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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number: 0-3658
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THE FIRST AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Incorporated in California 95-1068610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 First American Way, Santa Ana, California 92707-5913
(Address of principal executive offices) (Zip Code)
(714) 800-3000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Common New York Stock Exchange
Rights to Purchase Series A Junior New York Stock Exchange
Participating Preferred
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
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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. (S) 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. [_]
On March 27, 2001, the aggregate market value of voting stock held by non-
affiliates was $1,365,447,079.
On March 27, 2001, there were 64,485,196 shares of Common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement 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.
This report includes 62 pages.
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PART I
Item 1. Business.
The Company
The First American Corporation (the Company) was organized 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 commenced issuing title insurance policies. In 1986, the Company
began a diversification program by acquiring and developing business
information companies closely related to the real estate transfer and closing
process. In 1998, the Company expanded its diversification program to include
business information companies 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. Unless the context otherwise indicates,
the "Company," as used herein, refers to The First American Corporation and
its subsidiaries.
General
The Company, through its subsidiaries, is engaged in the business of
providing business information and related products and services. The
Company's three primary segments are title insurance and services, real estate
information and services and consumer information and services. The title
insurance segment issues residential and commercial title insurance policies,
provides escrow services, equity loan services, tax deferred exchanges and
other related services. The real estate information segment provides tax
monitoring, mortgage credit reporting, property data services, flood
certification, database services, default management services, field
inspection services, appraisal services, mortgage loan servicing systems,
mortgage document preparation and other real estate related services. The
consumer information segment provides home warranties, property and casualty
insurance, resident screening, pre-employment screening, specialized credit
reporting, automotive insurance tracking, investment advisory and trust and
thrift 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 its subsidiary, First American Title Insurance Company, is one
of the largest title insurers in the United States, based on operating
revenues, and its subsidiary, First American Real Estate Information Services,
Inc., is the nation's largest provider of flood zone determinations, based on
the number of flood zone determination reports issued; the nation's largest
mortgage credit reporting service, based on the number of credit reports
issued; and the nation's second largest provider of tax monitoring services,
based on the number of loans under service. The Company also believes that its
subsidiary, First American Home Buyers Protection Corporation, was the second
largest provider of home warranties in the United States, based on the number
of home protection contracts under service. Substantially all of the revenues
for the Company's title insurance and real estate 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. The majority of the revenues for the Company's consumer information
segment 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.
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 want 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
their lenders in the title to real property against loss by reason of adverse
claims to ownership of, or to defects, liens, encumbrances or other
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matters affecting such title which exist at the time a title insurance policy
is issued and which were not excluded from the coverage of a title insurance
policy. 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 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,
but in some cases might insure for 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, title insurance is
generally ordered on behalf of an insured by a real estate broker, lawyer,
developer, lender or closer involved in the transaction. 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 ("commitment") 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 (such person or entity, the "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 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 except 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 remainder of the premium is remitted to the title insurer as
compensation for bearing the risk of loss in the event a claim is made under
the
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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.
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 subsidiaries, transacts the business of title insurance through a network
of both direct operations and agents. Through this network, the Company issues
policies in all states (except Iowa), the District of Columbia, Puerto Rico,
Guam, the U.S. Virgin Islands, the Bahama Islands, Canada, Mexico, Bermuda,
the United Kingdom and Australia. In Iowa, the Company provides abstracts of
title only, because title insurance is not permitted. Through acquisitions and
start-ups during the mid-1980s, the Company has grown from a large regional
company to a nationwide company, becoming less dependent on operating revenues
from any one state or region.
Based on industry statistics showing premiums written in 1999 (adjusted to
reflect the pro-forma merger of Fidelity Title and Chicago Title, which closed
February 2000), the Company had the largest or second largest share of the
title insurance market in 26 states and in the District of Columbia, and had a
national market share of 21.5%. Industry statistics for 2000 are not currently
available.
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 will continue to focus
on expanding its share of the higher margin, title insurance business
conducted on behalf of commercial clients. 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 from referrals from persons in the real estate community, such as
independent escrow companies, real estate 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 certain 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 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 is located
throughout the Company's branch office network. 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 20 salespeople in its national accounts
department. One of the responsibilities of the national accounts department
sales personnel is the coordination of marketing efforts directed at large
real estate lenders and companies developing, selling, buying or brokering
properties on a multistate 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 during the past decade 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.
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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 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 has
also increased the number of agent representatives and agent auditors that it
employs. 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,
records of a title plant are generally 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.
With the formation of a limited liability corporation ("LLC") with Experian
Group on January 1, 1998, the Company enhanced its investment in title plants.
Experian Group contributed to the LLC its real estate information division,
which the Company believes is the nation's leading operator of title plants.
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 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. The assets so acquired are carried at the
lower of cost or fair value, less costs to sell. Notes, real estate and other
assets purchased or otherwise acquired in settlement of claims, net of
valuation reserves, totaled $12.0 million, $4.3 million and $11.5 million,
respectively, as of December 31, 2000.
Reinsurance and Coinsurance. The Company assumes and distributes large
title insurance risks through mechanisms of reinsurance and coinsurance. In
reinsurance agreements, in consideration 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 million of primary risk on any single policy.
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 varies 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. Approximately 75 title
insurance underwriters 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 (which also includes Chicago Title, Ticor Title
Insurance Company and Security Union Title Insurance Company) Land America
Title Insurance Company, 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.
The Company's Related Businesses
As an adjunct to its title insurance business, in 1986 the Company embarked
on a diversification program by acquiring and developing business information
companies closely related to the real estate transfer and closing process. In
1998, the Company expanded its diversification program to include business
information companies outside of the real estate transfer and closing process.
As a result of these diversification programs, the Company has become the
nation's leading, diversified provider of business information and related
products.
The Real Estate Information and Services Business. The real estate
information and service business encompasses tax monitoring, mortgage credit
reporting, flood certification, database services, default management
services, loan origination and servicing systems, mortgage document
preparation and other property information services.
The tax monitoring service, established by the Company 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 TRTS Data Services,
Inc., in November 1991, the Company believes that it is the second largest
provider of tax monitoring services in the United States.
Under a typical contract, a tax service provider monitors, on behalf of a
mortgage lender, 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
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impounded on behalf of borrowers, providers of tax monitoring services, such
as the Company's tax service, 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's primary source of tax service business is from large
multistate mortgage lenders. The Company's only major nationwide competitor in
the tax service business is Transamerica Real Estate Tax Service. Because of
its broad geographic coverage and the large number of mortgage loans not being
serviced by a third party tax service provider, the Company believes that it
is well positioned to increase its market share in the tax service market.
The fee charged to service each mortgage loan varies from region to region,
but generally falls within the $45 to $105 price range and is paid in full at
the time the contract is executed. 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.
The Company's mortgage credit reporting service provides credit information
reports for mortgage lenders throughout the United States. These reports are
derived from two or more credit bureau sources and are summarized and prepared
in a standard form 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. (now
named First American Credco, Inc.). With the acquisition of First American
Credco, Inc., the Company believes that it is now the largest mortgage credit
reporting service in the United States.
In January 1995, the Company acquired Flood Data Services, Inc. (now named
First American Flood Data Services, Inc.). This business furnishes to mortgage
lenders flood zone determination reports, which provide information on whether
or not property securing a loan is in a governmentally delineated special
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. First American Flood Data Services, Inc., is the largest provider of
flood zone determinations in the United States.
In April 1996, the Company acquired the Excelis Mortgage Loan Servicing
System (MLS), now known as Excelis, Inc. Excelis MLS is the only commercially
available real-time, online servicing system that has been developed since
1990 to meet increasingly sophisticated market demands. The software employs
rules-based technology which enables the user to customize the system to fit
its individual servicing criteria and policies.
In December 1996, the Company acquired Ward Associates, now known as First
American Field Services. The company was combined with First American's
existing field services company to provide comprehensive inspection and
property preservation services to mortgage lenders nationwide. With the
acquisition, the Company believes that it is now the largest field services
company in the United States.
In May 1997, the Company purchased all of the operations of SMS, with the
exception of SMS' flood zone determination business. SMS is a leading provider
of real estate information services to the U.S. mortgage and title insurance
industries. The acquired businesses include SMS' credit division, which the
Company believes is the third largest provider of U.S. mortgage credit
information; SMS' property appraisal division, which the Company believes is
the second largest provider of U.S. appraisal services; SMS' title division,
which provides title and closing services throughout the United States,
servicing primarily home equity mortgage institutions; SMS' settlement
services business, which provides title plant systems and accounting services,
as well as escrow closing software, to the title industry; and a controlling
interest in what is believed by the Company to be the largest mortgage
document preparation firm.
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On January 1, 1998, the Company and its real estate information service
subsidiaries (other than Excelis, Inc.) (the "Real Estate Information
Subsidiaries") consummated a business transaction with Experian Group
("Experian"), pursuant to which First American Real Estate Solutions LLC
("FARES") was established. Under the transaction, the Real Estate Information
subsidiaries contributed substantially all of their assets and liabilities to
FARES in exchange for an 80% ownership interest and Experian transferred
substantially all of the assets and liabilities of its Real Estate Solutions
division ("RES") to FARES in exchange for a 20% ownership interest. RES is
believed to be the nation's foremost supplier of core real estate data,
providing, among other things, property valuation information, title
information, tax information and imaged title documents.
In June 1998, the Company acquired Data Tree Corporation. Data Tree is a
supplier of database management and document imaging systems to county
recorders, other governmental agencies and the title industry.
In July 1998, the Company acquired ShadowNet Mortgage Technologies, LLC.
ShadowNet is a provider of electronic mortgage preparation and delivery
systems and now conducts business under the First American Nationwide
Documents brand-name.
In July 2000, the Company combined its Smart Title Solutions division with
the Datatrace division of LandAmerica Financial Group, Inc ("LandAmerica").
The combined entity, Data Trace Information Services, is 80% owned by the
Company's subsidiary, FARES, and 20% owned by LandAmerica. The Company
believes that Data Trace Information Services is the nation's most advanced
and comprehensive title information delivery system.
In August 2000, the Company combined its RES division with the Intellitech
real estate information business of Transamerica Corporation to form a new
entity, First American Real Estate Solutions, L.P. This joint venture is 80%
owned by the Company's subsidiary, FARES, and 20% by Transamerica Corporation.
The Company believes that this joint venture is the nation's largest database
of property characteristic information, supplying data and decision-support
products to the real estate and mortgage finance industry.
The Consumer Information and Services Business. In 1998, the Company
created this business segment to provide noncyclical, high-margin services to
a customer base outside the Company's traditional clientele and to expand the
Company's opportunities for revenue consistency. This business segment markets
a variety of services including automotive credit reporting, direct-to-
consumer credit reporting, subprime credit reporting, multifamily resident
screening, pre-employment screening, property and casualty insurance and other
related services. This segment also provides home warranties and trust and
thrift services.
The automotive and subprime automotive credit reporting service provides
auto dealers and lenders with consumer credit reports tailored to the specific
needs of the automotive market. This credit reporting service also offers
credit reports directly to the consumer, accessing information from the
nation's three largest credit bureaus.
The multifamily resident screening service provides landlords with
information regarding a housing applicant's rental payment history, occupancy
responsibilities, eviction actions, credit information and similar background
data.
The pre-employment screening service offers employers a variety of reports
on prospective employees, providing information on criminal records, warrants,
motor vehicle reports, credit reports, drug screens, education, prior
employment, professional licenses and more.
Property and casualty insurance is offered by the consumer information
segment through First American Property and Casualty Insurance Company,
acquired as Five Star Holdings and Great Pacific Insurance Company in 1999.
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 currently owns 90% of its
home warranty business, which is operated as a second tier subsidiary, with
the balance owned by management of that subsidiary. The Company's home
warranty business issues one-year warranties that protect homeowners against
defects in household systems and appliances, such as plumbing,
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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. For an additional charge, 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 are marketed
through real estate brokers and agents. This business is conducted in certain
counties of Arizona, California, Colorado, Georgia, Nevada, New Mexico,
North Carolina, Ohio, Oregon, South Carolina, Texas, Utah and Washington. The
principal competitor of the Company's home warranty business is American Home
Shield, a subsidiary of Service Master L.P.
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, 2000, the trust operation was administering fiduciary and
custodial assets having a market value in excess of $2.3 billion.
During 1988, the Company, through a majority owned subsidiary, acquired an
industrial bank (the Thrift), 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, 2000, the Thrift had approximately
$94.4 million of demand deposits and $81.3 million of loans outstanding.
Loans made or acquired during the current year, by the Thrift, ranged in
amount from $39,000 to $1,800,000. The average loan balance outstanding at
December 31, 2000, was $292,588. 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 98.0% 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, 2000, was 10.13%. 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 real estate lending market
are local community banks, other thrift and loan companies and, to a lesser
extent, commercial banks. The Thrift's average loan is 14 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 nonaccrual
status when two payments become past due. When a loan is placed on nonaccrual
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. Interest income on nonaccrual loans which would have been recognized
during the year ended December 31, 2000, if all of such loans had been current
in accordance with their original terms, totaled $6,722.
The following table sets forth the amount of the Thrift's nonperforming
loans as of the dates indicated.
Year Ended December 31
------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands)
Nonperforming Assets:
Loans accounted for on a nonaccrual basis.......... $89 $707 $898 $287 $166
Accruing loans past due 90 or more days............
Troubled debt restructurings.......................
--- ---- ---- ---- ----
Total............................................ $89 $707 $898 $287 $166
=== ==== ==== ==== ====
Based on a variety of factors concerning the creditworthiness of its
borrowers, the Thrift determined that it had $348,447 of potential problem
loans in existence as of December 31, 2000.
8
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
---------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(in thousands, except percentages)
Allowance for Loan Losses:
Balance at beginning of year....... $ 905 $1,150 $1,185 $1,050 $1,344
------ ------ ------ ------ ------
Charge-offs:
Real estate--mortgage.............. -- (346) (164) (136) (766)
Assigned lease payments............ (2) -- (34) -- (5)
------ ------ ------ ------ ------
(2) (346) (198) (136) (771)
------ ------ ------ ------ ------
Recoveries:
Real estate--mortgage.............. 9 -- -- 6 26
Assigned lease payments............ -- -- 4 22 18
------ ------ ------ ------ ------
9 4 28 44
------ ------ ------ ------ ------
Net charge-offs.................... 7 (346) (194) (108) (727)
Provision for losses............... 108 101 159 243 433
------ ------ ------ ------ ------
Balance at end of year............... $1,020 $ 905 $1,150 $1,185 $1,050
====== ====== ====== ====== ======
Ratio of net charge-offs during the
year to average loans outstanding
during the year..................... (.01%) .4% .3% .2% 1.4%
====== ====== ====== ====== ======
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
-------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- --------------- --------------- --------------- ---------------
% of % of % of % of % of
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
(in thousands, except percentages)
Loan Categories:
Real estate--mortgage.. $1,002 100 $904 100 $1,100 100 $1,116 100 $1,015 100
Real estate--
construction..........
Assigned lease
payments.............. -- -- -- 39 34
Other.................. 18 1 50 30 1
------ --- ---- --- ------ --- ------ --- ------ ---
$1,020 100 $905 100 $1,150 100 $1,185 100 $1,050 100
====== === ==== === ====== === ====== === ====== ===
9
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 launched its Consumer
Information and Services Division where a unique mix of products and services
is directed toward non-real estate related markets. 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.
During the current year, some of the key acquisitions made by the Company
in furtherance of this strategy were:
Acquired Entity Principal Market(s)
--------------- ------------------
Title Insurance(1):
Associated Land Title Group............................ Florida
Bay County Land and Abstract........................... Florida
Itasca County Abstract Co. ............................ Minnesota
Real Estate Information Services:
Datatrace(1)........................................... Nationwide
Intellitech(2)......................................... Nationwide
Consumer Risk Management:
Pretiem Corporation.................................... Mid-Atlantic Region
- --------
(1) On July 31, 2000, the Company combined its Smart Title Solutions division
with the Datatrace division of LandAmerica Financial Group, Inc. The
combined entity, Data Trace Information Services, a provider of advance
title information delivery systems, is 80% owned by the Company's
subsidiary, FARES, and 20% owned by LandAmerica.
