFFORTS, ADEQUACY OF ALLOWANCE FOR LOAN LOSSES, CORPORATE OFFICE EXPANSION, LITIGATION, DIVIDENDS, FUNDING FOR CORPORATE OFFICE EXPANSION, REGULATORY RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES AVAILABLE TO THE COMPANY, CASH REQUIREMENTS AND FUNDING FOR NON-QUALIFIED SUPPLEMENTAL BENEFIT PLANS ARE FORWARD LOOKING. RISKS AND UNCERTAINTIES EXIST THAT 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; LIMITATIONS ON ACCESS TO PUBLIC RECORDS AND OTHER DATA; GENERAL VOLATILITY IN THE CAPITAL MARKETS; CHANGES IN APPLICABLE GOVERNMENT REGULATIONS; CONSOLIDATION AMONG THE COMPANY’S SIGNIFICANT CUSTOMERS AND COMPETITORS; 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 THIS ANNUAL REPORT ON FORM 10-K. 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.

 

Item 1.    Business

 

The Company

 

The First American Corporation was founded in 1894 as Orange County Title Company, succeeding to the business of two title abstract companies founded in 1889 and operating in Orange County, California. In 1924, the Company began issuing title insurance policies. In 1986, the Company began a diversification program which involved the acquisition and development of business information companies closely related to the real estate transfer and closing process. Twelve years later, the Company expanded its diversification program to include business information products and services outside of the real estate transfer and closing process. The Company is a California corporation and has its executive offices at 1 First American Way, Santa Ana, California 92707-5913. The Company’s telephone number is (714) 800-3000.

 

General

 

The First American Corporation, through its subsidiaries, is engaged in the business of providing business information and related products and services. The Company has six reporting segments that fall within two primary business groups, financial services and information technology. The financial services group includes the Company’s title insurance and services segment and its specialty insurance segment. The title insurance and services segment issues residential and commercial title insurance policies, accommodates tax-deferred exchanges and provides escrow, equity loan, investment advisory, trust, thrift and other related products and services. The specialty insurance segment issues property and casualty insurance policies and sells home warranty products. The Company’s mortgage information, property information, credit information and screening information segments comprise its information technology group. The mortgage information segment offers tax monitoring, flood zone certification, default management services, document preparation and other real estate related services. The property information segment sells data relating to real property, database management services and appraisal services. In addition to providing specialty credit reports to the mortgage lending and automotive lending industries, the credit information segment includes a credit reporting agency which offers credit reports on sub-prime borrowers. The screening information segment provides employment

 

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background screening, drug-free workplace programs and other occupational health services, employee assistance programs, corporate tax and incentive services, resident screening, motor vehicle records, transportation business credit services, investigative services, computer forensics and electronic discovery services, supply chain security and consumer location services. Financial information regarding each of the Company’s business segments is included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data” of Part II of this report.

 

The Company believes that it holds the number one market share position for many of its products and services, including flood zone determinations, based on the number of flood zone certification reports issued; tax monitoring services, based on the number of loans under service; credit reporting services to the mortgage industry, based on the number of credit reports issued; credit reporting services to the automotive lending industry, based on the number of credit reports issued; property data services, based on the number of inquiries; automated appraisals, based on the number of reports sold; and resident screening, based on the number of reports issued. The Company also believes that it holds the number two market share position for title insurance, based on operating revenues; home warranty services, based on the number of home warranty contracts in effect; default management services, based on the number of foreclosure/bankruptcy cases reported; and drug testing administration, based on the number of reports issued.

 

Substantially all of the revenues for the Company’s title insurance and services and mortgage information segments result from resales and refinancings of residential real estate and, to a lesser extent, from commercial transactions and the construction and sale of new housing. Over one-half of the revenues in the Company’s property information and credit information segments also depend on real estate activity. The remaining portion of the property information and credit information revenues, as well as the revenues for the Company’s specialty insurance and screening information segments are isolated from the volatility of real estate transactions. Real estate activity is cyclical in nature and is affected greatly by the cost and availability of long-term mortgage funds. Real estate activity and, in turn, a large portion of the Company’s revenue base, can be adversely affected during periods of high interest rates and/or limited money supply. However, this adverse effect is mitigated in part by the continuing diversification of the Company’s operations into areas outside of the traditional real estate transfer and closing process.

 

The Financial Services Group

 

Title Insurance and Services Segment

 

The title insurance and services segment’s principal product is policies of title insurance on residential and commercial property. This segment also provides tax-deferred exchange, escrow, equity loan, investment advisory, trust, thrift and other related products and services.

 

Overview of Title Insurance Industry

 

Title to, and the priority of interests in, real estate are determined in accordance with applicable laws. In most real estate transactions, mortgage lenders and purchasers of real estate desire to be protected from loss or damage in the event that title is not as represented. In most parts of the United States, title insurance has become accepted as the most efficient means of providing such protection.

 

Title Policies.    Title insurance policies insure the interests of owners and lenders against defects in the title to real property. These defects include adverse ownership claims, liens, encumbrances or other matters affecting such title which existed at the time a title insurance policy was issued and which were not excluded from coverage. Title insurance policies are issued on the basis of a title report, which is prepared after a search of the public records, maps, documents and prior title policies to ascertain the existence of easements, restrictions, rights of way, conditions, encumbrances or other matters affecting the title to, or use of, real property. In certain

 

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instances, a visual inspection of the property is also made. To facilitate the preparation of title reports, copies of public records, maps, documents and prior title policies may be compiled and indexed to specific properties in an area. This compilation is known as a “title plant.”

 

The beneficiaries of title insurance policies are generally real estate buyers and mortgage lenders. A title insurance policy indemnifies the named insured and certain successors in interest against title defects, liens and encumbrances existing as of the date of the policy and not specifically excepted from its provisions. The policy typically provides coverage for the real property mortgage lender in the amount of its outstanding mortgage loan balance and for the buyer in the amount of the purchase price of the property. In some cases the policy might provide insurance in a greater amount where the buyer anticipates constructing improvements on the property. Coverage under a title insurance policy issued to a real property mortgage lender generally terminates upon the sale of the insured property unless the owner carries back a mortgage or makes certain warranties as to the title.

 

Before issuing title policies, title insurers seek to limit their risk of loss by accurately performing title searches and examinations. The major expenses of a title company relate to such searches and examinations, the preparation of preliminary reports or commitments and the maintenance of title plants, and not from claim losses as in the case of property and casualty insurers.

 

The Closing Process.    Title insurance is essential to the real estate closing process in most transactions involving real property mortgage lenders. In a typical residential real estate sale transaction, a real estate broker, lawyer, developer, lender or closer involved in the transaction orders title insurance on behalf of an insured. Once the order has been placed, a title insurance company or an agent conducts a title search to determine the current status of the title to the property. When the search is complete, the title company or agent prepares, issues and circulates a commitment or preliminary title report to the parties to the transaction. The commitment summarizes the current status of the title to the property, identifies the conditions, exceptions and/or limitations that the title insurer intends to attach to the policy and identifies items appearing on the title that must be eliminated prior to closing.

 

The closing function, sometimes called an escrow in western states, is often performed by a lawyer, an escrow company or a title insurance company or agent, generally referred to as a “closer”. Once documentation has been prepared and signed, and mortgage lender payoff demands are in hand, the transaction is “closed.” The closer records the appropriate title documents and arranges the transfer of funds to pay off prior loans and extinguish the liens securing such loans. Title policies are then issued insuring the priority of the mortgage of the real property mortgage lender in the amount of its mortgage loan and the buyer in the amount of the purchase price. The time lag between the opening of the title order and the issuance of the title policy is usually between 30 and 90 days. The seller and the buyer bear the risk of loss during this time lag. Any matter affecting title which is discovered during this period would have to be dealt with to the title insurers’ satisfaction or the insurer would exclude the matter from the coverage afforded by the title policy. Before a closing takes place, however, the closer would request that the title insurer provide an update to the commitment to discover any adverse matters affecting title and, if any are found, would work with the seller to eliminate them so that the title insurer would issue the title policy subject only to those exceptions to coverage which are acceptable to the buyer and the buyer’s lender.

 

Issuing the Policy: Direct vs. Agency.    A title policy can be issued directly by a title insurer or indirectly on behalf of a title insurer through agents which are not themselves licensed as insurers. Where the policy is issued by a title insurer, the search is performed by or at the direction of the title insurer, and the premium is collected and retained by the title insurer. Where the policy is issued by an agent, the agent performs the search, examines the title, collects the premium and retains a portion of the premium. The agent remits the remainder of the premium to the title insurer as compensation for bearing risk of loss in the event a claim is made under the policy. The percentage of the premium retained by an agent varies from region to region. A title insurer is obligated to pay title claims in accordance with the terms of its policies, regardless of whether it issues its policy directly or indirectly through an agent.

 

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Premiums.    The premium for title insurance is due and earned in full when the real estate transaction is closed. Premiums are generally calculated with reference to the policy amount. The premium charged by a title insurer or an agent is subject to regulation in most areas. Such regulations vary from state to state.

 

The Company’s Title Insurance Operations

 

Overview.    The Company, through First American Title Insurance Company and its affiliates, transacts the business of title insurance through a network of direct operations and agents. Through this network, the Company issues policies in all states (except Iowa) and the District of Columbia. In Iowa, the Company provides abstracts of title only, because title insurance is not permitted by law. The Company also offers title services in Guam, Puerto Rico, the U.S. Virgin Islands, the Bahamas, Australia, Canada, Hong Kong, Ireland, Mexico, New Zealand, South Korea, the United Kingdom and other territories and countries.

 

The Company plans to continue increasing its share of the title insurance market through strategic acquisitions and further development of its existing branch office and agency operations. The Company also continues to focus on expanding its share of the higher margin title insurance business conducted in connection with commercial transactions. The Company believes its national commercial market share has grown through programs directed at major developers, lenders and law firms.

 

Sales and Marketing.    The Company markets its title insurance services to a broad range of customers. The Company believes that its primary source of business is referrals from persons in the real estate community, such as independent escrow companies, real estate agents and brokers, developers, mortgage brokers, mortgage bankers, financial institutions and attorneys. In addition to the referral market, the Company markets its title insurance services directly to large corporate customers and mortgage lenders. As title agents contribute a large portion of the Company’s revenues, the Company also markets its title insurance services to independent agents. The Company’s marketing efforts emphasize the quality and timeliness of its services, process innovation and its national presence.

 

While virtually all personnel in the Company’s title insurance business assist in marketing efforts, the Company maintains a sales force of more than 1,000 persons dedicated solely to marketing. This sales force, which is located throughout the Company’s branch office network, not only markets the Company’s title insurance services, but also certain of the Company’s other products. The Company provides its sales personnel with training in selling techniques, and each branch manager is responsible for hiring the sales staff and ensuring that sales personnel under his or her supervision are properly trained. In addition to this sales force, the Company has approximately 60 salespeople in its national commercial services division. One of the responsibilities of the sales personnel of this division is the coordination of marketing efforts directed at large real estate lenders and companies developing, selling, buying or brokering properties on a multi-state basis. The Company also supplements the efforts of its sales force through general advertising in various trade and professional journals.

 

The Company’s increased commercial sales effort has enabled the Company to expand its commercial business base. Because commercial transactions involve higher coverage amounts and yield higher premiums, commercial title insurance business generates greater profit margins than does residential title insurance business. Accordingly, the Company plans to continue to emphasize its commercial sales program.

 

Although sales outside of the United States account for a small percentage of the Company’s revenues, the Company believes that the acceptance of title insurance in foreign markets has increased in recent years. Accordingly, the Company plans to continue its international sales efforts, particularly in Canada, the United Kingdom and Australia.

 

Underwriting.    Before a title insurance policy is issued, a number of underwriting decisions are made. For example, matters of record revealed during the title search may require a determination as to whether an exception should be taken in the policy. The Company believes that it is important for the underwriting function

 

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to operate efficiently and effectively at all decision making levels so that transactions may proceed in a timely manner. To perform this function, the Company has underwriters at the branch level, the regional level and the national level.

 

Agency Operations.    The relationship between the Company and each agent is governed by an agency agreement which states the conditions under which the agent is authorized to issue title insurance policies on behalf of the Company. The agency agreement also prescribes the circumstances under which the agent may be liable to the Company if a policy loss is attributable to error of the agent. Such agency agreements typically have a term of one to five years and are terminable immediately for cause.

 

Due to the high incidence of agency fraud in the title insurance industry during the late 1980s, the Company instituted measures to strengthen its agent selection and audit programs. In determining whether to engage an independent agent, the Company investigates the agent’s experience, background, financial condition and past performance. The Company maintains loss experience records for each agent and conducts periodic audits of its agents. The Company also maintains a large number of agent representatives and agent auditors. Agent representatives periodically visit agents and examine their books and records. In addition to periodic audits, a full agent audit will be triggered if certain “warning signs” are evident. Warning signs that can trigger an audit include the failure to implement Company-required accounting controls, shortages of escrow funds and failure to remit underwriting fees on a timely basis.

 

Title Plants.    The Company’s network of title plants constitutes one of its principal assets. A title search is conducted by searching the public records or utilizing a title plant. While public records are indexed by reference to the names of the parties to a given recorded document, most title plants arrange their records on a geographic basis. Because of this difference title plant records generally are easier to search. Most title plants also index prior policies, adding to searching efficiency. Many title plants are computerized. Certain offices of the Company utilize jointly owned plants or utilize a plant under a joint user agreement with other title companies. The Company believes its title plants, whether wholly or partially owned or utilized under a joint user agreement, are among the best in the industry.

 

The Company has significantly enhanced its investment in title plants through three business combinations. The first was the formation of a joint venture with Experian Information Solutions on January 1, 1998. Experian contributed to the joint venture its real estate information division. In June 1998 the Company acquired Data Tree Corporation, which owns the largest database of real estate document images. In July 2000 the Company and LandAmerica Financial Group formed Data Trace Information Services, LLC. This business, which is 80% owned by the Company and 20% owned by LandAmerica, is a provider of comprehensive title information delivery systems.

 

The Company’s title plants are carried on its balance sheet at original cost, which includes the cost of producing or acquiring interests in title plants or the appraised value of subsidiaries’ title plants at dates of acquisition for companies accounted for as purchases. Thereafter, the cost of daily maintenance of these plants is charged to expense as incurred. A properly maintained title plant has an indefinite life and does not diminish in value with the passage of time. Therefore, in accordance with generally accepted accounting principles, no provision is made for depreciation of these plants. Since each document must be reviewed and indexed into the title plant, such maintenance activities constitute a significant item of expense. The Company is able to offset title plant maintenance costs at its plants through joint ownership and access agreements with other title insurers and title agents.

 

Reserves for Claims and Losses.    The Company provides for title insurance losses based upon its historical experience and other factors by a charge to expense when the related premium revenue is recognized. The resulting reserve for known claims and incurred but not reported claims reflects management’s best estimate of the total costs required to settle all claims reported to the Company and claims incurred but not reported, and is considered by the Company to be adequate for such purpose.

 

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In settling claims, the Company occasionally purchases and ultimately sells the interest of the insured in the real property or the interest of the claimant adverse to the insured. These assets, which totaled $40.1 million at December 31, 2004, are carried at the lower of cost or fair value, less costs to sell, and are included in “Other assets” in the Company’s consolidated balance sheets.

 

Reinsurance and Coinsurance.    The Company assumes and distributes large title insurance risks through mechanisms of reinsurance and coinsurance. In reinsurance agreements, in exchange for a portion of the premium, the reinsurer accepts that part of the risk which the primary insurer cedes to the reinsurer over and above the portion retained by the primary insurer. The primary insurer, however, remains liable for the total risk in the event that the reinsurer does not meet its obligation. As a general rule, the Company does not retain more than $40.0 million of primary risk on any single policy, though the Company may retain primary risk above $40.0 million on a case-by-case basis. Under coinsurance agreements, each coinsurer is jointly and severally liable for the risk insured, or for so much thereof as is agreed to by the parties. The Company’s reinsurance activities account for less than 1.0% of its total title insurance operating revenues.

 

Competition.    The title insurance business is highly competitive. The number of competing companies and the size of such companies vary in the different areas in which the Company conducts business. Generally, in areas of major real estate activity, such as metropolitan and suburban localities, the Company competes with many other title insurers. Thirty-four title insurance underwriters, for example, are members of the American Land Title Association, the title insurance industry’s national trade association. The Company’s major nationwide competitors in its principal markets include Fidelity National Title Insurance Company, LandAmerica, Stewart Title Guaranty Company and Old Republic Title Insurance Group. In addition to these nationwide competitors, numerous agency operations throughout the country provide aggressive competition on the local level.

 

The Company believes that competition for title insurance business is based primarily on the quality and timeliness of service, because parties to real estate transactions are usually concerned with time schedules and costs associated with delays in closing transactions. In those states where prices are not established by regulatory authorities, the price of title insurance policies is also an important competitive factor. The Company believes that it provides quality service in a timely manner at competitive prices.

 

Trust, Thrift and Investment Advisory Services.    Since 1960, the Company has conducted a general trust business in California, acting as trustee when so appointed pursuant to court order or private agreement. In 1985, the Company formed a banking subsidiary into which its subsidiary trust operation was merged. During August 1999, this subsidiary converted from a state-chartered bank to a federal savings bank. As of December 31, 2004, the trust operation was administering fiduciary and custodial assets having a market value in excess of $2.9 billion. The trust operation also offers investment advisory services.

 

During 1988, the Company, through a majority-owned subsidiary, acquired an industrial bank, formerly known as an industrial loan corporation, that accepts thrift deposits and uses deposited funds to originate and purchase loans secured by commercial properties primarily in Southern California. As of December 31, 2004, this Thrift had approximately $62.5 million of demand deposits and $101.3 million of loans outstanding.

 

Loans made or acquired during the current year by the Thrift ranged in amount from $15 thousand to $3.1 million. The average loan balance outstanding at December 31, 2004, was $0.5 million. Loans are made only on a secured basis, at loan-to-value percentages no greater than 75.0%.

 

The Thrift specializes in making commercial real estate loans. In excess of 99.5% of the Thrift’s loans are made on a variable rate basis. The average yield on the Thrift’s loan portfolio as of December 31, 2004, was 7.04%. A number of factors are included in the determination of average yield, principal among which are loan fees and closing points amortized to income, prepayment penalties recorded as income, and amortization of discounts on purchased loans. The Thrift’s primary competitors in the Southern California commercial market

 

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are local community banks, other thrift and loan companies and, to a lesser extent, commercial banks. The Thrift’s average loan is approximately 14.0 years in duration.

 

The performance of the Thrift’s loan portfolio is evaluated on an ongoing basis by management of the Thrift. The Thrift places a loan on non-accrual status when two payments become past due. When a loan is placed on non-accrual status, the Thrift’s general policy is to reverse from income previously accrued but unpaid interest. Income on such loans is subsequently recognized only to the extent that cash is received and future collection of principal is probable.

 

The following table sets forth the amount of the Thrift’s non-performing assets as of the dates indicated:

 

     Year Ended December 31

     2004

   2003

   2002

   2001

   2000

     (in thousands)

Nonperforming Assets:

                                  

Loans accounted for on a nonaccrual basis

   $ —      $ 53    $ 65    $ 94    $ 89
    

  

  

  

  

Total

   $ —      $ 53    $ 65    $ 94    $ 89
    

  

  

  

  

 

Based on a variety of factors concerning the creditworthiness of its borrowers, the Thrift determined that it had no potential problem loans in existence as of December 31, 2004.

 

The Thrift’s allowance for loan losses is established through charges to earnings in the form of provision for loan losses. Loan losses are charged to, and recoveries are credited to, the allowance for loan losses. The provision for loan losses is determined after considering various factors, such as loan loss experience, maturity of the portfolio, size of the portfolio, borrower credit history, the existing allowance for loan losses, current charges and recoveries to the allowance for loan losses, the overall quality of the loan portfolio, and current economic conditions, as determined by management of the Thrift, regulatory agencies and independent credit review specialists. While many of these factors are essentially a matter of judgment and may not be reduced to a mathematical formula, the Company believes that, in light of the collateral securing its loan portfolio, the Thrift’s current allowance for loan losses is an adequate allowance against foreseeable losses.

 

The following table provides certain information with respect to the Thrift’s allowance for loan losses as well as charge-off and recovery activity.

 

     Year Ended December 31

 
     2004

    2003

    2002

    2001

    2000

 
     (in thousands, except percentages)  

Allowance for Loan Losses:

                                        

Balance at beginning of year

   $ 1,290     $ 1,170     $ 1,050     $ 1,020     $ 905  
    


 


 


 


 


Charge-offs:

                                        

Real estate—mortgage

     —         —         —         (140 )     —    

Assigned lease payments

     —         —         (3 )     (2 )     (2 )
    


 


 


 


 


       —         —         (3 )     (142 )     (2 )
    


 


 


 


 


Recoveries:

                                        

Real estate—mortgage

     —         —         —         —         9  

Assigned lease payments

     —         —         —         —         —    
    


 


 


 


 


       —         —         —         —         9  
    


 


 


 


 


Net (charge-offs) recoveries

     —         —         (3 )     (142 )     7  

Provision for losses

     60       120       123       172       108  
    


 


 


 


 


Balance at end of year

   $ 1,350     $ 1,290     $ 1,170     $ 1,050     $ 1,020  
    


 


 


 


 


Ratio of net charge-offs during the year to average loans outstanding during the year

     00 %     00 %     00 %     14 %     (.01 )%
    


 


 


 


 


 

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The adequacy of the Thrift’s allowance for loan losses is based on formula allocations and specific allocations. Formula allocations are made on a percentage basis, which is dependent on the underlying collateral, the type of loan and general economic conditions. Specific allocations are made as problem or potential problem loans are identified and are based upon an evaluation by the Thrift’s management of the status of such loans. Specific allocations may be revised from time to time as the status of problem or potential problem loans changes.

 

The following table shows the allocation of the Thrift’s allowance for loan losses and the percent of loans in each category to total loans at the dates indicated.

 

    Year Ended December 31

    2004

  2003

  2002

  2001

  2000

    Allowance

  % of
Loans


  Allowance

  % of
Loans


  Allowance

  % of
Loans


  Allowance

  % of
Loans


  Allowance

  % of
Loans


    (in thousands, except percentages)

Loan Categories:

                                                 

Real estate-mortgage

  $ 1,349   100   $ 1,289   100   $ 1,159   100   $ 1,036   100   $ 1,002   100

Other

    1   —       1   —       11   —       14   —       18   —  
   

 
 

 
 

 
 

 
 

 
    $ 1,350   100   $ 1,290   100   $ 1,170   100   $ 1,050   100   $ 1,020   100
   

 
 

 
 

 
 

 
 

 

 

Prior to January 2004 the Company’s trust, thrift and investment advisory companies made up its Trust and Other Services segment. In January 2004, the Company combined this segment with its Title Insurance and Services segment to better reflect the interaction within these businesses. This presentation is consistent with the way the operations of these businesses are evaluated by the Company’s management.