(2) On August 2, 2000, the Company combined its First American Solutions (RES)
division with the Intellitech real estate information business of
Transamerica Corporation, to form a new entity, First American Real Estate
Solutions, L.P. This joint venture, 80% owned by the Company's subsidiary,
FARES, and 20% owned by Transamerica Corporation, is a provider of
property characteristic information, supplying data and decision-support
products to the real estate and mortgage finance industry.
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 (included in the
acquisition of National Information Group) 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
10
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 is currently
licensed to write property and casualty insurance in 46 states and the
District of Columbia.
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 industrial loan company 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
Company's industrial loan company 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.
Employees
The following table provides a summary of the total number of employees of
the Company as of December 31, 2000:
Number of
Business Employees
-------- ---------
Title Insurance.................................................. 13,688
Real Estate Information.......................................... 5,460
Consumer Information............................................. 1,198
------
Total............................................................ 20,346
======
Item 2. Properties.
In September 1999, the Company moved its executive offices to one of the
newly constructed office buildings at MacArthur Place in Santa Ana,
California. 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 later in 1999. The three new buildings are in a campus
environment and total approximately 210,000 square feet. The Company continues
to own the two adjacent buildings in Santa Ana, California, which previously
housed its executive offices. That location, comprising approximately 105,000
square feet of floor space, continues as the home of the Company's trust and
banking division. In addition, there are plans to move certain other divisions
into that complex as their existing leases expire. The Company also owns an
18,000 square foot building located across the street from that complex. This
building is currently used primarily for storage.
The Company's title insurance subsidiary, First American, and its
subsidiaries, own or lease buildings or office space in more than 900
locations throughout the United States and abroad, principally for their
respective title operations.
The Company's real estate information subsidiary, First American Real
Estate Information Services, Inc. ("FAREISI"), houses its national operations
in a leased 231,000 square foot office building in Dallas, Texas. FAREISI's
corporate headquarters are housed in a leased office building located in St.
Petersburg, Florida. In 1999, the Company completed the construction of two
office buildings in Poway, California. The two buildings total approximately
152,000 square feet and are located on a 17 acre parcel of land. The buildings
are occupied by various divisions of FAREISI. In addition, FAREISI and its
subsidiaries lease office space in more than 75 locations throughout the
United States, principally for their respective operations.
11
The Company's home warranty subsidiary owns 1.7 acres of land in Van Nuys,
California, which contains a 20,000-square-foot office building, a 7,000-
square-foot warehouse and a parking lot.
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.
On May 19, 1999, the State of California, the controller and insurance
commissioner of the State of California filed a class action suit in the state
court in Sacramento. Initially, the action sought to certify as a class of
defendants all title and escrow companies doing business in California from
1970 to the present, including certain of the Company's subsidiaries. The
plaintiffs allege that the defendants: failed to give unclaimed property to
the State of California on a timely basis; charged California home buyers and
other escrow customers fees for services that were never performed or which
cost less than the amount charged; and devised and carried out schemes, known
as earnings credits, with financial institutions to receive interest on escrow
funds deposited by defendants with financial institutions in demand deposits.
Since the initial filing of the suit, the California Attorney General's
Office, on behalf of the State, the controller and the insurance commissioner,
indicated that it would not seek to certify a class of defendants, but would
instead amend its suit to name an unspecified number of title underwriters and
underwritten title companies. To date, the Attorney General has neither
amended the suit, nor to the Company's knowledge taken steps to progress with
it, including the service of process on any party. The Attorney General,
however, has entered into settlement discussions with various title insurance
underwriters, including certain of the Company's subsidiaries. Additionally,
the Attorney General indicated that it will address issues pertaining to
escheat obligations through routine audits conducted by the controller's
office, rather than through litigation.
Subsequent to the filing of this lawsuit, First American Title Insurance
Company, a subsidiary of the Company, was named and served as a defendant in
two private class actions in California courts. The allegations in those
actions include some, but not all, of the allegations contained in the lawsuit
discussed above. The private class actions independently seek injunctive
relief, attorneys' fees, damages and penalties in unspecified amounts. One of
the private class actions has been dismissed. The remaining private class
action has not progressed beyond limited document production.
The Company does not believe that the ultimate resolution of these actions
will have a material adverse effect on its financial condition or results of
operations.
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.
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.
12
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.
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
12, 2001, was 3,553.
High and low stock prices and dividends for the last two years were as
follows:
2000 1999
------------------------ ------------------------
Cash Cash
Quarter Ended High-low range dividends High-low range dividends
- ------------- -------------- --------- -------------- ---------
March 31...................... $13.94--$10.69 $.06 $34.81--$15.81 $.06
June 30....................... $17.44--$13.25 $.06 $20.69--$13.88 $.06
September 30.................. $22.44--$14.50 $.06 $19.25--$12.00 $.06
December 31................... $32.88--$17.44 $.06 $15.13--$11.50 $.06
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.
Recent Sales of Unregistered Securities
In the last three years, the Company has issued unregistered shares of its
common stock to the sellers of the businesses acquired on the dates listed
below.
Number
of Consideration
Date of Sale Shares Received
------------ ------- -------------
April 15, 1998........................................... 726,564 $15,500,000
May 6, 1998.............................................. 125,775 $ 2,587,167
May 7, 1998.............................................. 27,090 $ 435,698
May 29, 1998............................................. 111,039 $ 2,850,000
September 15, 1998....................................... 17,925 $ 525,000
February 25, 1999........................................ 69,584 $ 1,955,000
Item 6. Selected Financial Data.
The selected consolidated financial data for the Company for the five-year
period ended December 31, 2000, 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."
13
The First American Corporation and Subsidiary Companies
Year Ended December 31
----------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(in thousands, except percentages, per share amounts
and employee data)
Revenues................ $2,934,255 $2,988,169 $2,943,880 $1,962,001 $1,654,976
Income before cumulative
effect of a change in
accounting for tax
service contracts (Note
A)..................... $ 82,223 $ 88,643 $ 201,527 $ 67,765 $ 55,766
Cumulative effect of a
change in accounting
for tax service
contracts (Note A)..... -- $ (55,640) -- -- --
Net income.............. $ 82,223 $ 33,003 $ 201,527 $ 67,765 $ 55,766
Total assets............ $2,199,737 $2,116,414 $1,852,731 $1,220,377 $1,010,556
Notes and contracts
payable................ $ 219,838 $ 196,815 $ 143,466 $ 51,720 $ 72,761
Mandatorily redeemable
preferred securities... $ 100,000 $ 100,000 $ 100,000 $ 100,000
Stockholders' equity.... $ 870,237 $ 815,991 $ 762,265 $ 442,783 $ 384,931
Return on average
stockholders'
equity (Note B)........ 9.8% 10.9% 33.4% 16.4% 15.4%
Cash dividends on common
shares................. $ 15,256 $ 15,840 $ 13,894 $ 14,035 $ 7,928
Per share of common
stock (Note C)--
Basic:
Income before
cumulative effect of
a change in
accounting for tax
service contracts.... $ 1.29 $ 1.37 $ 3.35 $ 1.19 $ .98
Cumulative effect of a
change in accounting
for tax service
contracts............ -- (.86) -- -- --
---------- ---------- ---------- ---------- ----------
Net income............ $ 1.29 $ .51 $ 3.35 $ 1.19 $ .98
========== ========== ========== ========== ==========
Diluted:
Income before
cumulative effect of
a change in
accounting for tax
service contracts.... $ 1.24 $ 1.34 $ 3.21 $ 1.16 $ .98
Cumulative effect of a
change in accounting
for tax service
contracts............ -- (.84) -- -- --
---------- ---------- ---------- ---------- ----------
Net income............ $ 1.24 $ .50 $ 3.21 $ 1.16 $ .98
========== ========== ========== ========== ==========
Stockholders' equity.. $ 13.62 $ 12.54 $ 12.08 $ 7.74 $ 6.76
Cash dividends........ $ .24 $ .24 $ .23 $ .25 $ .14
Number of common shares
outstanding
Weighted average during
the year
Basic................. 63,680 64,669 60,194 57,092 56,652
Diluted............... 66,050 66,351 62,720 58,482 57,112
End of year............ 63,887 65,068 63,120 57,186 56,965
Title orders opened
(Note D)............... 1,241 1,334 1,585 1,173 1,027
Title orders closed
(Note D)............... 975 1,120 1,210 886 775
Number of employees..... 20,346 20,065 19,669 13,156 11,611
All consolidated results reflect the 1999 acquisition of NAIG accounted for
under the pooling-of-interests method of accounting.
Note A--See Note 1 to the consolidated financial statements for a
description of the change in accounting for tax service contracts.
Note B--Return on average stockholders' equity for 1999 excludes the
cumulative effect of a change in accounting for tax service contracts from
both net income and stockholders' equity.
Note C--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 D--Title order volumes are those processed by the direct title
operations of the Company and do not include orders processed by agents.
14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Certain statements made in this document, including those relating to cost
savings derived from a reorganization in the Company's title insurance
operations, margins in certain of the Company's businesses, the benefits and
results from certain acquisitions and joint ventures, the impact of the
restructuring of the Company's pension plan, the Company's ability to meet its
cash obligations, the sufficiency of the Company's resources to meet its cash
needs, pursue future opportunities and certain prospective statements, not of
a historical nature, 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; general
volatility in the capital markets; changes in the performance of the real
estate markets; general volatility in the capital markets; changes in
applicable government regulations; consolidation among the Company's
significant customers and competitors; legal proceedings commenced by the
California attorney general and related litigation; the Company's continued
ability to identify businesses to be acquired; and changes in the Company's
ability to integrate businesses which it acquires. The forward-looking
statements speak only as of the date they are made. The Company does not
undertake to update forward-looking statements to reflect circumstances or
events that occur after the date the forward-looking statements are made.
Results of Operations
Overview--The majority of the revenues for the Company's title insurance
and real estate 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. The majority of the revenues for
the Company's consumer information segment 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.
Interest rate declines, which started in the fourth quarter of 1997,
continued throughout 1998. This, coupled with higher consumer confidence, led
to nationwide record-setting residential resale and refinance transactions,
which, together with the particularly strong California real estate market,
resulted in record-setting revenues and net income for the Company in 1998.
The favorable conditions present throughout 1998 continued into 1999,
resulting in record-setting revenues for the first half of the year. However,
commencing in the second quarter of 1999, new orders began to soften as rising
interest rates led to a significant decline in refinance transactions,
although residential resale and commercial activity remained relatively
strong. During the second half of 1999, the trend of higher interest rates
continued. New orders, including residential resale orders, continued to
decline. This, coupled with fourth quarter seasonal factors, led to a decrease
in operating revenues for the fourth quarter of 1999 and resulted in a low
inventory of open orders going into the first quarter of 2000. The Company
instituted personnel reductions and other cost-containment programs during the
latter part of 1999; however, because of separation costs, the benefits of
these programs were not fully realized in 1999.
As a result of the low inventory of open orders going into the first
quarter of 2000, and the relatively weak real estate economy present during
the first half of 2000, revenues and profits during this period decreased
significantly when compared with the same period of 1999. During the second
half of 2000, real estate activity began to increase as a result of declining
mortgage interest rates. New order counts in the latter part of the third
quarter began to show favorable comparisons with the same period of 1999. This
trend continued into the fourth quarter of 2000 and resulted in a significant
increase in revenues and profits in the second half of 2000 when compared with
the same period of 1999.
15
Operating revenues--A summary by segment of the Company's operating
revenues is as follows:
2000 % 1999 % 1998 %
---------- --- ---------- --- ---------- ---
(in thousands, except percentages)
Title Insurance:
Direct operations................ $1,083,112 38 $1,067,133 36 $1,097,989 38
Agency operations................ 983,937 34 1,086,746 37 965,228 34
---------- --- ---------- --- ---------- ---
2,067,049 72 2,153,879 73 2,063,217 72
Real Estate Information............ 558,147 19 575,694 20 630,510 22
Consumer Information............... 252,332 9 206,623 7 173,380 6
---------- --- ---------- --- ---------- ---
$2,877,528 100 $2,936,196 100 $2,867,107 100
========== === ========== === ========== ===
Operating revenues from direct title operations increased 1.5% in 2000 over
1999 and decreased 2.8% in 1999 from 1998. The increase in 2000 over 1999 was
attributable to an increase in the average revenues per order closed, offset
in part by a decrease in the number of title orders closed by the Company's
direct title operations. The decrease in 1999 from 1998 was attributable to a
decrease in the number of title orders closed by the Company's direct title
operations, offset in part by an increase in the average revenues per order
closed. The Company's direct title operations closed 975,000, 1,119,900 and
1,210,200 title orders during 2000, 1999 and 1998, respectively, representing
a decrease of 12.9% in 2000 from 1999 and 7.5% in 1999 from 1998. These
decreases were primarily due to the significant decline in refinance
transactions mentioned above. The average revenues per order closed were
$1,111, $953, and $907 for 2000, 1999 and 1998, respectively, representing an
increase of 16.6% in 2000 over 1999 and 5.1% in 1999 over 1998. These
increases were primarily attributable to appreciating home values, an
increased mix of resale activity and, primarily in 2000, a resurgence in
commercial real estate transactions. Operating revenues from agency title
operations decreased 9.5% in 2000 from 1999 and increased 12.6% in 1999 over
1998. These fluctuations were primarily attributable to the same factors
affecting direct title operations mentioned above, compounded by the inherent
delay in the reporting of transactions by agents.
Real estate information operating revenues decreased 3.0% in 2000 from 1999
and 8.7% in 1999 from 1998. These fluctuations were primarily attributable to
the same factors affecting title insurance mentioned above, offset in part by
acquisition activity. In addition, the decrease in 1999 from 1998 was also due
to a $22.7 million reduction in tax service operating revenues attributable to
the change in revenue recognition policy (see Note 1 to the consolidated
financial statements). Operating revenues of $32.1 million and $19.3 million
were contributed by new acquisitions in 2000 and 1999, respectively.
Consumer information operating revenues increased 22.1% in 2000 over 1999
and 19.2% in 1999 over 1998. These increases were primarily attributable to an
increased awareness and acceptance of this business segment's products,
increased market share and acquisition activity. Operating revenues of $15.0
million and $8.1 million were contributed by new acquisitions in 2000 and
1999, respectively.
Investment and other income--Investment and other income increased $4.8
million in 2000 over 1999 and decreased $24.8 million in 1999 from 1998. The
increase in 2000 over 1999 was primarily due to a 4.6% increase in the average
investment portfolio balance, investment gains totaling $5.7 million relating
to the joint venture agreements with LandAmerica Financial Group, Inc, and
Transamerica Corporation (see Note 18 to the consolidated financial
statements) and $2.5 million of interest income contributed by a new
acquisition in the United Kingdom, offset in part by a $4.3 million realized
investment loss and reduced equity in earnings of unconsolidated affiliates.
The decrease in 1999 from 1998 was primarily due to an investment gain of
$32.4 million recognized in 1998 relating to the joint venture agreement with
Experian, offset in part, in 1999, by a 24.8% increase in the average
investment portfolio balance and a $5.2 million gain resulting from stock
received in the demutualization of a life insurance company, which insures a
large portion of the Company's corporate-owned life insurance portfolio. See
Note 9 to the consolidated financial statements for additional information.
16
Salaries and other personnel costs--A summary by segment of the Company's
salaries and other personnel costs is as follows:
2000 % 1999 % 1998 %
---------- --- ---------- --- -------- ---
(in thousands, except percentages)
Title Insurance................ $ 721,417 71 $ 729,720 71 $659,289 70
Real Estate Information........ 231,751 23 231,696 22 221,237 23
Consumer Information........... 67,920 7 59,106 6 51,425 6
Corporate...................... (6,322) (1) 14,250 1 13,562 1
---------- --- ---------- --- -------- ---
$1,014,766 100 $1,034,772 100 $945,513 100
========== === ========== === ======== ===
The Company's 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
business has created ongoing fixed costs required to service accounts.
Title insurance personnel expenses decreased 1.1% in 2000 from 1999 and
increased 10.7% in 1999 over 1998. The decrease in 2000 from 1999 was primarily
due to cost-containment measures, which included staff reductions in the
production area (consistent with the decrease in open orders), the
restructuring of the Company's principal pension plan and the consolidation of
certain administrative functions within the Company's regional structure,
offset in part by personnel costs associated with new acquisitions. The
restructuring of the Company's pension plan contributed $11.8 million to the
decrease in title personnel expenses (see Note 11 to the consolidated financial
statements). Personnel expenses associated with new acquisitions totaled $36.6
million for 2000. The increase in 1999 over 1998 was primarily due to the
relatively high number of employees added during the latter part of 1998 and
the beginning of 1999 in order to service the volume of orders processed during
those periods. The Company initiated personnel and other cost-reduction
programs in response to the subsequent decrease in business volume; however,
because of separation costs, the benefits of these reductions were not fully
realized until 2000. Contributing to the increase in salaries and other
personnel costs in 1999 were $20.8 million of personnel costs associated with
new acquisitions. The Company's direct title operations opened 1,240,700,
1,334,100, and 1,585,400 title orders in 2000, 1999 and 1998, respectively,
representing a decrease of 7.0% in 2000 from 1999 and 15.9% in 1999 from 1998.
Real estate information personnel expenses stayed constant in 2000 when
compared with 1999 primarily as a result of staff reductions and the
restructuring of the Company's principal pension plan, offset by $15.1 million
of personnel costs associated with new acquisitions. The restructuring of the
Company's pension plan reduced personnel expenses in 2000 by $3.0 million when
compared with 1999. Real estate information personnel expenses increased 4.7%
in 1999 over 1998. This increase was primarily attributable to $7.6 million of
personnel costs associated with new acquisitions and costs incurred in
connection with Y2K. Impacting personnel expenses for both 2000 and 1999 were
higher overhead costs attributable to the integration of new acquisitions and
costs associated with in-house development of new electronic communication
delivery systems for information-based products to interface with customer
needs.
Consumer information personnel expenses increased 14.9% in both 2000 over
1999 and 1999 over 1998. These increases were primarily attributable to
additional personnel required to service the increased business volume and
acquisition activity. The increase for 2000 was offset in part by a $0.8
million reduction in personnel expenses related to the restructuring of the
Company's pension plan. Personnel expenses associated with new acquisitions
were $4.8 million and $2.7 million for 2000 and 1999, respectively.
Corporate personnel expenses decreased $20.6 million in 2000 from 1999. This
decrease was primarily attributable to a reduction of $23.7 million resulting
from the restructuring of the Company's pension plan.
17
Premiums retained by agents--A summary of agent retention and agent revenues
is as follows:
2000 1999 1998
-------- ---------- --------
(in thousands, except
percentages)
Agent retention.............................. $791,940 $ 871,036 $773,030
======== ========== ========
Agent revenues............................... $983,937 $1,086,746 $965,228
======== ========== ========
% Retained by agents......................... 80.5% 80.2% 80.1%
======== ========== ========
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 may vary due to
the geographical mix of revenues from agency operations.
Other operating expenses--A summary by segment of the Company's other
operating expenses is as follows:
2000 % 1999 % 1998 %
-------- --- -------- --- -------- ---
(in thousands, except percentages)
Title Insurance....................... $363,807 53 $327,182 48 $307,055 49
Real Estate Information............... 231,975 33 240,469 36 253,695 40
Consumer Information.................. 92,631 13 82,514 12 58,243 9
Corporate............................. 9,259 1 28,691 4 14,424 2
-------- --- -------- --- -------- ---
$697,672 100 $678,856 100 $633,417 100
======== === ======== === ======== ===
Title insurance other operating expenses (principally direct operations)
increased 11.2% in 2000 over 1999 and 6.6% in 1999 over 1998. The increase in
2000 over 1999 was primarily due to $19.7 million of costs associated with new
acquisitions and $15.2 million of lease expense related to a sale-leaseback
agreement entered into in December 1999. The increase in 1999 over 1998 was
primarily due to $9.7 million of costs associated with new acquisitions, Y2K
expenses of $5.8 million, a $2.5 million charge resulting from a previously
announced fine imposed by the California insurance commissioner and
approximately $2.0 million in impaired asset write-offs. Contributing to the
increases for both years were general price-level increases, offset in part by
the results of the Company's cost-containment programs.
Real estate information other operating expenses decreased 3.5% in 2000 from
1999 and 5.2% in 1999 from 1998. These decreases were primarily due to a
reduction in costs resulting from the Company's cost-containment programs,
offset in part by $15.5 million and $6.9 million of costs associated with new
acquisitions for 2000 and 1999, respectively, and for 1999, Y2K expenses of
$19.0 million.
Consumer information other operating expenses increased 12.3% in 2000 over
1999 and 41.7% in 1999 over 1998. These increases were primarily attributable
to costs incurred servicing the increased business volume, as well as
acquisition activity. Other operating expenses associated with new acquisitions
were $4.1 million in 2000 and $3.3 million in 1999.
Corporate other operating expenses decreased 67.7% in 2000 from 1999 and
increased 98.9% in 1999 over 1998. The decrease in 2000 from 1999 was primarily
due to $10.8 million of nonrecurring, merger-related charges incurred in the
NAIG acquisition in 1999, Y2K costs incurred in 1999 and a reduction in costs
in 2000 resulting from the Company's cost-containment programs. The increase in
1999 over 1998 was primarily attributable to the $10.8 million of charges
incurred in the NAIG acquisition as well as Y2K costs.
18
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:
2000 % 1999 % 1998 %
-------- --- -------- --- -------- ---
(in thousands, except percentages)
Title Insurance....................... $ 75,790 54 $ 65,925 57 $ 68,697 55
Real Estate Information............... 9,094 6 10,391 9 17,428 14
Consumer Information.................. 56,748 40 39,902 34 38,053 31
-------- --- -------- --- -------- ---
$141,632 100 $116,218 100 $124,178 100
======== === ======== === ======== ===
The provision for title insurance losses, expressed as a percentage of title
insurance operating revenues, was 3.7% in 2000, 3.1% in 1999 and 3.3% in 1998.
The increase in 2000 over 1999 reflected the shift in revenue mix from
refinance to resale, which is generally more claims intensive. The decrease in
1999 from 1998 was primarily due to an improvement in title insurance claims
experience. The provision for consumer information losses principally reflects
home warranty claims and, to a lesser extent, property and casualty insurance
claims. The provision for home warranty claims, expressed as a percentage of
home warranty operating revenues, was 52.8% in 2000, 49.8% in 1999 and 56.2% in
1998. These fluctuations in rate reflected the relative change in the average
number of claims per contract experienced during these periods. The provision
for property and casualty insurance losses increased $7.9 million in 2000 over
1999. This increase was primarily due to the acquisition of Five Star Holdings,
Inc., in November 1999.
Depreciation and amortization--Depreciation and amortization, as well as
capital expenditures, are summarized in Note 19 to the consolidated financial
statements.
Premium taxes--A summary by pertinent segment of the Company's premium taxes
is as follows:
2000 % 1999 % 1998 %
------- --- ------- --- ------- ---
(in thousands, except percentages)
Title Insurance.......................... $20,289 90 $21,265 93 $19,959 94
Consumer Information..................... 2,284 10 1,632 7 1,376 6
------- --- ------- --- ------- ---
$22,573 100 $22,897 100 $21,335 100
======= === ======= === ======= ===
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 is
composed of a combination of premium taxes and state income taxes. Premium
taxes attributable to title insurance operations, as a percentage of title
insurance operating revenues, were approximately 1.0% for the three-year period
ended December 31, 2000.
Interest--Interest expense increased 46.4% in 2000 over 1999 and decreased
8.9% in 1999 over 1998. The increase in 2000 over 1999 was primarily due to
interest expense associated with debt incurred in connection with company
acquisitions. The decrease in 1999 from 1998 was primarily due to $2.5 million
of capitalized interest expense related to the development of internal-use
software and the construction of the Company's new corporate headquarters,
offset in part by increased interest expense associated with debt incurred in
connection with company acquisitions.
19
Income before income taxes, minority interests and cumulative effect of a
change in accounting principle--A summary by segment is as follows:
2000 % 1999 % 1998 %
-------- --- -------- --- -------- ---
Title Insurance.................... $ 93,205 50 $128,738 58 $227,906 62
Real Estate Information............ 58,110 31 65,342 29 110,069 30
Consumer Information............... 35,198 19 27,652 13 28,455 8
-------- --- -------- --- -------- ---
186,513 100 221,732 100 366,430 100
=== === ===
Corporate.......................... (32,637) (51,760) (1,379)
-------- -------- --------
$153,876 $169,972 $365,051
======== ======== ========
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. For
example, commercial transactions tend to generate higher revenues and greater
profit margins than residential transactions. Further, profit margins from
refinancing activities 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. Real estate information profits are generally
unaffected by the type of real estate activity but increase as the volume of
residential real estate loan transactions increases. Consumer information
profits increase as the volume of transactions increases and are not affected
by volatility of real estate transactions. 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.
Income taxes--The Company's effective income tax rate, which includes a
provision for state income and franchise taxes for noninsurance subsidiaries,
was 35.5%, 36.7% and 35.2% for 2000, 1999 and 1998, 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 10 to
the consolidated financial statements.
Minority interests--Minority interests in net income of consolidated
subsidiaries decreased $2.1 million in 2000 from 1999 and $16.0 million in
1999 from 1998. These fluctuations were primarily due to the relative change
in the operating results of the Company's joint venture with Experian.
20
Net income--Net income and per share information are summarized as follows:
2000 1999 1998
------- ------- --------
(in thousands, except
per share amounts)
Income before cumulative effect of a change in
accounting for
tax service contracts............................. $82,223 $88,643 $201,527
======= ======= ========
Net income......................................... $82,223 $33,003 $201,527
======= ======= ========
Per share of common stock:
Income before cumulative effect of a change in
accounting for
tax service contracts:
Basic............................................ $ 1.29 $ 1.37 $ 3.35
======= ======= ========
Diluted.......................................... $ 1.24 $ 1.34 $ 3.21
======= ======= ========
Net income:
Basic............................................ $ 1.29 $ .51 $ 3.35
======= ======= ========
Diluted.......................................... $ 1.24 $ .50 $ 3.21
======= ======= ========
Weighted-average shares:
Basic............................................ 63,680 64,669 60,194
======= ======= ========
Diluted.......................................... 66,050 66,351 62,720
======= ======= ========
Liquidity and Capital Resources
Cash provided by operating activities amounted to $141.4 million, $173.2
million and $361.6 million for 2000, 1999 and 1998, respectively, after net
claim payments of $135.4 million, $119.3 million and $100.9 million,
respectively. The principal nonoperating uses of cash and cash equivalents for
the three-year period ended December 31, 2000, were for capital expenditures,
additions to the investment portfolio, company acquisitions in 2000 and 1999,
dividends and the repayment of debt. The most significant nonoperating sources
of cash and cash equivalents were proceeds from the sales and maturities of
certain investments, proceeds in 2000 and 1999 from the sale-leaseback of
certain property and equipment and proceeds in 1998 from the issuance of
senior debentures. The net effect of all activities on total cash and cash
equivalents was a decrease of $49.1 million for 2000, a decrease of $31.3
million for 1999 and an increase of $197.9 million for 1998.
On July 2, 1999, the Company increased its lines of credit to $175.0
million. Pursuant to the terms of the credit agreements, the Company is
required to maintain minimum levels of capital and earnings and meet
predetermined debt-to-capitalization ratios. The lines of credit are currently
unused.
Notes and contracts payable, as a percentage of total capitalization, was
16.9% as of December 31, 2000, as compared with 16.4% as of the prior year
end. This increase was primarily attributable to debt incurred in connection
with company acquisitions, offset, in part, by an increase in the capital base
primarily due to the net income for the period. Notes and contracts payable
are more fully described in Note 8 to the consolidated financial statements.
Pursuant to various insurance and other regulations, the maximum amount of
dividends, loans and advances available to the Company in 2001 from its
insurance subsidiaries is $138.2 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.
21
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, 2000, the Company had equity securities with a book value of
$49.2 million and fair value of $58.7 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.
Fair
2001 2002 2003 2004 2005 Thereafter Total Value
------- ------- ------- ------- ------ ---------- -------- --------
(in thousands)
Interest-Rate Sensitive
Assets
Deposits with Savings
and Loan Associations
and Banks
Book Value............. $31,900 -- -- -- -- -- $ 31,900 $ 31,900
Average Interest Rate.. 3.51% -- -- -- -- -- -- 100.00%
Debt Securities
Book Value............. $19,810 $24,006 $18,004 $12,003 $6,001 $129,078 $208,902 $209,407
Average Interest Rate.. 6.21% 6.01% 5.78% 6.14% 5.96% 5.64% -- 100.24%
Loans Receivable
Book Value............. $ 2,902 $ 2,344 $ 2,463 $ 1,842 $1,261 $ 83,640 $ 94,452 $ 94,594
Average Interest Rate.. 11.58% 10.33% 9.10% 10.51% 10.82% 10.00% -- 100.15%
Interest-Rate Sensitive
Liabilities
Variable Rate Demand
Deposits
Book Value............. $11,243 -- -- -- -- -- $ 11,243 $ 11,243
Average Interest Rate.. 6.14% -- -- -- -- -- -- 100.00%
Fixed Rate Demand
Deposits
Book Value............. $54,381 $10,394 $ 3,880 $ 548 $ 843 -- $ 70,046 $ 69,908
Average Interest Rate.. 6.78% 6.82% 6.45% 6.29% 7.14% -- -- 99.80%
Notes and Contracts
Payable
Book Value............. $32,675 $21,657 $17,523 $16,059 $5,770 $126,154 $219,838 $223,812
Average Interest Rate.. 8.50% 8.50% 8.40% 8.40% 9.00% 7.85% -- 101.81%
Mandatorily Redeemable
Preferred Securities
Book Value............. -- -- -- -- -- $100,000 $100,000 $100,000
Average Interest Rate.. 8.50% 100.00%
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.
22
INDEX
Page No.
--------
Report of Independent Accountants................................... 24
Financial Statements:
Consolidated Balance Sheets...................................... 25
Consolidated Statements of Income................................ 26
Consolidated Statements of Stockholders' Equity.................. 27
Consolidated Statements of Cash Flows............................ 28
Notes to Consolidated Financial Statements....................... 29
Unaudited Quarterly Financial Data.................................. 48
Financial Statement Schedules:
Summary of Investments--Other than Investments in Related
I. Parties.................................................... 49
III. Supplementary Insurance Information........................ 50
IV. Reinsurance................................................ 52
V. Valuation and Qualifying Accounts.......................... 53
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.
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The First American Corporation:
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, 2000 and 1999, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2000, 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 auditing standards generally accepted in
the United States of America which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit 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.
As discussed in Note 1 to the financial statements, the Company changed its
method of recognizing revenue for tax service contracts in 1999.