 

Specialty Insurance Segment

 

Home Warranties.    The Company’s home warranty business commenced operations in 1984, in part with the proceeds of a $1.5 million loan from the Company which was, in 1986, converted to a majority equity interest. The Company’s home warranty business issues one-year warranties that protect homeowners against defects in household systems and appliances, such as plumbing, water heaters and furnaces. The Company’s home warranty subsidiary currently charges approximately $245 to $420 for its basic home warranty contract. Optional coverage is available for air conditioners, pools, spas, washers, dryers, refrigerators and other items for charges ranging from approximately $25 to $160 per year. Coverage is renewable annually at the option of the homeowner upon approval by the home warranty subsidiary. Fees for the warranties are paid at the closing of the home purchase and are recognized monthly over a 12-month period. Home warranties primarily are marketed through real estate brokers and agents. This business has continually expanded nationally and is currently doing business in 45 states.

 

Property and Casualty Insurance.    The Company offers property and casualty insurance through its subsidiaries First American Property and Casualty Insurance Company and First American Specialty Insurance Company. First American Property and Casualty Insurance Company primarily conducts its business utilizing the Company’s distribution channels, allowing for cross selling through existing closing-service activities. First American Specialty Insurance Company conducts its business utilizing a network of brokers.

 

The Information Technology Group

 

Mortgage Information Segment

 

The mortgage information segment provides tax monitoring, flood zone certification, default management services, document preparation services and other real estate related services.

 

Tax Monitoring.    The Company’s tax monitoring service, established in 1987, advises real property mortgage lenders of the status of property tax payments due on real estate securing their loans. With the acquisition of Transamerica Finance Corporation’s tax monitoring business in October 2003, the Company believes that it became the largest provider of tax monitoring services in the United States.

 

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Under a typical contract the Company, on behalf of a mortgage lender, monitors the real estate taxes owing on properties securing such lender’s mortgage loans for the life of such loans. In general, providers of tax monitoring services, such as the Company’s tax service, indemnify mortgage lenders against losses resulting from a failure to monitor delinquent taxes. Where a mortgage lender requires that tax payments be impounded on behalf of borrowers, the Company may be required to monitor and oversee the transfer of these monies to the taxing authorities and provide confirmation to lenders that such taxes have been paid.

 

The Company recognizes revenues from tax service contracts over the estimated duration of the contracts. However, income taxes are paid on the entire fee in the year the fee is received. Historically, the Company has maintained minimal reserves for losses relating to its tax monitoring service because its losses have been negligible.

 

Flood Zone Certification.    In January 1995, the Company entered the flood zone certification business with the acquisition of Flood Data Services, Inc In October 2003 the Company substantially expanded this business with the acquisition of Transamerica Flood Hazard Certification, Inc., one of the Company’s primary competitors in this business. This business furnishes to mortgage lenders a report as to whether a subject property lies within a governmentally delineated flood hazard area. Federal legislation passed in 1994 requires that most mortgage lenders obtain a determination of the current flood zone status at the time each loan is originated and obtain updates during the life of the loan.

 

Default Services.    The Company’s default management business sells software and services which help mortgage servicing companies and financial institutions mitigate losses on mortgages that are in default as well as manage foreclosures, maintain and sell real estate owned properties and process claims.

 

Property Information Segment

 

The Company’s property information segment provides data and database services to various businesses, in particular to businesses operating in the real estate industry, such as mortgage lenders and brokers, real estate agents, property and casualty insurance companies and title insurance companies. The data offered by this segment include property characteristic information, such as the square footage of a piece of property or the number of rooms in a residence, and images of publicly recorded documents relating to real property. The Company delivers such data to its customers almost exclusively through electronic means, including the Internet. This segment also owns and manages databases of title and tax records, known as title plants, which are used primarily by title insurance companies in the issuance of title insurance policies.

 

This segment also provides appraisal services to mortgage lenders, real estate agents, investors and other businesses requiring valuations of real property. These services include traditional appraisals, which require physical inspection and human analysis, broker price opinion services, which value real property based on the opinions of real estate brokers and agents, and automated valuation models which use data and sophisticated mathematical models to arrive at a valuation.

 

The property information segment was created in the Company’s joint venture with Experian in January 1998. Since that time this segment has grown through a number of significant acquisitions. In June 1998 the Company entered the imaged document business with the acquisition of Data Tree Corporation. In July 2000 the Company combined its title plant business with a competing business owned by the Company’s competitor, LandAmerica. The combined entity, Data Trace Information Services, LLC, is owned 80% by the Company and 20% by LandAmerica. In August 2000, the Company combined its property data business with Transamerica Corporation’s competing business. At the time the Company owned 80% of the resulting entity. During 2004 the Company purchased the remaining 20%. In September 2002, the Company added broker price opinions (BPO) to its appraisal operations with the acquisition of SourceOne Services, Corp. The Company believes that SourceOne is the largest provider of BPO services to the default market and the second largest provider of BPO services in the United States.

 

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Credit Information Segment

 

The Company’s mortgage credit reporting business provides credit information reports for mortgage lenders throughout the United States. In preparing its reports for mortgage lenders the Company obtains credit reports from at least two of the three United States primary credit bureaus, merges and summarizes the credit reports and delivers its report in a standard format acceptable to mortgage loan originators and secondary mortgage purchasers. The Company’s credit reporting service has grown primarily through acquisitions. In 1994, the Company acquired all of the minority interests in its lower tier subsidiaries Metropolitan Credit Reporting Services, Inc., and Metropolitan Property Reporting Services, Inc. In 1994, the Company also acquired California Credit Data, Inc., and Prime Credit Reports, Inc., and in 1995, the Company acquired CREDCO, Inc. The Company believes that it is now the largest provider of credit reports to the United States mortgage lending industry, based on the number of credit reports issued.

 

The credit information segment also provides specialized credit reports to non-mortgage lenders, such as auto lenders, and direct to consumers. These reports may be derived from credit reports obtained from one or more of the three United States credit bureaus and may be specially formatted for ease of use by the creditor or to facilitate interpretation by a consumer. The Company also owns Teletrack, Inc., which it acquired in 1999. The Company believes Teletrack is the largest provider of credit reports specializing in sub-prime borrowers in the United States, based on the number of reports issued. Teletrack’s credit reports are derived from its proprietary database. Its primary customers include pay-day loan and check-advance stores, rent-to-own retailers and similar types of creditors.

 

Screening Information Segment

 

The Company’s screening information segment is comprised entirely of First Advantage Corporation, a public company whose shares of Class A common stock trade on the Nasdaq National Market System under the ticker symbol FADV. First Advantage was formed in the 2003 merger of the Company’s screening information segment with US SEARCH.com, Inc., a provider of people location services. Since that time First Advantage has grown substantially through acquisition. In late 2003 it entered the investigative services business with the acquisition of Omega Insurance Services, Inc., which it augmented with the acquisition of Corefacts, LLC in early 2004. In May 2004, with the acquisition of CIC Enterprises, Inc., First Advantage began offering services which help businesses identify and utilize tax incentive programs. As of December 31, 2004, the Company owned all of First Advantage’s outstanding Class B common stock, which constitutes approximately 69% of the economic interest and 95% of the voting interest of First Advantage.

 

First Advantage’s business is organized into three business segments: Enterprise Screening, Risk Mitigation and Consumer Direct. First Advantage’s Enterprise Screening segment offers employment screening services, such as criminal records and credit checks; occupational health services, such as drug testing administration and employee assistance programs; resident screening services, such as eviction record, credit and criminal records checks; and tax incentive and consulting services such as identification of employment-related tax incentive programs available under both federal and state legislation, and processing the paperwork required to capture such tax incentives and credits. First Advantage’s Risk Management segment provides automated access to motor vehicle records from all 50 states and the District of Columbia and investigative services. The investigative services are designed to detect and expose worker’s compensation, disability and liability insurance fraud and assist customers in business, legal and financial matters, including investigations and litigation arising from trade secret theft, software infringement, financial fraud, employee malfeasance and unfair competition. This segment also provides customers with access to a database of payment practice records on more than 60,000 transportation brokers and shippers in North America. First Advantage, through its Consumer Direct segment, also provides location, verification and screening services directly to consumers through the Internet.

 

The Company’s screening information segment serves a wide variety of clients throughout the United States, including nearly a quarter of those businesses comprising the Fortune 1000, many major real estate investment trusts and property management companies, a number of the top providers of transportation services,

 

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insurance companies, governmental agencies, non-profit organizations and health care providers. Insurance carriers and agents purchase a substantial proportion of the segment’s risk mitigation products. Larger employers and transportation companies are major consumers of the segment’s employment screening and occupational health services. Multifamily housing property management companies and landlords of all sizes are represented in the resident screening business’ customer base.

 

Acquisitions

 

Commencing in the 1960s, the Company initiated a growth program with a view to becoming a nationwide provider of title insurance. This program included expansion into new geographic markets through internal growth and selective acquisitions. In 1986 the Company began expanding into other real estate business information services. In 1998 the Company expanded its diversification program to include business information companies outside of the real estate transfer and closing process. To date, the Company has made numerous strategic acquisitions designed to expand not only its direct title operations, but also the range of services it can provide to its customers.

 

Regulation

 

The title insurance business is heavily regulated by state insurance regulatory authorities. These authorities generally possess broad powers with respect to the licensing of title insurers, the types and amounts of investments that title insurers may make, insurance rates, forms of policies and the form and content of required annual statements, as well as the power to audit and examine title insurers. Under state laws, certain levels of capital and surplus must be maintained and certain amounts of securities must be segregated or deposited with appropriate state officials. Various state statutes require title insurers to defer a portion of all premiums in a reserve for the protection of policyholders and to segregate investments in a corresponding amount. Further, most states restrict the amount of dividends and distributions a title insurer may make to its shareholders.

 

In 1999, the Company entered into the property casualty insurance business through the acquisitions of Great Pacific Insurance Company and Five Star Holdings, Inc. The property and casualty business is subject to regulation by government agencies in the states in which they transact business. The nature and extent of such regulation may vary from jurisdiction to jurisdiction, but typically involves prior approval of the acquisition of “control” of an insurance company, regulation of certain transactions entered into by an insurance company with any of its affiliates, the payment of dividends by an insurance company, approval of premium rates and policy forms for many lines of insurance, standards of solvency and minimum amounts of capital and surplus which must be maintained. In order to issue policies on a direct basis in a state, the property and casualty insurer must generally be licensed by such state. In certain circumstances, such as dealings initiated directly by citizens or placements through licensed surplus lines brokers, it may conduct business without being admitted and without being subject to rate and/or policy forms approval.

 

The Company’s home warranty business also is subject to regulation by insurance authorities in the states in which it conducts such business. The Company’s trust company and the Thrift are both subject to regulation by the Federal Deposit Insurance Corporation. In addition, as a federal savings bank, the Company’s trust company is regulated by the United States Department of the Treasury’s Office of Thrift Supervision, and the Thrift is regulated by the California Commissioner of Corporations.

 

Investment Policies

 

The Company invests primarily in cash equivalents, federal and municipal governmental securities, mortgage loans and investment grade debt and equity securities. The largely fixed income portfolio is classified in the Company’s financial statements as “available for sale.” In addition to the Company’s investment strategy, state laws impose certain restrictions upon the types and amounts of investments that may be made by the Company’s regulated subsidiaries.

 

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Employees

 

As of December 31, 2004 the Company employed 30,994 people.

 

Risk Factors

 

You should carefully consider each of the following risk factors and the other information contained in this Annual Report on Form 10-K. The Company faces risks other than those listed here, including those that are unknown to the Company and others of which the Company may be aware but, at present, considers immaterial. Because of the following factors, as well as other variables affecting the Company’s operating results, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

 

Certain recurring trends generally result in a decrease in the demand for the Company’s products

 

Demand for the Company’s products generally decreases as the number of real estate transactions in which the Company’s products are purchased decreases. The Company has found that the number of real estate transactions in which the Company’s products are purchased decreases in the following situations:

 

    when mortgage interest rates are high;

 

    when the mortgage fund supply is limited; and

 

    when the United States economy is weak.

 

The Company believes that this trend will recur.

 

Changes in government regulation could prohibit or limit the Company’s operations

 

The Company’s title insurance, property and casualty insurance, home warranty, thrift, trust and investment businesses are regulated by various federal, state and local governmental agencies. Many of the Company’s other businesses operate within statutory guidelines. Changes in the applicable regulatory environment or statutory guidelines or changes in interpretations of existing regulations or statutes could prohibit or restrict the Company’s existing or future operations. Such restrictions may restrict the Company’s ability to implement rate increases, acquire assets or businesses or otherwise have a negative impact on the Company’s ability to generate revenue and earnings.

 

The Company may be subject to increased regulation regarding the use of personal information

 

Certain data and services the Company provides are subject to regulation by various federal, state and local regulatory authorities. Compliance with existing federal, state and local laws and regulations has not had a material adverse effect on the Company’s results of operations or financial condition to date. Nonetheless, federal, state and local laws and regulations in the United States designed to protect the public from the misuse of personal information in the marketplace and adverse publicity or potential litigation concerning the commercial use of such information may affect the Company’s operations and could result in substantial regulatory compliance expense, litigation expense and a loss of revenue.

 

The Company may not be able to pursue its acquisition strategy

 

The Company intends to continue to grow through acquisitions. The Company may not be able to identify suitable acquisition candidates or complete acquisitions on satisfactory terms. A number of the Company’s competitors also have adopted the strategy of expanding and diversifying through acquisitions. The Company will continue to experience competition in its effort to execute on its acquisition strategy. As a result, the Company may be unable to continue to make acquisitions or may be forced to pay more for the acquired companies.

 

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The integration of Company acquisitions may be difficult and may result in a failure to realize some of the anticipated potential benefits of acquisitions

 

When companies are acquired, the Company may not be able to integrate or manage these businesses so as to produce returns that justify the investment. Any difficulty in successfully integrating or managing the operations of the businesses could have a material adverse effect on the Company’s business, financial condition, results of operations or liquidity, and could lead to a failure to realize any anticipated synergies. The Company’s management also will be required to dedicate substantial time and effort to the integration of its acquisitions. These efforts could divert management’s focus and resources from other strategic opportunities and operational matters.

 

The Company’s earnings may be reduced if acquisition projections are inaccurate

 

The Company’s earnings have improved since 1991 in large part because of the Company’s acquisition and integration of non-title insurance businesses. These businesses generally have higher margins than the title insurance businesses. For example, pre-tax margins for the title insurance and services segment were 8.2% in 2004, while pre-tax margins for the segments in the Company’s information technology group in the same year were 23.3%. The success or failure of acquisitions in this group has depended in large measure upon the accuracy of the Company’s projections. These projections are not always accurate. Inaccurate projections have historically led to lower than expected earnings.

 

As a holding company, the Company depends on distributions from the Company’s subsidiaries, and if distributions from the Company’s subsidiaries are materially impaired, the Company’s ability to declare and pay dividends may be adversely affected

 

First American is a holding company whose primary assets are the securities of its operating subsidiaries. The Company’s ability to pay dividends is dependent on the ability of the Company’s subsidiaries to pay dividends or repay funds. If the Company’s operating subsidiaries are not able to pay dividends or repay funds, the Company may not be able to declare and pay dividends to its shareholders. Moreover, pursuant to insurance and other regulations under which the Company’s insurance subsidiaries operate, the amount of dividends, loans and advances available is limited. Under such regulations, the maximum amount of dividends, loans and advances available from the Company’s insurance subsidiaries in 2005 is $210.2 million.

 

Certain provisions of the Company’s charter and rights plan may make a takeover of our company difficult even if such takeover could be beneficial to some of the Company’s shareholders

 

The Company’s restated articles of incorporation authorize the issuance of “blank check” preferred stock with such designations, rights and preferences as may be determined from time to time by the Company’s board of directors. Accordingly, the Company’s board is empowered, without further shareholder action, to issue shares or series of preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights, including the ability to receive dividends, of the Company’s common shareholders. The issuance of such preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control. In conjunction with the rights plan discussed in the paragraph immediately below, the Company has authorized the issuance of the Company’s Series A Junior Participating Preferred Shares. Although the Company has no present intention of issuing any additional shares or series of preferred stock, the Company cannot guarantee that it will not make such an issuance in the future.

 

The Company has adopted a rights plan which could, alone or in combination with the Company’s restated articles of incorporation, discourage transactions involving actual or potential changes of control, including transactions that otherwise could involve payment of a premium over prevailing market prices to the Company’s shareholders for their common shares.

 

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Available Information

 

The Company maintains a website, www.firstam.com, which includes financial and other information for investors. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the “Investors” page of our website as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission. The Company’s website and the information contained therein or connected thereto are not intended to be incorporated into this annual report on Form 10-K, or any other filing with the Securities and Exchange Commission unless the Company expressly incorporates such materials.

 

Item 2.    Properties

 

In September 1999, the Company moved its executive offices to one of three newly constructed office buildings at MacArthur Place in Santa Ana, California. Later that same year, the Orange County branch and certain other operations of the Company’s title insurance segment moved into the two other buildings constructed on the site. The three buildings total approximately 210,000 square feet and are situated in a campus environment comprising 32 acres. In the first quarter of 2004, the Company began the expansion of its office campus. This expansion will add two 4-story office buildings totaling approximately 226,000 square feet, a two-story, free standing, 52,000 square foot technology center and a two-story parking structure. The construction is estimated to be completed by the fourth quarter of 2005. This property, including the land, buildings and fixtures, is subject to a deed of trust and security agreement securing payment of a promissory note evidencing a loan made in October 2003, to the Company’s subsidiary, First American Title Insurance Company, in the original sum of $55.0 million. This loan is payable in monthly installments of principal and interest, is fully amortizing and matures November 1, 2023. The outstanding principal balance of this loan was $53.3 million as of December 31, 2004.

 

The Company’s mortgage information segment houses its national operations in a leased 231,000 square foot office building in Dallas, Texas. In 1999, the Company completed the construction of two office buildings in Poway, California. These two buildings, which primarily house the Company’s credit reporting segment, total approximately 152,000 square feet and are located on a 17 acre parcel of land.

 

Each of the office facilities occupied by the Company or its subsidiaries is in good condition and adequate for its intended use.

 

Item 3.    Legal Proceedings

 

In December 2004 a subsidiary of the Company settled a class action lawsuit that was pending in New York state court. The lawsuit involved allegations that the Company’s subsidiary, directly and through its agents, charged improper rates for title insurance policies issued in connection with refinance transactions.

 

A subsidiary of the Company is a defendant in a class action lawsuit that is pending in federal court in Michigan. The plaintiffs allege that in certain transactions the premium our subsidiary charged to builders and developers for title insurance policies violated the Real Estate Settlement Procedures Act and similar state laws. The action seeks a refund of the title insurance premiums paid by the plaintiffs and other damages. Pending the outcome of this lawsuit, the Company has taken a charge to fourth quarter 2004 earnings of $3.3 million. The Company does not believe that the ultimate resolution of this action will have a material adverse affect on its financial condition or results of operations.

 

On January 25, 2005, a jury in the case of Chicago Title Insurance Corporation v. James A. Magnuson, et al. awarded damages in the amount of $43.2 million against a subsidiary of the Company. This matter involved claims of violation of a non-competition agreement and intentional interference with contract. The judgment

 

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comprised a compensatory award of $10.8 million and a punitive damage award of $32.4 million. The Company believes it has strong grounds to overturn this judgment and will conduct a vigorous appeal. Pending the outcome of this appeal, the Company has taken a charge to fourth quarter 2004 earnings of $10.0 million.

 

The Company is involved in numerous routine legal proceedings related to its operations. While the ultimate disposition of each proceeding is not determinable, the Company does not believe that any of such proceedings will have a material adverse affect on its financial condition or results of operations.

 

Item 4.    Submission of Matters to a Vote of Security Holders

 

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Common Stock Market Prices and Dividends

 

The Company’s common stock trades on the New York Stock Exchange (ticker symbol FAF). The approximate number of record holders of common stock on March 4, 2005 was 3,485.

 

High and low stock prices and dividends declared for the last two years were as follows:

 

     2004

   2003

Quarter Ended


   High-low range

   Cash
dividends


   High-low range

   Cash
dividends


March 31

   $ 32.01—$29.49    $ .15    $ 24.73—$21.72    $ .10

June 30

   $ 31.30—$24.60    $ .15    $ 27.85—$24.67    $ .10

September 30

   $ 30.83—$25.04    $ .15    $ 27.25—$23.36    $ .15

December 31

   $ 35.14—$29.82    $ .15    $ 30.64—$25.38    $ .15

 

While the Company expects to continue its policy of paying regular quarterly cash dividends, future dividends will be dependent on future earnings, financial condition and capital requirements. The payment of dividends is subject to the restrictions described in Note 2 to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” of Part II of this report

 

Plan Category


   Number of securities
to be issued upon
exercise of
outstanding options
(a)


  

Weighted-average
exercise price of
outstanding
options

(b)


  

Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in
column (a))

(c)


     (in thousands, except weighted-average exercise price)

Equity compensation plans approved by security holders (1)(3)

   7,168    $ 20.50    5,390

Equity compensation not approved by security
holders (2)

   221    $ 20.75    —  
    
         
     7,389    $ 20.51    5,390
    
         

(1) Consists of The First American Corporation 1996 Stock Option Plan and The First American Corporation 1997 Directors’ Stock Plan. See Note 14 to the Company’s consolidated financial statements for additional information.

 

(2) Includes shares related to plans assumed by the Company in the purchase of Credit Management Solutions, Inc. See Note 14 to the Company’s consolidated financial statements for additional information.

 

(3) Includes 2,166,000 shares available to be issued under the Company’s stock purchase plan. See Note 15 to the Company’s consolidated financial statements for additional information.

 

Recent Sales of Unregistered Securities

 

In the last three years, the Company has not issued unregistered shares of its common stock.

 

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Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

The following table describes purchases of the Company’s Common shares which settled during each period set forth in the table. Prices in column (b) include commissions. Purchases described in column (c) were made pursuant to the share repurchase program announced by the Company on May 18, 2004. Under this plan, which has no expiration date, the Company may repurchase up to $100 million of the Company’s issued and outstanding Common shares.

 

Period


  

(a)

Total
Number of
Shares
Purchased


  

(b)

Average
Price Paid
per Share


  

(c)

Total Number of
Shares
Purchased as Part
of Publicly
Announced Plans
or Programs


  

(d)

Maximum
Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans or
Programs


October 1 to October 31, 2004

   —        —      —      $ 62,716,671

November 1 to November 30, 2004

   50,000    $ 33.61    50,000    $ 61,036,316

December 1 to December 31, 2004

   —        —      —      $ 61,036,316
    
  

  
  

Total

   50,000    $ 33.61    50,000    $ 61,036,316

 

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Item 6.    Selected Financial Data.

 

The selected consolidated financial data for the Company for the five-year period ended December 31, 2004, has been derived from the audited Consolidated Financial Statements. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto, “Item 1—Business—Acquisitions,” and “Item 7—Management’s Discussion and Analysis—Results of Operations.”