PricewaterhouseCoopers LLP
Orange County, California
February 19, 2001
24
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
December 31
------------------------------
2000 1999
-------------- --------------
ASSETS
------
Cash and cash equivalents...................... $ 300,905,000 $ 350,010,000
Accounts and accrued income receivable, less
allowances ($15,477,000 and $13,669,000)...... 204,177,000 180,824,000
-------------- --------------
Income taxes receivable........................ 19,472,000 8,606,000
Investments:
Deposits with savings and loan associations
and banks.................................... 31,900,000 35,948,000
Debt securities............................... 209,407,000 230,976,000
Equity securities............................. 58,720,000 62,904,000
Other long-term investments................... 92,703,000 86,686,000
-------------- --------------
392,730,000 416,514,000
-------------- --------------
Loans receivable............................... 94,452,000 87,338,000
-------------- --------------
Property and equipment, at cost:
Land.......................................... 42,463,000 41,662,000
Buildings..................................... 168,897,000 145,204,000
Furniture and equipment....................... 450,838,000 379,975,000
Less--accumulated depreciation................ (227,110,000) (173,527,000)
-------------- --------------
435,088,000 393,314,000
-------------- --------------
Title plants and other indexes................. 290,072,000 250,723,000
-------------- --------------
Assets acquired in connection with claim
settlements................................... 27,846,000 24,196,000
-------------- --------------
Deferred income taxes.......................... 11,519,000 48,284,000
-------------- --------------
Goodwill and other intangibles, less
accumulated amortization ($43,257,000 and
$27,707,000) 346,156,000 284,390,000
-------------- --------------
Other assets................................... 77,320,000 72,215,000
-------------- --------------
$2,199,737,000 $2,116,414,000
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Demand deposits................................ $ 81,289,000 $ 80,843,000
Accounts payable and accrued liabilities:
Accounts payable.............................. 32,285,000 38,899,000
Salaries and other personnel costs............ 85,987,000 78,803,000
Pension costs................................. 47,538,000 65,796,000
Other......................................... 101,757,000 97,200,000
-------------- --------------
267,567,000 280,698,000
-------------- --------------
Deferred revenue............................... 261,673,000 279,766,000
Reserve for known and incurred but not reported
claims........................................ 284,607,000 273,724,000
Notes and contracts payable.................... 219,838,000 196,815,000
Minority interests in consolidated
subsidiaries.................................. 114,526,000 88,577,000
Commitments and contingencies (Note 13)........
Mandatorily redeemable preferred securities of
the Company's subsidiary trust whose sole
assets are the Company's $100,000,000 8.5%
Deferrable interest subordinated notes Due
2012.......................................... 100,000,000 100,000,000
-------------- --------------
Stockholders' equity:
Preferred stock, $1 par value
Authorized--500,000 shares; Outstanding--
None.......................................
Common stock, $1 par value
Authorized--108,000,000 shares Outstanding--
63,887,000 and 65,068,000 shares........... 63,887,000 65,068,000
Additional paid-in capital.................... 172,468,000 184,759,000
Retained earnings............................. 628,913,000 561,946,000
Accumulated other comprehensive income......... 4,969,000 4,218,000
-------------- --------------
Total stockholders' equity..................... 870,237,000 815,991,000
-------------- --------------
$2,199,737,000 $2,116,414,000
See Notes to Consolidated Financial Statements
25
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
----------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Revenues
Operating revenues............ $2,877,528,000 $2,936,196,000 $2,867,107,000
Investment and other income... 56,727,000 51,973,000 76,773,000
-------------- -------------- --------------
2,934,255,000 2,988,169,000 2,943,880,000
-------------- -------------- --------------
Expenses
Salaries and other personnel
costs........................ 1,014,766,000 1,034,772,000 945,513,000
Premiums retained by agents... 791,940,000 871,036,000 773,030,000
Other operating expenses...... 697,672,000 678,856,000 633,417,000
Provision for title losses and
other claims................. 141,632,000 116,218,000 124,178,000
Depreciation and
amortization................. 86,336,000 77,031,000 62,263,000
Premium taxes................. 22,573,000 22,897,000 21,335,000
Interest...................... 25,460,000 17,387,000 19,093,000
-------------- -------------- --------------
2,780,379,000 2,818,197,000 2,578,829,000
-------------- -------------- --------------
Income before income taxes,
minority interests and
cumulative effect of a change
in accounting principle....... 153,876,000 169,972,000 365,051,000
Income taxes................... 54,700,000 62,300,000 128,512,000
-------------- -------------- --------------
Income before minority
interests and cumulative
effect of a change in
accounting principle.......... 99,176,000 107,672,000 236,539,000
Minority interests............. 16,953,000 19,029,000 35,012,000
-------------- -------------- --------------
Income before cumulative effect
of a change in accounting
principle..................... 82,223,000 88,643,000 201,527,000
Cumulative effect of a change
in accounting for tax service
contracts, net of income taxes
and minority interests (Note
1)............................ -- (55,640,000) --
-------------- -------------- --------------
Net income..................... 82,223,000 33,003,000 201,527,000
-------------- -------------- --------------
Other comprehensive income
(loss), net of tax (Note 16):
Unrealized gain(loss) on
securities................... 1,880,000 (4,283,000) 3,269,000
Minimum pension liability
adjustment................... (1,129,000) 763,000 (1,206,000)
-------------- -------------- --------------
751,000 (3,520,000) 2,063,000
-------------- -------------- --------------
Comprehensive income........... $ 82,974,000 $ 29,483,000 $ 203,590,000
-------------- -------------- --------------
Per share amounts:
Basic:
Income before cumulative
effect of a change in
accounting for tax service
contracts................... $ 1.29 $ 1.37 $ 3.35
Cumulative effect of a change
in accounting for tax
service contracts........... -- (.86) --
-------------- -------------- --------------
Net income................... $ 1.29 $ .51 $ 3.35
-------------- -------------- --------------
Diluted:
Income before cumulative
effect of a change in
accounting for tax service
contracts................... $ 1.24 $ 1.34 $ 3.21
Cumulative effect of a change
in accounting for tax
service contracts........... -- (.84) --
-------------- -------------- --------------
Net income................... $ 1.24 $ .50 $ 3.21
-------------- -------------- --------------
Weighted-average common shares
outstanding:
Basic........................ 63,680,000 64,669,000 60,194,000
Diluted...................... 66,050,000 66,351,000 62,720,000
See Notes to Consolidated Financial Statements
26
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Additional other
Common paid-in Retained comprehensive
Shares Stock capital earnings income
---------- ----------- ------------ ------------ -------------
Balance at December 31,
1997................... 57,186,000 $57,186,000 $ 22,772,000 $357,150,000 $ 5,675,000
Net income for 1998..... 201,527,000
Cash dividends on common
shares................. (13,894,000)
Shares issued in
connection with company
acquisitions........... 4,458,000 4,458,000 100,854,000
Shares issued in
connection with option
benefit and savings
plans.................. 1,476,000 1,476,000 22,998,000
Other comprehensive
income................. 2,063,000
---------- ----------- ------------ ------------ -----------
Balance at December 31,
1998................... 63,120,000 63,120,000 146,624,000 544,783,000 7,738,000
Net income for 1999..... 33,003,000
Cash dividends on common
shares................. (15,840,000)
Shares issued in
connection with company
acquisitions........... 1,398,000 1,398,000 27,195,000
Shares issued in
connection with option
benefit and savings
plans.................. 794,000 794,000 13,789,000
Purchase of Company
shares................. (244,000) (244,000) (2,849,000)
Other comprehensive
loss................... (3,520,000)
---------- ----------- ------------ ------------ -----------
Balance at December 31,
1999................... 65,068,000 65,068,000 184,759,000 561,946,000 4,218,000
Net income for 2000..... 82,223,000
Cash dividends on common
shares................. (15,256,000)
Shares issued in
connection with company
acquisitions........... 125,000 125,000 2,375,000
Shares issued in
connection with option
benefit and savings
plans.................. 474,000 474,000 4,339,000
Purchase of Company
shares................. (1,780,000) (1,780,000) (19,005,000)
Other comprehensive
income................. 751,000
---------- ----------- ------------ ------------ -----------
Balance at December 31,
2000................... 63,887,000 $63,887,000 $172,468,000 $628,913,000 $ 4,969,000
========== =========== ============ ============ ===========
See Notes to Consolidated Financial Statements
27
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
----------------------------------------
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income............................. $ 82,223,000 $ 33,003,000 $201,527,000
Adjustments to reconcile net income to
cash provided by operating
activities:
Provision for title losses and other
claims.............................. 141,632,000 116,218,000 124,178,000
Depreciation and amortization........ 86,336,000 77,031,000 62,263,000
Minority interests in net income..... 16,953,000 19,029,000 35,012,000
Cumulative effect of a change in
accounting principle (Note 1)....... -- 55,640,000 --
Investment gains..................... (6,300,000) (5,160,000) (32,449,000)
Other, net........................... 3,040,000 (1,164,000) 2,226,000
Changes in assets and liabilities
excluding effects of company
acquisitions and noncash
transactions:
Claims paid, including assets
acquired, net of recoveries......... (135,398,000) (119,279,000) (100,855,000)
Net change in income tax accounts.... 26,447,000 (26,895,000) 34,382,000
(Increase) decrease in accounts and
accrued income receivable........... (16,100,000) 27,037,000 (42,570,000)
(Decrease) increase in accounts
payable and accrued liabilities..... (32,522,000) 1,745,000 71,075,000
(Decrease) increase in deferred
revenue............................. (23,325,000) 25,189,000 10,203,000
Other, net........................... (1,568,000) (29,175,000) (3,437,000)
------------ ------------ ------------
Cash provided by operating
activities........................ 141,418,000 173,219,000 361,555,000
------------ ------------ ------------
Cash flows from investing activities:
Net cash effect of company
acquisitions/dispositions............. (37,621,000) (73,700,000) 8,953,000
Net decrease (increase) in deposits
with banks............................ 4,137,000 7,648,000 (3,771,000)
Purchases of debt and equity
securities............................ (41,384,000) (92,463,000) (144,388,000)
Proceeds from sales of debt and equity
securities............................ 51,578,000 88,219,000 32,302,000
Proceeds from maturities of debt
securities............................ 15,824,000 21,789,000 36,729,000
Net decrease (increase) in other long-
term investments...................... 2,148,000 6,797,000 (1,580,000)
Net increase in loans receivable....... (7,114,000) (15,303,000) (8,657,000)
Capital expenditures................... (158,466,000) (212,588,000) (160,526,000)
Net proceeds from sale of property and
equipment............................. 35,940,000 86,037,000 3,361,000
------------ ------------ ------------
Cash used for investing
activities........................ (134,958,000) (183,564,000) (237,577,000)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in demand deposits........ 446,000 13,439,000 4,929,000
Proceeds from issuance of notes........ 3,340,000 -- 4,740,000
Repayment of debt...................... (25,401,000) (14,897,000) (28,058,000)
Proceeds from issuance of senior
debentures............................ -- -- 99,456,000
Purchase of Company shares............. (20,785,000) (3,093,000) --
Proceeds from exercise of stock
options............................... 3,560,000 4,350,000 3,413,000
Proceeds from issuance of stock to
employee savings plan................. -- 4,794,000 18,144,000
Contributions from minority
shareholders.......................... 4,500,000 -- --
Distributions to minority
shareholders.......................... (5,969,000) (9,691,000) (14,762,000)
Cash dividends......................... (15,256,000) (15,840,000) (13,894,000)
------------ ------------ ------------
Cash (used for) provided by
financing activities.............. (55,565,000) (20,938,000) 73,968,000
------------ ------------ ------------
Net (decrease) increase in cash and
cash equivalents.................. (49,105,000) (31,283,000) 197,946,000
Cash and cash equivalents--Beginning of
year................................... 350,010,000 381,293,000 183,347,000
------------ ------------ ------------
Cash and cash equivalents--End of year.. $300,905,000 $350,010,000 $381,293,000
============ ============ ============
Supplemental Information:
Cash paid during the year for:
Interest............................... $ 24,618,000 $ 19,454,000 $ 17,429,000
Premium taxes.......................... $ 22,867,000 $ 27,527,000 $ 18,433,000
Income taxes........................... $ 38,842,000 $ 91,926,000 $ 97,474,000
Noncash investing and financing
activities:
Shares issued for benefit plans........ $ 1,253,000 $ 5,439,000 $ 2,917,000
Company acquisitions in exchange for
common stock.......................... $ 2,500,000 $ 26,638,000 $ 88,788,000
Purchase of minority interest.......... $ 12,804,000 $ 1,955,000 $ 16,524,000
Liabilities in connection with company
acquisitions.......................... $ 61,149,000 $ 96,305,000 $118,718,000
See Notes to Consolidated Financial Statements
28
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's three primary business segments are title
insurance and services, real estate information and services and consumer
information and services. The title insurance segment issues residential and
commercial title insurance policies, provides escrow services, equity loan
services, tax-deferred exchanges and other related products. The real estate
information segment provides tax monitoring, mortgage credit reporting,
property data services, flood certification, database services, default
management services, field inspection services, appraisal services, mortgage
loan servicing systems, mortgage document preparation and other real-estate
related services. The consumer information segment provides home warranties,
property and casualty insurance, resident screening, pre-employment screening,
specialized credit reporting, automotive insurance tracking, investment
advisory and trust and thrift services.
Significant Accounting Policies:
Principles of consolidation
The consolidated financial statements include the accounts of The First
American Corporation and all majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated. Certain 1999
amounts have been reclassified to conform with the 2000 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
and certain state and political subdivisions.
Equity securities are carried at fair value and consist primarily of
investments in marketable common stocks of corporate entities in which the
Company's ownership does not exceed 20.0%.
Other long-term investments consist primarily of investments in affiliates,
which are accounted for under the equity method of accounting, and notes
receivable, 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 and, accordingly, includes unrealized gains and losses, net
of related tax effects, as a component of other comprehensive income. Realized
gains and losses on investments are determined using the specific-
identification method.
Property and equipment
Furniture and equipment includes computer software acquired and developed
for internal use and for use with the Company's products. Software development
costs are capitalized from the time technological feasibility is established
until the software is ready for use.
29
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Effective January 1, 1999, the Company adopted Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires the Company to capitalize interest costs
incurred and certain payroll-related costs of employees directly associated
with developing software in addition to incremental payments to third parties.
The adoption of SOP 98-1 did not have a material effect on the Company's
financial condition or results of operations.
Depreciation on buildings and on furniture and equipment is computed using
the straight-line method over estimated useful lives of 25 to 45 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 are carried at original cost. The costs of
daily maintenance (updating) of these plants and other indexes are charged to
expense as incurred. Because properly maintained title plants and other
indexes have indefinite lives and do not diminish in value with the passage of
time, no provision has been made for depreciation.
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.
Goodwill and other intangibles
Goodwill recognized in business combinations is amortized over its
estimated useful life ranging from 10 to 40 years. Other intangibles, which
include customer lists and covenants not to compete, are amortized over their
estimated useful lives, ranging from 3 to 20 years. The Company periodically
evaluates the amortization period assigned to each intangible asset to ensure
that there have not been any events or circumstances that warrant revised
estimates of useful lives.
Impairment of goodwill, loans receivable and other long-lived assets
The Company periodically reviews the carrying value of goodwill, loans
receivable and other long-lived assets for impairment when events or
circumstances warrant such a review.
To the extent that the undiscounted cash flows related to the businesses
underlying the goodwill are less than the carrying value of the related
goodwill, such goodwill will be reduced to the amount of the undiscounted cash
flows.
A loan is 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.
To the extent that the undiscounted cash flows related to other long-lived
assets are less than the assets' carrying value, the carrying value of such
assets is reduced to the assets' fair value.
30
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reserve for known and incurred but not reported claims
The Company provides for title insurance losses based upon its historical
experience by a charge to expense when the related premium revenue is
recognized. 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 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. The process applied to estimated claim costs
is subject to many variables, including changes and trends in the type of
title insurance policies issued, the real estate market and the interest rate
environment. It is reasonably possible that a change in the estimate will
occur in the future.
The Company provides for claims losses relating to its home warranty and
property and casualty insurance businesses 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 average cost per property and casualty claim is
calculated using historical claims experience.
Operating revenues
Title Insurance -- Title 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.
Real Estate Information -- In December 1999, the Company adopted Staff
Accounting Bulletin No. 101 (SAB), "Revenue Recognition in Financial
Statements." The SAB, which became effective January 1, 1999, applies to the
Company's tax service operations and requires the deferral of the tax service
fee and the recognition of 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 periodically reviews its tax service contract portfolio 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. The SAB finalizes a series of changes instituted by
the Securities and Exchange Commission concerning revenue recognition
policies. As a result of adopting the SAB, in 1999, the Company reported a
charge of $55.6 million, net of income taxes and minority interests, as a
cumulative change in accounting principle, reduced net income by $10.9
million, or $0.16 per diluted share and restated its quarterly information.
During the year ended December 31, 2000, the Company recognized $38.6 million
in revenues that were included in the cumulative effect adjustment. Revenues
earned by the other products in the real estate information segment are
recognized at the time of delivery, as the Company has no significant ongoing
obligation after delivery.
Consumer Information -- 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 consumer information segment 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.
31
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 the weighted-average
number of common shares outstanding is increased to include the number of
additional common shares that would have been outstanding if potential
dilutive common shares had been issued.
The Company's potential dilutive common shares are stock options and
convertible debt (see Notes 12 and 8, respectively, to the consolidated
financial statements). 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. Certain of the stock options and all of the convertible debt are
antidilutive and have been excluded when calculating diluted earnings per
share. The dilutive effect of stock options was 2,370,000, 1,682,000 and
2,526,000 for the three years ended December 31, 2000, 1999 and 1998,
respectively.
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 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.
Fiduciary assets and liabilities
Assets and liabilities of the trusts and escrows administered by the
Company are not included in the consolidated balance sheets.
NOTE 2. Statutory Restrictions on Investments and Stockholders' Equity:
Investments carried at $16.1 million were on deposit with state treasurers
in accordance with statutory requirements for the protection of policyholders
at December 31, 2000.
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, 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 2001 is $138.2 million.
The Company's title insurance subsidiary, First American Title Insurance
Company, maintained statutory capital and surplus of $406.8 million and $394.2
million at December 31, 2000 and 1999, respectively. Statutory
32
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
net income for the years ended December 31, 2000, 1999 and 1998 was $54.8
million, $71.2 million and $137.3 million, respectively.
The National Association of Insurance Commissioners (NAIC) has established
some new statutory accounting practices, which became effective January 1,
2001. Adoption of the new practices will not have a material impact on the
Company's statutory financial condition or results of operations.
NOTE 3. Debt and Equity Securities:
The amortized cost and estimated fair value of investments in debt
securities are as follows:
Gross
Unrealized Estimated
-------------- Fair
Cost Gains Losses Value
-------- ------ ------- ---------
(in thousands)
December 31, 2000
U.S. Treasury securities.............. $ 39,133 $1,303 $ (46) $ 40,390
Corporate securities.................. 112,715 762 (1,319) 112,158
Obligations of states and political
subdivisions......................... 30,700 476 (160) 31,016
Mortgage-backed securities............ 26,354 27 (538) 25,843
-------- ------ ------- --------
$208,902 $2,568 $(2,063) $209,407
======== ====== ======= ========
December 31, 1999
U.S. Treasury securities.............. $ 38,049 $ 156 $ (345) $ 37,860
Corporate securities.................. 139,837 1,542 (4,118) 137,261
Obligations of states and political
subdivisions......................... 32,547 91 (2,293) 30,345
Mortgage-backed securities............ 27,453 21 (1,964) 25,510
-------- ------ ------- --------
$237,886 $1,810 $(8,720) $230,976
======== ====== ======= ========
The amortized cost and estimated fair value of debt securities at December
31, 2000, by contractual maturities, are as follows:
Estimated
Amortized Fair
Cost Value
--------- ---------
(in thousands)
Due in one year or less................................ $ 19,259 $ 19,418
Due after one year through five years.................. 59,439 60,027
Due after five years through ten years................. 76,649 77,000
Due after ten years.................................... 27,201 27,119
-------- --------
182,548 183,564
Mortgage-backed securities............................. 26,354 25,843
-------- --------
$208,902 $209,407
======== ========
33
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
Amortized --------------- Fair
Cost Gains Losses Value
--------- ------- ------- ---------
(in thousands)
December 31, 2000
Preferred stock:
Other............................... $ 4,064 $ 17 $ (417) $ 3,664
Common stocks:
Corporate securities................ 44,842 14,711 (4,862) 54,691
Other............................... 256 109 -- 365
------- ------- ------- -------
$49,162 $14,837 $(5,279) $58,720
======= ======= ======= =======
December 31, 1999
Preferred stock:
Other............................... $ 4,339 $ -- $ -- $ 4,339
Common stocks:
Corporate securities................ 44,239 14,633 (710) 58,162
Other............................... 245 158 -- 403
------- ------- ------- -------
$48,823 $14,791 $ (710) $62,904
======= ======= ======= =======
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 $2.2 million, $3.5 million and $1.4 million; and realized losses of $4.8
million, $1.6 million and $0.2 million for the years ended December 31, 2000,
1999 and 1998, respectively.
NOTE 4. Loans Receivable:
Loans receivable are summarized as follows:
December 31
----------------
2000 1999
------- -------
(in thousands)
Real estate--mortgage.................................... $97,080 $89,421
Other.................................................... 59 94
------- -------
97,139 89,515
======= =======
Unearned income on lease contracts....................... (8) (11)
Allowance for loan losses................................ (1,020) (905)
Participations sold...................................... (1,439) (983)
Deferred loan fees, net.................................. (220) (278)
------- -------
$94,452 $87,338
======= =======
Real estate loans are collateralized by properties located primarily in
Southern California. The average yield on the Company's loan portfolio was
10.0% for the years ended December 31, 2000 and 1999. Average yields are
affected by amortization of discounts on loans purchased from other
institutions, prepayment penalties recorded as income, loan fees amortized to
income and the market interest rates charged by thrift and loan institutions.
34
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of loans receivable was $94.6 million and $87.7 million at
December 31, 2000 and 1999, 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, 2000, are as follows:
Year (in thousands)
2001...................................................... $2,909
2002...................................................... $2,344
2003...................................................... $2,463
2004...................................................... $1,842
2005...................................................... $1,261
NOTE 5. Assets Acquired in Connection with Claim Settlements:
December 31
---------------
2000 1999
------- -------
(in thousands)
Notes receivable........................................... $11,992 $10,863
Real estate................................................ 4,352 2,720
Judgments and other........................................ 11,502 10,613
------- -------
$27,846 $24,196
======= =======
The above amounts are net of valuation reserves of $1.0 million and $4.9
million at December 31, 2000 and 1999, respectively.
The fair value of notes receivable was $12.3 million and $11.1 million at
December 31, 2000 and 1999, respectively, and was estimated based on the
discounted value of future cash flows using the current rates at which similar
loans would be made to borrowers of similar credit quality.
NOTE 6. Demand Deposits:
Passbook and investment certificate accounts are summarized as follows:
December 31
----------------
2000 1999
------- -------
(in thousands
except
percentages)
Passbook accounts....................................... $11,243 $11,117
------- -------
Certificate accounts:
Less than one year.................................... 54,381 51,976
One to five years..................................... 15,665 17,750
------- -------
70,046 69,726
------- -------
$81,289 $80,843
======= =======
Annualized interest rates:
Passbook accounts..................................... 5%-6% 4%-5%
Certificate accounts.................................. 5%-8% 5%-8%
35
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The carrying value of the passbook accounts approximates fair value due to
the short-term nature of this liability. The fair value of investment
certificate accounts was $69.9 million and $69.5 million at December 31, 2000
and 1999, respectively, and was estimated based on the discounted value of
future cash flows using a discount rate approximating current market for
similar liabilities.
NOTE 7. 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
----------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Balance at beginning of year................. $273,724 $272,921 $254,058
-------- -------- --------
Provision related to:
Current year............................... 144,103 122,311 121,118
Prior years................................ (2,471) (6,093) 3,060
-------- -------- --------
141,632 116,218 124,178
-------- -------- --------
Payments related to:
Current year............................... 70,985 58,915 52,164
Prior years................................ 63,235 54,029 46,359
-------- -------- --------
134,220 112,944 98,523
-------- -------- --------
Other........................................ 3,471 (2,471) (6,792)
-------- -------- --------
Balance at end of year....................... $284,607 $273,724 $272,921
======== ======== ========
"Other" primarily represents reclassifications to the reserve for assets
acquired in connection with claim settlements and purchase accounting
adjustments related to company acquisitions. Claims activity associated with
reinsurance is not material and, therefore, not presented separately.
NOTE 8. Notes and Contracts Payable:
December 31
-----------------
2000 1999
-------- --------
(in thousands)
7.55% senior debentures, due April, 2028................ $ 99,504 $ 99,486
Trust deed notes with maturities through 2007, secured
by land and buildings with a net book value of $2,301,
average rate of 11.0%.................................. 2,001 3,022
Other notes and contracts payable with maturities
through 2007,
average rate of 8.0%................................... 118,333 94,307
-------- --------
$219,838 $196,815
======== ========
In April 1999, the Company paid off the fixed-rate indebtedness portion of
the 1997 amended credit agreement. The $75.0 million line of credit
established under the amended credit agreement remains in effect. In July
1999, the Company entered into a new credit agreement that provided for an
additional $100.0 million line of credit. Under the terms of the credit
agreements, the Company is required to maintain minimum levels of capital and
earnings and meet predetermined debt-to-capitalization ratios. Both lines of
credit expire in July 2002 and were unused at December 31, 2000.
36
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
To finance certain acquisitions, the Company has issued debt that is
convertible into shares of its common stock. 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. At December 31, 2000, there was
$29.8 million of convertible debt outstanding with a weighted-average interest
rate of 7.5%.
The aggregate annual maturities for notes and contracts payable in each of
the five years after December 31, 2000, are as follows:
Year (in thousands)
2001...................................................... $29,136
2002...................................................... $21,657
2003...................................................... $17,523
2004...................................................... $16,059
2005...................................................... $ 5,770
The fair value of notes and contracts payable was $223.8 million and $195.7
million at December 31, 2000 and 1999, 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 8.0% and 7.5% at December 31, 2000 and 1999,
respectively.
NOTE 9. Investment and Other Income:
The components of investment and other income are as follows:
2000 1999 1998
------- ------- -------
(in thousands)
Interest:
Cash equivalents and deposits with savings and
loan associations and banks.................. $14,319 $11,921 $10,706
Debt securities............................... 16,426 15,199 14,547
Other long-term investments................... 10,238 5,163 7,023
------- ------- -------
40,983 32,283 32,276
------- ------- -------
Investment gain................................. 6,300 5,160 32,449
Dividends on marketable equity securities....... 671 630 409
Equity in earnings of unconsolidated
affiliates..................................... 1,589 3,553 4,614
Net (loss) gain on sales of debt and equity
securities..................................... (2,598) 1,854 1,154
Other........................................... 9,782 8,493 5,871
------- ------- -------
$56,727 $51,973 $76,773
======= ======= =======
37
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10. Income Taxes:
Income taxes are summarized as follows:
2000 1999 1998
------- ------- --------
(in thousands)
Current:
Federal......................................... $20,906 $51,237 $101,238
State........................................... 3,290 7,183 12,520
Foreign......................................... 1,540 -- --
------- ------- --------
25,736 58,420 113,758
------- ------- --------
Deferred:
Federal......................................... 26,204 3,260 13,584
State........................................... 2,760 620 1,170
Foreign......................................... -- -- --
------- ------- --------
28,964 3,880 14,754
------- ------- --------
$54,700 $62,300 $128,512
======= ======= ========
For the year 2000, foreign and domestic pretax (loss) income from
continuing operation was $(0.3) million and $136.6 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 $1.0 million, $0.7 million
and zero for the years ended December 31, 2000, 1999 and 1998, respectively.
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:
2000 1999 1998
------- ------- --------
(in thousands)
Taxes calculated at federal rate............... $47,923 $52,830 $115,514
Tax exempt interest income..................... (908) (1,367) (1,684)
Tax effect of minority interests............... 823 826 1,273
State taxes, net of federal benefit............ 3,936 5,071 9,043
Exclusion of certain meals and entertainment
expenses...................................... 4,040 4,519 3,794
Other items, net............................... (1,114) 421 572
------- ------- --------
$54,700 $62,300 $128,512
======= ======= ========
38
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The primary components of temporary differences that give rise to the
Company's net deferred tax asset are as follows:
December 31
-----------------
2000 1999
-------- --------
(in thousands)
Deferred tax assets:
Deferred revenue...................................... $ 64,584 $ 65,140
Employee benefits..................................... 25,948 25,156
Bad debt reserves..................................... 8,822 8,074
Loss reserve.......................................... 10,284 12,163
Other................................................. 7,066 5,049
-------- --------
116,704 115,582
======== ========
Deferred tax liabilities:
Depreciable and amortizable assets.................... 60,486 36,361
Investment gain....................................... 13,300 11,357
Claims and related salvage............................ 24,632 11,611
Accumulated other comprehensive income................ 2,676 2,510
State tax............................................. 2,038 3,406
Other................................................. 2,053 2,053
-------- --------
105,185 67,298
-------- --------
Net deferred tax asset................................ $ 11,519 $ 48,284
======== ========
At December 31, 2000, the Company had various foreign net operating loss
carryforwards totaling approximately $5.4 million, which carry forward
indefinitely.
NOTE 11. Employee Benefit Plans:
The Company has pension and other retirement benefit plans covering
substantially all employees. The Company's principal pension plan is a
noncontributory, qualified, defined benefit plan with benefits based on the
employee's years of service and the highest five consecutive years'
compensation during the last ten years of employment. 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 intended to be funded with proceeds from life
insurance policies purchased by the Company on the lives of the executives. In
December 2000, the Company amended its principal pension plan and certain
other retirement plans. The primary impact of the amendment is to reduce
future benefits accrued by employees by limiting credit for pay increases
through December 31, 2001, and by limiting credit for years of service through
December 31, 2005. As a result of amending the plans, the Company reduced its
current-year pension expense by $5.0 million, recognized a one-time benefit of
$34.3 million and will record reduced employee benefit expense in subsequent
years.