 

The First American Corporation and Subsidiary Companies

 

     Year Ended December 31

 
     2004

    2003

    2002

    2001

    2000

 
     (in thousands, except percentages, per share amounts, and employee data)  

Revenues

   $ 6,722,326     $ 6,213,714     $ 4,704,209     $ 3,750,723     $ 2,934,255  

Net income

   $ 349,099     $ 451,022     $ 234,367     $ 167,268     $ 82,223  

Total assets

   $ 6,208,365     $ 5,139,902     $ 3,570,284     $ 2,977,648     $ 2,270,549  

Notes and contracts payable

   $ 732,770     $ 553,888     $ 425,705     $ 415,341     $ 219,838  

Deferrable interest subordinated notes

   $ 100,000     $ 100,000     $ 100,000     $ 100,000     $ 100,000  

Stockholders’ equity

   $ 2,463,564     $ 1,879,520     $ 1,364,589     $ 1,104,452     $ 870,237  

Return on average stockholders’ equity

     16.1 %     27.8 %     19.0 %     16.9 %     9.8 %

Cash dividends on common shares

   $ 52,403     $ 38,850     $ 24,570     $ 18,210     $ 15,256  

Per share of common stock (Note A)

                                        

Net income:

                                        

Basic

   $ 4.04     $ 5.89     $ 3.27     $ 2.51     $ 1.29  

Diluted

   $ 3.83     $ 5.22     $ 2.92     $ 2.27     $ 1.24  

Stockholders’ equity

   $ 27.36     $ 23.84     $ 18.53     $ 16.08     $ 13.62  

Cash dividends

   $ .60     $ .50     $ .34     $ .27     $ .24  

Number of common shares outstanding

                                        

Weighted average during the year

                                        

Basic

     86,430       76,632       71,594       66,568       63,680  

Diluted

     91,895       87,765       82,580       75,876       66,059  

End of year

     90,058       78,826       73,636       68,694       63,887  

Title orders opened (Note B)

     2,519       2,511       2,184       1,930       1,241  

Title orders closed (Note B)

     1,909       2,021       1,696       1,405       975  

Number of employees

     30,994       29,802       24,886       22,597       20,346  

 

Note A—Per share information relating to net income is based on weighted-average number of shares outstanding for the years presented. Per share information relating to stockholders’ equity is based on shares outstanding at the end of each year.

 

Note B—Title order volumes are those processed by the direct title operations of the Company and do not include orders processed by agents.

 

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Critical Accounting Policies

 

The Company’s management considers the accounting policies described below to be critical in preparing the Company’s consolidated financial statements. These policies require management to make estimates and judgments that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures of contingencies. See Note 1 to the consolidated financial statements for a more detailed description of the Company’s accounting policies.

 

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Revenue recognition.    Title premiums on policies issued directly by the Company are recognized on the effective date of the title policy, and for policies issued by independent agents, when notice of issuance is received from the agent. Revenues from home warranty contracts are recognized ratably over the 12-month duration of the contracts. Revenues from property and casualty insurance policies are recognized ratably over the 12-month duration of the policies. The Company’s tax service division defers its tax service fee and recognizes that fee as revenue ratably over the expected service period. The amortization rates applied to recognize the revenues assume a 10-year contract life and are adjusted to reflect prepayments. The Company reviews its tax service contract portfolio on a quarterly basis to determine if there have been changes in contract lives and/or changes in the number and/or timing of prepayments and adjusts the rates accordingly to reflect current trends. For all other products, revenues are recognized at the time of delivery, as the Company has no significant ongoing obligation after delivery.

 

Provision for title losses.    The Company provides for estimated title insurance losses by a charge to expense when the related premium revenue is recognized. The amount charged to expense (the loss rate), as well as the adequacy of the ending reserves, is determined by the Company based on historical experience and other factors, including, but not limited to, changes and trends in the type of title insurance policies issued, the real estate market and the interest rate environment. Management monitors the adequacy of the estimated loss reserves on a quarterly basis using a variety of techniques, including actuarial models, and adjusts the loss rate as necessary.

 

Purchase accounting and impairment testing for goodwill and other intangible assets.    Pursuant to Statement of Financial Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), the Company is required to perform an annual impairment test for goodwill and other indefinite-lived intangible assets by reporting unit. This annual test, which the Company has elected to perform every September 30, utilizes a variety of valuation techniques, all of which require management to make estimates and judgments, and includes discounted cash flow analysis, market approach valuations and the use of third-party valuation advisors. Certain of these valuation techniques are also utilized by the Company in accounting for business combinations, primarily in the determination of the fair value of acquired assets and liabilities. The Company’s reporting units, for purposes of applying the provisions of SFAS 142, are title insurance, home warranty, property and casualty insurance, trust and other services, mortgage origination products and services, mortgage servicing products and services, property information services, conventional credit information, sub-prime credit information, pre-employment and drug screening, resident screening and risk mitigation. In accordance with the provisions of SFAS 142, the Company completed the required annual impairment testing for goodwill and other intangible assets for the years ended December 31, 2004 and 2003, and determined that there was no impairment of value.

 

Income taxes.    The Company estimates its effective income tax rate based upon a variety of factors including, but not limited to, the expected revenues and resulting pretax income for the year, the composition and geographic mix of the pretax income and the ratio of permanent differences to pretax income. Any changes to the estimated rate are made prospectively in accordance with Accounting Principles Board Opinions No. 28, “Interim Financial Reporting.” Additionally, management makes estimates as to the amount of reserves, if any, that are necessary for known and potential tax exposures.

 

Depreciation and amortization lives for assets.    Management is required to estimate the useful lives of several asset classes, including capitalized data, internally developed software and other intangible assets. The estimation of useful lives requires a significant amount of judgment related to matters such as future changes in technology, legal issues related to allowable uses of data and other matters.

 

Stock-based compensation.    In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, “Shared-Based Payment” (SFAS No.123R). This standard is a revision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The standard requires a public entity to measure the cost of employee services received in exchange for an award of equity

 

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instruments based on the grant-date fair value of the award (with limited exceptions). The cost will be recognized over the period during which an employee is required to provide services in exchange for the award. This standard is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company will adopt the standard in the third quarter of 2005. The Company has not determined the impact, if any, that this standard will have on its consolidated financial position or results of operations.

 

Results of Operations

 

Overview—The majority of the revenues for the Company’s title insurance and mortgage information segments depend, in large part, upon the level of real estate activity and the cost and availability of mortgage funds. Revenues for these segments result primarily from resales and refinancings of residential real estate and, to a lesser extent, from commercial transactions and the construction and sale of new housing. Over one-half of the revenues for the Company’s property information and credit information segments also depend on real estate activity. The remaining portion of the property information and credit information revenues, as well as the revenues for the Company’s specialty insurance and screening information segments, are isolated from the volatility of real estate transactions. Traditionally, the greatest volume of real estate activity, particularly residential resale, has occurred in the spring and summer months. However, changes in interest rates, as well as other economic factors, can cause fluctuations in the traditional pattern of real estate activity.

 

The continuation of relatively low interest rates, coupled with the high demand for residential resale and new home sales, resulted in an exceptionally strong 2002. Mortgage originations reached $2.46 trillion, with refinance activity comprising 58% of the total. Mortgage interest rates remained low through the first three quarters of 2003, fueling new record-setting refinance activity, but began to rise during the fourth quarter of the year. Existing and new-home-sale activity also reached new record levels. Mortgage originations, based on Mortgage Bankers Association statistics totaled $3.81 trillion in 2003, with refinance activity comprising 66% of the total. The increase in mortgage interest rates that began in the fourth quarter of 2003 resulted in a low inventory of open orders going into 2004. This, together with an increasing mortgage interest rate environment during the first half of 2004, resulted in a decline in mortgage originations and a return to more traditional, seasonal real estate pattern, where the greatest volume of real estate activity occurs in the spring and summer months. However, as a result of new acquisitions and an increase in the average revenues per title order closed, operating revenues increased in 2004 when compared with 2003. Mortgage originations totaled $2.86 trillion in 2004, with refinance transactions comprising only 44% of the total.

 

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

 

     2004

   %

   2003

   %

   2002

   %

     (in thousands, except percentages)

Financial Services:

                                   

Title Insurance:

                                   

Direct operations

   $ 2,486,380    38    $ 2,264,925    38    $ 1,803,775    39

Agency operations

     2,299,656    35      2,138,059    35      1,589,817    35
    

  
  

  
  

  
       4,786,036    73      4,402,984    73      3,393,592    74

Specialty Insurance

     220,340    3      207,287    3      143,307    3
    

  
  

  
  

  
       5,006,376    76      4,610,271    76      3,536,899    77
    

  
  

  
  

  

Information Technology:

                                   

Mortgage Information

     653,562    10      642,684    11      479,288    10

Property Information

     401,716    6      366,271    6      259,315    6

Credit Information

     242,812    4      246,987    4      215,337    5

Screening Information

     266,280    4      166,430    3      100,702    2
    

  
  

  
  

  
       1,564,370    24      1,422,372    24      1,054,642    23
    

  
  

  
  

  
     $ 6,570,746    100    $ 6,032,643    100    $ 4,591,541    100
    

  
  

  
  

  

 

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Financial Services.    In January 2004, the Company combined its Title Insurance segment and its Trust and Other Services segment into one segment to better reflect the interaction within these businesses. This presentation is consistent with the way management evaluates the operations of these businesses. The prior year results have been reclassified to reflect the combination of these businesses.

 

Operating revenues from direct title operations increased 9.8% in 2004 over 2003 and 25.6% in 2003 over 2002. The increase in 2004 over 2003 was primarily due to an increase in the average revenues per order closed, offset in part by a decrease in the number of orders closed. The increase in 2003 over 2002 was primarily due to increases in both the average revenues per order closed and the number of title orders closed. The average revenues per order closed were $1,303, $1,121 and $1,063 for 2004, 2003 and 2002, respectively. The increase in average revenues per order closed of 16.2% in 2004 over 2003 was primarily due to a decrease in the mix of lower-premium refinance transactions, an increase in higher-premium resale and commercial transactions, and appreciating real estate values. The increase in average revenues per order closed of 5.5% in 2003 over 2002 primarily reflected appreciating real estate values. The Company’s direct title operations closed 1,908,600, 2,021,000 and 1,696,100 title orders during 2004, 2003 and 2002, respectively, a decrease of 5.6% in 2004 from 2003 and an increase of 19.2% in 2003 over 2002. The fluctuations in closings primarily reflected changes in mortgage origination activity, market share gains and acquisition activity. Operating revenues from agency title operations increased 7.6% in 2004 over 2003 and 34.5% in 2003 over 2002. These increases were primarily attributable to the same factors affecting direct title operations compounded by the inherent delay in the reporting of transactions by agents. In 2005 the Company’s title insurance company plans to reduce its title insurance premium on mortgage refinance transactions in California. Assuming that real estate values and the volume of activity, including the mix between refinance, resale and commercial transactions, remain unchanged from 2004 levels, this would result in a decrease in operating revenues in 2005 and in subsequent years. However, any decrease in operating revenues could be offset by factors such as anticipated market share gains, operating efficiencies and growth in the Company’s bundling program.

 

Specialty insurance operating revenues increased 6.3% in 2004 over 2003 and 44.7% in 2003 over 2002. The increase in 2004 over 2003 reflected continued geographic expansion at the Company’s home warranty division, offset in part by a reduction in revenues at the Company’s property and casualty insurance division due to an increase in reinsurance ceded. The increase in 2003 over 2002 was primarily attributable to geographic expansion at the Company’s home warranty division and market share growth at the property and casualty insurance division.

 

Information Technology.    Mortgage information operating revenues increased 1.7% in 2004 over 2003 and 34.1% in 2003 over 2002. The increase in 2004 over 2003 was primarily attributable to $166.4 million of operating revenues contributed by new acquisitions, offset in part by the decline in mortgage originations and a $10.2 million decrease in operating revenues as a result of an increase in estimated servicing life of the tax service loan portfolio due to a slowdown in prepayment speeds. The increase in 2003 over 2002 primarily reflected the increase in mortgage originations, $48.0 million of operating revenues contributed by new acquisitions and a $9.4 million increase in operating revenues as a result of a decrease in estimated servicing life of the tax service loan portfolio due an acceleration in prepayment speeds.

 

Property information operating revenues increased 9.7% in 2004 over 2003 and 41.3% in 2003 over 2002. The increase in 2004 over 2003 primarily reflected $21.6 million of operating revenues contributed by new acquisitions and the continued growth in this segment’s less cyclical subscription-based information businesses, offset in part by the reduction in mortgage originations. The increase in 2003 over 2002 was primarily due to $52.4 million of operating revenues contributed by new acquisitions and the increase in mortgage originations.

 

Credit information operating revenues decreased 1.7% in 2004 from 2003 and increased 14.7% in 2003 over 2002. The decrease in 2004 from 2003 primarily reflected a decline in operating revenues from mortgage related credit products as a result of the decrease in mortgage originations. The increase in 2003 over 2002 was primarily due to the growth in demand for credit information in the housing sector, offset in part by a $6.2 million reduction in revenues as a result of the sale of the Company’s subsidiary, FASTRAC Systems, Inc., in August 2002.

 

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Screening information operating revenues increased 60.0% in 2004 over 2003 and 65.3% in 2003 over 2002. These increases were primarily attributable to $68.5 million and $56.0 million of operating revenues contributed by new acquisitions for the respective periods.

 

Investment and other income—Investment and other income totaled $141.8 million, $145.4 million and $131.6 million in 2004, 2003 and 2002, respectively, a decrease of $3.6 million, or 2.5% in 2004 from 2003, and an increase of $13.8 million, or 10.5% in 2003 over 2002. These fluctuations primarily reflected the relative changes in equity in earnings of unconsolidated affiliates, which are accounted for under the equity method of accounting. See Note 11 to the consolidated financial statements for additional information.

 

Net realized investment gains/losses—Net realized investment gains totaled $9.8 million in 2004 and $35.7 million in 2003. Net realized investment losses totaled $18.9 million in 2002. The 2004 total included realized gains totaling $8.5 million relating to the issuance of shares by the Company’s publicly traded subsidiary, First Advantage Corporation. The 2003 total included the recognition of a previously deferred gain totaling $14.2 million relating to the sale of the Company’s Contour Software, Inc. subsidiary in the first quarter of 2001. Also included in the 2003 total was a $13.1 million realized gain associated with the merger of the Company’s Credit Online business with DealerTrack Holdings, Inc. The 2002 investment losses included a $13.6 million loss resulting from the write-down of WorldCom bonds; a $2.6 million loss associated with the sale of the Company’s subsidiary, FASTRAC Systems, Inc.; and $2.3 million of losses due to the restructuring of the 1031 tax-deferred exchange investment portfolio.

 

Salaries and other personnel costs—A summary by segment of the Company’s salaries and other personnel costs is as follows:

 

     2004

   %

   2003

   %

   2002

   %

     (in thousands, except percentages)

Financial Services:

                                   

Title Insurance

   $ 1,465,267    69    $ 1,261,120    70    $ 1,090,987    72

Specialty Insurance

     45,479    2      38,506    2      33,424    2
    

  
  

  
  

  
       1,510,746    71      1,299,626    72      1,124,411    74
    

  
  

  
  

  

Information Technology:

                                   

Mortgage Information

     247,615    12      210,033    12      156,999    10

Property Information

     144,857    7      127,832    7      102,614    7

Credit Information

     60,895    3      61,226    3      63,795    4

Screening Information

     81,650    4      54,333    3      31,985    2
    

  
  

  
  

  
       535,017    26      453,424    25      355,393    23
    

  
  

  
  

  

Corporate

     65,452    3      46,503    3      43,391    3
    

  
  

  
  

  
     $ 2,111,215    100    $ 1,799,553    100    $ 1,523,195    100
    

  
  

  
  

  

 

Financial Services.    The Company’s title insurance segment comprised 97.0% of total salaries and other personnel costs for the Financial Services group. The title insurance segment (primarily direct operations) is labor intensive; accordingly, a major variable expense component is salaries and other personnel costs. This expense component is affected by two competing factors: the need to monitor personnel changes to match corresponding or anticipated new orders, and the need to provide quality service. In addition, this segment’s growth in operations that specialize in builder and lender title business has created ongoing fixed costs required to service accounts.

 

Title insurance personnel expenses increased 16.2% in 2004 over 2003 and 15.6% in 2003 over 2002. The increase in 2004 over 2003 was primarily due to $139.9 million of personnel costs associated with new acquisitions, incremental costs incurred to service the more labor intensive higher mix of resale and commercial

 

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title orders processed during the year and $25.8 million of increased employee benefit costs. The increase in 2003 over 2002 was primarily attributable to $29.3 million of personnel costs associated with new acquisitions, incremental labor costs incurred to service the increase in refinance transactions, increased commissions associated with the increase in closed orders and $12.0 million of increased employee benefit costs. The increases in employee benefit costs were primarily the result of increases in health care costs of $16.7 million in 2004 over 2003 and $6.2 million in 2003 over 2002. Also contributing to the overall increase in employee benefit costs were increases in the Company’s discretionary match related to the 401(k) plan, which is profit driven and increases as profits escalate. This match can also increase when profits decrease if the number of participants in the plan increases or if the total amount of employee deferral increases. The match increased $8.2 million in 2004 over 2003 and $5.8 million in 2003 over 2002. The Company’s direct title operations opened 2,518,600, 2,511,000 and 2,184,200 orders in 2004, 2003 and 2002, respectively, representing an increase of 0.3% in 2004 over 2003 and 15.0% in 2003 over 2002. The fluctuation in orders year over year reflected relative changes in mortgage originations, market share fluctuations and acquisition activity.

 

Information Technology.    Personnel expenses in total for the Information Technology group increased 18.0% in 2004 over 2003 and 27.6% in 2003 over 2002. Excluding $101.6 million and $51.1 million of personnel costs associated with new acquisitions, personnel expenses for the information technology group decreased 4.4% in 2004 from 2003 and increased 13.2% in 2003 over 2002. The decrease in 2004 from 2003 reflects a decline in incremental costs associated with the decrease in business volume, offset in part by a $4.2 million increase in employee benefit costs and costs incurred at the Company’s tax service division to integrate new customers. The increase in 2003 over 2002 was primarily due to costs incurred to service the increase in business volume and $9.8 million of increased employee benefit costs.

 

Corporate.    Corporate personnel expenses increased 40.7% in 2004 over 2003 and 7.2% in 2003 over 2002. These increases were primarily attributable to an increase in employee benefit costs, increased technology personnel costs and higher general costs associated with the support effort needed to service the Company’s expanded national and international operations. The increase in 2004 over 2003 also reflected additional costs associated with the implementation of the provisions of Section 404 of the Sarbanes Oxley Act, primarily internal audit costs.

 

Premiums retained by agents—A summary of agent retention and agent revenues is as follows:

 

     2004

    2003

    2002

 
     (in thousands, except percentages)  

Agent retention

   $ 1,869,536     $ 1,729,104     $ 1,292,297  
    


 


 


Agent revenues

   $ 2,299,656     $ 2,138,059     $ 1,589,817  
    


 


 


% retained by agents

     81.3 %     80.9 %     81.3 %
    


 


 


 

The premium split between underwriter and agents is in accordance with their respective agency contracts and can vary from region to region due to divergencies in real estate closing practices, as well as rating structures. As a result, the percentage of title premiums retained by agents varies due to the geographical mix of revenues from agency operations.

 

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Table of Contents

Other operating expenses—A summary by segment of the Company’s other operating expenses is as follows:

 

     2004

   %

   2003

   %

   2002

   %

     (in thousands, except percentages)

Financial Services:

                                   

Title Insurance

   $ 840,790    56    $ 728,944    55    $ 597,262    57

Specialty Insurance

     16,646    1      23,316    2      11,596    1
    

  
  

  
  

  
       857,436    57      752,260    57      608,858    58
    

  
  

  
  

  

Information Technology:

                                   

Mortgage Information

     184,603    12      177,234    14      159,211    15

Property Information

     127,357    9      131,896    10      86,039    8

Credit Information

     126,628    9      129,367    10      107,781    10

Screening Information

     151,638    10      97,034    7      61,037    6
    

  
  

  
  

  
       590,226    40      535,531    41      414,068    39
    

  
  

  
  

  

Corporate

     41,275    3      32,084    2      26,199    3
    

  
  

  
  

  
     $ 1,488,937    100    $ 1,319,875    100    $ 1,049,125    100
    

  
  

  
  

  

 

Financial Services.    The Company’s title insurance segment comprised 98.1% of total other operating expenses for the Financial Services group. Title insurance other operating expenses (principally direct operations) increased 15.3% in 2004 over 2003 and 22.0% in 2003 over 2002. The increase in 2004 over 2003 was primarily due to $79.9 million of other operating expenses associated with new acquisitions and a voluntary $24.0 million charge taken in the fourth quarter of 2004 associated with captive reinsurance agreements with residential homebuilders. This charge, which was previously disclosed by the Company on February 18, 2005, represents a commitment by the Company to pay to the affected policy-holders the allocated portion of the reinsurance premium paid to the captive reinsurance participants. The increase in 2004 over 2003 also reflected $13.3 million of litigation charges taken in the fourth quarter of 2004. These charges included $10.0 million for a litigation matter disclosed by the Company on January 26, 2005. Excluding acquisition activity and the one-time items, title insurance other operating expenses decreased $5.3 million, or 0.7% in 2004 from 2003, primarily as a result of cost containment programs. The increase in other operating expenses in 2003 over 2002 was primarily due to incremental costs (i.e., messenger costs, reproduction costs, title plant maintenance costs, etc.) associated with servicing the increases in total order volume and $19.6 million of costs associated with new acquisitions.

 

Information Technology.    Other operating expenses for the Information Technology group increased 10.2% in 2004 over 2003 and 29.3% in 2003 over 2002. Excluding other operating expenses of $84.8 million and $66.2 million associated with new acquisitions for the respective periods, other operating expenses for the Information Technology group decreased 5.6% in 2004 from 2003 and increased 13.3% in 2003 over 2002. The decrease in 2004 from 2003 reflected a decline in incremental costs associated with the decline in mortgage origination volume. The increase in 2003 over 2002 was primarily due to costs associated with servicing the increase in business volume, primarily refinance transactions.

 

Corporate.    Corporate other operating expenses increased 28.6% in 2004 over 2003 and 22.5% in 2003 over 2002. The increase in 2004 over 2003 was primarily due to additional costs associated with the implementation of the provisions of Section 404 of the Sarbanes Oxley Act, which included increased costs associated with the Company’s independent registered public accounting firm and outside consultants. The increase in 2003 over 2002 was primarily due to $15.0 million of technology expenses, primarily consulting and outsourcing costs, required to expand the Company’s e-commerce capabilities. The increases for both 2004 and 2003 also reflected higher general costs associated with the support effort needed to service the Company’s expanded national and international operations.

 

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Table of Contents

Provision for title losses and other claims—A summary by segment of the Company’s provision for title losses and other claims is as follows:

 

     2004

   %

   2003

   %

   2002

   %

     (in thousands, except percentages)

Title Insurance

   $ 198,295    57    $ 179,681    55    $ 135,622    60
    

  
  

  
  

  

Specialty Insurance:

                                   

Home Warranty

     70,562    20      56,769    18      50,881    23

Property and Casualty Insurance

     52,087    15      62,777    19      26,168    12
    

  
  

  
  

  
       122,649    35      119,546    37      77,049    35
    

  
  

  
  

  

All other segments

     28,674    8      25,177    8      11,918    5
    

  
  

  
  

  
     $ 349,618    100    $ 324,404    100    $ 224,589    100
    

  
  

  
  

  

 

The provision for title insurance losses, expressed as a percentage of title insurance operating revenues, was 4.1% in 2004, 4.1% in 2003 and 4.0% in 2002.

 

The provision for home warranty claims, expressed as a percentage of home warranty operating revenues, was 49.0% in 2004, 48.9% in 2003 and 49.8% in 2002. The rate decrease in 2003 from 2002 was primarily due to a decrease in the average cost per claim, which was primarily due to the elimination of higher-cost contractors that were servicing claims in new geographic areas.