39
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net periodic pension cost for the Company's pension and other retirement
benefit plans includes the following components:
2000 1999 1998
-------- -------- -------
(in thousands)
Expense:
Service cost................................. $ 23,082 $ 23,726 $14,863
Interest cost................................ 17,110 15,376 13,067
Actual return on plan assets................. (15,379) (11,751) (9,196)
Amortization of net transition obligation.... 309 309 309
Amortization of prior service cost........... 144 143 143
Amortization of net loss..................... 783 1,746 1,408
Curtailment gain............................. (34,291) -- --
-------- -------- -------
$ (8,242) $ 29,549 $20,594
======== ======== =======
A reconciliation of benefit obligations, plan assets and funded status of
the plans is as follows:
December 31
---------------------------------------------
2000 1999
---------------------- ----------------------
Unfunded Unfunded
Funded supplemental Funded supplemental
pension benefit pension benefit
plans plans plans plans
-------- ------------ -------- ------------
(in thousands)
Change in benefit obligation:
Benefit obligation at
beginning of year............ $188,175 $ 41,576 $184,397 $ 38,176
Service costs................. 21,418 1,664 22,224 1,502
Interest costs................ 13,542 3,568 12,451 2,925
Plan amendments............... (53,348) 2,100 -- --
Actuarial (gains) losses...... (3,324) 5,471 (24,186) 606
Benefits paid................. (8,306) (2,090) (6,711) (1,633)
-------- -------- -------- --------
Projected benefit obligation at
end of year.................... 158,157 52,289 188,175 41,576
-------- -------- -------- --------
Change in plan assets:
Plan assets at fair value at
beginning of year............ 152,010 -- 141,233 --
Actual return on plan assets.. 3,161 -- 9,331 --
Company contributions......... 12,258 -- 8,157 --
Benefits paid................. (8,306) -- (6,711) --
-------- -------- -------- --------
Plan assets at fair value at end
of year........................ 159,123 -- 152,010 --
-------- -------- -------- --------
Reconciliation of funded status:
Funded status of the plans.... 966 (52,289) (36,165) (41,576)
Unrecognized net actuarial
loss......................... 9,637 14,486 741 9,765
Unrecognized prior service
cost......................... (17,795) 1,566 (367) 1,237
Unrecognized net transition
(asset) obligation........... (101) 360 (152) 721
-------- -------- -------- --------
Accrued pension cost............ (7,293) (35,877) (35,943) (29,853)
-------- -------- -------- --------
Amounts recognized in the
consolidated financial
statements consist of:
Accrued benefit liability..... (7,293) (40,222) (35,943) (31,732)
Intangible asset.............. -- 1,926 -- 1,198
Minimum pension liability
adjustment................... -- 2,419 -- 681
-------- -------- -------- --------
$ (7,293) $(35,877) $(35,943) $(29,853)
======== ======== ======== ========
The rate of increase in future compensation levels for the plans of 4.5% and
the weighted-average discount rate of 7.5% were used in determining the
actuarial present value of the projected benefit obligation at December 31,
40
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2000 and 1999. The majority of pension plan assets are invested in U.S.
government securities, time deposits and common stocks with a projected long-
term rate of return of 10.0% at December 31, 2000 and 1999.
The Company's principal profit sharing plan was amended effective January
1, 1995, to discontinue future contributions. The plan holds 5,393,000 and
5,799,000 shares of the Company's common stock, representing 8.4% and 9.0% of
the total shares outstanding at December 31, 2000 and 1999, respectively.
The Company also has a Stock Bonus Plan (the Plan) for key employees
pursuant to which 21,000, 154,000 and 186,000 common shares were issued in
2000, 1999 and 1998, respectively, resulting in a charge to operations of $0.2
million, $3.4 million and $2.7 million, respectively. The Plan, as amended
December 9, 1992, provides that a total of up to 1,350,000 common shares may
be awarded in any one year.
Effective January 1, 1995, the Company adopted The First American
Corporation 401(k) Savings Plan (the Savings Plan), which is available to
substantially all employees. The Savings Plan allows for employee-elective
contributions up to the maximum deductible amount as determined by the
Internal Revenue Code. The Company makes 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 $9.2 million, $13.7
million and $14.4 million for the years ended December 31, 2000, 1999 and
1998, respectively.
NOTE 12. 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
11,625,000. Currently outstanding options become exercisable 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 twelve-
consecutive-month period.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." In accounting for its plan, the Company, as allowable under the
provisions of SFAS No. 123, applies Accounting Principles Board Opinion 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, as set forth under SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts as follows:
2000 1999 1998
------- ------- --------
(in thousands, except
per share amounts)
Net income:
As reported....................................... $82,223 $33,003 $201,527
Pro forma......................................... $72,259 $25,341 $183,845
Earnings per share:
As reported
Basic........................................... $ 1.29 $ .51 $ 3.35
Diluted......................................... $ 1.24 $ .50 $ 3.21
Pro forma
Basic........................................... $ 1.13 $ .39 $ 3.05
Diluted......................................... $ 1.08 $ .38 $ 2.93
41
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 2000, 1999 and 1998, respectively; dividend
yield of 2.1%, 1.5% and 1.0%; expected volatility of 51.4%, 39.6%, and 36.0%;
risk-free interest rate of 5.2%, 5.8%, and 5.7%; and expected life of nine
years, seven years and seven years.
Transactions involving stock options are summarized as follows:
Number Weighted-average
outstanding exercise price
----------- ----------------
(in thousands, except
weighted-average exercise
price)
Balance at December 31, 1997.................... 3,449 $ 6.97
Granted during 1998............................. 4,305 $23.32
Exercised during 1998........................... (564) $ 6.52
Forfeited during 1998........................... (283) $14.16
----- ------
Balance at December 31, 1998.................... 6,907 $16.94
Granted during 1999............................. 224 $17.23
Exercised during 1999........................... (453) $ 8.54
Forfeited during 1999........................... (400) $18.61
----- ------
Balance at December 31, 1999.................... 6,278 $17.37
Granted during 2000............................. 4,509 $12.19
Exercised during 2000........................... (448) $ 8.78
Forfeited during 2000........................... (541) $16.36
----- ------
Balance at December 31, 2000.................... 9,798 $15.45
===== ======
Stock options outstanding and exercisable at December 31, 2000, are
summarized as follows:
Outstanding Exercisable
--------------------------- ----------------
Average Average Average
Range of life exercise exercise
Exercise Prices Options (years)(a) price Options price
--------------- ------- ---------- -------- ------- --------
(Options in thousands)
$ 5.69--$ 8.54............. 1,632 5.3 $ 5.78 1,159 $ 5.81
$ 8.77--$13.15............. 3,712 9.1 $10.76 15 $10.64
$13.25--$19.87............. 636 8.8 $17.22 201 $16.81
$20.13--$30.81............. 3,792 7.5 $23.80 1,441 $23.62
$32.00--$33.44............. 26 7.9 $32.34 8 $32.22
----- --- ------ ----- ------
$ 5.69--$33.44............. 9,798 7.8 $15.45 2,824 $15.78
===== === ====== ===== ======
- --------
(a) Average contractual life remaining in years
NOTE 13. Commitments and Contingencies:
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 2000, the Company's subsidiary, First American Real Estate
Information Services, Inc. and, in 1999, the Company entered into sale-
leaseback agreements with regard to certain furniture and equipment with a net
book value of $30.7 million and $65.7 million, respectively. Proceeds from the
sales which amounted to $33.8 million and $80.1 million and gains of $3.1
million and $14.4 million for the years ended December 31, 2000 and 1999,
respectively, have been included in deferred revenue and will be amortized
over the life of the
42
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
lease. Under the agreements, the Company's subsidiary and the Company agreed
to lease the equipment for three to five years with minimum annual lease
payments of $5.0 million and $15.2 million, respectively. At the end of the
term of the lease, the Company has the option to acquire the equipment or
return it to the lessor.
Future minimum rental payments under operating leases that have initial or
remaining noncancelable lease terms in excess of one year as of December 31,
2000, are as follows:
Year
---- (in thousands)
2001...................................................... $119,126
2002...................................................... 96,812
2003...................................................... 75,357
2004...................................................... 59,140
2005...................................................... 31,838
Later years............................................... 70,137
--------
$452,410
========
Total rental expense for all operating leases and month-to-month rentals
was $144.7 million, $126.3 million, and $110.3 million for the years ended
December 31, 2000, 1999 and 1998, respectively.
NOTE 14. Mandatorily Redeemable Preferred Securities:
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.
NOTE 15. Stockholders' Equity:
In December 1999, the Company announced plans to repurchase up to 5.0% of
its then issued and outstanding shares. The amount of any share repurchases
will depend on, among other factors, the market performance of the shares; the
availability of, and alternate uses of, the Company's funds; and Securities
and Exchange Commission regulations. Pursuant to the terms of the repurchase
program, the Company had repurchased and retired 1,754,000 of its issued and
outstanding shares as of December 31, 2000.
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 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.
43
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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%-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 16. 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:
Minimum Accumulated
Unrealized pension other
gains on liability comprehensive
securities adjustment income
---------- ---------- -------------
(in thousands)
Balance at December 31, 1997............. $ 5,675 $ -- $ 5,675
Pretax change.......................... 5,028 (1,856) 3,172
Tax effect............................. (1,759) 650 (1,109)
------- ------- -------
Balance at December 31, 1998............. 8,944 (1,206) 7,738
Pretax change.......................... (6,591) 1,175 (5,416)
Tax effect............................. 2,308 (412) 1,896
------- ------- -------
Balance at December 31, 1999............. 4,661 (443) 4,218
Pretax change.......................... 2,893 (1,738) 1,155
Tax effect............................. (1,013) 609 (404)
------- ------- -------
Balance at December 31, 2000............. $ 6,541 $(1,572) $ 4,969
======= ======= =======
The change in unrealized gains on debt and equity securities includes
reclassification adjustments of $(2.6) million, $3.7 million and $1.2 million
of net realized (losses) gains for the years ended December 31, 2000, 1999 and
1998, respectively.
NOTE 17. Litigation
On May 19, 1999, the State of California, the controller and insurance
commissioner of the State of California filed a class action suit in the state
court in Sacramento. Initially, the action sought to certify as a class of
defendants all title and escrow companies doing business in California from
1970 to the present, including certain of the Company's subsidiaries. The
plaintiffs allege that the defendants: failed to give unclaimed property to
the State of California on a timely basis; charged California home buyers and
other escrow customers fees for services that were never performed or which
cost less than the amount charged; and devised and carried out schemes, known
as earnings credits, with financial institutions to receive interest on escrow
funds deposited by defendants with financial institutions in demand deposits.
44
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Since the initial filing of the suit, the California Attorney General's
Office, on behalf of the State, the controller and the insurance commissioner,
indicated that it would not seek to certify a class of defendents, but would
instead amend its suit to name an unspecified number of title underwriters and
underwritten title companies. To date, the Attorney General has neither
amended the suit nor, to the Company's knowledge taken steps to progress with
it, including the service of process on any party. The Attorney General,
however, has entered into settlement discussions with various title insurance
underwriters, including certain of the Company's subsidiaries. Additionally,
the Attorney General indicated that it will address issues pertaining to
escheat obligations through routine audits conducted by the controller's
office, rather than through litigation.
Subsequent to the filing of this lawsuit, First American Title Insurance
Company, a subsidiary of the Company, was named and served as a defendant in
two private class actions in California courts. The allegations in those
actions include some, but not all, of the allegations contained in the lawsuit
discussed above. The private class actions independently seek injunctive
relief, attorneys' fees, damages and penalties in unspecified amounts. One of
the private class actions has been dismissed. The remaining private class
action has not progressed beyond limited document production.
The Company does not believe that the ultimate resolution of these actions
will have a material adverse effect on its financial condition or results of
operations.
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 18. Business Combinations:
On July 31, 2000, the Company combined its Smart Title Solutions(TM)
division, which it acquired in the 1998 business combination transaction with
Experian, with the Datatrace division of LandAmerica Financial Group, Inc. The
combined entity, Data Trace Information Services, is a provider of advanced
title information delivery systems. The Company treated this transaction as an
acquisition of the assets and liabilities of the Datatrace division in
consideration for a 20% interest in its Smart Title Solutions division. The
operating results of the combined entity are included in the Company's
consolidated financial statements commencing July 31, 2000.
On August 2, 2000, the Company combined its First American Real Estate
Solutions (RES) division, which it acquired in the 1998 business combination
transaction with Experian, with the Intellitech real estate information
business of Transamerica Corporation, to form a new entity, First American
Real Estate Solutions, L.P. This joint venture, is a provider of property
characteristic information, supplying data and decision-support products to
the real estate and mortgage finance industries. The Company treated this
transaction as an acquisition of the assets and liabilities of the Intellitech
division in consideration for a 20% interest in its RES division and $22.5
million in cash. The operating results of the joint venture are included in
the Company's consolidated financial statement commencing August 2, 2000.
As a result of the two transactions mentioned above, the Company recognized
a net gain of $5.7 million and recorded goodwill of $48.9 million.
In addition, during the year ended December 31, 2000, the Company acquired
16 companies. The purchase method of accounting was used for all of the
acquisitions.
The acquisitions accounted for under the purchase method of accounting were
individually not material and are included in the following business segments;
13 in the title insurance segment, one in the real estate
45
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
information services segment and two in the consumer information segment.
Their aggregate purchase price was $12.4 million in cash, $22.2 million in
notes and 125,000 shares of the Company's common stock. The purchase price for
each was allocated to the assets acquired and liabilities assumed based on
estimated fair values and approximately $24.6 million in goodwill was
recorded. Goodwill is being amortized on a straight-line basis over its
estimated useful life ranging from 20 to 30 years. The operating results of
these acquired companies were included in the Company's consolidated financial
statements from their respective acquisition dates.
Assuming all of the current year acquisitions had occurred January 1, 1999,
pro forma revenues, net income and net income per diluted share would have
been $2.98 billion, $82.2 million and $1.24, respectively, for the year ended
December 31, 2000; and $3.09 billion, $24.0 million and $0.36, respectively,
for the year ended December 31, 1999. All pro forma results include
amortization of goodwill and interest expense on acquisition debt. The 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.
Effective May 14, 1999, the Company completed its merger of National
Information Group (NAIG). Under the terms of the definitive merger agreement,
each of the NAIG shareholders received .67 of a share of the Company's common
stock for each NAIG common share they owned. To complete the merger, the
Company issued 3,004,800 shares, in exchange for 100% of the outstanding
common stock of NAIG. The information services provided by NAIG include
outsourcing services, flood zone determination services, real estate tax
tracking, hazard and motor vehicle insurance tracking, lender-placed insurance
and flood insurance. This merger was accounted for under the pooling-of-
interests method of accounting and, as a result, the Company has restated all
previously reported results to reflect this merger. Included in other
operating expenses for the 12 months ended December 31, 1999, were merger-
related charges of $10.8 million, $7.0 million after tax, or $0.10 per diluted
share. These nonrecurring charges included severance payments, lease
terminations and consulting services.
On January 1, 1998, the Company formed a limited liability corporation
(LLC) with Experian Group (Experian). The purpose of the LLC is to combine
certain operations of the Company's subsidiary, First American Real Estate
Information Services, Inc. (FAREISI), with Experian's Real Estate Solutions
division, a supplier of core real estate data, providing, among other things,
property valuation information, title and tax information and imaged title
documents. The LLC is 80% owned by the Company and 20% owned by Experian. The
Company treated the transaction as an acquisition of the assets and
liabilities of Experian's Real Estate Solutions division in consideration for
a 20% interest in FAREISI. As a result of the transaction, the Company
recognized an investment gain of $32.4 million in the first quarter 1998. The
operating results of the LLC are included in the Company's consolidated
financial statements commencing January 1, 1998.
NOTE 19. Segment Financial Information:
The Company's operations include three reportable segments: title insurance
and services, real estate information and services and consumer information
and services. The title insurance segment issues policies, which are insured
statements of the condition of title to real property, and provides other
related services. The real estate information segment provides to lender
customers the status of tax payments on real property securing their loans,
mortgage credit information derived from at least two credit bureau sources,
flood zone determination reports that provide information on whether or not a
property is in a special flood hazard area, as well as other real estate-
related information services. The consumer information segment provides home
warranties, which protect homeowners against defects in home fixtures;
automotive tracking services; resident screening; pre-employment screening;
property and casualty insurance; trust and banking services; investment
advisory and other related services.
46
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The title insurance and real estate information segments operate through
networks of offices nationwide. The Company provides its title services
through both direct operations and agents throughout the United States. It
also offers title services in Australia, the Bahama Islands, Canada, England,
Guam, Ireland, Mexico, Puerto Rico, Scotland, South Korea, the U.S. Virgin
Islands and other countries abroad. To date, the international title
operations have not been material to the Company's financial condition or
results of operations. The consumer information segment provides home warranty
services in 13 states throughout the United States. Trust, banking and thrift
services are provided in Southern California. Investment advisory, automotive
tracking, resident screening, pre-employment screening, property and casualty
insurance and lender-placed flood and hazard insurances are offered
nationwide.
Corporate consists primarily of unallocated interest expense, minority
interests, equity in earnings of affiliated companies and personnel and other
operating expenses associated with the Company's Home Office facilities.
Selected financial information about the Company's operations by segment
for each of the past three years is as follows:
Income (Loss)
before income taxes, Depreciation
minority interests and Capital
Revenues and cumulative effect Assets Amortization expenditures
---------- --------------------- ---------- ------------ ------------
(in thousands)
2000
Title Insurance......... $2,106,684 $ 93,205 $1,042,486 $34,536 $ 69,958
Real Estate
Information............ 573,013 58,110 710,881 40,179 59,635
Consumer Information.... 263,263 35,198 365,903 7,078 19,902
Corporate............... (8,705) (32,637) 80,467 4,543 8,971
---------- -------- ---------- ------- --------
$2,934,255 $153,876 $2,199,737 $86,336 $158,466
========== ======== ========== ======= ========
1999
Title Insurance......... $2,182,434 $128,738 $1,042,860 $36,839 $124,027
Real Estate
Information............ 583,033 65,342 710,613 32,541 85,186
Consumer Information.... 215,168 27,652 286,725 4,289 2,043
Corporate............... 7,534 (51,760) 76,216 3,362 1,332
---------- -------- ---------- ------- --------
$2,988,169 $169,972 $2,116,414 $77,031 $212,588
========== ======== ========== ======= ========
1998
Title Insurance......... $2,087,106 $227,906 $ 858,326 $29,375 $100,560
Real Estate
Information............ 632,997 110,069 628,116 28,038 58,258
Consumer Information.... 180,147 28,455 235,354 2,562 1,708
Corporate............... 43,630 (1,379) 130,935 2,288 --
---------- -------- ---------- ------- --------
$2,943,880 $365,051 $1,852,731 $62,263 $160,526
========== ======== ========== ======= ========
47
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
QUARTERLY FINANCIAL DATA
(Unaudited)
Quarter Ended
-------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
(in thousands, except per share amounts)
Year Ended December 31, 2000
Revenues........................... $646,174 $775,925 $750,260 $761,896
Income before income taxes and
minority interests................ $ 3,885 $ 48,346 $ 48,757 $ 52,888
Net income......................... $ 1,002 $ 25,032 $ 24,399 $ 31,790
Net income per share:
Basic............................. $ .02 $ .39 $ .38 $ .50
Diluted........................... $ .02 $ .38 $ .37 $ .47
Year Ended December 31, 1999
Revenues:
As reported....................... $706,926 $770,398 $762,592 $700,393
Pooling adjustment................ 15,116 -- -- --
Change in accounting for tax
service contracts................ 8,825 11,457 12,462 --
-------- -------- -------- --------
As restated....................... $730,867 $781,855 $775,054 $700,393
======== ======== ======== ========
Income before income taxes,
minority interests and
Cumulative effect of a change in
accounting principle:
As reported....................... $ 45,365 $ 51,553 $ 38,378 $ 3,436
Pooling adjustment................ (1,504) -- -- --
Change in accounting for tax
service contracts................ 8,825 11,457 12,462 --
-------- -------- -------- --------
As restated....................... $ 52,686 $ 63,010 $ 50,840 $ 3,436
======== ======== ======== ========
Net income (loss):
As reported....................... $ 24,877 $ 29,226 $ 21,940 $ (2,244)
Pooling adjustment................ (1,004) -- -- --
Change in accounting for tax
service contracts................ 4,210 5,585 6,053 --
Cumulative effect of a change in
accounting for tax service
contracts........................ (55,640) -- -- --
-------- -------- -------- --------
As restated....................... $(27,557) $ 34,811 $ 27,993 $ (2,244)
======== ======== ======== ========
Net income (loss) per share:
Basic:
As reported..................... $ .41 $ .45 $ .34 $ (.03)
Pooling adjustment.............. (.03) -- -- --
Change in accounting for tax
service contracts.............. .06 .09 .09 --
Cumulative effect of a change in
accounting for tax service
contracts...................... (.87) -- -- --
-------- -------- -------- --------
As restated..................... $ (.43) $ .54 $ .43 $ (.03)
======== ======== ======== ========
Diluted:
As reported..................... $ .40 $ .44 $ .33 $ (.03)
Pooling adjustment.............. (.02) -- -- --
Change in accounting for tax
service contracts.............. .05 .08 .09 --
Cumulative effect of a change in
accounting for tax service
contracts...................... (.85) -- -- --
-------- -------- -------- --------
As restated..................... $ (.42) $ .52 $ .42 $ (.03)
======== ======== ======== ========
The Company's real estate-related segments are cyclical in nature, with the
spring and summer months historically being the strongest. However, interest
rate adjustments by the Federal Reserve Board, as well as other economic
factors, can cause unusual fluctuations in the Company's quarterly operating
results. See Management's Discussion and Analysis on pages 15-21 for further
discussion of the Company's results of operations.
In December, 1999, the Company adopted Staff Accounting Bulletin No. 101
(SAB), "Revenue Recognition in Financial Statements," which became effective
January 1, 1999. In conformity with the SAB the Company has restated its
results for the first three quarters of 1999. See Note 1 to the consolidated
financial statements for further discussion.
All financial results presented include the effect of the 1999 acquisition
of NAIG accounted for under the pooling of interest method of accounting.
48
SCHEDULE I
1 OF 1
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2000
Column A Column B Column C Column D
-------- ------------ ------------ ---------------
Amount at which
shown in the
Type of investment Cost Market value balance sheet
------------------ ------------ ------------ ---------------
Deposits with savings and loan
associations and banks:
Registrant......................... $ 50,000 $ 50,000 $ 50,000
------------ ------------ ------------
Consolidated....................... $ 31,900,000 $ 31,900,000 $ 31,900,000
------------ ------------ ------------
Debt securities:
Registrant--None
Consolidated--
U.S. Treasury securities.......... $ 39,133,000 $ 40,390,000 $ 40,390,000
Corporate securities.............. 112,715,000 112,158,000 112,158,000
Obligations of states and
political subdivisions........... 30,700,000 31,016,000 31,016,000
Mortgage-backed securities........ 26,354,000 25,843,000 25,843,000
------------ ------------ ------------
$208,902,000 $209,407,000 $209,407,000
------------ ------------ ------------
Equity securities:
Registrant--None
Consolidated....................... $ 49,162,000 $ 58,720,000 $ 58,720,000
------------ ------------ ------------
Other long-term investments:
Registrant--None
Consolidated....................... $ 92,703,000 $ 92,703,000 $ 92,703,000
------------ ------------ ------------
Total Investments:
Registrant......................... $ 50,000 $ 50,000 $ 50,000
============ ============ ============
Consolidated....................... $382,667,000 $392,730,000 $392,730,000
============ ============ ============
49
SCHEDULE III
1 OF 2
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INSURANCE INFORMATION
BALANCE SHEET CAPTIONS
Column A Column B Column C Column D
-------- ----------------- ------------ ------------
Deferred policy Claims Deferred
Segment acquisition costs reserves revenues
------- ----------------- ------------ ------------
2000
Title Insurance..................... -- $251,188,000 $ 12,770,000
Real Estate Information............. -- 18,625,000 196,684,000
Consumer Information................ $12,213,000 14,794,000 52,219,000
Corporate........................... -- -- --
----------- ------------ ------------
Total............................. $12,213,000 $284,607,000 $261,673,000
=========== ============ ============
1999
Title Insurance..................... -- $245,376,000 $ 14,429,000
Real Estate Information............. -- 16,600,000 213,880,000
Consumer Information................ $11,534,000 11,748,000 51,457,000
Corporate........................... -- -- --
----------- ------------ ------------
Total............................. $11,534,000 $273,724,000 $279,766,000
=========== ============ ============
50
SCHEDULE III
2 OF 2
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INSURANCE INFORMATION
INCOME STATEMENT CAPTIONS
Column A Column F Column G Column H Column I Column J Column K
-------- -------------- ----------- ------------ ------------ ------------ -----------
Amortization
of deferred
Net policy Other Net
Operating investment Loss acquisition operating premiums
Segment revenues income provision costs expenses written
------- -------------- ----------- ------------ ------------ ------------ -----------
2000
Title Insurance......... $2,067,049,000 $39,635,000 $ 75,790,000 -- $363,807,000 --
Real Estate
Information............ 558,147,000 14,866,000 9,094,000 -- 231,975,000 --
Consumer Information.... 252,332,000 10,931,000 56,748,000 $10,856,000 81,775,000 $27,451,000
Corporate............... -- (8,705,000) -- -- 9,259,000 --
-------------- ----------- ------------ ----------- ------------ -----------
Total................. $2,877,528,000 $56,727,000 $141,632,000 $10,856,000 $686,816,000 $27,451,000
============== =========== ============ =========== ============ ===========
1999
Title Insurance......... $2,153,879,000 $28,555,000 $ 65,925,000 -- $327,182,000 --
Real Estate
Information............ 575,694,000 7,339,000 10,391,000 -- 249,987,000 --
Consumer Information.... 206,623,000 8,545,000 39,902,000 $11,385,000 61,611,000 $18,032,000
Corporate............... -- 7,534,000 -- -- 28,691,000 --
-------------- ----------- ------------ ----------- ------------ -----------
Total................. $2,936,196,000 $51,973,000 $116,218,000 $11,385,000 $667,471,000 $18,032,000
============== =========== ============ =========== ============ ===========
1998
Title Insurance......... $2,063,217,000 $23,889,000 $ 68,697,000 - $307,055,000 --
Real Estate
Information............ 630,510,000 2,487,000 17,428,000 -- 254,118,000 --
Consumer Information.... 173,380,000 6,767,000 38,053,000 $ 9,286,000 48,534,000 $14,277,000
Corporate............... -- 43,630,000 -- -- 14,424,000 --
-------------- ----------- ------------ ----------- ------------ -----------
Total................. $2,867,107,000 $76,773,000 $124,178,000 $ 9,286,000 $624,131,000 $14,277,000
============== =========== ============ =========== ============ ===========
51
SCHEDULE IV
1 OF 1
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
REINSURANCE
Insurance Percentage
operating Assumed of amount
revenues Ceded to from Insurance assumed to
before other other operating operating
Segment reinsurance companies companies revenues revenues
------- ------------- --------- --------- ------------- ----------
Title Insurance
2000............. 2,066,990,000 3,805,000 3,864,000 2,067,049,000 0.2%
1999............. 2,153,726,000 3,401,000 3,554,000 2,153,879,000 0.2%
1998............. 2,062,679,000 4,151,000 4,689,000 2,063,217,000 0.2%
Consumer
Information
2000............. 36,767,000 5,054,000 -- 31,713,000 0.0%
1999............. 21,593,000 3,562,000 1,000 18,032,000 0.0%
1998............. 17,915,000 3,637,000 (1,000) 14,277,000 0.0%
52
SCHEDULE V
1 OF 3
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 2000
Column A Column B Column C Column D Column E
-------- ------------ ------------------------ ------------ --------------
Additions
------------------------
Balance at Charged to Charged to
beginning of costs and other Deductions Balance at end
Description period expenses accounts from reserve of period
----------- ------------ ------------ ----------- ------------ --------------
Reserve deducted from
accounts receivable:
Registrant--None
Consolidated.......... $ 13,669,000 $ 9,555,000 -- $ 7,747,000(A) $ 15,477,000
============ ============ =========== ============ ============
Reserve for title losses
and other claims:
Registrant--None
Consolidated.......... $273,724,000 $141,632,000 $ 3,471,000(B) $134,220,000(C) $284,607,000
============ ============ =========== ============ ============
Reserve deducted from
loans receivable:
Registrant--None
Consolidated.......... $ 905,000 $ 108,000 -- $ (7,000)(A) $ 1,020,000
============ ============ =========== ============ ============
Reserve deducted from
assets acquired in
connection with
claim settlements:
Registrant--None
Consolidated.......... $ 4,856,000 -- $(2,471,000) $ 193,000(D) $ 2,192,000
============ ============ =========== ============ ============
Reserve deducted from
other assets:
Registrant--None
Consolidated.......... $ 2,059,000 $ 561,000 -- $ 20,000(D) $ 2,600,000
============ ============ =========== ============ ============
- --------
Note A--Amount represents accounts written off, net of recoveries.
Note B--Amount represents net $1,000,000 in purchase accounting adjustments,
$2,471,000 reclassification from the reserve for assets acquired in
connection with claim settlements.
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.
53
SCHEDULE V
2 OF 3
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 1999
Column A Column B Column C Column D Column E
-------- ------------ ------------------------ ------------ ------------
Additions
------------------------
Balance at Charged to Charged to Balance at
beginning of costs and other Deductions end of
Description period expenses accounts from reserve period
----------- ------------ ------------ ----------- ------------ ------------
Reserve deducted from
accounts receivable:
Registrant--None
Consolidated.......... $ 10,715,000 $ 12,278,000 $ 9,324,000(A) $ 13,669,000
============ ============ ============ ============
Reserve for title losses
and other claims:
Registrant--None
Consolidated.......... $272,921,000 $116,218,000 $ 2,797,000(B) $118,212,000(C) $273,724,000
============ ============ =========== ============ ============
Reserve deducted from
loans receivable:
Registrant--None
Consolidated.......... $ 1,150,000 $ 102,000 $ 347,000(A) $ 905,000
============ ============ ============ ============
Reserve deducted from
assets acquired in
connection with claim
settlements:
Registrant--None
Consolidated.......... $ 12,256,000 $(6,093,000) $ 1,307,000(D) $ 4,856,000
============ =========== ============ ============
Reserve deducted from
other assets:
Registrant--None
Consolidated.......... $ 1,934,000 $ 817,000 $ 692,000(D) $ 2,059,000
============ ============ ============ ============
- --------
Note A--Amount represents accounts written off, net of recoveries.
Note B--Amount represents net $7,955,000 in purchase accounting adjustments,
$11,251,000 related to the disposition of a subsidiary and $6,093,000
from the reserve for assets acquired in connection with claim
settlements.
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.
54
SCHEDULE V
3 OF 3
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 1998
Column A Column B Column C Column D Column E
-------- ------------ ------------------------ ------------ ------------
Additions
------------------------
Balance at Charged to Charged to Balance at
beginning of costs and other Deductions end of
Description period expenses accounts from reserve period
----------- ------------ ------------ ----------- ------------ ------------
Reserve deducted from
accounts receivable:
Registrant--None
Consolidated.......... $ 7,602,000 $ 11,095,000 $ 7,982,000(A) $ 10,715,000
============ ============ ============ ============
Reserve for title losses
and other claims:
Registrant--None
Consolidated.......... $254,058,000 $124,178,000 $(3,596,000)(B) $101,719,000(C) $272,921,000
============ ============ =========== ============ ============
Reserve deducted from
loans receivable:
Registrant--None
Consolidated.......... $ 1,185,000 $ 159,000 $ 194,000(A) $ 1,150,000
============ ============ ============ ============
Reserve deducted from
assets acquired in
connection with claim
settlements:
Registrant--None
Consolidated.......... $ 11,135,000 $ 3,951,000 $ 2,830,000(D) $ 12,256,000
============ =========== ============ ============
Reserve deducted from
other assets:
Registrant--None
Consolidated.......... $ 1,807,000 $ 263,000 $ 136,000(D) $ 1,934,000
============ ============ ============ ============
- --------
Note A--Amount represents accounts written off, net of recoveries.
Note B--Amount represents $355,000 in purchase accounting adjustments, net of a
reclassification of $3,951,000 to the reserve for assets acquired in
connection with claim settlements.
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.
55
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
The information required by Items 10 through 13 of this report is set forth
in the sections entitled "Who are the Largest Principle Shareholders Outside
of Management?," "Election of Directors," "Transactions with Management and
Others," "Security Ownership of Management," "Executive Compensation," "Report
of the Compensation Committee on Executive Compensation," "Comparative
Cumulative Total Return to Shareholders," "Executive Officers," "Section 16(a)
Beneficial Ownership Reporting Compliance," "Compensation Committee Interlocks
and Insider Participation," "Stock Option Grants and Exercises," "Pension
Plan," "Supplemental Benefit Plan," "Deferred Compensation Plan," "Change of
Control Arrangements" and "Directors Compensations." 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 close of Registrant's fiscal year.