 

The provision for property and casualty insurance claims, expressed as a percentage of property and casualty insurance operating revenues, was 68.4% in 2004, 63.6% in 2003 and 63.8% in 2002. The rate for 2003 excludes $5.0 million of catastrophe losses related to the Southern California wildfires, which represents the Company’s deductible on its reinsurance treaty. The rate increase in 2004 over 2003 was primarily due to $6.2 million of claims expense in the third quarter of 2004 associated with the Florida hurricanes.

 

Depreciation and amortization—Depreciation and amortization increased 12.7% in 2004 over 2003 and 18.2% in 2003 over 2002. These increases were primarily due to an increase in the amortization of intangibles as a result of acquisition activity and an increase in the amortization of capitalized data and software as a result of new capital expenditures. Depreciation and amortization, as well as capital expenditures for each of the Company’s segments, are summarized in Note 21 to the consolidated financial statements.

 

 

Premium taxes—A summary by pertinent segment of the Company’s premium taxes is as follows:

 

     2004

   %

   2003

   %

   2002

   %

     (in thousands, except percentages)

Title Insurance

   $ 47,662    90    $ 46,211    90    $ 31,045    90

Specialty Insurance

     5,273    10      5,324    10      3,613    10
    

  
  

  
  

  
     $ 52,935    100    $ 51,535    100    $ 34,658    100
    

  
  

  
  

  

 

Insurers are generally not subject to state income or franchise taxes. However, in lieu thereof, a “premium” tax is imposed on certain operating revenues, as defined by statute. Tax rates and bases vary from state to state; accordingly, the total premium tax burden is dependent upon the geographical mix of operating revenues. The Company’s underwritten title company (noninsurance) subsidiaries are subject to state income tax and do not pay premium tax. Accordingly, the Company’s total tax burden at the state level for the title insurance segment is composed of a combination of premium taxes and state income taxes. Premium taxes as a percentage of title insurance operating revenues remained relatively constant at approximately 1.0%.

 

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Table of Contents

Interest—Interest expense increased $7.7 million, or 21.4%, in 2004 over 2003, and $2.5 million, or 7.4%, in 2003 over 2002. These increases were primarily due to an increase in acquisition-related indebtedness.

 

Income before income taxes and minority interests—A summary by segment is as follows:

 

     2004

    %

   2003

    %

   2002

    %

     (in thousands, except percentages)

Financial Services:

                                      

Title Insurance

   $ 398,777     49    $ 504,629     53    $ 285,268     50

Specialty Insurance

     41,419     5      30,125     3      24,465     4
    


 
  


 
  


 
       440,196     54      534,754     56      309,733     54
    


 
  


 
  


 

Information Technology:

                                      

Mortgage Information

     174,868     21      238,508     25      146,849     26

Property Information

     126,460     16      105,339     11      71,459     12

Credit Information

     54,613     7      64,291     7      39,266     7

Screening Information

     18,593     2      4,505     1      2,459     1
    


 
  


 
  


 
       374,534     46      412,643     44      260,033     46
    


 
  


 
  


 
       814,730     100      947,397     100      569,766     100
    


 
  


 
  


 

Corporate

     (137,446 )          (108,675 )          (119,859 )    
    


      


      


   
     $ 677,284          $ 838,722          $ 449,907      
    


      


      


   

 

The Company’s title insurance profit margins vary according to a number of factors, including the volume, composition (residential or commercial) and type (resale, refinancing or new construction) of real estate activity. Commercial transactions tend to generate higher revenues and greater profit margins than residential transactions. Profit margins from refinancing activities, on a per transaction basis, are lower than those from resale activities because in many states there are premium discounts on, and cancellation rates are higher for refinancing transactions. Cancellations of title orders adversely affect profits because costs are incurred in opening and processing such orders, but revenues are not generated. Also, the Company’s direct title insurance business has significant fixed costs in addition to its variable costs. Accordingly, profit margins from the Company’s direct title insurance business improve as the volume of title orders closed increases. 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 that are 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 information segment, like title insurance, are primarily dependent on the level of real estate activity and the cost and availability of mortgage funds. Revenues from the property information segment are, in part, dependent on real estate activity, but are less cyclical than title insurance and mortgage information revenues as a result of a significant subscription-based revenue stream. Revenues for the credit information segment are, in part, impacted by real estate activity, but also by the consumer and automobile sectors.

 

In general, the title insurance business is a lower-margin business when compared with the Company’s other segments. The lower margins reflect the high fixed cost of producing title evidence, whereas the corresponding revenues are subject to regulatory and competitive pricing constraints.

 

Corporate expenses include investment gains and losses, personnel and other operating expenses associated with the Company’s corporate facilities, certain technology initiatives and unallocated interest expense.

 

Income taxes—The Company’s effective income tax rate, which includes a provision for state income and franchise taxes for noninsurance subsidiaries, was 35.9%, 34.8% and 33.3% for 2004, 2003 and 2002,

 

27


Table of Contents

respectively. The differences in the effective tax rate were primarily due to changes in the ratio of permanent differences to income before income taxes and minority interests and changes in state income and franchise taxes resulting from fluctuations in the Company’s noninsurance subsidiaries’ contribution to pretax profits. Information regarding items included in the reconciliation of the effective rate with the federal statutory rate is contained in Note 12 to the consolidated financial statements.

 

Minority interests—Minority interests in net income of consolidated subsidiaries decreased $10.7 million in 2004 over 2003 and increased $30.1 million in 2003 over 2002. These changes were primarily due to the fluctuations in the operating results of the Company’s joint venture with Experian, which includes certain companies in the Company’s mortgage information, property information and credit information segments.

 

Net income—Net income and per share information are summarized as follows (see Note 13 to the consolidated financial statements):

 

     2004

   2003

   2002

     (in thousands, except per share amounts)

Net income

   $ 349,099    $ 451,022    $ 234,367
    

  

  

Per share of common stock:

                    

Net income:

                    

Basic

   $ 4.04    $ 5.89    $ 3.27
    

  

  

Diluted

   $ 3.83    $ 5.22    $ 2.92
    

  

  

Weighted-average shares:

                    

Basic

     86,430      76,632      71,594
    

  

  

Diluted

     91,895      87,765      82,580
    

  

  

 

Liquidity and Capital Resources

 

Cash provided by operating activities amounted to $678.9 million, $830.1 million and $540.6 million for 2004, 2003 and 2002, respectively, after net claim payments of $268.0 million, $269.5 million and $193.1 million, respectively. The principal nonoperating uses of cash and cash equivalents for the three-year period ended December 31, 2004, were for the $375 million acquisition of Transamerica’s flood determination and tax reporting businesses, other company acquisitions, additions to the investment portfolio, capital expenditures, dividends, distributions to minority shareholders, the repayment of debt and the repurchase of Company shares. The most significant nonoperating sources of cash and cash equivalents were proceeds from the issuance of debt in 2004 and 2003, proceeds from the sale-leaseback of certain equipment and capitalized software in 2004 and proceeds from the sales and maturities of certain investments. The net effect of all activities on total cash and cash equivalents was an increase of $168.8 million for 2004, $220.2 million for 2003 and $251.3 million for 2002.

 

Notes and contracts payable, as a percentage of total capitalization, was 22.7% as of December 31, 2004, as compared with 23.1% as of the prior year-end. This decrease was primarily attributable to the redemption of the Company’s senior convertible debentures and an increase in the capital base primarily due to net income for the year, offset in part by indebtedness incurred in connection with a sale–leaseback transaction. Notes and contracts payable are more fully described in Note 9 to the consolidated financial statements. In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The implementation of this statement required the Company to reclassify its “Mandatorily redeemable preferred securities of the Company’s subsidiary trust whose sole assets are the Company’s $100.0 million 8.5% deferrable interest subordinated notes due 2012” as debt.

 

28


Table of Contents

On December 31, 2004, the Company entered into a sale-leaseback transaction for certain equipment and software. The transaction totaled $122.0 million and was accounted for as a capital lease in the accompanying consolidated financial statements.

 

In August 2004, the Company increased its primary line of credit facility from $200.0 million to $500.0 million with a new expiration date of August 2009. The terms of the credit agreement remained relatively the same, with the Company required to maintain certain minimum levels of capital and earnings and meet predetermined debt-to-capitalization ratios. The Company’s credit facility was unused at December 31, 2004 and 2003. The Company’s publicly traded subsidiary, First Advantage Corporation has two bank credit agreements. The first agreement provides for a $20.0 million collateralized line of credit. Under the terms of that credit agreement, First Advantage Corporation is required to satisfy certain financial requirements. The line of credit remains in effect until July 2006 and had a balance due of $12.5 million and $9.0 million at December 31, 2004 and 2003, respectively. The second credit agreement entered into in March 2004 provides for a $25.0 million unsecured line of credit. This credit agreement matures in March 2007 and had a balance due of $25.0 million at December 31, 2004.

 

In July 2004, the Company sold unsecured debt securities in the aggregate principal amount of $150.0 million. These securities, which bear interest at 5.7%, are due August 2014. The Company anticipates using the proceeds from the sale of the securities for general corporate purposes.

 

In the first quarter of 2004, the Company began the expansion of its corporate office campus. This expansion will add two 4-story office buildings totaling approximately 226,000 square feet, a 2-story, free-standing, 52,000 square foot technology center and a 2-story parking structure. The construction is estimated to be completed by the fourth quarter of 2005 with an estimated total cost of $80.0 million. The Company has been funding and anticipates to continue funding the corporate office expansion with internally generated funds.

 

On October 1, 2003, the Company completed the previously announced acquisition of Transamerica Finance Corporation’s real estate tax service and flood hazard certification business for a net purchase price of $375.0 million. The acquisition was made through the Company’s 80.0% owned joint venture with Experian. There was no debt assumed in the transaction and the purchase price was funded with $125.0 million of existing cash at the joint venture, a $200.0 million contribution from the Company and a $50.0 million contribution from Experian.

 

Off-balance sheet arrangements and contractual obligations.    The Company administers escrow and trust deposits as a service to its customers. Escrow deposits totaled $4.8 billion and $4.5 billion at December 31, 2004 and 2003, respectively, of which $337.4 million and $247.8 million were held at the Company’s trust and thrift division. The escrow deposits held at the Company’s trust and thrift division are included in the accompanying consolidated balance sheets. The remaining escrow deposits were held at third party financial institutions. Trust deposits totaled $2.9 billion and $2.3 billion at December 31, 2004 and 2003, respectively, and were held at the Company’s trust division. Escrow deposits held at third party financial institutions and trust deposits are not considered assets of the Company and, therefore, are not included in the accompanying consolidated balance sheets. However, the Company remains contingently liable for the disposition of these assets.

 

In addition, the Company facilitates tax-deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code and tax-deferred reverse exchanges pursuant to Revenue Procedure 2000-37. As a facilitator and intermediary, the Company holds the proceeds from sales transactions and takes temporary title to property identified by the customer to be acquired with such proceeds. Upon the completion of such exchange the identified property is transferred to the customer or, if the exchange does not take place, an amount equal to the sales proceeds or, in the case of a reverse exchange, title to the property held by the Company is transferred to the customer. Like-kind exchange funds held by the Company for the purpose of completing such transactions totaled $1.9 billion and $1.1 billion at December 31, 2004 and 2003, respectively. Though the Company is the legal and beneficial owner of such proceeds and property, due to the structure utilized to facilitate these

 

29


Table of Contents

transactions the proceeds and property are not considered assets of the Company for accounting purposes and, therefore, are not included in the accompanying consolidated balance sheets. The Company remains contingently liable to the customer for the transfers of property, disbursements of proceeds and the return on the proceeds.

 

A summary, by due date, of the Company’s total contractual obligations at December 31, 2004, is as follows:

 

     Notes and
contracts
payable


   Operating
leases


   Deferrable
interest
subordinated
notes


   Total

     (in thousands)

2005

   $ 104,570    $ 176,333      —      $ 280,903

2006

     129,098      127,028      —        256,126

2007

     114,312      85,474      —        199,786

2008

     86,180      46,465      —        132,645

2009

     15,120      26,172      —        41,292

Later Years

     283,490      21,079    $ 100,000      404,569
    

  

  

  

     $ 732,770    $ 482,551    $ 100,000    $ 1,315,321
    

  

  

  

 

Pursuant to various insurance and other regulations, the maximum amount of dividends, loans and advances available to the Company in 2004 from its insurance subsidiaries is $210.2 million. Such restrictions have not had, nor are they expected to have, an impact on the Company’s ability to meet its cash obligations. See Note 2 to the consolidated financial statements.

 

Due to the Company’s significant liquid-asset position and its consistent ability to generate cash flows from operations, management believes that its resources are sufficient to satisfy its anticipated operational cash requirements. The Company’s financial position will enable management to react to future opportunities for acquisitions or other investments in support of the Company’s continued growth and expansion.

 

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Table of Contents

Item 7A.    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 table below provides information about certain assets and liabilities that are sensitive to changes in interest rates and presents cash flows and the related weighted average interest rates by expected maturity dates. The Company is also subject to equity price risk as related to its equity securities. At December 31, 2004, the Company had equity securities with a book value of $49.9 million and fair value of $46.2 million. 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.

 

     2005

    2006

    2007

    2008

    2009

    Thereafter

    Total

   Fair
Value


 
     (in thousands except percentages)  

Assets

                                                       

Deposits with Savings and Loans

                                                       

Book Value

   $ 94,445                                     $ 94,445    $ 94,445  

Ave. Interest Rate

     1.94 %                                            100.0 %

Debt Securities

                                                       

Book Value

   $ 49,948     39,758     43,992     39,249     69,601       454,055     $ 696,603    $ 705,674  

Ave. Interest Rate

     3.94 %   4.33 %   4.34 %   4.05 %   4.31 %     4.43 %            101.3 %

Loans Receivable

                                                       

Book Value

   $ 3     0     4     473     1,815       99,046     $ 101,341    $ 101,355  

Ave. Interest Rate

     8.33 %   0.00 %   8.09 %   9.00 %   8.32 %     6.42 %            100.0 %

Liabilities

                                                       

Interest Bearing Escrow Deposits

                                                       

Book Value

   $ 159,776                                     $ 159,776    $ 159,776  

Ave. Interest Rate

     1.10 %                                            100.0 %

Variable Rate Demand Deposits

                                                       

Book Value

   $ 18,126                                     $ 18,126    $ 18,126  

Ave. Interest Rate

     2.20 %                                            100.0 %

Fixed Rate Demand Deposits

                                                       

Book Value

   $ 23,819     10,268     5,223     2,418     2,176             $ 43,904    $ 44,097  

Ave. Interest Rate

     2.71 %   3.21 %   4.16 %   3.77 %   4.38 %                    100.4 %

Notes Payable

                                                       

Book Value

   $ 104,570     129,098     114,312     86,180     15,120       283,490     $ 732,770    $ 735,100  

Ave. Interest Rate

     5.57 %   5.52 %   4.85 %   5.58 %   5.21 %     6.21 %            101.9 %

Deferrable Interest Subordinates Notes

                                                       

Book Value

                                   $ 100,000     $ 100,000    $ 100,000  

Ave. Interest Rate

                                     8.50 %            100.0 %

 

Item 8.    Financial Statements and Supplementary Data

 

Separate financial statements for subsidiaries not consolidated and 50% or less owned persons accounted for by the equity method have been omitted because, if considered in the aggregate, they would not constitute a significant subsidiary.

 

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Table of Contents

INDEX

 

         Page No.

Report of Independent Registered Public Accounting Firm

   33

Financial Statements:

    
   

Consolidated Balance Sheets

   35
   

Consolidated Statements of Income and Comprehensive Income

   36
   

Consolidated Statements of Stockholders’ Equity

   37
   

Consolidated Statements of Cash Flows

   38
   

Notes to Consolidated Financial Statements

   39
   

Unaudited Quarterly Financial Data

   67

Financial Statement Schedules:

    
   

I.

  Summary of Investments—Other than Investments in Related Parties    68
   

III.

  Supplementary Insurance Information    69
   

IV.

  Reinsurance    71
   

V.

  Valuation and Qualifying Accounts    72

 

Financial statement schedules not listed are either omitted because they are not applicable or the required information is shown in the consolidated financial statements or in the notes thereto.

 

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

The First American Corporation:

 

We have completed an integrated audit of The First American Corporation’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

 

Consolidated financial statements and financial statement schedules

 

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of The First American Corporation and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

Internal control over financial reporting

 

Also, in our opinion, management’s assessment, included in “Management’s Report on Internal Control Over Financial Reporting”, appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting

 

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Table of Contents

includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

PricewaterhouseCoopers LLP

Orange County, California

March 16, 2005

 

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Table of Contents

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

CONSOLIDATED BALANCE SHEETS

(in thousands, except percentage and share data)

 

     December 31

 
     2004

    2003

 

ASSETS

                

Cash and cash equivalents

   $ 1,336,643     $ 1,167,799  
    


 


Accounts and accrued income receivable, less allowances ($62,730 and $55,112)

     438,365       347,035  
    


 


Income taxes receivable

     34,074       —    
    


 


Investments:

                

Deposits with savings and loan associations and banks

     94,445       57,945  

Debt securities

     705,674       543,997  

Equity securities

     46,190       45,758  

Other long-term investments

     305,571       233,794  
    


 


       1,151,880       881,494  
    


 


Loans receivable, net

     101,341       105,228  
    


 


Property and equipment, net

     593,401       478,016  
    


 


Title plants and other indexes

     497,430       426,086  
    


 


Deferred income taxes

     39,886       141,622  
    


 


Goodwill, net

     1,605,879       1,253,080  
    


 


Other assets

     409,466       339,542  
    


 


     $ 6,208,365     $ 5,139,902  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY

                

Demand deposits

   $ 399,429     $ 324,371  
    


 


Accounts payable and accrued liabilities:

                

Accounts payable

     128,214       72,315  

Salaries and other personnel costs

     228,393       227,193  

Pension costs and other retirement plans

     237,827       218,249  

Other

     289,327       301,258  
    


 


       883,761       819,015  
    


 


Deferred revenue

     729,537       719,503  
    


 


Reserve for known and incurred but not reported claims

     526,516       435,852  
    


 


Income taxes payable

     —         4,017  
    


 


Notes and contracts payable

     732,770       553,888  
    


 


Deferrable interest subordinated notes

     100,000       100,000  
    


 


Minority interests in consolidated subsidiaries

     372,788       303,736  
    


 


Commitments and contingencies

                

Stockholders’ equity:

                

Preferred stock, $1 par value

                

Authorized—500,000 shares; Outstanding—None

                

Common stock, $1 par value

                

Authorized—180,000,000 shares Outstanding— 90,058,000 and 78,826,000 shares

     90,058       78,826  

Additional paid-in capital

     757,931       463,610  

Retained earnings

     1,696,636       1,399,940  

Accumulated other comprehensive loss

     (81,061 )     (62,856 )
    


 


Total stockholders’ equity

     2,463,564       1,879,520  
    


 


     $ 6,208,365     $ 5,139,902  
    


 


 

See Notes to Consolidated Financial Statements

 

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Table of Contents

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(in thousands, except per share amounts)

 

     Year Ended December 31

 
     2004

    2003

    2002

 

Revenues:

                        

Operating revenues

   $ 6,570,746     $ 6,032,643     $ 4,591,541  

Investment and other income

     141,796       145,354       131,560  

Net realized investment gains (losses)

     9,784       35,717       (18,892 )
    


 


 


       6,722,326       6,213,714       4,704,209  
    


 


 


Expenses:

                        

Salaries and other personnel costs

     2,111,215       1,799,553       1,523,195  

Premiums retained by agents

     1,869,536       1,729,104       1,292,297  

Other operating expenses

     1,488,937       1,319,875       1,049,125  

Provision for title losses and other claims

     349,618       324,404       224,589  

Depreciation and amortization

     128,978       114,424       96,829  

Premium taxes

     52,935       51,535       34,658  

Interest

     43,823       36,097       33,609  
    


 


 


       6,045,042       5,374,992       4,254,302  
    


 


 


Income before income taxes and minority interests

     677,284       838,722       449,907  

Income taxes

     243,200       292,000       149,900  
    


 


 


Income before minority interests

     434,084       546,722       300,007  

Minority interests

     84,985       95,700       65,640  
    


 


 


Net income

     349,099       451,022       234,367  
    


 


 


Other comprehensive income (loss), net of tax:

                        

Unrealized gain (loss) on securities

     997       3,831       (1,199 )

Minimum pension liability adjustment

     (19,202 )     (10,228 )     (41,644 )
    


 


 


       (18,205 )     (6,397 )     (42,843 )
    


 


 


Comprehensive income

   $ 330,894     $ 444,625     $ 191,524  
    


 


 


Net income per share:

                        

Basic

   $ 4.04     $ 5.89     $ 3.27  
    


 


 


Diluted

   $ 3.83     $ 5.22     $ 2.92  
    


 


 


Weighted-average common shares outstanding:

                        

Basic

     86,430       76,632       71,594  
    


 


 


Diluted

     91,895       87,765       82,580  
    


 


 


 

See Notes to Consolidated Financial Statements

 

36


Table of Contents

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

 

     Shares

    Common
Stock


    Additional
paid-in
capital


    Retained
earnings


    Accumulated
other
comprehensive
income (loss)


    Total

 

Balance at December 31, 2001

   68,694     $ 68,694     $ 271,403     $ 777,971     $ (13,616 )   $ 1,104,452  

Net income for 2002

                           234,367               234,367  

Cash dividends on common shares

                           (24,570 )             (24,570 )

Shares issued in connection with company acquisitions

   3,094       3,094       58,257                       61,351  

Shares issued in connection with option, benefit and savings plans

   1,848       1,848       29,984                       31,832  

Other comprehensive loss

                                   (42,843 )     (42,843 )
    

 


 


 


 


 


Balance at December 31, 2002

   73,636       73,636       359,644       987,768       (56,459 )     1,364,589  

Net income for 2003

                           451,022               451,022  

Cash dividends on common shares

                           (38,850 )             (38,850 )

Shares issued in connection with company acquisitions

   1,067       1,067       27,413                       28,480  

Shares issued in connection with option, benefit and savings plans

   4,123       4,123       76,553                       80,676  

Other comprehensive loss

                                   (6,397 )     (6,397 )
    

 


 


 


 


 


Balance at December 31, 2003

   78,826       78,826       463,610       1,399,940       (62,856 )     1,879,520  

Net income for 2004

                           349,099               349,099  

Cash dividends on common shares

                           (52,403 )             (52,403 )

Purchase of Company shares

   (1,465 )     (1,465 )     (37,499 )                     (38,964 )

Conversion of debt

   7,458       7,458       198,270                       205,728  

Shares issued in connection with company acquisitions

   1,648       1,648       45,314                       46,962  

Shares issued in connection with option, benefit and savings plans

   3,591       3,591       88,236                       91,827  

Other comprehensive loss

                                   (18,205 )     (18,205 )
    

 


 


 


 


 


Balance at December 31, 2004

   90,058     $ 90,058     $ 757,931     $ 1,696,636     $ (81,061 )   $ 2,463,564  
    

 


 


 


 


 


 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Year Ended December 31

 
     2004

    2003

    2002

 

CASH FLOWS FROM OPERATING ACTIVITIES:

                        

Net income

   $ 349,099     $ 451,022     $ 234,367  

Adjustments to reconcile net income to cash provided by operating activities:

                        

Provision for title losses and other claims

     349,618       324,404       224,589  

Depreciation and amortization

     128,978       114,424       96,829  

Minority interests in net income

     84,985       95,700       65,640  

Realized investment (gains) losses

     (9,784 )     (35,717 )     18,892  

Other, net

     (53,455 )     (59,789 )     (43,337 )

Changes in assets and liabilities excluding effects of company acquisitions and noncash transactions:

                        

Claims paid, including assets acquired, net of recoveries

     (268,025 )     (269,468 )     (193,105 )

Net change in income tax accounts

     81,652       (4,975 )     (8,376 )

Increase in accounts and accrued income receivable

     (62,533 )     (17,443 )     (17,223 )

Increase in accounts payable and accrued liabilities

     20,373       161,140       95,531  

Increase in deferred revenue

     5,613       129,507       66,047  

Other, net

     52,333       (58,685 )     753  
    


 


 


Cash provided by operating activities

     678,854       830,120       540,607  
    


 


 


CASH FLOWS FROM INVESTING ACTIVITIES:

                        

Net cash effect of company acquisitions/dispositions

     (329,652 )     (499,038 )     (51,450 )

Net increase in deposits with banks

     (14,668 )     (13,768 )     (11,905 )

Purchases of debt and equity securities

     (354,350 )     (388,165 )     (320,978 )

Proceeds from sales of debt and equity securities

     97,414       232,941       116,701  

Proceeds from maturities of debt securities

     101,425       52,857       127,187  

Net decrease in other long-term investments

     8,611       42,110       24,859  

Net decrease (increase) in loans receivable

     3,887       2,934       (3,898 )

Capital expenditures

     (201,803 )     (98,963 )     (94,672 )

Purchases of capitalized data

     (19,485 )     (19,866 )     (17,745 )

Proceeds from sale of property and equipment

     7,741       3,373       3,661  
    


 


 


Cash used for investing activities

     (700,880 )     (685,585 )     (228,240 )
    


 


 


CASH FLOWS FROM FINANCING ACTIVITIES:

                        

Net change in demand deposits

     75,020       67,658       25,042  

Proceeds from issuance of notes and capital lease

     325,933       177,117       9,919  

Repayment of debt

     (107,180 )     (152,722 )     (40,414 )

Purchase of Company shares

     (38,964 )     —         —    

Proceeds from exercise of stock options

     27,509       26,500       8,401  

Proceeds from issuance of stock to employee benefit plans

     6,993       5,989       4,433  

Contributions from minority shareholders

     12,100       58,000       —    

Distributions to minority shareholders

     (58,138 )     (72,882 )     (43,903 )

Cash dividends

     (52,403 )     (34,008 )     (24,570 )
    


 


 


Cash provided by (used for) financing activities

     190,870       75,652       (61,092 )
    


 


 


Net increase in cash and cash equivalents

     168,844       220,187       251,275  

Cash and cash equivalents—Beginning of year

     1,167,799       947,612       696,337  
    


 


 


Cash and cash equivalents—End of year

   $ 1,336,643     $ 1,167,799     $ 947,612  
    


 


 


SUPPLEMENTAL INFORMATION:

                        

Cash paid during the year for:

                        

Interest

   $ 41,679     $ 36,276     $ 33,281  

Premium taxes

   $ 59,335     $ 46,723     $ 30,655  

Income taxes

   $ 170,811     $ 296,227     $ 157,528  

Noncash investing and financing activities:

                        

Shares issued for benefits plans

   $ 57,325     $ 48,187     $ 18,998  

Shares issued in repayment of convertible debt

   $ 205,728     $ —       $ —    

Company acquisitions in exchange for common stock

   $ 46,962     $ 28,480     $ 61,351  

Liabilities in connection with company acquisitions

   $ 202,084     $ 330,599     $ 55,761  

 

See Notes to Consolidated Financial Statements

 

 

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THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1.    Description of the Company:

 

The First American Corporation (the Company), through its subsidiaries, is engaged in the business of providing business information and related products and services. The Company has six reporting segments that fall within two primary business groups, financial services and information technology. The Financial Services group includes the Company’s title insurance and services segment and its specialty insurance segment. The title insurance and services segment issues residential and commercial title insurance policies, provides escrow services, equity loan services, tax-deferred exchanges, investment advisory, trust and thrift services, and other related products and services. The specialty insurance segment issues property and casualty insurance policies and provides home warranties. The Information Technology group includes the Company’s mortgage information, property information, credit information and screening information segments. The mortgage information segment provides tax monitoring, flood zone certification, default management services and other real estate related services. The property information segment provides property database services and appraisal services. The credit information segment provides mortgage credit and specialized credit reporting services. The screening information segment provides resident screening, employment screening, substance abuse management and testing, consumer direct location services and motor vehicle reporting and other related services.

 

Significant Accounting Policies:

 

Principles of consolidation

 

The consolidated financial statements include the accounts of The First American Corporation and all controlled subsidiaries. All significant intercompany transactions and balances have been eliminated. In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). This interpretation requires the consolidation of variable interest entities (VIEs) created or acquired if certain conditions are met. During December 2003, the FASB issued FIN 46 revised (FIN 46R) to defer the implementation date for pre-existing VIEs that are not special purpose entities until the end of the first interim or annual period ending after December 15, 2003. For VIEs that are not special purpose entities, companies must apply FIN 46R no later than the end of the first reporting period ending after March 15, 2004. The adoption of FIN 46 as revised by FIN 46R did not have a material impact on the Company’s financial condition or results of operations.

 

Certain 2002 and 2003 amounts have been reclassified to conform to the 2004 presentation.

 

Cash equivalents

 

The Company considers cash equivalents to be all short-term investments that have an initial maturity of 90 days or less and are not restricted for statutory deposit or premium reserve requirements. The carrying amount for cash equivalents is a reasonable estimate of fair value due to the short-term maturity of these investments.

 

Investments

 

Deposits with savings and loan associations and banks are short-term investments with initial maturities of more than 90 days. The carrying amount of these investments is a reasonable estimate of fair value due to their short-term nature.

 

Debt securities are carried at fair value and consist primarily of investments in obligations of the United States Treasury, various corporations, certain state and political subdivisions and mortgage-backed securities.

 

Equity securities are carried at fair value and consist primarily of investments in marketable common stocks of corporate entities.

 

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THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Other long-term investments consist primarily of investments in affiliates, which are accounted for under the equity method of accounting, and notes receivable and other investments, which are carried at the lower of cost or fair value less costs to sell.

 

The Company classifies its debt and equity securities portfolio as available-for-sale. This portfolio is continually monitored for differences between the cost and estimated fair value of each security. If the Company believes that a decline in the value of a debt or equity security is temporary in nature, it records the decline as an unrealized loss in stockholders’ equity. If the decline is believed to be other than temporary, the debt or equity security is written down to the carrying value and a realized loss is recorded on the Company’s statement of income. Management’s assessment of a decline in value includes, among other things, its current judgment as to the financial position and future prospects of the entity that issued the security. If that judgment changes in the future, the Company may ultimately record a realized loss after having initially concluded that the decline in value was temporary.

 

Property and equipment

 

Property and equipment includes computer software acquired or developed for internal use and for use with the Company’s products. Software development costs, which include capitalized interest costs and certain payroll-related costs of employees directly associated with developing software, in addition to incremental payments to third parties, are capitalized from the time technological feasibility is established until the software is ready for use.

 

Depreciation on buildings and on furniture and equipment is computed using the straight-line method over estimated useful lives of 25 to 40 and 3 to 10 years, respectively. Capitalized software costs are amortized using the straight-line method over estimated useful lives of 3 to 10 years.

 

Title plants and other indexes

 

Title plants and other indexes include the Company’s title plants, flood zone databases and capitalized real estate data. Title plants and flood zone databases are carried at original cost, with the costs of daily maintenance (updating) charged to expense as incurred. Because properly maintained title plants and flood zone databases have indefinite lives and do not diminish in value with the passage of time, no provision has been made for depreciation or amortization. Capitalized real estate data, which is primarily used by the Company’s property information segment, is amortized using the straight-line method over estimated useful lives of 5 to 15 years. The Company continually analyzes its title plant and other indexes for impairment. This analysis includes, but is not limited to, the effects of obsolescence, duplication, demand and other economic factors.

 

Assets acquired in connection with claim settlements

 

In connection with settlement of title insurance and other claims, the Company sometimes purchases mortgages, deeds of trust, real property or judgment liens. These assets, sometimes referred to as “salvage assets,” are carried at the lower of cost or fair value less costs to sell and are included in “Other assets” in the Company’s consolidated balance sheets. The balance for these assets was $40.1 million and $42.7 million at December 31, 2004 and 2003, respectively.

 

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THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Goodwill

 

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 intangible assets. In accordance with the provisions of SFAS 142, goodwill is no longer amortized but is rather tested at least annually for impairment. The Company has selected September 30 as the annual valuation date to test goodwill for impairment.

 

Impairment of long-lived assets and loans receivable

 

On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” (SFAS 144). This standard requires that the Company test long-lived assets for impairment whenever there are recognized events or changes in circumstances that could affect the carrying value of the long-lived assets. In accordance with SFAS 144, management uses estimated expected future cash flows (undiscounted and excluding interest costs) to measure the recoverability of long-lived assets held and used. As of December 31, 2004 and 2003, no indications of impairment were identified. SFAS 144 also requires that long-lived assets classified as held for sale be carried at the lower of cost or market as of the date the criteria established by SFAS 144 have been met. As of December 31, 2004 and 2003, no long-lived assets were classified as held for sale.

 

Loans receivable are impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans receivable are measured at the present value of expected future cash flows discounted at the loan’s effective interest rate. As a practical expedient, the loan may be valued based on its observable market price or the fair value of the collateral, if the loan is collateral-dependent. No indications of impairment of loans receivable were identified during the three year period ended December 31, 2004.

 

Reserve for known and incurred but not reported claims

 

The Company provides for estimated title insurance losses by a charge to expense when the related premium revenue is recognized. The amount charged to expense (the loss rate), as well as the adequacy of the ending reserves, is determined by the Company based on historical experience and other factors, including, but not limited to, changes and trends in the type of title insurance policies issued, the real estate market and the interest rate environment. Management monitors the adequacy of the estimated loss reserves on a quarterly basis using a variety of techniques, including actuarial models, and adjusts the loss rate as necessary. Title insurance losses and other claims associated with ceded reinsurance are provided for as the Company remains contingently liable in the event that the reinsurer does not satisfy its obligations.

 

The Company provides for property and casualty insurance losses based upon its historical experience by a charge to expense when the related premium revenue is recognized.

 

The Company provides for claims losses relating to its home warranty business based on the average cost per claim as applied to the total of new claims incurred. The average cost per home warranty claim is calculated using the average of the most recent 12 months of claims experience.

 

The reserve for known and incurred but not reported claims reflects management’s best estimate of the total costs required to settle all claims reported to the Company and claims incurred but not reported.

 

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THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Operating revenues

 

Financial Services GroupTitle premiums on policies issued directly by the Company are recognized on the effective date of the title policy and escrow fees are recorded upon close of the escrow. Revenues from title policies issued by independent agents are recorded when notice of issuance is received from the agent.

 

Revenues from home warranty contracts are recognized ratably over the 12-month duration of the contracts. Revenues from property and casualty insurance policies are recognized ratably over the 12-month duration of the policies.

 

Interest on loans with the Company’s thrift subsidiary is recognized on the outstanding principal balance on the accrual basis. Loan origination fees and related direct loan origination costs are deferred and recognized over the life of the loan. Revenues earned by the other products in the trust and banking operations of the Company are recognized at the time of delivery, as the Company has no significant ongoing obligation after delivery.

 

Information Technology GroupThe Company’s tax service division defers the tax service fee and recognizes that fee as revenue ratably over the expected service period. The amortization rates applied to recognize the revenues assume a 10-year contract life and are adjusted to reflect prepayments. The Company reviews its tax service contract portfolio quarterly to determine if there have been changes in contract lives and/or changes in the number and/or timing of prepayments. Accordingly, the Company may adjust the rates to reflect current trends. Revenues earned by the other products in the Information Technology group are recognized at the time of delivery, as the Company has no significant ongoing obligation after delivery.

 

Premium taxes

 

Title insurance, property and casualty insurance and home warranty companies, like other types of insurers, are generally not subject to state income or franchise taxes. However, in lieu thereof, most states impose a tax based primarily on insurance premiums written. This premium tax is reported as a separate line item in the consolidated statements of income in order to provide a more meaningful disclosure of the taxation of the Company.

 

Income taxes

 

Taxes are based on income for financial reporting purposes and include deferred taxes applicable to temporary differences between the financial statement carrying amount and the tax basis of certain of the Company’s assets and liabilities.

 

Earnings per share

 

Basic earnings per share are computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that net income is increased by the effect of interest expense, net of tax, on the Company’s convertible debt; and the weighted-average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if dilutive stock options had been exercised and the debt had been converted.

 

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THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Risk of real estate market

 

Real estate activity is cyclical in nature and is affected greatly by the cost and availability of long-term mortgage funds. Real estate activity and, in turn, the majority of the Company’s revenues can be adversely affected during periods of high interest rates and/or limited money supply.

 

Use of estimates

 

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the statements. Actual results could differ from the estimates and assumptions used.

 

Escrow and trust deposits

 

The Company administers escrow and trust deposits as a service to its customers. Escrow deposits totaled $4.8 billion and $4.5 billion at December 31, 2004 and 2003, respectively, of which $337.4 million and $247.8 million were held at the Company’s trust and thrift division. The escrow deposits held at the Company’s trust and thrift division are included in the accompanying consolidated balance sheets, with $43.3 million and $54.3 million included in cash and cash equivalents and $294.1 million and $193.5 million included in debt securities at December 31, 2004 and 2003, respectively. The remaining escrow deposits were held at third party financial institutions. Trust deposits totaled $2.9 billion and $2.3 billion at December 31, 2004 and 2003, respectively, and were held at the Company’s trust division. Escrow deposits held at third party financial institutions and trust deposits are not considered assets of the Company and, therefore, are not included in the accompanying consolidated balance sheets. However, the Company remains contingently liable for the disposition of these assets.

 

Like-kind exchanges

 

In addition, the Company facilitates tax-deferred property exchanges pursuant to Section 1031 of the Internal Revenue Code and tax-deferred reverse exchanges pursuant to Revenue Procedure 2000-37. As a facilitator and intermediary, the Company holds the proceeds from sales transactions and takes temporary title to property identified by the customer to be acquired with such proceeds. Upon the completion of such exchange the identified property is transferred to the customer or, if the exchange does not take place, an amount equal to the sales proceeds or, in the case of a reverse exchange, title to the property held by the Company is transferred to the customer. Like-kind exchange funds held by the Company for the purpose of completing such transactions totaled $1.9 billion and $1.1 billion at December 31, 2004 and 2003, respectively. Though the Company is the legal and beneficial owner of such proceeds and property, due to the structure utilized to facilitate these transactions the proceeds and property are not considered assets of the Company for accounting purposes and, therefore, are not included in the accompanying consolidated balance sheets. The Company remains contingently liable to the customer for the transfers of property, disbursements of proceeds and a return on the proceeds.

 

NOTE 2.    Statutory Restrictions on Investments and Stockholders’ Equity:

 

Investments carried at $60.8 million were on deposit with state treasurers in accordance with statutory requirements for the protection of policyholders at December 31, 2004.

 

Pursuant to insurance and other regulations of the various states in which the Company’s insurance subsidiaries operate, the amount of dividends, loans and advances available to the Company is limited,

 

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THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

principally for the protection of policyholders. Under such statutory regulations, the maximum amount of dividends, loans and advances available to the Company from its insurance subsidiaries in 2005 is $210.2 million.

 

The Company’s title insurance subsidiary, First American Title Insurance Company, maintained statutory capital and surplus of $746.0 million and $746.6 million at December 31, 2004 and 2003, respectively. Statutory net income for the years ended December 31, 2004, 2003 and 2002, was $130.5 million, $229.9 million and $132.0 million, respectively.

 

The escrow deposits held by the Company’s trust operations are restricted in use in accordance with regulations of the Office of Thrift Supervision.

 

NOTE 3.    Debt and Equity Securities:

 

The amortized cost and estimated fair value of investments in debt securities are as follows:

 

     Amortized
cost


   Gross unrealized

    Estimated
fair value


        gains

   losses

   
     (in thousands)

December 31, 2004

                            

U.S. Treasury securities

   $ 112,197    $ 1,442    $ (243 )   $ 113,396

Corporate securities

     160,174      5,593      (302 )     165,465

Obligations of states and political subdivisions

     93,740      2,797      (99 )     96,438

Mortgage-backed securities

     330,492      150      (267 )     330,375
    

  

  


 

     $ 696,603    $ 9,982    $ (911 )   $ 705,674
    

  

  


 

December 31, 2003

                            

U.S. Treasury securities

   $ 106,064    $ 2,399    $ (120 )   $ 108,343

Corporate securities

     136,574      7,464      (287 )     143,751

Obligations of states and political subdivisions

     79,726      3,713      (200 )     83,239

Mortgage-backed securities

     208,888      633      (857 )     208,664
    

  

  


 

     $ 531,252    $ 14,209    $ (1,464 )   $ 543,997
    

  

  


 

 

The amortized cost and estimated fair value of debt securities at December 31, 2004, by contractual maturities, are as follows:

 

     Amortized
cost


   Estimated
fair value


     (in thousands)

Due in one year or less

   $ 49,370    $ 49,776

Due after one year through five years

     169,658      174,310

Due after five years through ten years

     125,902      128,206

Due after ten years

     21,181      23,007
    

  

       366,111      375,299

Mortgage-backed securities

     330,492      330,375
    

  

     $ 696,603    $ 705,674
    

  

 

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THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The cost and estimated fair value of investments in equity securities are as follows:

 

          Gross unrealized

    Estimated
fair value


     Cost

   gains

   losses

   
          (in thousands)      

December 31, 2004

                            

Preferred stock:

                            

Other

   $ 2,554    $ 143    $ (217 )   $ 2,480

Common stocks:

                            

Corporate securities

     47,263      4,953      (8,649 )     43,567

Other

     80      68      (5 )     143
    

  

  


 

     $ 49,897    $ 5,164    $ (8,871 )   $ 46,190
    

  

  


 

December 31, 2003

                            

Preferred stock:

                            

Other

   $ 2,925    $ 312    $ (1 )   $ 3,236

Common stocks:

                            

Corporate securities

     46,625      4,707      (8,914 )     42,418

Other

     81      34      (11 )     104
    

  

  


 

     $ 49,631    $ 5,053    $ (8,926 )   $ 45,758
    

  

  


 

 

The fair value of debt and equity securities was estimated using quoted market prices. Sales of debt and equity securities resulted in realized gains of $2.9 million, $7.0 million and $2.2 million; and realized losses of $0.6 million, $3.1 million and $4.8 million for the years ended December 31, 2004, 2003 and 2002, respectively.

 

In accordance with the enhanced disclosure provisions of Emerging Issues Task Force Issue No. 03-1, “The Meaning of Other-Than Temporary Impairment and Its Application to Certain Investments,” the Company, at December 31, 2004 had gross unrealized losses of $.9 million from debt securities that had been in an unrealized loss position for less than 12 months. The fair value of those debt securities that had been in an unrealized loss position for less than 12 months is $99.3 million. At December 31, 2004, the Company had gross unrealized losses of $8.7 million from equity securities that had been in an unrealized loss position for 12 months or greater. The fair value of those equity securities that had been in an unrealized loss position for 12 months or greater was $17.6 million. Management has determined that the unrealized losses from debt and equity securities at December 31, 2004 are temporary in nature. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been below cost, the financial condition and near-term prospects of the issuer, and our ability and intent to hold the investment for a period of time sufficient to allow for anticipated recovery.

 

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THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 4.    Loans Receivable:

 

Loans receivable are summarized as follows:

 

     December 31

 
     2004

    2003

 
     (in thousands)  

Real estate—mortgage

   $ 105,454     $ 109,340  

Other

     7       8  
    


 


       105,461       109,348  

Allowance for loan losses

     (1,350 )     (1,290 )

Participations sold

     (2,516 )     (2,588 )

Deferred loan fees, net

     (254 )     (242 )
    


 


     $ 101,341     $ 105,228  
    


 


 

Real estate loans are collateralized by properties located primarily in Southern California. The average yield on the Company’s loan portfolio was 7.0% and 8.0% for the years ended December 31, 2004 and 2003, respectively. Average yields are affected by prepayment penalties recorded as income, loan fees amortized to income and the market interest rates charged by thrift and loan institutions.

 

The fair value of loans receivable was $101.4 million and $105.3 million at December 31, 2004 and 2003, respectively, and was estimated based on the discounted value of the future cash flows using the current rates being offered for loans with similar terms to borrowers of similar credit quality.

 

The allowance for loan losses is maintained at a level that is considered appropriate by management to provide for known risks in the portfolio.

 

The aggregate annual maturities for loans receivable in each of the five years after December 31, 2004, are as follows:

 

Year


   (in thousands)

2005

   $ 3

2006

   $ —  

2007

   $ 4

2008

   $ 473

2009

   $ 1,815

 

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THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 5.    Property and Equipment:

 

Property and equipment consists of the following:

 

     December 31

 
     2004

    2003

 
     (in thousands)  

Land

   $ 45,742     $ 43,327  

Buildings

     241,432       187,167  

Furniture and equipment

     369,038       286,337  

Capitalized software

     442,462       364,658  
    


 


       1,098,674       881,489  

Accumulated depreciation and amortization

     (505,273 )     (403,473 )
    


 


     $ 593,401     $ 478,016  
    


 


 

In December 2004, the Company entered into a sale-leaseback transaction for certain equipment and capitalized software. This transaction, which totaled $122.0 million, was accounted for as a capital lease. The assets and related obligation have been included in the accompanying consolidated financial statements.

 

NOTE 6.    Goodwill and Other Intangible Assets:

 

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 superceded Accounting Principles Board Opinions No. 17, “Intangible Assets.” SFAS 142 addresses how goodwill and other intangible assets should be accounted for in the financial statements. Pursuant to SFAS 142, the Company’s goodwill and intangible assets that have indefinite lives will not be amortized but rather will be tested at least annually for impairment. SFAS 142 requires that goodwill and other intangible assets be allocated to various reporting units that are either operating segments or one reporting unit below the operating segment. The Company’s reporting units, for purposes of applying the provisions of SFAS 142, are title insurance, home warranty, property and casualty insurance, trust and other services, mortgage origination products and services, mortgage servicing products and services, property information services, conventional credit information, subprime credit information, pre-employment and drug screening, resident screening and risk mitigation.

 

The SFAS 142 impairment testing process includes two phases. The first phase (Test 1) compares the fair value of each reporting unit to its book value. The fair value of each reporting unit is determined by using discounted cash flow analysis, market approach valuations and third-party valuation advisors. If the fair value of the reporting unit exceeds its book value, the goodwill is not considered impaired and no additional analysis is required. However, if the book value is greater than the fair value, a second test (Test 2) must be completed to determine if the fair value of the goodwill exceeds the book value. The fair value of the goodwill is determined by discounted cash flow analysis and appraised values. If the fair value is less than the book value, an impairment is considered to exist.

 

The Company has determined that its flood zone certification database, which is included in “Title plants and other indexes,” is an intangible asset with an indefinite life. Accordingly, this asset is not amortized but rather tested annually for impairment by comparing the fair value of the database with its carrying value. In addition, the Company had $154.0 million of intangible assets included in “Other assets” at December 31, 2004,

 

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THE FIRST AMERICAN CORPORATION

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

with definite lives ranging from three to ten years. These assets, comprised primarily of customer lists and noncompete agreements, are being amortized in a manner consistent with periods prior to the adoption of SFAS 142.

 

In accordance with the provisions of SFAS 142, the Company completed the required annual impairment tests of goodwill and intangible assets with indefinite lives for the years ended December 31, 2004 and 2003, and determined that there was no impairment of value.

 

A reconciliation of the changes in the carrying amount of net goodwill, by operating segment, as of December 31, 2004, is as follows:

 

     Balance as of
January 1,
2004


   Acquired/(disposed of)
during the year


   Post acquisition
Adjustments


   Balance as of
December 31,
2004


     (in thousands)

Financial Services:

                           

Title Insurance

   $ 260,152    $ 115,545    $ 1,239    $ 376,936

Specialty Insurance

     19,794      —        —        19,794

Information Technology:

                           

Mortgage Information

     545,612      32,125      5,985      583,722

Property Information

     150,399      96,840      199      247,438

Credit Information

     72,450      —        —        72,450

Screening Information

     204,673      99,863      1,003      305,539
    

  

  

  

     $ 1,253,080    $ 344,373    $ 8,426    $ 1,605,879
    

  

  

  

 

NOTE 7.    Demand Deposits:

 

Escrow, passbook and investment certificate accounts are summarized as follows:

 

     December 31

     2004

   2003

     (in thousands except
percentages)

Escrow accounts:

             

Interest bearing

   $ 159,776    $ 92,596

Non-interest bearing

     177,623      155,195
    

  

       337,399      247,791
    

  

Passbook accounts

     18,126      19,784
    

  

Certificate accounts:

             

Less than one year

     23,819      35,473

One to five years

     20,085      21,323
    

  

       43,904      56,796
    

  

     $ 399,429    $ 324,371
    

  

Annualized interest rates:

             

Escrow deposits

     1%      1%
    

  

Passbook accounts

     2%      2%
    

  

Certificate accounts

     2%-7%      2%-7%
    

  

 

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THE FIRST AMERICAN CORPORATION

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The carrying value of escrow and passbook accounts approximates fair value due to the short-term nature of this liability. The fair value of investment certificate accounts was $44.1 million and $57.1 million at December 31, 2004 and 2003, respectively, and was estimated based on the discounted value of future cash flows using a discount rate approximating current market for similar liabilities.

 

NOTE 8.    Reserve for Known and Incurred But Not Reported Claims:

 

Activity in the reserve for known and incurred but not reported claims is summarized as follows:

 

     December 31

 
     2004

   2003

    2002

 
     (in thousands)  

Balance at beginning of year

   $ 435,852    $ 360,305     $ 314,777  

Provision related to:

                       

Current year

     348,806      324,406       224,058  

Prior years

     812      (2 )     531  
    

  


 


       349,618      324,404       224,589  
    

  


 


Payments related to:

                       

Current year

     162,729      151,590       97,729  

Prior years

     105,559      117,896       79,888  
    

  


 


       268,288      269,486       177,617  
    

  


 


Other

     9,334      20,629       (1,444 )
    

  


 


Balance at end of year

   $ 526,516    $ 435,852     $ 360,305  
    

  


 


 

“Other” primarily represents reclassifications to the reserve for assets acquired in connection with claim settlements and purchase accounting adjustments related to company acquisitions. Included in “Other” for 2003 was a $16.0 million purchase accounting adjustment related to the acquisition of Transamerica Finance Corporation’s tax monitoring and flood zone certification businesses. Claims activity associated with reinsurance is not material and, therefore, not presented separately. Current year payments include $143.1 million, $133.3 million and $79.8 million in 2004, 2003 and 2002, respectively, that relate to the Company’s non-title insurance operations.

 

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THE FIRST AMERICAN CORPORATION

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 9.    Notes and Contracts Payable:

 

     December 31

     2004

   2003

     (in thousands)

4.5% senior convertible debentures, due April 2008

   $ —      $ 210,000

5.7% senior debenture, due August 2014

     149,598      —  

7.55% senior debentures, due April 2028

     99,572      99,558

Trust deed notes with maturities through 2023, collateralized by land and buildings with a net book value of $75,631, weighted-average interest rate of 5.5%

     64,771      62,360

Other notes and contracts payable with maturities through 2013, weighted-average interest rate of 5.9%

     296,829      181,970

Capital lease obligation

     122,000      —  
    

  

     $ 732,770    $ 553,888
    

  

 

In December 2004, the Company entered into a sale-leaseback transaction for certain equipment and capitalized software. The transaction totaled $122.0 million and was accounted for as a capital lease. The capital lease bears interest at a rate of 5.7% and has a base term of two years with three one-year renewal options. The assets and related obligation have been included in the accompanying consolidated financial statements.

 

In July 2004, the Company sold unsecured debt securities in the aggregate principal amount of $150.0 million. These securities, which bear interest at a fixed rate of 5.7%, are due August 2014.

 

In April 2004, the Company redeemed for cash $1.2 million of the $210.0 million aggregate principal outstanding on its 4.5% Senior Convertible Debentures Due 2008. Prior to the redemption date, holders had converted an aggregate principal amount of $208.8 million of debentures into 7,457,938 common shares of the Company at the fixed conversion price of $28 per share.

 

In October 2003, the Company obtained a $55.0 million loan collateralized by its corporate headquarters. This loan, which bears interest at the rate of 5.26%, will be repaid over a 20-year period and requires the Company to maintain certain minimum levels of capital and earnings.

 

The Company has also issued debt that is convertible into shares of its common stock to finance certain acquisitions. This debt, which is included in “Other notes and contracts payable,” is convertible at the option of each note holder at a conversion price of $30 per share. The balance of this convertible debt was $20.4 million and $24.5 million at December 31, 2004 and 2003, respectively.

 

In August 2004, the Company entered into a credit agreement that provides for a $500.0 million unsecured line of credit. This agreement supersedes the Company’s prior credit agreement that was scheduled to expire in July 2005. Under the terms of the credit agreement, the Company is required to maintain certain minimum levels of capital and earnings and meet predetermined debt-to-capitalization ratios. The line of credit remains in effect until August 2009 and was unused at December 31, 2004. The Company’s publicly traded subsidiary, First Advantage Corporation has two bank credit agreements. The first agreement provides for a $20.0 million collateralized line of credit. Under the terms of that credit agreement, First Advantage Corporation is required to satisfy certain financial requirements. The line of credit remains in effect until July 2006 and had a balance due of $12.5 and $9.0 million at December 31, 2004 and 2003, respectively. The second credit agreement entered into in March 2004 provides for a $25.0 million unsecured line of credit. This credit agreement matures in matures in March 2007 and had a balance due of $25.0 million at December 31, 2004.

 

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THE FIRST AMERICAN CORPORATION

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The aggregate annual maturities for notes and contracts payable and capital leases in each of the five years after December 31, 2004, are as follows:

 

Year


   Notes
payable


   Capital
lease


     (in thousands)

2005

   $ 82,196    $ 22,375

2006

   $ 105,424    $ 23,674

2007

   $ 89,263    $ 25,048

2008

   $ 35,277    $ 50,093

2009

   $ 15,120      —  

 

The fair value of notes and contracts payable was $742.5 million and $564.5 million at December 31, 2004 and 2003, respectively, and was estimated based on the current rates offered to the Company for debt of the same remaining maturities. The weighted-average interest rate for the Company’s notes and contracts payable was 5.7% and 5.5% at December 31, 2004 and 2003, respectively.

 

NOTE 10.    Deferrable Interest Subordinated Notes:

 

On April 22, 1997, the Company issued and sold $100.0 million of 8.5% trust preferred securities, due in 2012, through its wholly owned subsidiary, First American Capital Trust. In connection with the subsidiary’s issuance of the preferred securities, the Company issued to the subsidiary trust 8.5% subordinated interest notes due in 2012. The sole assets of the subsidiary are and will be the subordinated interest notes. The Company’s obligations under the subordinated interest notes and related agreements, taken together, constitute a full and unconditional guarantee by the Company of the subsidiary’s obligations under the preferred securities. Distributions payable on the securities are included as interest expense in the Company’s consolidated income statements.

 

In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement was effective for interim periods beginning after June 15, 2003 and establishes standards regarding the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The implementation of this statement required the Company to reclassify its “Mandatorily redeemable preferred securities” as debt. As a result of the change in classification, the Company’s debt-to-total capitalization ratio increased. This change has not had any other impact on the Company’s financial condition or results of operations.

 

The fair value of the Company’s mandatorily redeemable preferred securities was $100.0 million at December 31, 2004 and 2003 and was estimated based on the current rates offered to the Company for debt of the same type and remaining maturity.

 

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THE FIRST AMERICAN CORPORATION

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 11.    Investment and Other Income:

 

The components of investment and other income are as follows:

 

     2004

   2003

   2002

     (in thousands)

Interest:

                    

Cash equivalents and deposits with savings and loan associations and banks

   $ 12,034    $ 10,109    $ 8,285

Debt securities

     29,006      23,930      21,469

Other long-term investments

     9,153      2,877      5,786

Loans receivable

     7,531      8,468      9,277

Dividends on marketable equity securities

     2,895      1,435      1,328

Equity in earnings of unconsolidated affiliates

     53,620      59,789      43,337

Trust and banking activities

     21,564      26,496      29,102

Other

     5,993      12,250      12,976
    

  

  

     $ 141,796    $ 145,354    $ 131,560
    

  

  

 

NOTE 12.    Income Taxes:

 

Income taxes are summarized as follows:

 

     2004

   2003

    2002

 
     (in thousands)  

Current:

                       

Federal

   $ 124,001    $ 247,779     $ 118,748  

State

     7,294      43,727       23,560  

Foreign

     5,120      6,964       2,609  
    

  


 


       136,415      298,470       144,917  
    

  


 


Deferred:

                       

Federal

     87,980      (4,697 )     6,587  

State

     18,805      (1,773 )     (1,604 )
    

  


 


       106,785      (6,470 )     4,983  
    

  


 


     $ 243,200    $ 292,000     $ 149,900  
    

  


 


 

Income taxes differ from the amounts computed by applying the federal income tax rate of 35.0%. A reconciliation of this difference is as follows:

 

     2004

   2003

    2002

 
     (in thousands)  

Taxes calculated at federal rate

   $ 207,305    $ 260,091     $ 134,494  

Tax effect of minority interests

     3,037      1,249       1,837  

State taxes, net of federal benefit

     22,370      28,670       13,767  

Exclusion of certain meals and entertainment expenses

     7,010      5,990       5,222  

Other items, net

     3,478      (4,000 )     (5,420 )
    

  


 


     $ 243,200    $ 292,000     $ 149,900  
    

  


 


 

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THE FIRST AMERICAN CORPORATION

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The primary components of temporary differences that give rise to the Company’s net deferred tax assets are as follows:

 

     December 31

 
     2004

    2003

 
     (in thousands)  

Deferred tax assets:

                

Deferred revenue

   $ 68,246     $ 195,476  

Employee benefits

     45,835       48,516  

Bad debt reserves

     22,064       19,181  

Loss reserves

     89,158       35,764  

Accumulated other comprehensive income

     43,183       31,464  

Net operating loss carryforward

     57,167       50,171  

Excess capital losses

     —         3,554  

Investment in affiliates

     5,564       5,518  

Other

     951       2,888  
    


 


       332,168       392,532  
    


 


Deferred tax liabilities:

                

Depreciable and amortizable assets

     161,061       131,948  

Investment gain

     17,434       17,261  

Claims and related salvage

     67,518       55,794  

Other

     3,737       2,478  
    


 


       249,750       207,481  
    


 


Net deferred tax asset before valuation allowance

     82,418       185,051  
    


 


Valuation allowance

     (42,532 )     (43,429 )
    


 


Net deferred tax asset

   $ 39,886     $ 141,622  
    


 


 

For the year 2004, domestic and foreign pretax income from continuing operations was $573.9 million and $18.4 million, respectively.

 

The exercise of stock options represents a tax benefit and has been reflected as a reduction of taxes payable and an increase to the additional paid-in capital account. The benefits recorded were $6.7 million, $5.8 million and $1.5 million for the years ended December 31, 2004, 2003 and 2002, respectively.

 

At December 31, 2004, the Company had available net operating-loss carryforwards totaling approximately $146.9 million for income tax purposes, of which $9.5 million has an indefinite expiration. The remaining $137.4 million begins to expire at various times beginning in 2008 and ending in 2024.

 

The valuation allowance relates primarily to deferred tax assets for federal and state net operating-loss carryforwards relating to acquisitions consummated by First Advantage. Utilization of the pre-acquisition net operating losses is subject to limitations by the Internal Revenue Code and State jurisdictions. The Company evaluates the realizability of its deferred tax assets by assessing the valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are the Company’s forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. To the extent that the related tax benefits are realized in subsequent years, they will be applied to reduce goodwill arising from the acquisitions.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 13.    Earnings Per Share:

 

The Company’s potential dilutive securities are stock options and convertible debt. Stock options are reflected in diluted earnings per share by application of the treasury-stock method and convertible debt is reflected in diluted earnings per share by application of the if-converted method. A reconciliation of net income and weighted average shares outstanding is as follows:

 

     2004

   2003

   2002

     (in thousands, except per share data)

Numerator:

                    

Net income—numerator for basic net income per share

   $ 349,099    $ 451,022    $ 234,367

Effect of dilutive securities:

                    

Convertible debt—interest expense (net of tax)

     2,597      6,823      7,017
    

  

  

Numerator for diluted net income per share

   $ 351,696    $ 457,845    $ 241,384
    

  

  

Denominator:

                    

Weighted-average shares—denominator for basic net income per share

     86,430      76,632      71,594

Effect of dilutive securities:

                    

Employee stock options

     2,586      2,744      2,449

Convertible debt

     2,879      8,389      8,537
    

  

  

Denominator for diluted net income per share

     91,895      87,765      82,580
    

  

  

Net income per share:

                    

Basic

   $ 4.04    $ 5.89    $ 3.27
    

  

  

Diluted

   $ 3.83    $ 5.22    $ 2.92
    

  

  

 

For the three years ended December 31, 2004, 2003 and 2002, 0.5 million, 0.3 million and 3.4 million options, respectively, were excluded from the weighted-average diluted common shares outstanding due to their antidilutive effect.

 

NOTE 14.    Employee Benefit Plans:

 

In December 2003, the Financial Accounting Standards Board revised Statement of Financial Accounting Standards (SFAS) No. 132, “Employers’ Disclosures About Pensions and Other Post Retirement Benefits” to require additional disclosures. The Company has implemented the revised disclosures in these financial statements.

 

The Company has benefit plans covering substantially all employees, including a 401(k) savings plan (the Savings Plan), an employee stock purchase plan and a defined benefit pension plan.

 

The Savings Plan allows for employee-elective contributions up to the maximum deductible amount as determined by the Internal Revenue Code. The Company makes discretionary contributions to the Savings Plan based on profitability, as well as contributions of the participants. The Company’s expense related to the Savings Plan amounted to $58.3 million, $48.4 million and $39.6 million for the years ended December 31, 2004, 2003 and 2002, respectively. The Savings Plan allows the participants to purchase the Company’s stock as one of the investment options. The Savings Plan held 10,689,000 and 9,982,000 shares of the Company’s common stock, representing 11.9% and 12.7% of the total shares outstanding at December 31, 2004 and 2003, respectively.

 

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THE FIRST AMERICAN CORPORATION

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The employee stock purchase plan allows eligible employees to purchase common stock of the Company at 85% of the closing price on the last day of each month. There were 289,000, 283,000 and 245,000 shares issued in connection with the plan for the years ending December 31, 2004, 2003 and 2002, respectively. At December 31, 2004, there were 2,166,000 shares reserved for future issuances.

 

The Company’s defined benefit pension plan is a noncontributory, qualified, defined benefit plan with benefits based on the employee’s years of service. The Company’s policy is to fund all accrued pension costs. Contributions are intended to provide not only for benefits attributable to past service, but also for those benefits expected to be earned in the future. The Company also has nonqualified, unfunded supplemental benefit plans covering certain key management personnel. Benefits under these plans are anticipated to be funded with proceeds from life insurance policies purchased by the Company on the lives of the executives.

 

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THE FIRST AMERICAN CORPORATION

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table provides a reconciliation of the changes in the defined benefit plan and supplemental benefit plan obligations, fair value of assets, a statement of the funded status and a summary of the amounts recognized in the consolidated financial statements as of December 31, 2004 and 2003:

 

     December 31

 
     2004

    2003

 
     Defined
benefit
pension
plans


    Unfunded
supplemental
benefit plans


    Defined
benefit
pension
plans


    Unfunded
supplemental
benefit plans


 
     (in thousands)  

Change in projected benefit obligation:

                                

Benefit obligation at beginning of year

   $ 252,150     $ 92,218     $ 227,013     $ 73,322  

Service costs

     12,282       3,870       12,033       2,904  

Interest costs

     15,684       6,781       14,789       5,535  

Plan amendments

     —         —         (2,168 )     6  

Actuarial losses

     17,778       18,491       15,250       13,663  

Benefits paid

     (14,373 )     (3,493 )     (14,767 )     (3,212 )
    


 


 


 


Projected benefit obligation at end of year

     283,521       117,867       252,150       92,218  
    


 


 


 


Change in plan assets:

                                

Plan assets at fair value at beginning of year

     153,476       —         147,932       —    

Actual return on plan assets

     6,892       —         17,407       —    

Company contributions

     43,215       3,493       2,904       3,212  

Benefits paid

     (14,373 )     (3,493 )     (14,767 )     (3,212 )
    


 


 


 


Plan assets at fair value at end of year

     189,210       —         153,476       —    
    


 


 


 


Reconciliation of funded status:

                                

Funded status of the plans

     (94,311 )     (117,867 )     (98,674 )     (92,218 )

Unrecognized net actuarial loss

     119,972       52,589       101,267       37,262  

Unrecognized prior service cost

     (3,631 )     153       (7,791 )     464  

Unrecognized net transition asset

     —         —         (7 )     —    
    


 


 


 


Prepaid (accrued) pension cost

     22,030       (65,125 )     (5,205 )     (54,492 )
    


 


 


 


Amounts recognized in the consolidated financial statements consist of:

                                

Accrued benefit liability

     (91,173 )     (86,504 )     (96,778 )     (68,483 )

Intangible asset

     —         153       —         463  

Minimum pension liability adjustment

     113,203       21,226       91,573       13,528  
    


 


 


 


     $ 22,030     $ (65,125 )   $ (5,205 )   $ (54,492 )
    


 


 


 


 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Net periodic pension cost for the Company’s defined benefit pension and supplemental benefit plans includes the following components:

 

     2004

    2003

    2002

 
     (in thousands)  

Expense:

                        

Service cost

   $ 16,152     $ 14,937     $ 19,625  

Interest cost

     22,465       20,324       18,193  

Actual return on plan assets

     (14,488 )     (14,046 )     (14,795 )

Amortization of net transition obligation

     (6 )     (22 )     (22 )

Amortization of prior service cost

     (3,851 )     (3,802 )     (3,632 )

Amortization of net loss

     9,766       6,309       2,707  
    


 


 


     $ 30,038     $ 23,700     $ 22,076  
    


 


 


 

Unrecognized prior service costs are being amortized over the average remaining period of benefit service of participants at the time of the plan change. The benefit obligation and related assets have been measured as of December 31, 2004 for all plans.

 

Weighted average actuarial assumptions used to determine costs for the plans were as follows:

 

     December 31

 
     2004

    2003

 

Defined benefit pension plan

            

Discount rate

   6.25 %   6.75 %

Rate of return on plan assets

   9.00 %   9.00 %

Unfunded supplemental benefit plans

            

Discount rate

   6.25 %   6.75 %

 

Weighted average actuarial assumptions used to determine benefit obligations for the plans were as follows:

 

     December 31

 
     2004

    2003

 

Defined benefit pension plan

            

Discount rate

   6.00 %   6.25 %

Rate of return on plan assets

   9.00 %   9.00 %

Unfunded supplemental benefit plans

            

Discount rate

   6.00 %   6.25 %

Salary increase rate

   4.50 %   4.50 %

 

Negative financial market returns during 2000 through 2002 resulted in a decline in the fair-market value of plan assets. This, when combined with the declining discount rate assumptions in the last several years, has resulted in a decline in the plans’ funded status. Consequently, the Company’s accumulated benefit obligation exceeded the fair-market value of the plan assets for the Company’s funded, defined benefit plans. In addition, the Company has nonqualified, unfunded supplemental benefit plans covering certain key management personnel. Benefits under these plans are anticipated to be funded with proceeds from life insurance policies purchased by the Company on the lives of the executives.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The accumulated benefit obligations for the plans were as follows:

 

     December 31

     2004

   2003

     Defined
benefit
pension
plans


   Unfunded
supplemental
benefit plans


   Defined
benefit
pension
plans


   Unfunded
supplemental
benefit plans


     (in thousands)

Accumulated benefit obligation

   $ 283,521    $ 86,504    $ 252,404    $ 68,482

 

The Company has a pension investment policy designed to meet or exceed the expected rate of return on plan assets assumption. To achieve this, the pension plan assets are managed by investment managers that invest plan assets in equity and fixed income debt securities and cash. A summary of the asset allocation as of December 31, 2004 and 2003 and the target mix are as follows:

 

     Target
allocation


    Percentage of
plan assets at
December 31


 
     2005

    2004

    2003

 

Asset category

                  

Domestic and international equities

   50 %   52 %   52 %

Fixed income

   47 %   43 %   46 %

Cash

   3 %   5 %   2 %

 

Included in the domestic equities amount above are common shares of the Company with a market value of $14.3 million as of December 31, 2004. The Company expects to make cash contributions to its pension plans of approximately $29.9 million during 2005.

 

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:

 

Year


   (in thousands)

2005

   $ 16,352

2006

   $ 17,115

2007

   $ 18,145

2008

   $ 19,000

2009

   $ 19,717

2010-2014

   $ 121,766

 

NOTE 15.    Stock Option Plans:

 

On April 24, 1996, the Company implemented The First American Corporation 1996 Stock Option Plan (the Stock Option Plan). Under the Stock Option Plan, options are granted to certain employees to purchase the Company’s common stock at a price no less than the market value of the shares on the date of the grant. The maximum number of shares that may be subject to options is 14,625,000. Currently, outstanding options become exercisable in one to five years, and expire ten years from the grant date. On April 24, 1997, the Company implemented The First American Corporation 1997 Directors’ Stock Plan (the Directors’ Plan). The Directors’ Plan is similar to the employees’ Stock Option Plan, except that the maximum number of shares that may be subject to options is 1,800,000 and the maximum number of shares that may be purchased pursuant to options granted shall not exceed 6,750 shares during any consecutive 12-month period.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Effective December 15, 2002, the Company adopted Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, which amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation” (SFAS 148). In accounting for its plans, the Company, as allowable under the provisions of SFAS 148, applies Accounting Principles Board Opinions No. 25, “Accounting for Stock issued to Employees.” As a result of this election, the Company does not recognize compensation expense for its stock option plans.

 

Had the Company determined compensation cost based on the fair value for its stock options at grant date, net income and earnings per share would have been reduced to the pro forma amounts as follows:

 

     2004

   2003

   2002

     (in thousands, except per share amounts)

Net income:

                    

As reported

   $ 349,099    $ 451,022    $ 234,367

Pro forma

   $ 342,165    $ 441,517    $ 229,434

Net income per share:

                    

As reported:

                    

Basic

   $ 4.04    $ 5.89    $ 3.27

Diluted

   $ 3.83    $ 5.22    $ 2.92

Pro forma:

                    

Basic

   $ 3.96    $ 5.76    $ 3.20

Diluted

   $ 3.75    $ 5.11    $ 2.86

 

The fair value of each option grant is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2004, 2003 and 2002, respectively; dividend yield of 2.1%, 1.8% and 1.9%; expected volatility of 41.9%, 45.1% and 48.9%; risk-free interest rate of 4.6%, 4.2% and 4.2%; and expected life of six years, seven years and seven years.

 

Transactions involving stock options are summarized as follows:

 

     Number
outstanding


    Weighted-average
exercise price


     (in thousands, except
weighted-average exercise price)

Balance at December 31, 2001

   9,706     $ 16.22

Granted during 2002

   508     $ 17.41

Exercised during 2002

   (802 )   $ 11.08

Forfeited during 2002

   (466 )   $ 17.73
    

 

Balance at December 31, 2002

   8,946     $ 16.66

Granted during 2003

   1,652     $ 23.45

Exercised during 2003

   (2,011 )   $ 13.30

Forfeited during 2003

   (241 )   $ 18.66
    

 

Balance at December 31, 2003

   8,346     $ 18.75

Granted during 2004

   967     $ 29.00

Exercised during 2004

   (1,622 )   $ 17.03

Forfeited during 2004

   (302 )   $ 18.23
    

 

Balance at December 31, 2004

   7,389     $ 20.51
    

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Stock options outstanding and exercisable at December 31, 2004, are summarized as follows:

 

     Outstanding

   Exercisable

Range of Exercise Prices


   Options

   Average remaining
life in years


   Average
exercise
price


   Options

   Average
exercise
price


     (options in thousands)

$  3.95—$13.00

   1,682    4.8    $ 10.28    1,132    $ 10.06

$13.01—$23.57

   2,089    7.1    $ 19.72    821    $ 18.38

$23.58—$24.00

   1,753    3.3    $ 23.58    1,747    $ 23.58

$24.01—$43.58

   1,865    8.4    $ 27.72    362    $ 27.68
    
  
  

  
  

$  3.95—$43.58

   7,389    6.0    $ 20.51    4,062    $ 19.12
    
  
  

  
  

 

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS No. 123R). This standard is a revision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). The cost will be recognized over the period during which an employee is required to provide services in exchange for the award. This standard is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company will adopt the standard in the third quarter of 2005. The Company has not determined the impact, if any, that this standard will have on its consolidated financial position or results of operations.

 

NOTE 16.    Commitments and Contingencies:

 

Lease commitments

 

The Company leases certain office facilities, automobiles and equipment under operating leases, which, for the most part, are renewable. The majority of these leases also provide that the Company will pay insurance and taxes. In December 2004 the Company purchased, for $35.5 million, certain furniture and equipment that had been part of a sales-leaseback transaction entered into by the Company in December 1999. This equipment, along with additional equipment and software, was subsequently resold and leased back in a transaction that resulted in the Company recording a capitalized lease. In December 2000, the Company’s subsidiary, First American Real Estate Information Services, Inc. entered into sale-leaseback agreement with regard to certain furniture and equipment with a net book value of $30.7 million. Proceeds from the sale amounted to $33.8 million and a gain of $3.1 million was included in “Deferred revenue” and is being amortized over the life of the lease. Under the agreements, the Company’s subsidiary agreed to lease the property for five years with minimum annual lease payments of $3.8 million.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Future minimum rental payments under operating and capital leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2004 are as follows:

 

     Operating

   Capital

 

Year


   (in thousands)  

2005

   $ 176,333    $ 28,838  

2006

     127,028      28,838  

2007

     85,474      28,838  

2008

     46,465      53,238  

2009

     26,172         

Later years

     21,079         
    

  


     $ 482,551    $ 139,752  
    

        

Less: Amounts related to interest

            (17,752 )
           


            $ 122,000  
           


 

Total rental expense for all operating leases and month-to-month rentals was $259.0 million; $205.6 million and $178.2 million for the years ended December 31, 2004, 2003, and 2002, respectively.

 

Other commitments and guarantees

 

In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others” (FIN 45). This interpretation clarifies the requirements relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of FIN 45 were effective for fiscal years ending after December 15, 2002. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The adoption of FIN 45 had no impact on the Company’s financial condition or results of operations.

 

The Company and Experian Information Solutions, Inc. (Experian) are parties to a joint venture that resulted in the creation of the Company’s First American Real Estate Solutions, LLC (FARES) subsidiary. Pursuant to the terms of the joint venture, Experian has the right to sell to the Company its interest in FARES at a purchase price determined pursuant to a specified formula based on the after-tax earnings of FARES. Experian may only exercise this right if the purchase price is greater than $80.0 million and less than $160.0 million. As of December 31, 2004, the purchase price exceeded $160.0 million and, therefore, Experian’s right was not exercisable as of such date. In addition to the agreement with Experian, the Company is also party to several other agreements that require the Company to purchase some or all of the minority shares of certain less-than-100.0% owned subsidiaries if certain conditions are met. The total potential purchase price related to those agreements that have met the necessary conditions as of December 31, 2004 was not material.

 

The Company also guarantees the obligations of certain of its subsidiaries. These obligations are included in the Company’s consolidated balance sheets as of December 31, 2004.

 

NOTE 17.    Stockholders’ Equity:

 

On October 23, 1997, the Company adopted a Shareholder Rights Plan (the Rights Plan). Under the Rights Plan, after the close of business on November 15, 1997, each holder of the Company’s common shares received a

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

dividend distribution of one Right for each common share held. Each Right entitles the holder thereof to buy a preferred share fraction equal to 1/100,000 of a share of Series A Junior Participating Preferred Shares of the Company at an exercise price of $265 per preferred share fraction. Each fraction is designed to be equivalent in voting and dividend rights to one common share.

 

The Rights will be exercisable and will trade separately from the common shares only if a person or group, with certain exceptions, acquires beneficial ownership of 15.0% or more of the Company’s common shares or commences a tender or exchange offer that would result in such person or group beneficially owning 15.0% or more of the common shares then outstanding. The Company may redeem the Rights at $0.001 per Right at any time prior to the occurrence of one of these events. All Rights expire on October 23, 2007.

 

Each Right will entitle its holder to purchase, at the Right’s then-current exercise price, preferred share fractions (or other securities of the Company) having a value of twice the Right’s exercise price. This amounts to the right to buy preferred share fractions of the Company at half price. Rights owned by the party triggering the exercise of Rights will be void and, therefore, will not be exercisable.

 

In addition, if, after any person has become a 15.0%-or-more stockholder, the Company is involved in a merger or other business combination transaction with another person in which the Company’s common shares are changed or converted, or if the Company sells 50.0% or more of its assets or earning power to another person, each Right will entitle its holder to purchase, at the Right’s then-current exercise price, common stock of such other person (or its parent) having a value of twice the Right’s exercise price.

 

NOTE 18.    Other Comprehensive Income:

 

Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.

 

Components of other comprehensive income are as follows:

 

     Unrealized
gains on
securities


    Minimum
pension
liability
adjustment


    Accumulated
other
comprehensive
income (loss)


 
     (in thousands)  

Balance at December 31, 2001

   $ 2,689     $ (16,305 )   $ (13,616 )

Pretax change

     28       (64,068 )     (64,040 )

Tax effect

     (1,227 )     22,424       21,197  
    


 


 


Balance at December 31, 2002

     1,490       (57,949 )     (56,459 )

Pretax change

     4,709       (15,810 )     (11,101 )

Tax effect

     (878 )     5,582       4,704  
    


 


 


Balance at December 31, 2003

     5,321       (68,177 )     (62,856 )

Pretax change

     1,534       (29,329 )     (27,795 )

Tax effect

     (537 )     10,127       9,590  
    


 


 


Balance at December 31, 2004

   $ 6,318     $ (87,379 )   $ (81,061 )
    


 


 


 

The change in unrealized gains on debt and equity securities includes reclassification adjustments of $2.3 million, $3.9 million and $(2.6) million of net realized gains (losses) for the years ended December 31, 2004, 2003 and 2002, respectively.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 19.    Litigation.

 

A subsidiary of the Company is a defendant in a class action lawsuit that is pending in federal court in Michigan. The plaintiffs allege that in certain transactions the premium our subsidiary charged to builders and developers for title insurance policies violated the Real Estate Settlement Procedures Act and similar state laws. The action seeks a refund of the title insurance premiums paid by the plaintiffs and other damages. Pending the outcome of this lawsuit, the Company has taken a charge to fourth quarter 2004 earnings of $3.3 million. The Company does not believe that the ultimate resolution of this action will have a material adverse affect on its financial condition or results of operations.

 

On January 25, 2005, a jury in the case of Chicago Title Insurance Corporation v. James A. Magnuson, et al. awarded damages in the amount of $43.2 million against a subsidiary of the Company. This matter involved claims of violation of a non-competition agreement and intentional interference with contract. The judgment comprised a compensatory award of $10.8 million and a punitive damage award of $32.4 million. The Company believes it has strong grounds to overturn this judgment and is conducting a vigorous appeal. Pending the outcome of this appeal, the Company has taken a charge to fourth quarter 2004 earnings of $10.0 million.

 

During the first quarter of 2005, a subsidiary of the Company executed a Consent Order with the Colorado State Division of Insurance (the “Division”) wherein the Division asserted that the Company’s subsidiary participated in an industry-wide practice of offering captive reinsurance arrangements to residential homebuilders with captive reinsurance companies. In settling the matter, the Company’s subsidiary agreed, without admission of liability or wrongdoing, to cease participating in captive reinsurance arrangements of this nature. The Company’s subsidiary had similar reinsurance arrangements in other states and determined that the entire amount of premiums paid pursuant to its captive reinsurance arrangements nationwide was $24.0 million in total since inception. Although not required by the Consent Order and despite the Company’s subsidiary’s belief that it had legal support for its reinsurance practices, the Company’s subsidiary terminated all its captive reinsurance arrangements with those parties, and unilaterally and voluntarily determined to promptly pay to the effected policy holders the allocated portion of the reinsurance premium paid to the captive reinsurance participants in all states. At December 31, 2004, the Company recorded a charge of $24.0 million for the estimated exposure associated with this decision.

 

The Company is involved in numerous routine legal proceedings related to its operations. While the ultimate disposition of each proceeding is not determinable, the Company does not believe that any of such proceedings will have a material adverse effect on its financial condition or results of operations.

 

NOTE 20.    Business Combinations:

 

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 supersedes Accounting Principles Board Opinions No. 16, “Business Combinations.” SFAS 141 requires that all business combinations be accounted for under the purchase method of accounting. In applying the purchase method of accounting, the Company undertakes a comprehensive review of the acquired entity to ensure that all identifiable assets and liabilities are properly recorded at their fair value. In determining fair value, the Company utilizes a variety of valuation techniques, including discounted cash flow analysis and outside appraisals, to the extent necessary, given materiality and complexity. All excess purchase price is appropriately recorded as goodwill. The useful lives for all assets recorded in purchase accounting are based on market conditions, contractual terms and other appropriate factors.

 

During the year ended December 31, 2004, the Company completed 58 acquisitions. Individually, these acquisitions were not material. Of these acquisitions, 38 have been in the Company’s title insurance segment, 3

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

in the Company’s mortgage information segment, 3 in the Company’s property information segment and 14 in the Company’s screening information segment The aggregate purchase price of the 44 acquisitions included in the Company’s title insurance, mortgage information and property information segments was $199.1 million in cash, $96.8 million in notes payable and 1.5 million shares of the Company’s common stock valued at $42.8 million. The operating results of these acquired companies were included in the Company’s consolidated financial statements from their respective acquisition dates. The 14 acquisitions included in the Company’s screening information segment were completed by the Company’s publically-traded subsidiary, First Advantage Corporation. The aggregate purchase price of these acquisitions was $58.5 million in cash, $59.0 million in notes payable and 1.4 million shares, valued at $23.2 million, of First Advantage’s Class A common stock. The purchase price of each acquisition was allocated to the assets acquired and liabilities assumed using a variety of valuation techniques including discounted cash flow analysis. As a result of these transactions, First Advantage recorded approximately $99.9 million of goodwill and $26.0 million of intangible assets with definite lives. As a result of the remaining 44 acquisitions, the Company recorded approximately $223.2 of goodwill and $35.6 million of intangible assets with definite lives. The Company is awaiting information necessary to finalize the purchase accounting adjustments for certain of these acquisitions and the final purchase price allocations could change the recorded intangible asset and goodwill amounts. In accounting for the First Advantage shares issued in these acquisitions, the Company, whose ownership interest was reduced to approximately 69 percent, recorded a pretax gain of $8.5 million.

 

Assuming all of the current year acquisitions had occurred on January 1, 2003, unaudited pro forma revenues, net income and net income per diluted share would have been $6.9 billion, $377.7 million and $4.10, respectively, for the year ended December 31, 2004; and $6.6 billion, $497.1 million and $5.64, respectively, for the year ended December 31, 2003. All pro forma results include interest expense on acquisition debt. The unaudited pro forma results are not necessarily indicative of the operating results that would have been obtained had the acquisitions occurred at the beginning of the periods presented, nor are they necessarily indicative of future operating results.

 

On October 1, 2003, the Company acquired the real estate tax monitoring and flood zone certification businesses of Transamerica Finance Corporation for a combined net purchase price of $375 million. These businesses have been integrated with the Company’s existing real estate tax monitoring and flood zone certification businesses which are included in the Company’s mortgage information and services segment. The purchase price was allocated to the assets acquired and liabilities assumed based on their fair values at October 1, 2003. As a result of this acquisition, the Company recognized approximately $473.0 million of goodwill and $63.6 million of intangible assets with definite lives. The operating results of Transamerica’s tax monitoring and flood zone certification businesses are included in the Company’s consolidated financial statements commencing October 1, 2003.

 

On June 5, 2003, the Company formed First Advantage Corporation, which was created through the merger of First American Corporation’s screening information businesses with the operations of US SEARCH.com Inc. Under the terms of the agreement, the former stockholders of US SEARCH received 0.04 of a Class A common share of First Advantage for each share of US SEARCH owned prior to the merger. The former stockholders of US SEARCH hold approximately 20% of the total shares of First Advantage. The First American Corporation received Class B common stock, entitling 10 votes for each share, representing approximately 80% of the total shares of First Advantage. Approximately $3.0 million of intangible assets with definite lives and $54.9 million of goodwill was recorded by First Advantage as part of this transaction. The new public company trades Class A common stock as “FADV” on the NASDAQ National Market System.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

NOTE 21.    Segment Financial Information:

 

In January 2004, the Company combined its Title Insurance and Services and Trust and Other Services into one segment to better reflect the interaction within these businesses. This presentation is consistent with the way the operations of these businesses are evaluated by the Company’s management. The prior year results have been reclassified to reflect the combination of these businesses. After the change, the Company has six reporting segments that fall within two primary business groups, Financial Services and Information Technology. The Financial Services Group includes Title Insurance and Services and Specialty Insurance. The Information Technology Group includes Mortgage Information, Property Information, Credit Information and Screening Information. The Company, through its subsidiaries, is engaged in the business of providing business information and related products and services. The title insurance and services segment issues residential and commercial title insurance policies, provides escrow services, equity loan services, tax-deferred exchanges, other related products and provides advisory and trust and thrift services. The specialty insurance segment issues property and casualty insurance policies and provides home warranties. The mortgage information segment provides tax monitoring, flood zone certification, default management services and other real estate related services. The property information segment provides property database services and appraisal services. The credit information segment provides mortgage credit and specialized credit reporting services. The screening information segment provides resident screening, pre-employment screening, substance abuse management and testing, consumer direct location services, risk management and other services.

 

The Company provides its title services through both direct operations and agents throughout the United States. It also offers title services in Australia, the Bahamas, Canada, Guam, Hong Kong, Ireland, Mexico, New Zealand, Puerto Rico, South Korea, the United Kingdom, the U.S. Virgin Islands and other territories and countries. The international operations account for less than 1% of the Company’s income before income taxes and minority interests. Home warranty services are provided in 45 states throughout the United States. Property and casualty insurance is offered nationwide. The products offered by the four segments included in the Information Technology group are provided nationwide.

 

Corporate consists primarily of investment gains and losses, personnel and other operating expenses associated with the Company’s corporate facilities, certain technology initiatives and unallocated interest expense.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Selected financial information about the Company’s operations by segment for each of the past three years is as follows:

 

     Revenues

    Depreciation
and
amortization


   Income (loss)
before income
taxes and
minority interests


    Assets

   Investment in
affiliates


   Capital
expenditures


     (in thousands)

2004

                                           

Title Insurance and Services

   $ 4,875,524     $ 43,821    $ 398,777     $ 3,360,417    $ 130,192    $ 121,863

Specialty insurance

     234,708       2,153      41,419       393,130      —        1,857

Mortgage Information

     660,780       26,613      174,868       1,024,896      1,989      22,223

Property Information

     427,234       24,987      126,460       741,190      39,154      20,541

Credit Information

     252,087       9,792      54,613       185,221      63,296      3,162

Screening Information

     266,687       12,539      18,593       431,353      40      5,607

Corporate

     5,306       9,073      (137,446 )     72,158      —        26,550
    


 

  


 

  

  

     $ 6,722,326     $ 128,978    $ 677,284     $ 6,208,365    $ 234,671    $ 201,803
    


 

  


 

  

  

2003

                                           

Title Insurance and Services

   $ 4,494,883     $ 39,987    $ 504,629     $ 2,527,356    $ 112,604    $ 39,184

Specialty insurance

     219,837       1,929      30,125       380,663      —        1,305

Mortgage Information

     668,765       19,296      238,508       1,117,825      2,313      15,941

Property Information

     390,151       22,847      105,339       539,882      9,337      19,798

Credit Information

     267,074       11,838      64,291       189,389      54,528      4,949

Screening Information

     166,536       10,166      4,505       284,007      —        4,740

Corporate

     6,468       8,361      (108,675 )     100,780      —        13,046
    


 

  


 

  

  

     $ 6,213,714     $ 114,424    $ 838,722     $ 5,139,902    $ 178,782    $ 98,963
    


 

  


 

  

  

2002

                                           

Title Insurance and Services

   $ 3,479,413     $ 43,183    $ 285,268     $ 1,937,464    $ 70,497    $ 45,313

Specialty insurance

     153,205       1,965      24,465       282,199      —        1,829

Mortgage Information

     485,206       10,161      146,849       433,471      —        12,130

Property Information

     279,754       18,729      71,459       450,355      23,787      14,096

Credit Information

     221,761       11,355      39,266       161,964      13,457      7,732

Screening Information

     100,888       4,050      2,459       157,051      —        3,964

Corporate

     (16,018 )     7,386      (119,859 )     147,780      —        9,608
    


 

  


 

  

  

     $ 4,704,209     $ 96,829    $ 449,907     $ 3,570,284    $ 107,741    $ 94,672
    


 

  


 

  

  

 

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QUARTERLY FINANCIAL DATA

(Unaudited)

 

     Quarter Ended

     March 31

   June 30

   September 30

   December 31

     (in thousands, except per share amounts)

Year Ended December 31, 2004

                           

Revenues

   $ 1,473,771    $ 1,724,053    $ 1,721,485    $ 1,803,017

Income before income taxes and minority interests

   $ 111,130    $ 219,191    $ 202,005    $ 144,958

Net income

   $ 54,956    $ 116,526    $ 107,215    $ 70,402

Net income per share:

                           

Basic

   $ 0.69    $ 1.32    $ 1.21    $ 0.78

Diluted

   $ 0.62    $ 1.27    $ 1.17    $ 0.76

Year Ended December 31, 2003

                           

Revenues

   $ 1,341,975    $ 1,542,931    $ 1,716,742    $ 1,612,066

Income before income taxes and minority interests

   $ 163,493    $ 239,753    $ 260,759    $ 174,717

Net income

   $ 87,580    $ 127,476    $ 141,847    $ 94,119

Net income per share:

                           

Basic

   $ 1.18    $ 1.67    $ 1.83    $ 1.20

Diluted

   $ 1.05    $ 1.47    $ 1.62    $ 1.07

Year Ended December 31, 2002

                           

Revenues

   $ 1,042,202    $ 1,091,530    $ 1,196,086    $ 1,374,391

Income before income taxes and minority interests

   $ 88,559    $ 80,054    $ 129,022    $ 152,272

Net income

   $ 44,075    $ 40,121    $ 67,359    $ 82,812

Net income per share:

                           

Basic

   $ 0.63    $ 0.56    $ 0.94    $ 1.13

Diluted

   $ 0.57    $ 0.51    $ 0.84    $ 1.01

 

67


Table of Contents

SCHEDULE I

1 OF 1

 

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

SUMMARY OF INVESTMENTS—OTHER THAN INVESTMENTS IN RELATED PARTIES

(in thousands)

 

December 31, 2004

 

Column A


   Column B

   Column C

   Column D

Type of investment


   Cost

   Market value

   Amount at which
shown in the
balance sheet


Deposits with savings and loan associations and banks:

                    

Registrant—None

                    

Consolidated

   $ 94,445    $ 94,445    $ 94,445
    

  

  

Debt securities:

                    

U.S. Treasury securities

                    

Registrant—None

                    

Consolidated

   $ 112,197    $ 113,396    $ 113,396
    

  

  

Corporate securities

                    

Registrant—None

                    

Consolidated

   $ 160,174    $ 165,465    $ 165,465
    

  

  

Obligations of states and political subdivisions

                    

Registrant—None

                    

Consolidated

   $ 93,740    $ 96,438    $ 96,438
    

  

  

Mortgage-backed securities

                    

Registrant—None

                    

Consolidated

   $ 330,492    $ 330,375    $ 330,375
    

  

  

Total debt securities:

                    

Registrant—None

                    

Consolidated

   $ 696,603    $ 705,674    $ 705,674
    

  

  

Equity securities:

                    

Registrant—None

                    

Consolidated

   $ 49,897    $ 46,190    $ 46,190
    

  

  

Other long-term investments:

                    

Registrant

   $ 4,505    $ 4,505    $ 4,505
    

  

  

Consolidated

   $ 305,571    $ 305,571    $ 305,571
    

  

  

Total investments:

                    

Registrant

   $ 4,505    $ 4,505    $ 4,505
    

  

  

Consolidated

   $ 1,146,516    $ 1,151,880    $ 1,151,880
    

  

  

 

68


Table of Contents

SCHEDULE III

1 OF 2

 

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

SUPPLEMENTARY INSURANCE INFORMATION

(in thousands)

 

BALANCE SHEET CAPTIONS

 

Column A


   Column B

   Column C

   Column D

Segment


  

Deferred

policy

acquisition

costs


  

Claims

reserves


  

Deferred

revenues


2004

                    

Title Insurance and Services

     —      $ 450,309    $ 1,896

Specialty Insurance

   $ 21,259      40,524      139,680

Mortgage Information

     —        30,620      568,517

Property Information

     —        5,063      13,638

Credit Information

     —        —        3,510

Screening Information

     —        —        2,296

Corporate

     —        —        —  
    

  

  

Total

   $ 21,259    $ 526,516    $ 729,537
    

  

  

2003

                    

Title Insurance and Services

     —      $ 367,995    $ 6,558

Specialty Insurance

   $ 19,888      32,285      98,718

Mortgage Information

     —        31,620      596,274

Property Information

     —        3,952      12,727

Credit Information

     —        —        3,725

Screening Information

     —        —        1,501

Corporate

     —        —        —  
    

  

  

Total

   $ 19,888    $ 435,852    $ 719,503
    

  

  

 

69


Table of Contents

SCHEDULE III

2 OF 2

 

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

SUPPLEMENTARY INSURANCE INFORMATION

(in thousands)

 

INCOME STATEMENT CAPTIONS

 

Column A


   Column F

   Column G

    Column H

    Column I

   Column J

   Column K

Segment


   Operating
revenues


   Net
investment
income


    Loss
provision


    Amortization
of deferred
policy
acquisition
costs


   Other
operating
expenses


   Net
premiums
written


2004

                                           

Title Insurance and Services

   $ 4,786,036    $ 89,491     $ 198,295            $ 840,790       

Specialty Insurance

     220,340      14,368       122,649     $ 1,371      15,275    $ 127,513

Mortgage Information

     653,562      7,218       27,314              184,603       

Property Information

     401,716      25,517       1,435              127,357       

Credit Information

     242,812      9,274       (75 )            126,628       

Screening Information

     266,280      406       —                151,638       

Corporate

     —        5,306       —                41,275       
    

  


 


 

  

  

Total

   $ 6,570,746    $ 151,580     $ 349,618     $ 1,371    $ 1,487,566    $ 127,513
    

  


 


 

  

  

2003

                                           

Title Insurance and Services

   $ 4,402,984    $ 91,899     $ 179,843            $ 728,944       

Specialty Insurance

     207,287      12,550       119,546     $ 2,885      20,431    $ 139,012

Mortgage Information

     642,684      26,081       24,229              177,234       

Property Information

     366,271      23,880       786              131,896       

Credit Information

     246,987      20,087       —                129,367       

Screening Information

     166,430      106       —                97,034       

Corporate

     —        6,468       —                32,084       
    

  


 


 

  

  

Total

   $ 6,032,643    $ 181,071     $ 324,404     $ 2,885    $ 1,316,990    $ 139,012
    

  


 


 

  

  

2002

                                           

Title Insurance and Services

   $ 3,393,592    $ 85,820     $ 135,752            $ 597,262       

Specialty Insurance

     143,307      9,898       77,049     $ 11,313      283    $ 69,412

Mortgage Information

     479,288      5,919       11,975              159,211       

Property Information

     259,315      20,440       150              86,039       

Credit Information

     215,337      6,424       (348 )            107,781       

Screening Information

     100,702      186       11              61,037       

Corporate

     —        (16,019 )     —                26,199       
    

  


 


 

  

  

Total

   $ 4,591,541    $ 112,668     $ 224,589     $ 11,313    $ 1,037,812    $ 69,412
    

  


 


 

  

  

 

70


Table of Contents

SCHEDULE IV

1 OF 1

 

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

REINSURANCE

(in thousands, except percentages)

 

Segment


   Insurance
operating
revenues before
reinsurance


   Ceded to
other
companies


   Assumed
from
other
companies


   Insurance
operating
revenues


  

Percentage of
amount

assumed to
operating revenues


 

Title Insurance

                          

2004

   4,795,776    18,033    8,293    4,786,036    0.2 %
    
  
  
  
  

2003

   4,406,746    9,223    5,461    4,402,984    0.1 %
    
  
  
  
  

2002

   3,395,743    5,357    3,206    3,393,592    0.1 %
    
  
  
  
  

Specialty Insurance

                          

2004

   135,238    59,143    —      76,095    0.0 %
    
  
  
  
  

2003

   141,456    50,572    —      90,884    0.0 %
    
  
  
  
  

2002

   49,497    8,648    171    41,020    0.4 %
    
  
  
  
  

 

71


Table of Contents

SCHEDULE V

1 OF 3

 

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

Year Ended December 31, 2004

 

Column A


   Column B

   Column C

    Column D

    Column E

          Additions

           

Description


   Balance at
beginning
of period


   Charged to
costs and
expenses


   Charged
to other
accounts


    Deductions
from
reserve


    Balance
at end
of period


Reserve deducted from
accounts receivable:

                                    

Registrant—None

                                    

Consolidated

   $ 55,112    $ 18,289            $ 10,671 (A)   $ 62,730
    

  

          


 

Reserve for title losses and
other claims:

                                    

Registrant—None

                                    

Consolidated

   $ 435,852    $ 349,618    $ 10,146 (B)   $ 269,100 (C)   $ 526,516
    

  

  


 


 

Reserve deducted from
loans receivable:

                                    

Registrant—None

                                    

Consolidated

   $ 1,290    $ 60                    $ 1,350
    

  

                  

Reserve deducted from
assets acquired in
connection with claim
settlements:

                                    

Registrant—None

                                    

Consolidated

   $ 1,202    $ 119            $ 68 (D)   $ 1,253
    

  

          


 

Reserve deducted from
other assets:

                                    

Registrant—None

                                    

Consolidated

   $ 3,570    $ 0            $ 102 (E)   $ 3,468
    

  

          


 

Reserve deducted from
deferred income taxes:

                                    

Registrant—None

                                    

Consolidated

   $ 43,429                   $ 897 (F)   $ 42,532
    

                 


 

 

Note A—Amount represents accounts written off, net of recoveries.

 

Note B—Amount represents net $10,146 in purchase accounting adjustments

 

Note C—Amount represents claim payments, net of recoveries

 

Note D—Amount represents elimination of reserve in connection with disposition and/or revaluation of the related asset.

 

Note E—Amount represents elimination of reserve in connection with disposition and/or revaluation of the related asset.

 

Note F—Amount represents elimination of reserve in connection with the realizability of its deferred tax assets.

 

72


Table of Contents

SCHEDULE V

2 OF 3

 

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

Year Ended December 31, 2003

 

Column A


   Column B

   Column C

    Column D

    Column E

          Additions

           

Description


   Balance at
beginning
of period


   Charged
to costs
and
expenses


   Charged
to other
accounts


    Deductions
from
reserve


    Balance at
end of
period


Reserve deducted from
accounts receivable:

                                    

Registrant—None

                                    

Consolidated

   $ 50,782    $ 25,723            $ 21,393 (A)   $ 55,112
    

  

          


 

Reserve for title losses and
other claims:

                                    

Registrant—None

                                    

Consolidated

   $ 360,305    $ 324,404    $ 20,629 (B)   $ 269,486 (C)   $ 435,852
    

  

  


 


 

Reserve deducted from loans
receivable:

                                    

Registrant—None

                                    

Consolidated

   $ 1,170    $ 120                    $ 1,290
    

  

                  

Reserve deducted from
assets acquired in
connection with claim
settlements:

                                    

Registrant—None

                                    

Consolidated

   $ 1,066    $ 155            $ 19 (D)   $ 1,202
    

  

          


 

Reserve deducted from
other assets:

                                    

Registrant—None

                                    

Consolidated

   $ 2,489    $ 1,081                    $ 3,570
    

  

                  

Reserve deducted from
deferred income taxes:

                                    

Registrant—None

                                    

Consolidated

   $ 10,526           $ 32,903 (E)           $ 43,429
    

         


         

 

Note A—Amount represents accounts written off, net of recoveries.

 

Note B—Amount represents net $20,629 in purchase accounting adjustments

 

Note C—Amount represents claim payments, net of recoveries

 

Note D—Amount represents elimination of reserve in connection with disposition and/or revaluation of the related asset.

 

Note E—Amount represents allowance against recognition of future tax benefits related to net operating loss carryforwards.

 

73


Table of Contents

SCHEDULE V

3 OF 3

 

THE FIRST AMERICAN CORPORATION

AND SUBSIDIARY COMPANIES

 

VALUATION AND QUALIFYING ACCOUNTS (in thousands)

Year Ended December 31, 2002

 

Column A


   Column B

   Column C

    Column D

    Column E

          Additions

           

Description


   Balance at
beginning
of period


   Charged
to costs
and
expenses


   Charged
to other
accounts


    Deductions
from
reserve


    Balance at
end of
period


Reserve deducted from
accounts receivable:

                                    

Registrant—None

                                    

Consolidated

   $ 39,107    $ 22,061            $ 10,386 (A)   $ 50,782
    

  

          


 

Reserve for title losses and
other claims:

                                    

Registrant—None

                                    

Consolidated

   $ 314,777    $ 224,589    $ 1,865 (B)   $ 180,926 (C)   $ 360,305
    

  

  


 


 

Reserve deducted from loans
receivable:

                                    

Registrant—None

                                    

Consolidated

   $ 1,050    $ 123            $ 3 (A)   $ 1,170
    

  

          


 

Reserve deducted from
assets acquired in
connection with claim
settlements:

                                    

Registrant—None

                                    

Consolidated

   $ 1,101           $ 137     $ 172 (D)   $ 1,066
    

         


 


 

Reserve deducted from
other assets:

                                    

Registrant—None

                                    

Consolidated

   $ 3,418    $ 200            $ 1,129 (D)   $ 2,489
    

  

          


 

Reserve deducted from
deferred income taxes:

                                    

Registrant—None

                                    

Consolidated

                 $ 10,526 (E)           $ 10,526
                  


         

 

Note A—Amount represents accounts written off, net of recoveries.

 

Note B—Amount represents net $1,865 in purchase accounting adjustments

 

Note C—Amount represents claim payments, net of recoveries.

 

Note D—Amount represents elimination of reserve in connection with disposition and/or revaluation of the related asset.

 

Note E—Amount represents allowance against recognition of future tax benefits related to net operating loss carryforwards.

 

 

74


Table of Contents

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None

 

Item 9A.    Controls and Procedures

 

The Company’s President and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, have concluded that, as of the end of the fiscal year covered by this report on Form 10-K, the Company’s disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports filed or submitted under such Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

There was no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Management of The First American Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.

 

The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets of the Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorization of management and directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on that assessment under the framework in Internal Control—Integrated Framework, management determined that, as of December 31, 2004, the Company’s internal control over financial reporting was effective.

 

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

 

Attestation Report of the Registered Public Accounting Firm

 

See the Report of Independent Registered Public Accounting Firm on page 33 in Item 8, above.

 

75


Table of Contents

Item 9B.    Other Information

 

None

 

PART III

 

The information required by Items 10 through 14 of this report is set forth in the sections entitled “Election of Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Executive Compensation,” “Stock Option Grants and Exercises,” “Pension Plan,” “Supplemental Benefit Plan,” “Deferred Compensation Plan,” “Change of Control Arrangements,” “Directors’ Compensation,” “Codes of Ethics,” “Compensation Committee Interlocks and Insider Participation,” “Report of the Compensation Committee on Executive Compensation,” “Comparative Cumulative Total Return to Shareholders,” “Report of the Audit Committee,” “Who are the largest principal shareholders outside of management?,” “Security Ownership of Management,” “Principal Accountant Fees and Services” and “Transactions with Management and Others” in the Company’s definitive proxy statement, which sections are incorporated in this report and made a part hereof by reference. The definitive proxy statement will be filed no later than 120 days after the close of Registrant’s fiscal year.

 

76


Table of Contents

PART IV

 

Item 15.    Exhibits and Financial Statement Schedules

 

(a) 1. & 2.

  Financial Statements and Financial Statement Schedules
    The Financial Statements and Financial Statement Schedules filed as part of this report are listed in the accompanying index at page 32 in Item 8 of Part II of this report.

3.

  Exhibits. See Exhibit Index. (Each management contract or compensatory plan or arrangement in which any director or named executive officer of The First American Corporation, as defined by Item 402(a)(3) of Regulation S-K (17 C.F.R. §229.402(a)(3)), participates that is included among the exhibits listed on the Exhibit Index is identified on the Exhibit Index by an asterisk (*).)

 

77


Table of Contents

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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)

By

  /s/    PARKER S. KENNEDY        
   
   

Parker S. Kennedy

Chairman and Chief Executive Officer

(Principal Executive Officer)

    Date: March 16, 2005

By

  /s/    THOMAS A. KLEMENS        
   
   

Thomas A. Klemens

Senior Executive Vice President,

Chief Financial Officer

(Principal Financial Officer)

    Date: March 16, 2005

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature


  

Title


 

Date


/s/    D. P. KENNEDY        


D. P. Kennedy

   Chairman Emeritus and Director   March 16, 2005

/s/    PARKER S. KENNEDY        


Parker S. Kennedy

   Chairman, CEO and Director   March 16, 2005

/s/    THOMAS A. KLEMENS        


Thomas A. Klemens

  

Senior Executive Vice President,

Chief Financial Officer

  March 16, 2005

/s/    MAX O. VALDES        


Max O. Valdes

  

Vice President

(Principal Accounting Officer)

  March 16, 2005

/s/    GARY J. BEBAN        


Gary J. Beban

   Director   March 16, 2005

/s/    J. DAVID CHATHAM        


J. David Chatham

   Director   March 16, 2005

/s/    WILLIAM G. DAVIS        


William G. Davis

   Director   March 16, 2005

/s/    JAMES L. DOTI        


James L. Doti

   Director   March 16, 2005

 

78


Table of Contents

Signature


  

Title


 

Date


/s/    LEWIS W. DOUGLAS, JR.        


Lewis W. Douglas, Jr.

   Director   March 16, 2005

/s/    PAUL B. FAY, JR.        


Paul B. Fay, Jr.

   Director   March 16, 2005

/s/    FRANK O’BRYAN        


Frank O’Bryan

   Director   March 16, 2005

/s/    ROSLYN B. PAYNE        


Roslyn B. Payne

   Director   March 16, 2005

/s/    D. VAN SKILLING        


D. Van Skilling

   Director   March 16, 2005

/s/    HERBERT B. TASKER        


Herbert B. Tasker

   Director   March 16, 2005

/s/    VIRGINIA UEBERROTH        


Virginia Ueberroth

   Director   March 16, 2005

 

79


Table of Contents
Exhibit No.

  

Description


   Sequentially
Numbered
Page


(3)(a)    Restated Articles of Incorporation of The First American Financial Corporation dated July 14, 1998, incorporated by reference herein from Exhibit 3.1 of Amendment No. 1, dated July 28, 1998, to the Company’s Registration Statement No. 333-53681 on Form S-4.     
(3)(b)    Certificate of Amendment of Restated Articles of Incorporation of The First American Financial Corporation dated April 23, 1999, incorporated by reference herein from Exhibit (3) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.     
(3)(c)    Certificate of Amendment of Restated Articles of Incorporation of The First American Financial Corporation dated May 11, 2000, incorporated by reference herein from Exhibit 3.1 of Report on Form 8-K dated June 12, 2000.     
(3)(d)    Bylaws of The First American Corporation, as amended, incorporated by reference herein from Exhibit (3) of Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.     
(4)(a)    Rights Agreement, dated as of October 23, 1997, incorporated by reference herein from Exhibit 4 of Registration Statement on Form 8-A dated November 7, 1997.     
(4)(b)    Junior Subordinated Indenture, dated as of April 22, 1997, incorporated by reference herein from Exhibit (4.2) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.     
(4)(c)    Form of New 8.50% Junior Subordinated Deferrable Interest Debenture, incorporated by reference herein from Exhibit 4.2 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997.     
(4)(d)    Certificate of Trust of First American Capital Trust I, incorporated by reference herein from Exhibit 4.3 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997.     
(4)(e)    Amended and Restated Declaration of Trust of First American Capital Trust I dated as of April 22, 1997, incorporated by reference herein from Exhibit (4.3) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.     
(4)(f)    Form of New 8.50% Capital Security (Liquidation Amount $1,000 per Capital Security), incorporated by reference herein from Exhibit 4.6 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997.     
(4)(g)    Form of New Guarantee Agreement, incorporated by reference herein from Exhibit 4.7 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997.     
(4)(h)    Senior Indenture, dated as of April 7, 1998, between The First American Financial Corporation and Wilmington Trust Company as Trustee, incorporated by reference herein from Exhibit (4) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.     
(4)(i)    Form of Underwriting Agreement, incorporated by reference herein from Exhibit 1.1 of Pre-effective Amendment No. 2 to Registration Statement No 333-116855 on Form S-3 dated July 19, 2004.     
(4)(j)    Form of First Supplemental Indenture, incorporated by reference herein from Exhibit 4.2 of Registration Statement 333-116855 on Form S-3 dated June 25, 2004.     

 

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(4)(k)    Form of Senior Note, incorporated by reference herein from Exhibit 4.3 of Registration Statement 333-116855 on Form S-3 dated June 25, 2004.     
*(10)(a)    Description of Stock Bonus Plan, as amended, incorporated by reference herein from Exhibit (10)(a) of Annual Report on Form 10-K for the fiscal year ended December 31, 1992.     
*(10)(b)    Executive Supplemental Benefit Plan dated April 10, 1986, and Amendment No. 1 thereto dated October 1, 1986, incorporated by reference herein from Exhibit (10)(b) of Annual Report on Form 10-K for the fiscal year ended December 31, 1988.     
*(10)(c)    Amendment No. 2, dated March 22, 1990, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(c) of Annual Report on Form 10-K for the fiscal year ended December 31, 1989.     
*(10)(d)    Amendment No. 3, dated July 7, 1998, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(d) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.     
*(10)(e)    Amendment No. 4, dated March 22, 2000, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(c) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999.     
*(10)(f)    Amendment No. 5, dated July 19, 2000, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(e) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.     
*(10)(g)    Management Supplemental Benefit Plan dated July 20, 1988, incorporated by reference herein from Exhibit (10) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1992.     
*(10)(h)    Amendment No. 1, dated July 7, 1998, to Management Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(f) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.     
*(10)(i)    Amendment No. 2, dated March 22, 2000, to Management Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(h) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999.     
*(10)(j)    Amendment No. 3, dated July 19, 2000, to Management Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(f) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.     
*(10)(k)    Pension Restoration Plan (effective as of January 1, 1994), incorporated by reference herein from Exhibit (10)(c) of Annual Report on Form 10-K for the fiscal year ended December 31, 1996.     
*(10)(l)    Amendment No. 1, dated July 19, 2000, to Pension Restoration Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.     
*(10)(m)    Amendment No. 2, dated August 1, 2001, to Pension Restoration Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.     
*(10)(n)    1996 Stock Option Plan, incorporated by reference herein from Exhibit 4 of Registration Statement No. 333-19065 on Form S-8 dated December 30, 1996.     

 

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*(10)(o)    Amendment No. 1, dated February 26, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(i) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.     
*(10)(p)    Amendment No. 2, dated June 22, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(j) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.     
*(10)(q)    Amendment No. 3, dated July 7, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(k) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.     
*(10)(r)    Amendment No. 4, dated April 22, 1999, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.     
*(10)(s)    Amendment No. 5, dated February 29, 2000, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(o) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.     
*(10)(t)    Amendment No. 6, dated July 19, 2000, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(b) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.     
*(10)(u)    Amendment No. 7, dated June 4, 2002, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for quarter ended June 30, 2002.     
*(10)(v)    Change in Control Agreement (Executive Form) dated November 12, 1999, incorporated by reference herein from Exhibit (10)(p) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999.     
*(10)(w)    Change in Control Agreement (Management Form) dated November 12, 1999, incorporated by reference herein from Exhibit (10)(q) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999.     
*(10)(x)    1997 Directors’ Stock Plan, incorporated by reference herein from Exhibit 4.1 of Registration Statement No. 333-41993 on Form S-8 dated December 11, 1997.     
*(10)(y)    Amendment No. 1 to 1997 Directors’ Stock Plan, dated February 26, 1998, incorporated by reference herein from Exhibit (10)(m) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.     
*(10)(z)    Amendment No. 2 to 1997 Directors’ Stock Plan, dated July 7, 1998, incorporated by reference herein from Exhibit (10)(n) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.     
*(10)(aa)    Amendment No. 3, dated July 19, 2000, to 1997 Directors’ Stock Plan, incorporated by reference herein from Exhibit (10)(c) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.     
*(10)(bb)    The First American Financial Corporation Deferred Compensation Plan dated March 10, 2000, incorporated by reference herein from Exhibit (10)(v) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999.     

 

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*(10)(cc)    Amendment No. 1, dated July 19, 2000, to Deferred Compensation Plan, incorporated by reference herein from Exhibit (10)(d) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.     
*(10)(dd)    Amendment No. 2, dated February 1, 2003, to Deferred Compensation Plan, incorporated by reference herein from Exhibit (10) of Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.     
*(10)(ee)    The First American Financial Corporation Deferred Compensation Plan Trust Agreement dated March 10, 2000, incorporated by reference herein from Exhibit (10)(w) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999.     
(10)(ff)    Contribution and Joint Venture Agreement By and Among The First American Financial Corporation and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.     
(10)(gg)    Amendment No. 1, dated June 30, 2003, to Contribution and Joint Venture Agreement By and Among The First American Financial Corporation and Experian Information Solutions, Inc., et al, dated November 30, 1997 incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.     
(10)(hh)    Amendment No. 2, dated September 23, 2003, to Contribution and Joint Venture Agreement By and Among The First American Financial Corporation and Experian Information Solutions, Inc., et al., dated November 30, 1997 incorporated by reference herein from Exhibit (10)(b) of Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.     
(10)(ii)    Operating Agreement for First American Real Estate Solutions LLC, a California Limited Liability Company, By and Among First American Real Estate Information Services, Inc., and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(b) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.     
(10)(jj)    Data License Agreement dated November 30, 1997, incorporated by reference herein from Exhibit (10)(d) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.     
(10)(kk)    Reseller Services Agreement dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(g) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.     
(10)(ll)    Amendment to Reseller Services Agreement For Resales to Consumers, dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(h) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.     
(10)(mm)    Trademark License Agreement, dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(i) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.     
(10)(nn)    Credit Agreement dated as of October 12, 2001, incorporated by reference herein from Exhibit (10)(b) of Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.     
           

 

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(10)(oo)    Amendment No. 1, dated as of July 7, 2003, to Credit Agreement, incorporated by reference herein from Exhibit (10)(oo) of Annual Report on Form 10-K for the fiscal year ended December 31, 2003.     
(10)(pp)    Amendment No. 2, dated as of October 22, 2003, to Credit Agreement, incorporated by reference herein from Exhibit (10)(pp) of Annual Report on Form 10-K for the fiscal year ended December 31, 2003.     
(10)(qq)    Amendment No. 3, dated as of November 26, 2003, to Credit Agreement, incorporated by reference herein from Exhibit (10)(qq) of Annual Report on Form 10-K for the fiscal year ended December 31, 2003.     
(10)(rr)    Credit Agreement, dated as of August 4, 2004 between The First American Corporation, JP Morgan Chase Bank, as Administrative Agent, and certain other Lenders party thereto, incorporated by reference herein from Exhibit (10) of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004.     
(10)(ss)    Master Lease Financing Agreement, dated as of December 29, 2004, between General Electric Capital Corporation, for Itself and as Agent for Certain Participants, and First American Title Insurance Company, together with Equipment Schedule No. 1 and Equipment Schedule No. 2.     
(21)    Subsidiaries of the registrant.     
(23)    Consent of Independent Registered Public Accounting Firm.     
(31)(a)    Certification by Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Act of 1934.     
(31)(b)    Certification by Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.     
(32)(a)    Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.     
(32)(b)    Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.     

 

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