56
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(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 22 in Item 8 of Part II of this report.
3. Exhibits (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. (S)229.402(a)(3)), participates that is
included among the exhibits listed below is identified by an
asterisk (*).)
(2) Agreement and Plan of Merger, dated as of November 17, 1998,
among The First American Financial Corporation, National
Insurance Group, and Pea Soup Acquisition Corp., incorporated by
reference herein from Exhibit 2.1 of Form 8-K filed by National
Information Group on November 25, 1998.
(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, executed 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.
(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 8.5% 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 8.5% 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.
57
(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
the Quarterly Report on Form 10-Q for the quarter ended June
30, 1998.
*(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 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)(f) of Quarterly Report on Form 10-Q for
quarter ended June 30, 2000.
*(10)(j) Amendment No. 3, dated July 19, 2000, to Management
Supplemental Benefit Plan, incorporated by reference from
Exhibit (10)(f) of the 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) 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.
*(10)(n) 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)(o) 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.
58
*(10)(p) 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)(q) 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)(r) Amendment No. 5, dated February 29, 2000, to 1996 Stock
Option Plan, incorporated by reference from Exhibit (10)(o)
of Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
*(10)(s) 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)(t) Change in Control Agreement (Executive Form) dated November
12, 1999.
*(10)(u) Change in Control Agreement (Management Form) dated November
12, 1999.
*(10)(v) 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)(w) 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)(x) 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)(y) 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)(z) Registration Rights Agreement, dated April 22, 1997,
incorporated by reference herein from Exhibit (10.1) of
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.
*(10)(aa) The First American Financial Corporation Deferred
Compensation Plan dated March 10, 2000.
*(10)(bb) 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)(cc) The First American Financial Corporation Deferred
Compensation Plan dated March 10, 2000.
*(10)(dd) 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)(ee) 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 the
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998.
(10)(ff) 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 the Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998.
59
(10)(gg) Data License Agreement, dated November 30, 1997, incorporated
by reference herein from Exhibit (10)(d) of the Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998.
(10)(hh) Reseller Services Agreement, dated as of November 30, 1997,
incorporated by reference herein from Exhibit (10)(g) of the
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998.
(10)(ii) Amendment to Reseller Services Agreement For Resales to
Consumers, dated as of November 30, 1997, incorporated by
reference herein from Exhibit (10)(h) of the Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998.
(10)(jj) Trademark License Agreement, dated as of November 30, 1997,
incorporated by reference herein from Exhibit 10)(i) of the
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998.
(10)(kk) Amended and Restated Credit Agreement, dated as of July 29,
1997, incorporated by reference herein from Exhibit (4.4) of
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.
(10)(ll) Amendment No. 1, dated as of November 10, 1997, to Amended and
Restated Credit Agreement dated as of July 29, 1997,
incorporated by reference herein from Exhibit (4.1) of
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
(10)(mm) Amendment No. 2, dated as of May 15, 2000, to Amended and
Restated Credit Agreement, dated as of July 29, 1997,
incorporated by reference herein from Exhibit (10)(j) of
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000.
(10)(nn) Credit Agreement, dated as of July 2, 1999, incorporated by
reference herein from Exhibit (10)(b) of Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999.
(10)(oo) Amendment No. 1, dated as of May 15, 2000, to Credit Agreement
dated as of July 2, 1999, incorporated by reference herein
from Exhibit (10)(i) of Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
(10)(pp) Master Lease Agreement, dated as of December 27, 1999, between
FATICO 1999 TRUST, as Lessor, and First American Title
Insurance Company, as Lessee, incorporated by reference herein
from Exhibit (10)(g) of Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
(10)(qq) Agreement and Amendment No. 1, dated as of May 5, 2000, to
Master Lease Agreement and Equipment Schedule No. 1,
incorporated by reference herein from Exhibit (10)(h) of
Quarterly Report on Form 10-Q for the quarter ended June 30,
1999.
(21) Subsidiaries of the registrant.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule.
- --------
(b) Reports on Form 8-K
During the last quarter of the period covered by this report, the Company
filed a current report on Form 8-K dated November 1, 2000, reporting on the
Company's third quarter earnings.
60
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)
/s/ Parker S. Kennedy
By __________________________________
Parker S. Kennedy
President
(Principal Executive Officer)
Date: March 29, 2001
/s/ Thomas A. Klemens
By __________________________________
Thomas A. Klemens
Executive Vice President, Chief
Financial Officer (Principal
Financial Officer)
Date: March 29, 2001
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 date indicated.
Signature Title Date
--------- ----- ----
/s/ D.P. Kennedy Chairman and Director March 29, 2001
____________________________________
D.P. Kennedy
/s/ Parker S. Kennedy President and Director March 29, 2001
____________________________________
Parker S. Kennedy
/s/ Thomas A. Klemens Executive Vice President, March 29, 2001
____________________________________ Chief Financial Officer
Thomas A. Klemens
/s/ Max O. Valdes Vice President, March 29, 2001
____________________________________ (Chief Accounting Officer)
Max O. Valdes
/s/ George L. Argyros Director March 29, 2001
____________________________________
George L. Argyros
Director
____________________________________
Gary J. Beban
/s/ J. David Chatham Director March 29, 2001
____________________________________
J. David Chatham
61
Signature Title Date
--------- ----- ----
Director
____________________________________
William G. Davis
/s/ James L. Doti Director March 29, 2001
____________________________________
James L. Doti
/s/ Lewis W. Douglas, Jr. Director March 29, 2001
____________________________________
Lewis W. Douglas, Jr.
/s/ Paul B. Fay, Jr. Director March 29, 2001
____________________________________
Paul B. Fay, Jr.
/s/ Frank O'Bryan Director March 29, 2001
____________________________________
Frank O'Bryan
/s/ Roslyn B. Payne Director March 29, 2001
____________________________________
Roslyn B. Payne
/s/ D. Van Skilling Director March 29, 2001
____________________________________
D. Van Skilling
/s/ Virginia Ueberroth Director March 29, 2001
____________________________________
Virginia Ueberroth
62
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(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 in Item 8 of Part II of this report.
3. Exhibits (Each management contract or compensatory plan or
arrangement in which any director or named executive officer of
The First American Financial Corporation, as defined by
Item 402(a)(3) of Regulation S-K (17 C.F.R. (S)229.402(a)(3)),
participates that is included among the exhibits listed below is
identified by an asterisk (*).)
(2) Agreement and Plan of Merger, dated as of November 17, 1998, among
The First American Financial Corporation, National Insurance
Group, and Pea Soup Acquisition Corp., incorporated by reference
herein from Exhibit 2.1 of Form 8-K filed by National Information
Group on November 25, 1998.
(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 executed 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 Financial Corporation, as amended.
(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.
II-1
*(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 the
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.
*(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 form Exhibit
(10)(e) 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 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 form Exhibit
(10)(f) of Quarterly Report on Form 10-Q for quarter ended June
20, 2000.
*(10)(j) Pension Restoration Plan (effective as of January 1, 1994),
incorporated by reference herein from Exhibit (10)(e) of Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
*(10)(k) Amendment No. 1, dated July 19, 2000, to Pension Restoration
Plan, incorporated by reference herein from Exhibit (10)(a) of of
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000.
*(10)(l) 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.
*(10)(m) 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)(n) 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)(o) 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.
II-2
*(10)(p) 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)(q) Amendment No. 5, dated February 29, 2000, to 1996 Stock Option
Plan, incorporated by reference from Exhibit (10)(o) of Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.
*(10)(r) Amendment No. 6, dated July 19, 2000, to 1996 Stock Option Plan,
incorporated by reference herein from Exhibit (10)(b) of of
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000.
*(10)(s) Change in Control Agreement (Executive Form) dated November 12,
1999.
*(10)(t) Change in Control Agreement (Management Form) dated November 12,
1999.
*(10)(u) 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)(v) 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)(w) 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)(x) 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)(y) Registration Rights Agreement, dated April 22, 1997,
incorporated by reference herein from Exhibit (10.1) of
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.
*(10)(z) The First American Financial Corporation Deferred Compensation
Plan dated March 10, 2000.
*(10)(aa) 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)(bb) The First American Financial Corporation Deferred Compensation
Plan Trust Agreement dated March 10, 2000.
*(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) 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 the Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998.
*(10)(ee) 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 the
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998.
II-3
(10)(ff) Data License Agreement dated November 30, 1997, incorporated by
reference herein from Exhibit (10)(d) of the Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998.
(10)(gg) Reseller Services Agreement dated as of November 30, 1997,
incorporated by reference herein from Exhibit (10)(g) of the
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998.
(10)(hh) Amendment to Reseller Services Agreement For Resales to Consumers
dated as of November 30, 1997, incorporated by reference herein
from Exhibit (10)(h) of the Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
(10)(ii) Trademark License Agreement, dated as of November 30, 1997,
incorporated by reference herein from Exhibit (10)(i) of the
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998.
(10)(jj) Amended and Restated Credit Agreement dated as of July 29, 1997,
incorporated by reference herein from Exhibit (4.4) of Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997.
(10)(kk) Amendment No. 1 dated as of November 10, 1997, to Amended and
Restated Credit Agreement dated as of July 29, 1997, incorporated
by reference herein from Exhibit (4.1) of Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
(10)(ll) Amendment No. 2, dated as of May 15, 2000, to Amended and
Restated Credit Agreement dated as of July 29, 1997, incorporated
by reference herein from Exhibit (10)(j) of Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000.
(10)(mm) Credit Agreement dated as of July 2, 1999, incorporated by
reference herein from Exhibit (10)(b) of Quarterly Report on Form
10-Q for the quarter ended June 30, 1999.
(10)(nn) Amendment No. 1, dated as of May 15, 2000, to Credit Agreement
dated as of July 2, 1999, incorporated by reference herein from
Exhibit (10)(i) of Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000.
(10)(oo) Master Lease Agreement, dated as of December 27, 1999, between
FATICO 1999 TRUST, as Lessor, and First American Title Insurance
Company, as Lessee, incorporated by reference herein from Exhibit
(10)(g) of Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000.
(10)(pp) Agreement of Amendment No. 1, dated as of May 5, 2000, to Master
Lease Agreement and Equipment Schedule No. 1, incorporated by
reference herein from Exhibit (10)(h) of Quarterly Report on Form
10-Q for the quarter ended June 30, 1999.
(22) Subsidiaries of the registrant.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
During the last quarter the period covered by this report, the Company filed a
current report on Form 8-K dated November 1, 2000, reporting on the Companys
third quarter earnings.
II-4
EXHIBIT INDEX
Sequentially
Numbered
Exhibit No. Description Page
----------- ----------- ------------
(2) Agreement and Plan of Merger, dated as of November
17, 1998, among The First American Financial
Corporation, National Insurance Group, and Pea Soup
Acquisition Corp., incorporated by reference herein
from Exhibit 2.1 of Form 8-K filed by National
Information Group on November 25, 1998.
(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
Companys 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, executed 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.
(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 8.5% 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 8.5% 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 the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.
*(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.
Sequentially
Numbered
Exhibit No. Description Page
----------- ----------- ------------
*(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 form Exhibit (10)(e) 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 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 form Exhibit (10)(f) of
Quarterly Report on Form 10-Q for quarter ended
June 30, 2000.
*(10)(j) Amendment No. 3, dated July 19, 2000, to Management
Supplemental Benefit Plan, incorporated by
reference from Exhibit (10)(f) of the 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)(e) 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 of Quarterly Report on Form
10-Q for the quarter ended June 30, 2000.
*(10)(m) 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.
*(10)(n) 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)(o) 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)(p) 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)(q) 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.
Sequentially
Numbered
Exhibit No. Description Page
----------- ----------- ------------
*(10)(r) Amendment No. 5, dated February 29, 2000, to 1996
Stock Option Plan, incorporated by reference from
Exhibit (10)(o) of Annual Report on Form 10-K for
the fiscal year ended December 31, 1998.
(10)(s) Amendment No. 6, dated July 19, 2000, to 1996 Stock
Option Plan, incorporated by reference herein from
Exhibit (10)(b) of of Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000.
*(10)(t) Change in Control Agreement (Executive Form) dated
November 12, 1999.
*(10)(u) Change in Control Agreement (Management Form) dated
November 12, 1999.
*(10)(v) 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)(w) 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)(x) 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)(y) Amendment No. 3, dated July 19, 2000, to 1997
Directors Stock Plan, incorporated by reference
herein from Exhibit (10)(c) of of Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000.
(10)(z) Registration Rights Agreement, dated April 22,
1997, incorporated by reference herein from Exhibit
(10.1) of Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
*(10)(aa) The First American Financial Corporation Deferred
Compensation Plan dated March 10, 2000.
*(10)(bb) Amendment No. 1, dated July 19, 2000, to Deferred
Compensation Plan, incorporated by reference herein
from Exhibit (10)(d) of of Quarterly Report on Form
10-Q for the quarter ended June 30, 2000.
*(10)(cc) The First American Financial Corporation Deferred
Compensation Plan Trust Agreement dated March 10,
2000.
*(10)(dd) Amendment No. 1, dated July 19, 2000, to Deferred
Compensation Plan, incorporated by reference herein
from Exhibit (10)(d) of of Quarterly Report on Form
10-Q for the quarter ended June 30, 2000.
(10)(ee) 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 the Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998.
(10)(ff) 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 the Quarterly Report on Form 10-
Q for the quarter ended March 31, 1998.
Sequentially
Numbered
Exhibit No. Description Page
----------- ----------- ------------
(10)(gg) Data License Agreement, dated November 30, 1997,
incorporated by reference herein from Exhibit
(10)(d) of the Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998.
(10)(hh) Reseller Services Agreement, dated as of November
30, 1997, incorporated by reference herein from
Exhibit (10)(g) of the Quarterly Report on Form 10-
Q for the quarter ended March 31, 1998.
(10)(ii) Amendment to Reseller Services Agreement For
Resales to Consumers, dated as of November 30,
1997, incorporated by reference herein from Exhibit
(10)(h) of the Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998.
(10)(jj) Trademark License Agreement, dated as of November
30, 1997, incorporated by reference herein from
Exhibit (10)(i) of the Quarterly Report on Form 10-
Q for the quarter ended March 31, 1998.
(10)(kk) Amended and Restated Credit Agreement, dated as of
July 29, 1997, incorporated by reference herein
from Exhibit (4.4) of Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997.
(10)(ll) Amendment No. 1, dated as of November 10, 1997, to
Amended and Restated Credit Agreement dated as of
July 29, 1997, incorporated by reference herein
from Exhibit (4.1) of Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997.
(10)(mm) Amendment No. 2, dated as of May 15, 2000, to
Amended and Restated Credit Agreement, dated as of
July 29, 1997, incorporated by reference herein
from Exhibit (10)(j) of Quarterly Report on Form
10-Q for the quarter ended June 30, 2000.
(10)(nn) Credit Agreement, dated as of July 2, 1999,
incorporated by reference herein from
Exhibit (10)(b) of Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999.
(10)(oo) Amendment No. 1, dated as of May 15, 2000, to
Credit Agreement dated as of July 2, 1999,
incorporated by reference herein from Exhibit
(10)(i) of Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
(10)(pp) Master Lease Agreement, dated as of December 27,
1999, between FATICO 1999 TRUST, as Lessor, and
First American Title Insurance Company, as Lessee,
incorporated by reference herein from Exhibit
(10)(g) of Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
(10)(qq) Agreement of Amendment No. 1, dated as of May 5,
2000, to Master Lease Agreement and Equipment
Schedule No. 1, incorporated by reference herein
from Exhibit (10)(h) of Quarterly Report on Form
10-Q for the quarter ended June 30, 1999.
(21) Subsidiaries of the registrant.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule.