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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, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 0-3658
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THE FIRST AMERICAN FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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INCORPORATED IN CALIFORNIA 95-1068610
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
114 EAST FIFTH STREET, SANTA ANA, CALIFORNIA 92701-4642
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(714) 558-3211
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON NEW YORK STOCK EXCHANGE
RIGHTS TO PURCHASE SERIES A
JUNIOR PARTICIPATING PREFERRED NEW YORK STOCK EXCHANGE
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(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. 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 18, 1998, the aggregate market value of voting stock held by non-
affiliates was $887,616,253.
On March 18, 1998, there were 17,850,189 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 58 pages.
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PART I
ITEM 1. BUSINESS.
The Company
The First American Financial 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 financial
service businesses closely related to the real estate transfer and closing
process. The Company is a California corporation and has its executive offices
at 114 East Fifth Street, Santa Ana, California 92701-4642. The Company's
telephone number is (714) 558-3211. Unless the context otherwise indicates,
the "Company," as used herein, refers to The First American Financial
Corporation and its subsidiaries.
General
The Company, through its subsidiaries, is engaged in the business of
providing real estate-related financial and information services to real
property buyers and mortgage lenders. These services include title insurance,
tax monitoring, credit reporting, property data services, flood certification,
field inspection services, appraisal services, mortgage loan servicing
systems, mortgage document preparation and home warranty services. The Company
also provides investment, trust and thrift services. Financial information
regarding each of the Company's primary 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. Although industry-wide data for 1997 are not currently
available, the Company believes that its wholly owned subsidiary, First
American Title Insurance Company ("First American"), was the largest title
insurer in the United States, based on premiums written, and its wholly owned
subsidiary, First American Real Estate Information Services, Inc., was 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 majority
owned 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
Company's title insurance, tax monitoring, credit reporting, flood zone
determination and property information business results from resales and
refinancings of real estate, including residential and commercial properties,
and from the construction and sale of new properties. The Company's home
warranty business results from residential resales and does not benefit from
refinancings or commercial transactions. Resales and refinancings of
residential properties constitute the major source of the Company's revenues.
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 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 its traditional title insurance business.
Overview of Title Insurance Industry
Title insurance has become increasingly accepted as the most efficient means
of determining title to, and the priority of interests in, real estate in
nearly all parts of the United States. Today, virtually all real property
mortgage lenders require their borrowers to obtain a title insurance policy at
the time a mortgage loan is made.
Title Policies. Title insurance policies are insured statements of the
condition of title to real property, showing priority of ownership as
indicated by public records, as well as outstanding liens, encumbrances and
other matters of record, and certain other matters not of public record. 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
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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. 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.
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 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.
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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 more than 300 branch offices and over 4,000 independent agents. Through its
branch office and agent 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 the major areas in
which the Company operates, in 1996, the Company had the largest or second
largest share of the title insurance market in 30 states and in the District
of Columbia. In addition, the Company's national market share grew from 20.1%
in 1995 to 20.4% in 1996. Industry statistics for 1997 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
approximately 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 sales personnel 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. Accordingly, the
Company plans to continue its international sales efforts, particularly in
Canada, the United Kingdom and Australia.
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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. Based on the low turnover and longevity
of First American's employees and its continuing training programs, the
Company believes that its underwriting personnel are among the most
experienced and well trained in the title insurance industry.
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,
with the second largest repository of imaged title documents.
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.
4
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 $12.2 million, $5.0 million and $3.9 million,
respectively, as of December 31, 1997.
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 $25 million of coverage 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% 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 90 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 Chicago Title and
Trust Company (which also includes Ticor Title Insurance Company and Security
Union Title Insurance Company) Land America Title Insurance Company (formerly
Commonwealth Land Title Insurance Company and Lawyers Title Insurance
Company), Stewart Title Guaranty Company, Old Republic Title Insurance Group
and Fidelity National Title Insurance Company. 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 financial service
businesses closely related to the real estate transfer and closing process. To
date, these businesses include tax monitoring, credit reporting, property data
services, flood certification, field inspection services, appraisal services,
mortgage loan servicing systems, mortgage document preparation and home
warranty services. The development of these businesses has allowed the Company
to become the nation's leading company offering a full range of services to
real property buyers and mortgage lenders. The Company also provides
investment, trust and thrift services.
The Real Estate Information Service Business. The real estate information
service business encompasses tax monitoring, mortgage credit reporting, flood
certification, mortgage loan servicing systems 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.,
(now named First American Real Estate Information 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
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of tax monitoring services, such as the Company's tax service, indemnify
mortgage lenders against losses resulting from a failure to monitor delinquent
taxes. Where a mortgage lender requires that tax payments be impounded on
behalf of borrowers, 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 tax service business markets its product through a nationwide
sales staff which calls on servicers and originators of mortgage loans. 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 $44 to $95 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 as the related
servicing costs are estimated to occur. However, income taxes are paid on the
entire fee in the year the fee is received. The Company maintains minimal
reserves for losses relating to its tax monitoring services because
historically the Company's losses relating to such services have been
negligible, and the Company is not presently aware of any reason why its
historical loss experience will not continue at current levels.
The Company's 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 credit reporting service also provides prequalifying reports,
merged credit data, resident screening services, business reports, credit
scoring tools and personal credit reports. It also has recently branched into
the consumer lending and risk scoring areas, providing credit reporting and
information management services to automobile dealers, consumers and home
equity lenders nationwide. 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 on-line 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 second largest field
services company in the United States.
In May 1997, the Company purchased all of the operations of SMS, other than
SMS' flood zone determination business. SMS is a leading provider of real
estate information services to the U.S. mortgage and
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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.
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. As a result of this
transaction, the Company believes that FARES will become the nation's largest
and most diverse provider of information technology and decision support
solutions for the mortgage and real estate industries.
The Home Warranty Business. 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 79% 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
which protect homeowners against defects in household systems and appliances,
such as plumbing, water heaters and furnaces. The Company's home warranty
subsidiary currently charges approximately $245 to $295 for its basic home
warranty contract. Optional coverage is available for air conditioners, pools,
spas, washers, dryers and refrigerators for charges ranging from approximately
$25 to $125. 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, Nevada, Texas, Utah and Washington. In early
1997, the home warranty subsidiary expanded operations to North and South
Carolina. The principal competitor of the Company's home warranty business is
American Home Shield, a subsidiary of Service Master L.P.
The Trust Business. 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. As of December 31, 1997,
the trust operation was administering fiduciary and custodial assets having a
market value in excess of $1.3 billion.
The Thrift Business. During 1988, the Company, through a majority owned
subsidiary, acquired an industrial loan corporation (the "Thrift") that
accepts thrift deposits and uses deposited funds to originate and purchase
loans secured by commercial properties in Southern California. As of December
31, 1997, the Thrift had approximately $62.5 million of demand deposits and
$65.5 million of loans outstanding.
The loans made or acquired by the Thrift currently range in amount from
$20,000 to $1,105,000 with an average loan balance of $270,500. Loans are made
only on a secured basis, at loan-to-value percentages no greater than 75%. The
Thrift specializes in making commercial real estate loans. In excess of 93% 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, 1997, was 11%. 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,
7
commercial banks. The Company believes that many borrowers who might be
eligible for loans from commercial banks use thrift and loan companies, such
as the Thrift, because, in general, thrift and loan companies offer longer
maturity loans than do commercial banks, which typically offer one-year
renewable loans. There is, however, a higher degree of risk associated with
longer term loans than shorter term loans. The Thrift's average loan is 60
months 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, 1997, if all of such loans had been current
in accordance with their original terms, totaled $35,000. Interest income
actually recognized on these nonaccrual loans for the year ended December 31,
1997, was $24,000. The following table sets forth the amount of the Thrift's
nonperforming loans as of the dates indicated.
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995 1994 1993
---- ---- ------ ------ ------
($000)
NONPERFORMING ASSETS:
Loans accounted for on a nonaccrual basis........ $287 $166 $1,956 $1,741 $1,833
Accruing loans past due 90 or more days..........
Troubled debt restructurings.....................
---- ---- ------ ------ ------
Total.......................................... $287 $166 $1,956 $1,741 $1,833
==== ==== ====== ====== ======
Based on a variety of factors concerning the creditworthiness of its
borrowers, the Thrift determined that it had $1,419,000 of potential problem
loans in existence as of December 31, 1997.
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.
8
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,
------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ----- -----
($000)
Allowance for Loan Losses:
Balance at beginning of year........... $1,050 $1,344 $ 950 $ 750 $ 500
------ ------ ------ ----- -----
Charge-Offs:
Real estate-mortgage................. (136) (766) (194) (311) (66)
Assigned lease payments.............. (5) (9) (9) (21)
Other................................ (44)
------ ------ ------ ----- -----
(136) (771) (203) (320) (131)
------ ------ ------ ----- -----
Recoveries:
Real estate-mortgage................... 6 26 55 3
Assigned lease payments................ 22 18 35 28 32
Other.................................. 23
------ ------ ------ ----- -----
28 44 35 83 58
------ ------ ------ ----- -----
Net (charge-offs) recoveries........... (108) (727) (168) (237) (73)
Provision for losses................... 243 433 562 437 323
------ ------ ------ ----- -----
Balance at end of year................... $1,185 $1,050 $1,344 $ 950 $ 750
====== ====== ====== ===== =====
Ratio of net charge-offs during the year
to average loans outstanding during the
year.................................... .2% 1.4% .4% .6% .2%
====== ====== ====== ===== =====
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,
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- --------------- --------------- ---------------
% OF % OF % OF % OF % OF
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
($000)
Loan Categories:
Real estate-mortgage... $ 1,116 100 $1,015 100 $1,300 99 $879 99 $635 98
Real estate-
construction.......... 3 1
Assigned lease
payments.............. 39 34 41 71 1 95 1
Other.................. 30 1 20 1
------- --- ------ --- ------ --- ---- --- ---- ---
$ 1,185 100 $1,050 100 $1,344 100 $950 100 $750 100
======= === ====== === ====== === ==== === ==== ===
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-
related financial services. 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 real property buyers and mortgage
lenders. 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:
Settlers Abstract................................... Pennsylvania
Hillam Title Agency................................. Utah
Klamath County Title Company........................ Oregon
Illini Title Services, Inc.......................... Illinois
Pekin Abstract & Title Company...................... Illinois
Woodford County Abstract & Title.................... Illinois
Miller Abstract..................................... Missouri
Donegan Abstract.................................... Texas
Service Standard.................................... U.S. Virgin Islands
Real Estate Information Services: (1)
Strategic Mortgage Services, Inc.................... Nationwide
Real Estate Solutions (1)........................... Nationwide
- --------
(1) 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., with Experian's Real Estate Solutions division
(RES). The LLC is 80% owned by the Company and 20% owned by Experian.
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.
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, the
Company's trust company is regulated by the California Superintendent of Banks
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.
10
EMPLOYEES
The following table provides a summary of the total number of employees of
the Company as of December 31, 1997:
NUMBER OF
BUSINESS EMPLOYEES
-------- ---------
Title insurance................................................ 10,424
Real estate information services............................... 2,106
Home warranty.................................................. 295
Trust and banking.............................................. 105
------
Total........................................................ 12,930
======
ITEM 2. PROPERTIES.
The Company owns two adjacent office buildings in Santa Ana, California,
which house its executive offices, its trust and banking subsidiary and the
Orange County title insurance branch operations. This complex, which contains
approximately 105,000 square feet of floor space and an enclosed parking area,
comprises one city block. The Company also owns an 18,000 square foot office
building located across the street from its main offices. This building is
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 400
locations throughout the United States and Canada, 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 addition, FAREISI and its subsidiaries lease office
space in more than 75 locations throughout the United States, principally for
their respective operations.
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.
The Company is involved in numerous routine legal proceedings incidental to
such businesses described in Item 1 above. Some of these proceedings involve
claims for damages in material amounts. At this time, however, the Company
does not anticipate that the resolution of any of these proceedings will
materially and adversely affect its financial condition.
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.
11
PART II
ITEM 5. MARKET FOR THE 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
February 25, 1998, was 3,033.
High and low stock prices and dividends for the last two years were (Note A):
1997 1996
----------------------- -----------------------
CASH CASH
------------- --------- ------------- ---------
HIGH-LOW HIGH-LOW
QUARTER ENDED RANGE DIVIDENDS RANGE DIVIDENDS
------------- ------------- --------- ------------- ---------
March 31..................... $29.75-$25.08 $.12 $21.33-$16.75 $.10
June 30...................... $26.58-$20.92 $.12 $22.50-$16.59 $.12
September 30................. $40.21-$26.00 $.135 $23.83-$19.50 $.12
December 31.................. $49.25-$39.83 $.135 $27.42-$22.42 $.12
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 in the acquisitions listed below.
NUMBER
OF
SHARES
(Note CONSIDERATION
DATE OF SALE A) RECEIVED
------------ ------- -------------
September 14, 1995..................................... 67,500 $1,108,000
December 29, 1995...................................... 90,000 $1,605,000
September 13, 1996..................................... 98,063 $2,173,719
December 10, 1996...................................... 250,715 $5,417,149
July 8, 1997........................................... 7,200 $ 192,600
November 17, 1997...................................... 7,755 $ 315,047
December 31, 1997...................................... 825 $ 40,630
- --------
Note A--After adjustment for 3-for-2 stock split effected January 15, 1998
12
ITEM 6. SELECTED FINANCIAL DATA.
THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES
YEAR ENDED DECEMBER 31
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENT, PER SHARE AMOUNTS AND
EMPLOYEE DATA)
Revenues................ $1,887,461 $1,597,566 $1,250,216 $1,376,393 $1,398,426
Net income.............. $ 64,709 $ 53,589 $ 7,587 $ 18,945 $ 66,291
Total assets............ $1,168,144 $ 979,794 $ 873,778 $ 828,649 $ 786,448
Notes and contracts
payable................ $ 41,973 $ 71,257 $ 77,206 $ 89,600 $ 85,022
Stockholders' equity.... $ 411,412 $ 352,465 $ 302,767 $ 292,110 $ 283,718
Return on average
stockholders' equity... 16.9% 16.4% 2.6% 6.6% 26.5%
Cash dividends on common
shares................. $ 8,818 $ 7,928 $ 6,850 $ 6,869 $ 5,840
Per share of common
stock
(Notes A & B)--
Net income
Basic............... $ 3.73 $ 3.12 $ .44 $ 1.10 $ 3.89
Diluted............. $ 3.64 $ 3.09 $ .44 $ 1.10 $ 3.89
Stockholders' equity.. $ 23.68 $ 20.34 $ 17.69 $ 17.09 $ 16.62
Cash dividends........ $ .51 $ .46 $ .40 $ .40 $ .34
Number of common shares
outstanding (Note A)--
Weighted average
during the year
Basic............... 17,362 17,179 17,105 17,171 17,030
Diluted............. 17,785 17,325 17,105 17,171 17,030
End of year........... 17,374 17,331 17,117 17,093 17,072
Title orders opened
(Note C)............... 1,173 1,027 894 873 1,218
Title orders closed
(Note C)............... 886 775 667 723 933
Number of employees..... 12,930 11,611 10,149 9,033 10,679
- --------
Note A--After adjustment for 3-for-2 stock split effected January 15, 1998,
and restatement for the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings per Share."
Note B--Per share information relating to net income is based on the 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 C--Title order volumes are those processed by the direct title operations
of the Company and do not include orders processed by agents.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS.
Any statements in this document looking forward in time involve risks and
uncertainties, including but not limited to the following risks: the effect of
interest rate fluctuations, changes in the performance of the real estate
markets; the effect of changing economic conditions; and the demand for and
the acceptance of the Company's products.
Results of Operations
OVERVIEW--As with all providers of real estate-related financial and
information services, the Company's revenues depend, in large part, upon the
level of real estate activity and the cost and availability of mortgage funds.
The majority of the Company's revenues for the 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 properties. Revenues for the Company's home
warranty segment result
13
primarily from residential resale activity and do not benefit from
refinancings. Traditionally, the greatest volume of real estate activity,
particularly residential resale, has occurred in the spring and summer months.
However, in recent years, interest rate adjustments by the Federal Reserve
Board, as well as other economic factors, have caused unusual fluctuations in
the traditional pattern of real estate activity. During 1994 the Federal
Reserve Board raised interest rates. This, coupled with the persistently poor
real estate economy in California and the effects of the traditional seasonal
real estate cycle, resulted in a low inventory of open transactions going into
1995. As a result, 1995 first quarter operating revenues experienced a 30%
decline when compared with the same period of the prior year. In response to
the severe decline in new orders, the Company instituted personnel reductions.
However, the cost-cutting measures lagged the revenue declines, resulting in
losses for the first quarter 1995. Mortgage interest rates peaked in January
1995 and decreased throughout the remainder of the year and into 1996. This
decrease, as well as increased consumer confidence, contributed significantly
to an improved national real estate economy during the second half of 1995,
and resulted in a 26% improvement in operating revenues when compared to the
first half of 1995. This resurgence in real estate activity generated a high
inventory of open transactions going into 1996, which, together with the
continuation of lower mortgage interest rates, the improved national real
estate economy (including the beginnings of a recovery in California) and the
Company's successful integration of its diverse businesses, resulted in strong
revenues and profits for 1996. These favorable conditions continued into 1997,
contributing to record-setting residential resale transactions, an increase in
new home sales and renewed commercial activity. In addition, stability in the
marketplace prompted an increase in refinance and home equity transactions,
primarily towards the latter part of the year. These factors, as well as
market share increases in all of the Company's primary business segments,
culminated in 1997 being the best year overall in the Company's history.
OPERATING REVENUES--A summary by segment of the Company's operating revenues
is as follows:
1997 % 1996 % 1995 %
----------- --- ---------- --- ---------- ---
(IN THOUSANDS, EXCEPT PERCENT)
Title Insurance:
Direct Operations............... $ 761,774 41 $ 626,314 40 $ 517,616 42
Agency Operations............... 700,193 38 641,919 41 517,173 42
----------- --- ---------- --- ---------- ---
1,461,967 79 1,268,233 81 1,034,789 84
Real Estate Information........... 331,372 18 246,745 16 145,755 12
Home Warranty..................... 46,859 2 38,351 2 32,531 3
Trust and Banking................. 20,007 1 17,839 1 14,110 1
----------- --- ---------- --- ---------- ---
$ 1,860,205 100 $1,571,168 100 $1,227,185 100
=========== === ========== === ========== ===
Operating revenues from direct title operations increased 21.6% in 1997 over
1996 and 21.0% in 1996 over 1995. These increases were attributable to
increases in the number of title orders closed by the Company's direct
operations, as well as increases in the average revenues per order closed. The
Company's direct operations closed 885,600, 775,100 and 667,200 title orders
during 1997, 1996 and 1995, respectively, representing increases of 14.3% in
1997 over 1996 and 16.2% in 1996 over 1995. These increases were primarily due
to the continuation of lower mortgage interest rates, the improved national
real estate economy (including California, a state highly concentrated with
direct operations) and an increase in the Company's national market share. The
average revenues per order closed were $860, $808 and $776 for 1997, 1996 and
1995, respectively, representing increases of 6.4% in 1997 over 1996 and 4.1%
in 1996 over 1995. These increases were primarily attributable to an increased
mix of residential resale activity, appreciating home values and a resurgence
in commercial real estate activity. Operating revenues from agency operations
increased 9.1% in 1997 over 1996 and 24.1% in 1996 over 1995. These
fluctuations were primarily attributable to the same factors affecting direct
operations mentioned above, compounded by the inherent delay in the reporting
by agents.
Real estate information operating revenues increased 34.3% in 1997 over 1996
and 69.3% in 1996 over 1995. These increases were primarily attributable to
the same factors affecting title insurance mentioned above and $53.8 million
and $11.3 million of operating revenues contributed by new acquisitions in
1997 and 1996, respectively.
14
Home warranty operating revenues increased 22.2% in 1997 over 1996 and 17.9%
in 1996 over 1995. These increases were primarily attributable to improvements
in certain of the residential resale markets in which this segment operates,
successful geographic expansion, increased consumer awareness and increases in
the number of annual renewals.
INVESTMENT AND OTHER INCOME--Investment and other income increased 3.3% in
1997 over 1996. This increase was primarily attributable to a 4.8% increase in
the average investment portfolio balance and increased equity in earnings of
unconsolidated subsidiaries, offset in part by an increase of $0.9 million in
losses from the sales of fixed assets. Investment and other income increased
14.6% in 1996 over 1995. This increase was primarily attributable to an
increase in realized investment gains of $1.7 million, as well as an increase
in fixed income securities, offset in part by a 5.4% decrease in the average
investment portfolio balance.
SALARIES AND OTHER PERSONNEL COSTS--A summary by segment of the Company's
salaries and other personnel costs is as follows:
1997 % 1996 % 1995 %
-------- --- -------- --- -------- ---
(IN THOUSANDS, EXCEPT PERCENT)
Title Insurance....................... $498,424 77 $413,164 78 $352,745 82
Real Estate Information............... 119,856 18 90,559 17 57,738 13
Home Warranty......................... 11,430 2 9,075 2 7,714 2
Trust and Banking..................... 7,061 1 6,621 1 4,799 1
Corporate............................. 10,979 2 11,831 2 8,988 2
-------- --- -------- --- -------- ---
$647,750 100 $531,250 100 $431,984 100
======== === ======== === ======== ===
The Company's title insurance segment 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, the Company's growth in
operations which specialize in builder and lender business has created ongoing
fixed costs required to service accounts.
Title insurance personnel expenses increased 20.6% in 1997 over 1996 and
17.1% in 1996 over 1995. These increases were primarily attributable to the
costs incurred servicing the increasing volume of title orders and, to a
lesser extent, acquisition activity and salary increases. Contributing to the
increase for 1997 was an increased mix of more labor intensive residential
resale transactions. The Company's direct operations opened 1,173,300,
1,026,900 and 894,400 title orders in 1997, 1996 and 1995, respectively,
representing increases of 14.3% in 1997 over 1996 and 14.8% in 1996 over 1995.
Real estate information personnel expenses increased 32.4% in 1997 over 1996
and 56.8% in 1996 over 1995. These increases were primarily attributable to
costs incurred servicing the increase in business volume, costs associated
with in-house development of new electronic communications delivery systems
for information-based products, and approximately $20.7 million and $8.6
million of costs attributable to company acquisitions for 1997 and 1996,
respectively.
Home warranty personnel expenses increased 26.0% in 1997 over 1996 and 17.6%
in 1996 over 1995. These increases were primarily due to the additional
personnel required to service the increased business volume in the states this
segment currently services, as well as new geographic expansion and modest
salary increases.
15
PREMIUMS RETAINED BY AGENTS--A summary of agent retention and agent revenues
is as follows:
1997 1996 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT
PERCENT)
Agent Retention................................ $563,137 $516,593 $413,444
======== ======== ========
Agent Revenues................................. $700,193 $641,919 $517,173
======== ======== ========
% Retained by Agents........................... 80% 80% 80%
======== ======== ========
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:
1997 % 1996 % 1995 %
-------- --- -------- --- -------- ---
(IN THOUSANDS, EXCEPT PERCENT)
Title Insurance....................... $247,579 60 $216,514 67 $186,876 72
Real Estate Information............... 142,985 35 91,249 29 59,527 23
Home Warranty......................... 2,071 1,323 1,843 1
Trust and Banking..................... 8,093 2 6,982 2 5,650 2
Corporate............................. 10,591 3 6,641 2 3,927 2
-------- --- -------- --- -------- ---
$411,319 100 $322,709 100 $257,823 100
======== === ======== === ======== ===
Title insurance other operating expenses increased 14.3% in 1997 over 1996
and 15.9% in 1996 over 1995. These increases were primarily the result of the
impact created by the changes in incremental costs (i.e., office supplies,
document reproduction, messenger services, plant maintenance and title search
costs) associated with the relative changes in title order volume. Also
contributing to the increases were marginal price level increases, offset in
part by successful cost-containment programs.
Real estate information other operating expenses increased 56.7% in 1997
over 1996 and 53.3% in 1996 over 1995. These increases were primarily
attributable to costs incurred servicing the increased business activity, as
well as $33.5 million and $7.0 million of other operating costs relating to
acquisitions in 1997 and 1996, respectively, offset in part by cost-
containment programs. Contributing to the increases were costs incurred
developing and enhancing new electronic communications delivery systems for
information-based products and costs associated with assimilating and
expanding this segment's increased operations.
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:
1997 % 1996 % 1995 %
------- --- ------- --- ------- ---
(IN THOUSANDS, EXCEPT PERCENT)
Title Insurance.......................... $52,924 59 $58,909 68 $68,338 76
Real Estate Information.................. 9,874 11 4,453 5 3,166 3
Home Warranty............................ 27,338 30 23,055 27 18,857 21
Trust and Banking........................ 187 70 26
------- --- ------- --- ------- ---
$90,323 100 $86,487 100 $90,387 100
======= === ======= === ======= ===
16
The provision for title insurance losses expressed as a percentage of title
insurance operating revenues was 3.6% in 1997, 4.6% in 1996, and 6.6% in 1995.
These decreases reflect an ongoing improvement in the Company's claims
experience. The provision for home warranty losses as a percentage of home
warranty operating revenues was 58.3% in 1997, 60.1% in 1996 and 58.0% in
1995. These fluctuations were primarily attributable to the relative changes
in the average number of claims per contract experienced during these periods.
Depreciation and amortization--Depreciation and amortization as well as
capital expenditures are summarized in Note 16 to the consolidated financial
statements.
Interest--Interest expense increased 108.4% in 1997 over 1996 and decreased
23.2% in 1996 when compared with 1995. The increase in 1997 was primarily due
to $5.7 million of interest expense related to the Company's junior
subordinated deferrable interest debentures, offset in part by a 23.7%
reduction in the average outstanding debt balance. The decrease in 1996 was
primarily attributable to a 13.5% reduction in the average outstanding debt
balance and a reduced interest rate option on the Company's variable rate
indebtedness. For descriptions of the Company's borrowings under its bank
credit agreement and its junior subordinated deferrable interest debentures,
see Notes 8 and 13 to the consolidated financial statements, respectively.
Minority interests--Minority interests in net income of consolidated
subsidiaries increased 40.1% in 1997 over 1996 and 23.1% in 1996 over 1995.
These increases were attributable to the relatively strong operating results
of the Company's less than 100% owned subsidiaries, offset in part by
purchases of shares from minority shareholders.
Pretax profits--A summary by segment of the Company's pretax profits is as
follows:
1997 % 1996 % 1995 %
-------- --- -------- --- ------- ---
(IN THOUSANDS, EXCEPT PERCENT)
Title Insurance..................... $ 95,636 62 $ 66,056 51 $17,540 37
Real Estate Information............. 45,317 29 52,581 40 19,690 42
Home Warranty....................... 9,741 6 8,178 6 6,828 14
Trust and Banking................... 4,062 3 3,728 3 3,304 7
-------- --- -------- --- ------- ---
154,756 100 130,543 100 47,362 100
-------- === -------- === ------- ===
Corporate........................... (31,643) (24,678) (19,948)
-------- -------- -------
$123,113 $105,865 $27,414
======== ======== =======
The Company's profit margins and pretax profits 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, in title insurance operations, 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 pretax 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 pretax profits are generally
unaffected by the type of real estate activity but increase as the volume of
residential real estate loan transactions increases. Home warranty pretax
profits improve as the volume of residential resales increases. In general,
the title insurance business is a lower margin business when compared to 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.
17
The increases in corporate expenses were primarily attributable to increased
costs associated with supporting the overall growth of the Company's
businesses, as well as additional unallocated interest expense for 1997
associated with the Company's junior subordinated deferrable interest
debentures, and certain unallocated expenses in 1996 associated with employee
benefit plans.
PREMIUM TAXES--A summary by pertinent segment of the Company's premium taxes
is as follows:
1997 % 1996 % 1995 %
------- --- ------- --- ------- ---
(IN THOUSANDS, EXCEPT PERCENT)
Title Insurance......................... $16,034 95 $15,927 96 $13,016 96
Home Warranty........................... 870 5 749 4 611 4
------- --- ------- --- ------- ---
$16,904 100 $16,676 100 $13,627 100
======= === ======= === ======= ===
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 title insurance and home warranty operating revenues. The Company's
underwritten title company (non-insurance) 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 as a percentage of title insurance operating
revenues were 1.1% in 1997 and 1.3% in 1996 and 1995. The decrease in the
current year was attributable to changes in the geographical mix of title
insurance revenues, as well as changes in the Company's non-insurance
subsidiaries' contribution to revenues.
INCOME TAXES--The Company's effective income tax rate, which includes a
provision for state income and franchise taxes for non-insurance subsidiaries,
was 39.1%, 39.9% and 45.0% for 1997, 1996 and 1995, respectively. The
differences in effective rate were primarily due to changes in the ratio of
permanent differences to income before income taxes and changes in state
income and franchise taxes resulting from fluctuations in the Company's non-
insurance 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 9 to the consolidated financial
statements.
NET INCOME--Net income and per share information, which has been restated
for the 3-for-2 stock split effected January 15, 1998, and the adoption of
Statement of Financial Accounting Standards No. 128, "Earnings per Share," are
summarized as follows:
1997 1996 1995
------- ------- ------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net income............................................ $64,709 $53,589 $7,587
======= ======= ======
Net income per share:
Basic............................................... $ 3.73 $ 3.12 $ 0.44
======= ======= ======
Diluted............................................. $ 3.64 $ 3.09 $ 0.44
======= ======= ======
Weighted average shares:
Basic............................................... 17,362 17,179 17,105
======= ======= ======
Diluted............................................. 17,785 17,325 17,105
======= ======= ======
18
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities amounted to $111.2 million, $112.8
million and $38.5 million for 1997, 1996 and 1995, respectively, after claim
payments of $81.6 million, $78.0 million, $66.6 million, respectively. The
principal non-operating uses of cash and cash equivalents for the three-year
period ended December 31, 1997, were for additions to the investment
portfolio, capital expenditures, company acquisitions 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 and, in
1997, proceeds from the issuance of junior subordinated deferrable interest
debentures. The net effect of all activities on total cash and cash
equivalents were increases of $8.1 million and $27.5 million for 1997 and
1996, respectively, and a decrease of $8.3 million for 1995.
Notes and contracts payable as a percentage of total capitalization as of
December 31, 1997, was 7.3% as compared with 16.0% as of the prior year end.
The decrease was primarily attributable to an increase in the capital base due
to the issuance of junior subordinated deferrable interest debentures, net
income for the year, as well as a net decrease in debt. The Company maintains
a $75.0 million revolving line of credit which remained unused as of December
31, 1997. 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 1998 from its
principal subsidiary, First American Title Insurance Company, is $52.1
million. Such restrictions have not had, nor are they expected to have, an
impact on the Company's ability to meet its cash obligations.
The Company is evaluating the Year 2000 issue as it relates to its internal
computer systems and third party computer systems with which the Company
interacts. The Company expects to incur internal staff costs as well as
consulting and other expenses related to this issue; these costs will be
expensed as incurred. At this time the Company is unable to reasonably
estimate the total costs for this issue.
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 strong 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.
19
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.
INDEX
PAGE
NO.
----
Report of Independent
Accountants.............. 21
Financial Statements:
Consolidated Balance
Sheets................. 22
Consolidated Statements
of Income.............. 24
Consolidated Statements
of Stockholders'
Equity................. 25
Consolidated Statements
of Cash Flows.......... 26
Notes to Consolidated
Financial Statements... 27
Unaudited Quarterly
Financial Data........... 43
Financial Statement
Schedules:
I. Summary of
Investments--Other than
Investments in Related
Parties................ 44
II. Condensed Financial
Information of
Registrant............. 45
III. Supplementary
Insurance Information.. 49
IV. Reinsurance......... 51
V. Valuation and
Qualifying Accounts.... 52
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.
20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The First American Financial Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of The First
American Financial Corporation and its subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards 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 the opinion expressed above.
Price Waterhouse LLP
Costa Mesa, California
February 9, 1998
21
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
----------------------------
1997 1996
-------------- ------------
ASSETS
------
Cash and Cash Equivalents........................ $ 181,531,000 $173,439,000
-------------- ------------
Accounts and Accrued Income Receivable, less
allowances ($7,602,000 and $5,351,000).......... 128,017,000 89,355,000
-------------- ------------
Investments:
Deposits with savings and loan associations and
banks......................................... 29,029,000 21,674,000
Debt securities................................ 151,503,000 130,576,000
Equity securities.............................. 13,904,000 8,517,000
Other long-term investments.................... 35,047,000 30,414,000
-------------- ------------
229,483,000 191,181,000
-------------- ------------
Loans Receivable................................. 63,378,000 54,256,000
-------------- ------------
Property and Equipment, at cost:
Land........................................... 17,059,000 15,869,000
Buildings...................................... 84,935,000 77,265,000
Furniture and equipment........................ 221,071,000 164,762,000
Less--accumulated depreciation................. (122,688,000) (100,258,000)
-------------- ------------
200,377,000 157,638,000
-------------- ------------
Title Plants and Other Indexes................... 100,626,000 94,226,000
-------------- ------------
Assets Acquired in Connection with Claim
Settlements..................................... 21,119,000 24,270,000
-------------- ------------
Deferred Income Taxes............................ 31,563,000 38,401,000
-------------- ------------
Goodwill and Other Intangibles, less accumulated
amortization ($13,093,000 and $11,116,000)...... 132,361,000 87,189,000
-------------- ------------
Deferred Policy Acquisition Costs................ 25,016,000 24,753,000
-------------- ------------
Other Assets..................................... 54,673,000 45,086,000
-------------- ------------
$1,168,144,000 $979,794,000
============== ============
See Notes to Consolidated Financial Statements
22
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
DECEMBER 31
---------------------------
1997 1996
-------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Demand Deposits.................................... $ 62,475,000 $ 51,321,000
-------------- ------------
Accounts Payable and Accrued Liabilities:
Accounts payable................................. 12,220,000 7,218,000
Salaries and other personnel costs............... 55,973,000 37,270,000
Pension costs.................................... 39,431,000 32,592,000
Other............................................ 60,509,000 53,245,000
-------------- ------------
168,133,000 130,325,000
-------------- ------------
Deferred Revenue................................... 104,124,000 104,133,000
-------------- ------------
Reserve for Known and Incurred But Not Reported
Claims............................................ 250,826,000 245,245,000
-------------- ------------
Income Taxes Payable............................... 3,987,000 2,554,000
-------------- ------------
Notes and Contracts Payable........................ 41,973,000 71,257,000
-------------- ------------
Minority Interests in Consolidated Subsidiaries.... 25,214,000 22,494,000
-------------- ------------
Commitments and Contingencies (Note 12)
Guaranteed Preferred Beneficial Interests in
Company's Junior Subordinated Deferrable Interest
Debentures (Note 13).............................. 100,000,000
--------------
Stockholders' Equity:
Preferred stock, $1 par value
Authorized--500,000 shares
Outstanding--None
Common stock, $1 par value (Note 14)
Authorized--36,000,000 shares
Outstanding--17,374,000 and 17,331,000 shares.. 17,374,000 17,331,000
Additional paid-in capital....................... 43,953,000 43,643,000
Retained earnings................................ 344,645,000 288,754,000
Net unrealized gain on securities................ 5,440,000 2,737,000
-------------- ------------
Total Stockholders' Equity................... 411,412,000 352,465,000
-------------- ------------
$1,168,144,000 $979,794,000
============== ============
See Notes to Consolidated Financial Statements
23
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
Revenues
Operating revenues............. $1,860,205,000 $1,571,168,000 $1,227,185,000
Investment and other income.... 27,256,000 26,398,000 23,031,000
-------------- -------------- --------------
1,887,461,000 1,597,566,000 1,250,216,000
-------------- -------------- --------------
Expenses
Salaries and other personnel
costs......................... 647,750,000 531,250,000 431,984,000
Premiums retained by agents.... 563,137,000 516,593,000 413,444,000
Other operating expenses....... 411,319,000 322,709,000 257,823,000
Provision for title losses and
other claims.................. 90,323,000 86,487,000 90,387,000
Depreciation and amortization.. 38,149,000 27,242,000 20,790,000
Interest....................... 9,994,000 4,796,000 6,242,000
Minority interests............. 3,676,000 2,624,000 2,132,000
-------------- -------------- --------------
1,764,348,000 1,491,701,000 1,222,802,000
-------------- -------------- --------------
Income before premium and income
taxes........................... 123,113,000 105,865,000 27,414,000
Premium taxes.................... 16,904,000 16,676,000 13,627,000
-------------- -------------- --------------
Income before income taxes....... 106,209,000 89,189,000 13,787,000
Income taxes..................... 41,500,000 35,600,000 6,200,000
-------------- -------------- --------------
Net income....................... $ 64,709,000 $ 53,589,000 $ 7,587,000
============== ============== ==============
Net income per common share (Note
1):
Basic.......................... $ 3.73 $ 3.12 $ 0.44
Diluted........................ $ 3.64 $ 3.09 $ 0.44
Weighted average common shares
outstanding (Note 1):
Basic.......................... 17,362,000 17,179,000 17,105,000
Diluted........................ 17,785,000 17,325,000 17,105,000
See Notes to Consolidated Financial Statements
24
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NET
UNREALIZED
ADDITIONAL GAIN (LOSS)
COMMON PAID-IN RETAINED ON
SHARES STOCK CAPITAL EARNINGS SECURITIES
---------- ----------- ----------- ------------ -----------
Balance at December 31,
1994, as previously
reported............... 11,395,000 $11,395,000 $44,013,000 $242,356,000 $(5,654,000)
3-for-2 stock split
(Note 14).............. 5,698,000 5,698,000 (5,698,000)
---------- ----------- ----------- ------------ -----------
Balance at December 31,
1994, as restated...... 17,093,000 17,093,000 38,315,000 242,356,000 (5,654,000)
Net income for 1995..... 7,587,000
Cash dividends on common
shares................. (6,850,000)
Shares issued in
connection with company
acquisitions........... 157,000 157,000 2,555,000
Shares issued in
connection with benefit
and savings plans...... 98,000 98,000 1,055,000
Purchase of Company
shares................. (231,000) (231,000) (3,361,000)
Net unrealized gain on
securities............. 9,647,000
---------- ----------- ----------- ------------ -----------
Balance at December 31,
1995................... 17,117,000 17,117,000 38,564,000 243,093,000 3,993,000
Net income for 1996..... 53,589,000
Cash dividends on common
shares................. (7,928,000)
Shares issued in
connection with company
acquisitions........... 300,000 300,000 7,258,000
Shares issued in
connection with benefit
and savings plans...... 75,000 75,000 1,195,000
Purchase of Company
shares................. (161,000) (161,000) (3,374,000)
Net unrealized loss on
securities............. (1,256,000)
---------- ----------- ----------- ------------ -----------
Balance at December 31,
1996................... 17,331,000 17,331,000 43,643,000 288,754,000 2,737,000
Net income for 1996..... 64,709,000
Cash dividends on common
shares................. (8,818,000)
Shares issued in
connection with company
acquisitions........... 16,000 16,000 532,000
Shares issued in
connection with benefit
and savings plan....... 209,000 209,000 4,759,000
Purchase of Company
shares................. (182,000) (182,000) (4,981,000)
Net unrealized gain on
securities............. 2,703,000
---------- ----------- ----------- ------------ -----------
Balance at December 31,
1997................... 17,374,000 $17,374,000 $43,953,000 $344,645,000 $ 5,440,000
========== =========== =========== ============ ===========
See Notes to Consolidated Financial Statements.
25
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
----------------------------------------
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................... $ 64,709,000 $ 53,589,000 $ 7,587,000
Adjustments to reconcile net income
to cash provided by operating
activities--
Provision for title losses and
other claims..................... 90,323,000 86,487,000 90,387,000
Depreciation and amortization..... 38,149,000 27,242,000 20,790,000
Minority interests in net income.. 3,676,000 2,624,000 2,132,000
Other, net........................ 933,000 (366,000) 207,000
Changes in assets and liabilities
excluding effects of company
acquisitions and noncash
transactions-
Claims paid, including assets
acquired, net of recoveries...... (81,603,000) (78,048,000) (66,639,000)
Net change in income tax accounts. 11,974,000 381,000 10,777,000
Increase in accounts and accrued
income receivable................ (25,704,000) (11,324,000) (22,943,000)
Increase in accounts payable and
accrued liabilities.............. 17,708,000 34,314,000 11,190,000
Decrease in deferred revenue...... (9,000) (426,000) (13,588,000)
Other, net........................ (9,001,000) (1,630,000) (1,418,000)
------------ ------------ ------------
Cash provided by operating
activities..................... 111,155,000 112,843,000 38,482,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash effect of company
acquisitions....................... (49,336,000) (12,097,000) (31,054,000)
Net (increase) decrease in deposits
with banks......................... (7,355,000) (3,037,000) 901,000
Purchases of debt and equity
securities......................... (80,241,000) (68,498,000) (19,513,000)
Proceeds from sales of debt and
equity securities.................. 39,240,000 46,506,000 41,066,000
Proceeds from maturities of debt
securities......................... 18,842,000 31,291,000 19,278,000
Net (increase) decrease in other
long-term investments.............. (1,117,000) (2,575,000) 2,761,000
Net increase in loans receivable.... (9,122,000) (8,122,000) (5,588,000)
Capital expenditures................ (74,486,000) (48,785,000) (29,643,000)
Net proceeds from sale of property
and equipment...................... 1,646,000 3,245,000 757,000
------------ ------------ ------------
Cash used for investing
activities..................... (161,929,000) (62,072,000) (21,035,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits..... 11,154,000 7,903,000 4,723,000
Repayment of debt................... (40,940,000) (19,674,000) (20,060,000)
Proceeds from the issuance of
junior subordinated deferrable
interest debentures................ 100,000,000
Purchase of Company shares.......... (5,163,000) (3,535,000) (3,592,000)
Proceeds from exercise of stock
options............................ 1,653,000
Proceeds from issuance of stock to
employee savings plan.............. 980,000
Cash dividends...................... (8,818,000) (7,928,000) (6,850,000)
------------ ------------ ------------
Cash provided by (used for)
financing activities........... 58,866,000 (23,234,000) (25,779,000)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................... 8,092,000 27,537,000 (8,332,000)
Cash and cash equivalents--Beginning
of year............................. 173,439,000 145,902,000 154,234,000
------------ ------------ ------------
Cash and cash equivalents--End of
year................................ $181,531,000 $173,439,000 $145,902,000
============ ============ ============
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Interest.......................... $ 8,223,000 $ 5,044,000 $ 6,108,000
Premium taxes..................... $ 18,103,000 $ 14,146,000 $ 14,048,000
Income taxes...................... $ 31,292,000 $ 36,682,000 $ 6,580,000
Noncash investing and financing
activities:
Shares issued for benefits plan... $ 2,335,000 $ 1,270,000 $ 1,153,000
Company acquisitions in exchange
for common stock................. $ 548,000 $ 7,558,000 $ 2,712,000
Net unrealized gain (loss) on
securities....................... $ 2,703,000 $ (1,256,000) $ 9,647,000
Liabilities in connection with
company acquisitions............. $ 48,294,000 $ 32,180,000 $ 20,345,000
See Notes to Consolidated Financial Statements
26
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
DESCRIPTION OF THE COMPANY:
The First American Financial Corporation ("the Company"), through its
subsidiaries, is engaged in the business of providing real estate-related
financial and information services to real property buyers and mortgage
lenders. These services include title insurance, tax monitoring, credit
reporting, property data services, flood certification, field inspection
services, appraisal services, mortgage loan servicing systems, mortgage
document preparation and home warranties. The Company also provides
investment, trust and thrift services.
SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The consolidated financial statements include the accounts of The First
American Financial Corporation and all majority-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Certain 1995 and 1996 amounts have been reclassified to conform with the 1997
presentation.
Cash equivalents
The Company considers cash equivalents to be all short-term investments
which 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%.
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 separate component of stockholders' equity.
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. Capitalized development costs for
internal use software include only incremental payments to third parties.
27
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. Appraised
values are used in conjunction with the acquisition of purchased subsidiaries.
The cost 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 20 to 40 years. Other intangibles, which include
customer lists, covenants not to compete and organization costs, are amortized
over their estimated useful lives, ranging from 3 to 20 years.
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.
Deferred policy acquisition costs
Deferred policy acquisition costs are directly related to the procurement of
tax service and home warranty contracts. These costs are deferred and
amortized to expense in the same manner as contract fees are recognized as
revenues.
28
THE FIRST AMERICAN FINANCIAL 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 estimate claims 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 claim losses relating to its home warranty business
based on the average cost per claim as applied to the total of new claims
incurred. The average cost per claim is calculated using the average of the
most recent twelve months of claims experience.
Operating revenues
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.
Revenues from tax service contracts are recognized over the estimated
duration of the contracts as the related servicing costs are estimated to
occur.
Revenues from home warranty contracts are recognized ratably over the 12-
month duration of the contracts.
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.
Premium taxes
Title insurance and home warranty companies, like other types of insurers,
are generally not subject to state income or franchise taxes. However, in lieu
thereof, most states impose a tax based primarily on insurance premiums
written. This premium tax is reported as a separate line item in the
consolidated statements of income in order to provide a more meaningful
disclosure of the taxation of the Company.
Income taxes
Taxes are based on income for financial reporting purposes and include
deferred taxes applicable to temporary differences between the financial
statement carrying amount and the tax basis of certain of the Company's assets
and liabilities.
Earnings per share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS
No. 128 became effective for 1997 and requires the presentation of basic and
diluted earnings per share on the face of the income statement. Basic earnings
per share are computed by dividing net income available to common stockholders
by the weighted-average number of
29
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 only potential dilutive common shares are stock options (see
Note 11). Stock options are reflected in diluted earnings per share by
application of the treasury stock method. All earnings per share amounts
presented have been restated to reflect the adoption of SFAS No. 128.
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 revenue base, 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 STOCKHOLDERS' EQUITY AND INVESTMENTS:
Pursuant to insurance and other regulations of the various states in which
the Company's title insurance subsidiary, First American Title Insurance
Company (FATICO), operates, the amount of dividends, loans and advances
available to the parent company from FATICO is limited, principally for the
protection of policyholders. Under such statutory regulations, the maximum
amount of dividends, loans and advances available to the parent company from
FATICO in 1998 is $52.1 million.
Investments carried at $16.5 million were on deposit with state treasurers
in accordance with statutory requirements for the protection of policyholders
at December 31, 1997.
FATICO maintained statutory capital and surplus of $210.3 million and $208.3
million at December 31, 1997 and 1996, respectively. Statutory net income for
the years ended December 31, 1997, 1996 and 1995 was $35.9 million,
$34.6 million and $11.4 million, respectively.
30
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3.
DEBT AND EQUITY SECURITIES:
The amortized cost and estimated fair value of investments in debt
securities are as follow:
GROSS
UNREALIZED ESTIMATED
AMORTIZED ------------- FAIR
COST GAINS LOSSES VALUE
--------- ------ ------ ---------
(IN THOUSANDS)
December 31, 1997
U.S. Treasury securities.................. $ 38,972 $ 792 $ (46) $ 39,718
Corporate securities...................... 54,884 717 (22) 55,579
Obligations of state and political
subdivisions............................. 38,977 1,092 40,069
Mortgage-backed securities................ 16,186 36 (85) 16,137
-------- ------ ----- --------
$149,019 $2,637 $(153) $151,503
======== ====== ===== ========
December 31, 1996
U.S. Treasury securities.................. $ 42,956 $ 621 $(146) $ 43,431
Corporate securities...................... 37,636 87 (165) 37,558
Obligations of state and political
subdivisions............................. 38,544 290 (23) 38,811
Mortgage-backed securities................ 11,038 37 (299) 10,776
-------- ------ ----- --------
$130,174 $1,035 $(633) $130,576
======== ====== ===== ========
The amortized cost and estimated fair value of debt securities at December
31, 1997, by contractual maturities, are as follows:
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
(IN THOUSANDS
Due in one year or less.................................. $ 17,055 $ 17,220
Due after one year through five years.................... 63,304 63,726
Due after five years through ten years................... 47,268 49,102
Due after ten years...................................... 5,206 5,318
--------- --------
132,833 135,366
Mortgage-backed securities............................... 16,186 16,137
--------- --------
$ 149,019 $151,503
========= ========
The cost and estimated fair value of investments in equity securities are as
follows:
GROSS
UNREALIZED
------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
------- ------ ------ ----------
(IN THOUSANDS)
December 31, 1997
Common stocks:
Corporate securities...................... $ 7,941 $5,856 $(82) $13,715
Other..................................... 78 111 189
------- ------ ---- -------
$ 8,019 $5,967 $(82) $13,904
======= ====== ==== =======
December 31, 1996
Common stocks:
Corporate securities...................... $ 4,614 $3,838 $(82) $ 8,370
Other..................................... 91 56 147
------- ------ ---- -------
$ 4,705 $3,894 $(82) $ 8,517
======= ====== ==== =======
31
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Sales of debt and equity securities resulted in realized gains of $706,000,
$3,257,000 and $1,316,000 and realized losses of $348,000, $646,000 and
$358,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
The fair value of debt and equity securities was estimated using quoted market
prices.
NOTE 4.
LOANS RECEIVABLE:
Loans receivable are summarized as follows:
DECEMBER 31
----------------
1997 1996
------- -------
(IN THOUSANDS)
Real estate-mortgage..................................... $65,384 $55,835
Assigned lease payments.................................. 50 81
Other.................................................... 36 139
------- -------
65,470 56,055
------- -------
Unearned income on lease contracts....................... (18) (33)
Allowance for loan losses................................ (1,185) (1,050)
Participations sold...................................... (481) (140)
Deferred loan fees, net.................................. (408) (576)
------- -------
(2,092) (1,799)
------- -------
$63,378 $54,256
======= =======
Real estate loans are secured by properties located in Southern California.
The average yield on the Company's loan portfolio was 11% for the years ended
December 31, 1997 and 1996. 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.
The fair value of loans receivable was $64.2 million and $54.3 million at
December 31, 1997 and 1996, 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 and inherent risks in the
portfolio.
NOTE 5.
ASSETS ACQUIRED IN CONNECTION WITH CLAIM SETTLEMENT:
DECEMBER 31
---------------
1997 1996
------- -------
(IN THOUSANDS)
Notes receivable........................................... $12,177 $11,083
Real estate................................................ 5,013 7,156
Judgments and other........................................ 3,929 6,031
------- -------
$21,119 $24,270
======= =======
The above amounts are net of valuation reserves of $11.1 million and $10.3
million at December 31, 1997 and 1996, respectively.
32
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of notes receivable was $12.5 million and $10.1 million at
December 31, 1997 and 1996, respectively, and was estimated based on the
discounted value of the future cash flows using the current rates at which
similar loans would be made to borrowers of similar credit quality.
The activity in the valuation reserve is summarized as follows:
DECEMBER 31
----------------
1997 1996
------- -------
(IN THOUSANDS)
Balance at beginning of year............................. $10,278 $11,246
Provision for losses..................................... 4,678 4,948
Dispositions............................................. (3,821) (5,916)
------- -------
Balance at end of year................................... $11,135 $10,278
======= =======
NOTE 6.
DEMAND DEPOSITS:
Passbook and investment certificate accounts are summarized as follows:
DECEMBER 31
---------------
1997 1996
------- -------
(IN THOUSANDS)
Passbook.................................................... $13,209 $13,335
Certificate accounts:
Less than one year........................................ 28,798 23,753
One to five years......................................... 20,468 14,233
------- -------
$62,475 $51,321
======= =======
Annualized interest rates:
Passbook.................................................. 5% 5%
Certificate accounts...................................... 6%-8% 5%-8%
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 $49.4 million and $38.0 million at December 31, 1997
and 1996, respectively, and was estimated based on the discounted value of the
future cash flows using a discount rate approximating current market for
similar liabilities.
33
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
YEAR ENDED DECEMBER 31
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Balance at beginning of year................... $245,245 $238,161 $206,743
-------- -------- --------
Provision related to:
Current year................................. 85,645 81,539 82,632
Prior years.................................. 4,678 4,948 7,755
-------- -------- --------
Total provision................................ 90,323 86,487 90,387
-------- -------- --------
Payments related to:
Current year................................. 39,934 29,680 25,039
Prior year................................... 39,745 43,967 40,934
-------- -------- --------
Total payments................................. 79,679 73,647 65,973
-------- -------- --------
Other.......................................... (5,063) (5,756) 7,004
-------- -------- --------
Balance at end of year......................... $250,826 $245,245 $238,161
======== ======== ========
"Other" primarily represents reclassifications to the reserve for assets
acquired in connection with claim settlements. Included in 1995 is $10.0
million in purchase accounting adjustments. Claims activity associated with
reinsurance is not material and, therefore, not presented separately.
NOTE 8.
NOTES AND CONTRACTS PAYABLE:
DECEMBER 31
---------------
1997 1996
------- -------
(IN THOUSANDS)
Secured notes payable pursuant to amended credit agreement.. $ 5,320 $37,250
Trust deed notes with maturities through 2017, secured by
land and buildings with a net book value of $11,739 average
rate of 8 1/2%............................................. 7,359 8,630
Other notes and contracts payable with maturities through
2005,
average rate of 7 1/2%..................................... 29,294 25,377
------- -------
$41,973 $71,257
======= =======
In April 1997, the Company paid off the variable rate indebtedness portion
of the amended credit agreement with proceeds received from its junior
subordinated interest debentures (see Note 13).
At December 31, 1997, the Company's remaining borrowings under its amended
bank credit agreement consisted of fixed rate indebtedness of $5.3 million,
maturing in April 1999 and bearing interest at 9.38% per annum.
34
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During July 1997, the Company amended the credit agreement to relax and/or
eliminate certain restrictive covenants and increase the revolving line of
credit to $75.0 million which was unused as of December 31, 1997. In November
1997, the Company further amended the credit agreement to issue a letter of
credit in the amount of $5.7 million to secure its fixed rate obligation and
release as security the capital stock of its wholly owned subsidiaries.
Pursuant to the terms of the credit agreement, the Company is required to
maintain minimum levels of capital and earnings and meet predetermined debt to
capitalization ratios.
The aggregate annual maturities for notes and contracts payable in each of
the five years after December 31, 1997, are as follows (in thousands):
1998............................................................. $13,503
1999............................................................. $11,813
2000............................................................. $ 5,599
2001............................................................. $ 4,381
2002............................................................. $ 1,723
The fair value of notes and contracts payable was $44.3 million and $70.6
million at December 31, 1997 and 1996, 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% and 7% at December 31, 1997 and 1996, respectively.
NOTE 9.
INCOME TAXES:
Income taxes are summarized as follows:
1997 1996 1995
------- ------- ------
(IN THOUSANDS)
Current:
Federal........................................... $27,234 $28,535 $3,442
State............................................. 3,925 6,038 1,810
------- ------- ------
31,159 34,573 5,252
------- ------- ------
Deferred:
Federal........................................... 9,747 232 70
State............................................. 594 795 878
------- ------- ------
10,341 1,027 948
------- ------- ------
$41,500 $35,600 $6,200
======= ======= ======
35
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income taxes differ from the amounts computed by applying the federal income
tax rate of 35%. A reconciliation of this difference is as follows:
1997 1996 1995
------- ------- ------
(IN THOUSANDS)
Taxes calculated at federal rate................ $37,173 $31,216 $4,825
Tax exempt interest income...................... (651) (669) (719)
Tax effect of minority interests................ 1,286 918 746
State taxes, net of federal benefit............. 3,706 4,442 2,456
Exclusion of certain meals and entertainment
expenses....................................... 2,889 2,429 2,391
Change in tax reserves.......................... (2,301)
Other items, net................................ (2,903) (2,736) (1,198)
------- ------- ------
$41,500 $35,600 $6,200
======= ======= ======
The primary components of temporary differences which give rise to the
Company's net deferred tax asset are as follows:
DECEMBER 31
---------------
1997 1996
------- -------
(IN THOUSANDS)
Deferred tax assets:
Deferred revenue.......................................... $23,066 $25,709
Employee benefits......................................... 11,021 9,811
Title claims and related salvage.......................... 3,183 11,934
Bad debt reserves......................................... 4,952 3,382
Acquisition reserve....................................... 3,970 2,254
State taxes............................................... 346 441
Other..................................................... 7,009 4,261
------- -------
Total deferred tax assets............................... 53,547 57,792
======= =======
Deferred tax liabilities:
Depreciable and amortizable assets........................ 15,116 13,611
Unrealized gain on securities............................. 2,929 1,475
Sale leaseback............................................ 1,327 1,462
Other..................................................... 2,612 2,843
------- -------
Total deferred tax liabilities.......................... 21,984 19,391
------- -------
Net deferred tax asset...................................... $31,563 $38,401
======= =======
36
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10.
EMPLOYEE BENEFIT PLANS:
The Company has pension and other retirement benefit plans covering
substantially all employees. The Company's principal pension plan, amended to
be noncontributory effective January 1, 1995, is a 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.
Net pension cost for the Company's pension and other retirement benefit
plans includes the following components:
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
Service cost--benefits
earned during the year. $ 10,550 $ 9,186 $ 7,798
Interest cost on
projected benefit
obligation............. 11,178 9,764 8,741
Actual gain on plan
assets................. (20,555) (10,517) (9,636)
Net amortization and
deferral............... 14,531 5,810 4,674
-------- -------- -------
Net periodic pension
cost.................... $ 15,704 $ 14,243 $11,577
======== ======== =======
The following table sets forth the plans' status at:
DECEMBER 31,
--------------------------------------------
(IN THOUSANDS)
1997 1996
---------------------- ---------------------
UNFUNDED UNFUNDED
FUNDED SUPPLEMENTAL FUNDED SUPPLEMENTAL
PENSION BENEFIT PENSION BENEFIT
PLANS PLANS PLANS PLANS
-------- ------------ ------- ------------
Present value of benefit
obligation:
Vested benefits................. $ 97,463 $19,766 $74,536 $17,137
Non-vested benefits............. 8,619 5,303 7,479 5,068
-------- ------- ------- -------
Accumulated benefit obligation.... 106,082 25,069 82,015 22,205
Value of future pay increases..... 35,607 7,065 29,663 7,046
-------- ------- ------- -------
Total projected benefit
obligation....................... 141,689 32,134 111,678 29,251
Plan assets at fair value......... (109,357) (87,096)
-------- ------- ------- -------
Plan assets less than projected
benefits obligation.............. 32,332 32,134 24,582 29,251
Unrecognized net (asset)
obligation at transition......... 255 (1,441) 307 (1,801)
Prior service cost not yet
recognized....................... 457 (1,614) 503 (1,802)
Unrecognized net loss............. (18,682) (6,280) (15,005) (5,419)
Adjustment to recognize minimum
liability........................ 2,270 1,976
-------- ------- ------- -------
Accrued pension costs............. $ 14,362 $25,069 $10,387 $22,205
======== ======= ======= =======
The rate of increase in future compensation levels for the plans of 4 1/2%
and the weighted average discount rates of 7 1/4% and 7 3/4% were used in
determining the actuarial present value of the projected benefit obligation at
December 31, 1997 and 1996, respectively. The majority of pension plan assets
are invested in U.S. government securities, time deposits and common stocks
with projected long-term rates of return of 9%.
37
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's principal profit sharing plan was amended effective January 1,
1995, to discontinue future contributions. The plans holds 2,192,000 and
2,391,000 shares of the Company's common stock, representing 13% and 14% of
the total shares outstanding at December 31, 1997, and 1996 respectively.
The Company also has a Stock Bonus Plan for key employees pursuant to which
86,000, 75,000 and 98,000 common shares were awarded for 1997, 1996 and 1995,
respectively, resulting in a charge to operations of $2.2 million, $1.3
million and $1.2 million, respectively. The Plan, as amended December 9, 1992,
provides that a total of up to 450,000 common shares may be awarded in any one
year.
Effective January 1, 1995, the Company adopted The First American Financial
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.
NOTE 11.
STOCK OPTION PLANS:
On April 24, 1996, the Company implemented The First American Financial
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 1,875,000. Currently outstanding options become exercisable one to
five years, and expire 10 years, from the grant date. On April 24, 1997, the
Company implemented The First American Financial 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 600,000 and the maximum number of shares that may
be purchased pursuant to options granted shall not exceed 2,250 shares during
any 12-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, in accordance with 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 indicated below:
1997 1996
------- -------
(IN THOUSANDS,
EXCEPT PER
SHARE AMOUNTS)
Net income:
As reported................................................ $64,709 $53,589
Pro forma.................................................. $63,909 $53,070
Earnings per share:
As reported
Basic.................................................... $ 3.73 $ 3.12
Diluted.................................................. $ 3.64 $ 3.09
Pro forma
Basic.................................................... $ 3.68 $ 3.09
Diluted.................................................. $ 3.59 $ 3.06
38
THE FIRST AMERICAN FINANCIAL 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 method with the following weighted-average
assumptions used for grants in 1997 and 1996, respectively: dividend yield of
1.2% and 1.9%; expected volatility of 38.1% and 41.0%; risk-free interest rate
of 6.3% and 6.5%; and expected life of six years. The weighted-average fair
value of options granted during 1997 and 1996 was $12.79 and $6.57,
respectively.
Transactions involving stock options are summarized as follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OUTSTANDING PRICE
----------- --------
(IN THOUSANDS,
EXCEPT WEIGHTED-
AVERAGE EXERCISE
PRICE)
Balance at December 31, 1995............................
Granted during 1996..................................... 1,005 $17.08
----- ------
Balance at December 31, 1996............................ 1,005 $17.08
Granted during 1997..................................... 69 $31.50
Exercised during 1997................................... 97 $17.08
Forfeited during 1997................................... 44 $17.08
----- ------
Balance at December 31, 1997............................ 933 $18.15
===== ======
At December 31, 1997, the range of exercise prices was $17.08--$39.83 and
the weighted-average remaining contractual life of outstanding options was six
years. The number of options exercisable was 104,250 and the weighted-average
exercise price of those options was $17.08. There were no options exercisable
at December 31, 1996.
NOTE 12.
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
1994, the Company entered into a sale-leaseback agreement with regard to
certain furniture and equipment. Under the agreement, the Company agreed to
lease the equipment for four years with minimum annual lease payments of $8.3
million.
Future minimum rental payments under operating leases that have initial or
remaining noncancelable lease terms in excess of one year as of December 31,
1997, are as follows (in thousands):
1998............................................................ $ 71,522
1999............................................................ 53,280
2000............................................................ 31,836
2001............................................................ 21,535
2002............................................................ 16,889
Later Years..................................................... 43,015
--------
$238,077
========
39
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total rental expense for all operating leases and month-to-month rentals was
$78.3 million, $63.9 million and $58.6 million for 1997, 1996 and 1995,
respectively.
The Company is involved in various 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 materially adverse effect on its financial condition or results of
operations.
NOTE 13.
JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES:
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 I. In connection with the subsidiary's issuance of the
preferred securities, the Company issued to the subsidiary trust 8.5%
subordinated interest notes, due 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 statement.
NOTE 14.
STOCKHOLDERS' EQUITY:
On October 23, 1997, the Company adopted a Shareholder 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% 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% or more of the common shares then outstanding. The Company may
redeem the Rights at $0.001 per Right at any time prior to the occurrence of
one of these events. All Rights expire on October 23, 2007.
Each Right will entitle its holder to purchase, at the Right's then-current
exercise price, preferred share fractions (or other securities of the Company)
having a value of twice the Right's exercise price. This amounts to the right
to buy preferred share fractions of the Company at half price. Rights owned by
the party triggering the exercise of Rights will be void and therefore will
not be exercisable.
In addition, if after any person has become a 15%-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% 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.
40
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On January 15, 1998, the Company distributed a 3-for-2 common stock split in
the form of a 50% stock dividend. This resulted in an increase of 5,791,492
common shares outstanding with the par value of these additional shares being
capitalized by a transfer from additional paid-in capital to the common stock
account. This stock split has been reflected in the consolidated statements of
stockholders' equity on a retroactive basis as of December 31, 1994. In order
to effect the stock split, the Company increased its authorized shares from
24,000,000 to 36,000,000. All references in the consolidated financial
statements with regards to common stock, additional paid-in capital, number of
shares of common stock and per share amounts have been restated to reflect the
stock split.
NOTE 15.
SUBSEQUENT EVENTS:
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., with Experian's Real Estate Solutions division
("RES"). The LLC is 80% owned by the Company and 20% owned by Experian. RES is
a supplier of core real estate data, providing, among other things, property
valuation information, title insurance, tax information and imaged title
documents.
This business combination has been accounted for under the purchase method
of accounting and, accordingly, the purchase price will be allocated to the
assets acquired and liabilities assumed based on the estimated fair values at
January 1, 1998. In addition, as a result of the transaction, the Company will
recognize a pretax gain of $33.0 million in the first quarter 1998. The
operating results of the LLC will be included in the Company's consolidated
financial statements commencing January 1, 1998.
NOTE 16.
SEGMENT FINANCIAL INFORMATION:
The Company's operations include four reportable segments: title insurance,
real estate information, home warranty and trust and banking. The title
insurance segment issues policies which are insured statements of the
condition of title to real property. The real estate information segment
provides to lender customers the status of tax payments on real property
securing their loans, credit information derived from at least two credit
bureau sources, flood zone determination reports which 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 home warranty segment issues
one-year warranties which protect homeowners against defects in home fixtures.
The trust and banking segment provides full-service trust and depository
services, accepts deposits and makes real estate secured loans.
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 abroad in Australia, the Bahama Islands, Canada,
Guam, Mexico, Puerto Rico, the U.S. Virgin Islands and the United Kingdom.
Home warranty services are available in Arizona, California, Nevada, North
Carolina, South Carolina, Texas, Utah and Washington. The trust, banking and
thrift businesses operate in Southern California.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement is effective for 1998
and requires certain information about a company's operating segments and
products and services. The Company believes that the adoption of SFAS No. 131
will not materially alter its segment disclosures and related information.
41
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Selected financial information about the Company's operations by segment for
each of the past three years is as follows:
DEPRECIATION
PRETAX AND CAPITAL
REVENUES PROFIT (LOSS) ASSETS AMORTIZATION EXPENDITURES
----------- ------------- ---------- ------------ ------------
(IN THOUSANDS)
1997
Title Insurance......... $ 1,482,993 $ 95,636 $ 656,622 $23,501 $39,190
Real Estate Information. 331,152 45,317 312,666 12,369 33,602
Home Warranty........... 51,005 9,741 81,444 424 768
Trust and Banking....... 20,007 4,062 83,423 604 676
Corporate............... 2,304 (31,643) 33,989 1,251 250
----------- -------- ---------- ------- -------
$ 1,887,461 $123,113 $1,168,144 $38,149 $74,486
=========== ======== ========== ======= =======
1996
Title Insurance......... $ 1,288,947 $ 66,056 $ 584,800 $17,236 $30,082
Real Estate Information. 247,810 52,581 225,527 8,281 17,060
Home Warranty........... 41,927 8,178 67,622 296 277
Trust and Banking....... 17,839 3,728 72,473 438 1,366
Corporate............... 1,043 (24,678) 29,372 991
----------- -------- ---------- ------- -------
$ 1,597,566 $105,865 $ 979,794 $27,242 $48,785
=========== ======== ========== ======= =======
1995
Title Insurance......... $ 1,052,823 $ 17,540 $ 532,697 $13,356 $20,321
Real Estate Information. 147,004 19,690 182,499 6,205 7,984
Home Warranty........... 35,531 6,828 56,637 289 149
Trust and Banking....... 14,110 3,304 63,416 331 1,189
Corporate............... 748 (19,948) 38,529 609
----------- -------- ---------- ------- -------
$ 1,250,216 $ 27,414 $ 873,778 $20,790 $29,643
=========== ======== ========== ======= =======
Corporate consists primarily of unallocated interest expense, minority
interest, equity in earnings of affiliated companies and personnel and other
operating expenses associated with the Company's home office facilities.
42
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
UNAUDITED QUARTERLY FINANCIAL DATA
QUARTER ENDED
--------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, 1997
Revenues.......................... $382,877 $450,374 $501,848 $552,362
======== ======== ======== ========
Income before income taxes........ $ 4,766 $ 30,216 $ 33,572 $ 37,655
======== ======== ======== ========
Net income........................ $ 2,866 $ 18,516 $ 20,572 $ 22,755
======== ======== ======== ========
Net income per share (Note A):
Basic........................... $ .17 $ 1.06 $ 1.19 $ 1.31
======== ======== ======== ========
Diluted......................... $ .16 $ 1.05 $ 1.16 $ 1.27
======== ======== ======== ========
Year Ended December 31, 1996
Revenues.......................... $347,376 $413,374 $411,304 $425,512
======== ======== ======== ========
Income before income taxes........ $ 14,982 $ 32,827 $ 23,569 $ 17,811
======== ======== ======== ========
Net income........................ $ 8,582 $ 19,427 $ 13,769 $ 11,811
======== ======== ======== ========
Net income per share (Note A):
Basic........................... $ .50 $ 1.13 $ 0.80 $ 0.69
======== ======== ======== ========
Diluted......................... $ .50 $ 1.13 $ 0.79 $ 0.67
======== ======== ======== ========
The Company's primary business 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 in Part 1, Item 7 of this
report for further discussion of the Company's results of operations.
Note A--After adjustment for 3-for-2 stock split effected January 15, 1998,
and restatement for the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings per Share."
43
SCHEDULE I
1 OF 1
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
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...................... $ 29,029,000 $ 29,029,000 $ 29,029,000
------------ ------------ ------------
Debt securities:
Registrant--None
Consolidated
U.S. Treasury securities........ $ 38,972,000 $ 39,718,000 $ 39,718,000
Corporate securities............ 54,884,000 55,579,000 55,579,000
Obligations of states and
political subdivisions......... 38,977,000 40,069,000 40,069,000
Mortgage-backed securities...... 16,186,000 16,137,000 16,137,000
------------ ------------ ------------
$149,019,000 $151,503,000 $151,503,000
------------ ------------ ------------
Equity securities:
Registrant--None
Consolidated...................... $ 8,019,000 $ 13,904,000 $ 13,904,000
------------ ------------ ------------
Other long-term investments:
Registrant--None
Consolidated...................... $ 35,047,000 $ 35,047,000 $ 35,047,000
------------ ------------ ------------
Total Investments:
Registrant........................ $ 50,000 $ 50,000 $ 50,000
============ ============ ============
Consolidated...................... $221,114,000 $229,483,000 $229,483,000
============ ============ ============
44
SCHEDULE II
1 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY BALANCE SHEETS
DECEMBER 31
--------------------------
1997 1996
------------ ------------
ASSETS
------
Cash and cash equivalents.......................... $ 9,657,000 $ 8,983,000
------------ ------------
Stock of subsidiaries, at equity................... 624,690,000 532,128,000
------------ ------------
Deposits with savings and loan associations and
banks............................................. 50,000 0,000
------------ ------------
Property and equipment, at cost:
Land............................................. 425,000 425,000
Buildings and building improvements.............. 5,006,000 5,006,000
Less--accumulated depreciation................... (4,628,000) (4,442,000)
------------ ------------
803,000 989,000
------------ ------------
Other assets....................................... 5,217,000 4,471,000
------------ ------------
$640,417,000 546,621,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Dividends payable.................................. $ 2,376,000 $ 2,118,000
------------ ------------
Accrued expenses................................... 1,798,000 322,000
------------ ------------
Payable to subsidiaries............................ 114,143,000 146,268,000
------------ ------------
Notes and contracts payable........................ 10,688,000 45,448,000
------------ ------------
Guaranteed preferred beneficial interests in
Company's junior subordinated deferrable interest
debentures........................................ 100,000,000
------------
Stockholders' equity:
Preferred stock, $1 par value; Authorized--
500,000 shares;
Outstanding--None
Common stock, $1 par value; Authorized--
36,000,000 shares;
Outstanding--17,374,000 and 17,331,000 shares... 17,374,000 17,331,000
Additional paid-in capital....................... 43,953,000 43,643,000
Retained earnings................................ 344,645,000 288,754,000
Net unrealized gain on securities................ 5,440,000 2,737,000
------------ ------------
Total stockholders' equity..................... 411,412,000 352,465,000
------------ ------------
$640,417,000 $546,621,000
============ ============
See Notes to Parent Company Financial Statements
45
SCHEDULE II
2 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
-----------------------------------
1997 1996 1995
----------- ----------- -----------
Revenues:
Interest and other income................. $ 501,000 $ 891,000 $ 837,000
Equity in earnings of subsidiaries........ 94,479,000 75,696,000 25,803,000
----------- ----------- -----------
94,980,000 76,587,000 26,640,000
----------- ----------- -----------
Expenses:
Interest.................................. 7,450,000 3,635,000 5,040,000
Depreciation.............................. 186,000 186,000 185,000
Other administrative expenses............. 22,635,000 19,177,000 13,828,000
----------- ----------- -----------
30,271,000 22,998,000 19,053,000
----------- ----------- -----------
Net income.................................. $64,709,000 $53,589,000 $ 7,587,000
=========== =========== ===========
Net income per share:
Basic..................................... $ 3.73 $ 3.12 $ 0.44
=========== =========== ===========
Diluted................................... $ 3.64 $ 3.09 $ 0.44
=========== =========== ===========
Weighted Average Shares:
Basic..................................... 17,362,000 17,179,000 17,105,000
=========== =========== ===========
Diluted................................... 17,785,000 17,325,000 17,105,000
=========== =========== ===========
See Notes to Parent Company Financial Statements
46
SCHEDULE II
3 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
Net income......................... $ 64,709,000 $ 53,589,000 $ 7,587,000
Adjustments to reconcile net income
to cash (used for) provided by
operating activities--
Depreciation..................... 186,000 186,000 185,000
Expense relating to stock plans.. 2,335,000 1,270,000 1,153,000
Equity in earnings of
subsidiaries, net of dividends.. (76,808,000) (63,697,000) (25,802,000)
Other............................ (225,000)
Changes in assets and liabilities,
excluding effects of company
acquisitions and noncash
transactions--
(Increase) decrease in other
assets.......................... (746,000) 453,000 503,000
Increase in dividends payable and
accrued expenses................ 1,734,000 174,000 7,000
(Decrease) increase in
intercompany accounts........... (23,286,000) 23,369,000 40,509,000
------------ ------------ ------------
Cash (used for) provided by
operating activities.......... (31,876,000) 15,344,000 23,917,000
------------ ------------ ------------
Cash flows from investing activities:
Capital contribution to subsidiary. (21,342,000)
Net increase in deposits with
banks............................. (50,000)
Sales of equity securities......... 1,933,000
------------ ------------
Cash (used for) provided by
investing activities.......... (21,342,000) 1,883,000
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of junior
subordinated debentures........... 100,000,000
Proceeds from exercise of stock
options........................... 1,653,000
Proceeds from issuance of stock to
employees savings plan............ 980,000
Repayment of debt.................. (34,760,000) (14,313,000) (11,121,000)
Purchase of Company shares......... (5,163,000) (3,535,000) (3,592,000)
Cash dividends..................... (8,818,000) (7,928,000) (6,850,000)
------------ ------------ ------------
Cash provided by (used for)
financing activities.......... 53,892,000 (25,776,000) (21,563,000)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................... 674,000 (10,432,000) 4,237,000
Cash and cash equivalents--
Beginning of year.................. 8,983,000 19,415,000 15,178,000
------------ ------------ ------------
End of year........................ $ 9,657,000 $ 8,983,000 $ 19,415,000
============ ============ ============
Supplementary information:
Cash paid during the year for
interest.......................... $ 5,973,000 $ 3,835,000 $ 4,986,000
Noncash investing and financing
activities:
Shares issued for benefits plan.... $ 2,185,000 $ 1,270,000 $ 1,153,000
Company acquisitions in exchange
for common stock.................. $ 548,000 $ 7,558,000 $ 2,712,000
See Notes to Parent Company Financial Statements
47
SCHEDULE II
4 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
NOTE A
The composition of Notes and Contracts Payable consists of:
DECEMBER 31,
-----------------------
1997 1996
----------- -----------
Secured notes payable to financial institutions.... $ 5,320,000 $37,250,000
Trust deed notes with maturities through 2002,
average rate of 10%. Secured by land and buildings
with an aggregate net book
value of $872,000................................. 623,000 759,000
Other notes and contracts payable with maturities
through 2000,
average rate of 7%................................ 4,745,000 7,439,000
----------- -----------
$10,688,000 $45,448,000
=========== ===========
The aggregate annual maturities for notes and contracts payable in each of
the five years after December 31, 1997, are $5,711,000, $4,180,000, $582,000,
$136,000, and $79,000, respectively.
NOTE B
The parent company files a consolidated tax return with its subsidiary
companies in which it owns 80% or more of the outstanding stock. The current
and cumulative tax effects relating to the operations of the parent company
are reflected in the accounts of First American Title Insurance Company.
48
SCHEDULE III
1 OF 2
THE FIRST AMERICAN FINANCIAL 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
- ------- ----------------- ------------ ------------
1997
Title Insurance..................... $238,141,000 $ 2,151,000
Real Estate Information............. $19,700,000 9,238,000 75,391,000
Home Warranty....................... 5,316,000 3,357,000 26,582,000
Trust and Banking................... 90,000
Corporate
----------- ------------ ------------
Total............................. $25,016,000 $250,826,000 $104,124,000
=========== ============ ============
1996
Title Insurance..................... $237,596,000 $ 4,396,000
Real Estate Information............. $20,889,000 4,880,000 79,401,000
Home Warranty....................... 3,864,000 2,769,000 20,336,000
Trust and Banking
Corporate...........................
----------- ------------ ------------
Total............................. $24,753,000 $245,245,000 $104,133,000
=========== ============ ============
49
SCHEDULE III
2 OF 2
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INSURANCE INFORMATION
INCOME STATEMENT CAPTIONS
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J
-------- -------------- ----------- ----------- ------------ ------------
AMORTIZATION
OF DEFERRED
NET POLICY OTHER
OPERATING INVESTMENT LOSS ACQUISITION OPERATING
SEGMENT REVENUES INCOME PROVISION COSTS EXPENSES
------- -------------- ----------- ----------- ------------ ------------
1997
Title Insurance......... $1,461,967,000 $21,026,000 $52,924,000 $247,579,000
Real Estate Information. 331,372,000 (220,000) 9,874,000 $7,532,000 135,453,000
Home Warranty........... 46,859,000 4,146,000 27,338,000 562,000 1,509,000
Trust and Banking....... 20,007,000 187,000 8,093,000
Corporate............... 2,304,000 10,591,000
-------------- ----------- ----------- ---------- ------------
Total................. $1,860,205,000 $27,256,000 $90,323,000 $8,094,000 $403,225,000
============== =========== =========== ========== ============
1996
Title Insurance......... $1,268,233,000 $20,714,000 $58,909,000 $216,091,000
Real Estate Information. 246,745,000 1,065,000 4,453,000 $7,113,000 84,136,000
Home Warranty........... 38,351,000 3,576,000 23,055,000 665,000 658,000
Trust and Banking....... 17,839,000 70,000 6,982,000
Corporate............... 1,043,000 7,064,000
-------------- ----------- ----------- ---------- ------------
Total................. $1,571,168,000 $26,398,000 $86,487,000 $7,778,000 $314,931,000
============== =========== =========== ========== ============
1995
Title Insurance......... $1,034,789,000 $18,034,000 $68,338,000 $186,876,000
Real Estate Information. 145,755,000 1,249,000 3,166,000 $5,891,000 53,636,000
Home Warranty........... 32,531,000 3,000,000 18,857,000 1,748,000 95,000
Trust and Banking....... 14,110,000 26,000 5,650,000
Corporate............... 748,000 3,927,000
-------------- ----------- ----------- ---------- ------------
Total................. $1,227,185,000 $23,031,000 $90,387,000 $7,639,000 $250,184,000
============== =========== =========== ========== ============
50
SCHEDULE IV
1 OF 1
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
REINSURANCE
TITLE
INSURANCE
OPERATING TITLE PERCENTAGE
REVENUES CEDED TO ASSUMED INSURANCE OF AMOUNT
BEFORE OTHER FROM OTHER OPERATING ASSUMED TO
SEGMENT REINSURANCE COMPANIES COMPANIES REVENUES OPERATING REVENUES
- ------- -------------- ---------- ---------- -------------- ------------------
1997.... $1,461,551,000 $3,609,000 $4,025,000 $1,461,967,000 0.3%
============== ========== ========== ============== ===
1996.... $1,267,309,000 $2,094,000 $3,018,000 $1,268,233,000 0.2%
============== ========== ========== ============== ===
1995.... $1,034,435,000 $2,840,000 $3,194,000 $1,034,789,000 0.3%
============== ========== ========== ============== ===
51
SCHEDULE V
1 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1997
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ ----------------------- ----------- ------------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING OF COSTS AND OTHER FROM END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS RESERVE PERIOD
----------- ------------ ----------- ----------- ----------- ------------
Reserve deducted from
accounts receivable:
Registrant--None
Consolidated.......... $ 5,351,000 $ 4,510,000 $ 2,259,000(A) $ 7,602,000
============ =========== =========== ============
Reserve for title losses
and other claims:
Registrant--None
Consolidated.......... $245,245,000 $90,323,000 $(4,633,000)(B) $80,109,000(C) $250,826,000
============ =========== =========== =========== ============
Reserve deducted from
loans receivable:
Registrant--None
Consolidated.......... $ 1,050,000 $ 243,000 $ 108,000(A) $ 1,185,000
============ =========== =========== ============
Reserve deducted from
assets acquired in
connection with claim
settlements:
Registrant--None
Consolidated.......... $ 10,278,000 $ 4,678,000 $ 3,821,000(D) $ 11,135,000
============ =========== =========== ============
Reserve deducted from
deferred income taxes:
Registrant--None
Consolidated.......... $ 438,000 $ 438,000(E)
============ ===========
Reserve deducted from
other assets:
Registrant--None
Consolidated.......... $ 1,387,000 $ 640,000 $ 220,000(D) $ 1,807,000
============ =========== =========== ============
- --------
Note A--Amount represents accounts written off, net of recoveries.
Note B--Amount represents $45,000 in purchase accounting adjustments, net of a
reclassification of $4,678,000 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.
Note E--Amount represents elimination of reserve in connection with the
expiration of the related temporary differences.
52
SCHEDULE V
2 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1996
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......... $ 5,970,000 $ 4,386,000 $ 5,005,000(A) $ 5,351,000
============ =========== ============= ============
Reserve for title losses
and other claims:
Registrant--None
Consolidated......... $238,161,000 $86,487,000 $(4,915,000)(B) $74,488,000(C) $245,245,000
============ =========== =========== ============= ============
Reserve deducted from
loans receivable:
Registrant--None
Consolidated......... $ 1,344,000 $ 433,000 $ 727,000(A) $ 1,050,000
============ =========== ============= ============
Reserve deducted from
other investments:
Registrant--None
Consolidated......... $ 353,000 $ 353,000(D)
============ =============
Reserve deducted from
assets acquired in
connection with claim
settlements:
Registrant--None
Consolidated......... $ 11,246,000 $ 4,948,000 $ 5,916,000(D) $ 10,278,000
============ =========== ============= ============
Reserve deducted from
deferred income taxes:
Registrant--None
Consolidated......... $ 856,000 $ 418,000(E) $ 438,000
============ ============= ============
Reserve deducted from
other assets:
Registrant--None
Consolidated......... $ 1,420,000 $ 2,000 $ 35,000(D) $ 1,387,000
============ =========== ============= ============
- --------
Note A--Amount represents accounts written off, net of recoveries.
Note B--Amount represents $33,000 in purchase accounting adjustments, net of a
reclassification of $4,948,000 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.
Note E--Amount represents elimination of reserve in connection with the
expiration of the related temporary differences.
53
SCHEDULE V
3 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ ---------------------- ----------- ------------
ADDITIONS
----------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND OTHER FROM END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVE PERIOD
----------- ------------ ----------- ---------- ----------- ------------
Reserve deducted from
accounts receivable:
Registrant--None
Consolidated......... $ 4,022,000 $ 2,965,000 $ 1,017,000(A) $ 5,970,000
============ =========== =========== ============
Reserve for title losses
and other claims:
Registrant--None
Consolidated......... $206,743,000 $90,387,000 $7,004,000(B) $65,973,000(C) $238,161,000
============ =========== ========== =========== ============
Reserve deducted from
loans receivable:
Registrant--None
Consolidated......... $ 950,000 $ 562,000 $ 168,000(A) $ 1,344,000
============ =========== =========== ============
Reserve deducted from
other investments:
Registrant--None
Consolidated $ 353,000 $ 353,000
============ ============
Reserve deducted from
assets acquired in
connection with claim
settlements:
Registrant--None
Consolidated......... $ 12,354,000 $3,019,000 $ 4,127,000(D) $ 11,246,000
============ =========== ========== =========== ============
Reserve deducted from
deferred income taxes:
Registrant--None
Consolidated......... $ 2,880,000 $ 2,024,000(E) $ 856,000
============ =========== ============
Reserve deducted from
other assets:
Registrant--None
Consolidated......... $ 1,342,000 $ 84,000 $ 6,000 $ 1,420,000
============ =========== =========== ============
- --------
Note A--Amount represents accounts written off, net of recoveries.
Note B--Amount represents $10,023,000 in purchase accounting adjustments, net
of a reclassification of $3,019,000 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.
Note E--Amount represents elimination of reserve in connection with the
expiration of the related temporary differences.
54
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 "Security Ownership of Certain Beneficial Owners,"
"Election of Directors," "Security Ownership of Management," "Executive
Compensation," "Report of the Compensation Committee on Executive
Compensation," "Comparative Cumulative Total Return to Shareholders,"
"Executive Officers" and "Compliance With Section 16(a) of the Securities
Exchange Act of 1934" 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.
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 20
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 (*).)
(3)(a) Restated Articles of Incorporation of The First American Financial
Corporation dated January 1, 1998.
(4)(a) 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.
(4)(b) 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.
(4)(c) 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)(d) Junior Subordinated Indenture, dated as of April 22, 1997,
incorporated by reference herein from Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997.
(4)(e) Form of New 8.50% Junior Subordinated Deferrable Interest Debenture,
incorporated by reference herein from Exhibit 4.2 of Registration
Statement on Form S-4 dated September 18, 1997.
(4)(f) Certificate of Trust of First American Capital Trust I, incorporated
by reference herein from Exhibit 4.3 of Registration Statement on
Form S-4 dated September 18, 1997.
(4)(g) Declaration of Trust of First American Capital Trust I dated as of
April 11, 1997, incorporated by reference herein from Exhibit 4.4 of
Registration Statement on Form S-4 dated September 18, 1997.
55
(4)(h) 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)(i) 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 on Form S-4 dated September 18, 1997.
(4)(j) Form of New Guarantee Agreement, incorporated by reference herein
from Exhibit 4.7 of Registration Statement on Form S-4 dated
September 18, 1997.
*(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) 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)(e) 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)(f) 1996 Stock Option Plan, incorporated by reference herein from
Exhibit 4 of Registration Statement on Form S-8 dated December 30,
1996.
*(10)(g) 1997 Directors' Stock Plan, incorporated by reference herein from
Exhibit 4.1 of Registration Statement on Form S-8 dated December
11, 1997.
(10)(h) 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.
(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 7, 1997, reporting that
the Company has adopted a shareholder rights plan and, in connection
therewith, declared a dividend of Rights to Purchase $1.00 par value Series
A Junior Participating Preferred Shares.
56
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 FINANCIAL
CORPORATION (Registrant)
/s/ Parker S. Kennedy
By: ______________________________________
Parker S. Kennedy
President
(Principal Executive Officer)
Date: March 20, 1998
/s/ Thomas A. Klemens
By: ______________________________________
Thomas A. Klemens
Executive Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 20, 1998
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 in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ D.P. Kennedy Chairman and Director March 20, 1998
____________________________________
D.P. Kennedy
/s/ Parker S. Kennedy President and Director March 20, 1998
____________________________________
Parker S. Kennedy
/s/ Thomas A. Klemens Executive Vice President, March 20, 1998
____________________________________ Chief Financial Officer
Thomas A. Klemens
Director
____________________________________
George L. Argyros
/s/ Gary J. Beban Director March 20, 1998
____________________________________
Gary J. Beban
/s/ J. David Chatham Director March 20, 1998
____________________________________
J. David Chatham
/s/ William G. Davis Director March 20, 1998
____________________________________
William G. Davis
57
SIGNATURE TITLE DATE
--------- ----- ----
/s/ James L. Doti Director March 20, 1998
____________________________________
James L. Doti
/s/ Lewis W. Douglas, Jr. Director March 20, 1998
____________________________________
Lewis W. Douglas, Jr.
/s/ Paul B. Fay, Jr. Director March 20, 1998
____________________________________
Paul B. Fay, Jr.
/s/ Dale F. Frey Director March 20, 1998
____________________________________
Dale F. Frey
/s/ Anthony R. Moiso Director March 20, 1998
____________________________________
Anthony R. Moiso
Director
____________________________________
Rudolph J. Munzer
/s/ Frank E. O'Bryan Director March 20, 1998
____________________________________
Frank E. O'Bryan
/s/ Roslyn B. Payne Director March 20, 1998
____________________________________
Roslyn B. Payne
Director
____________________________________
D. Van Skilling
/s/ Virginia M. Ueberroth Director March 20, 1998
____________________________________
Virginia M. Ueberroth
58
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
(3)(a) Restated Articles of Incorporation of The First
American Financial Corporation dated January 1, 1998.
(4)(a) 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.
(4)(b) 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.
(4)(c) 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)(d) Junior Subordinated Indenture, dated as of April 22,
1997, incorporated by reference herein from Quarterly
Report on Form 10-Q for the quarter ended June 30,
1997.
(4)(e) Form of New 8.50% Junior Subordinated Deferrable
Interest Debenture, incorporated by reference herein
from Exhibit 4.2 of Registration Statement on Form S-4
dated September 18, 1997.
(4)(f) Certificate of Trust of First American Capital Trust
I, incorporated by reference herein from Exhibit 4.3
of Registration Statement on Form S-4 dated September
18, 1997.
(4)(g) Declaration of Trust of First American Capital Trust I
dated as of April 11, 1997, incorporated by reference
herein from Exhibit 4.4 of Registration Statement on
Form S-4 dated September 18, 1997.
(4)(h) 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)(i) 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 on Form S-4 dated September 18, 1997.
(4)(j) Form of New Guarantee Agreement, incorporated by
reference herein from Exhibit 4.7 of Registration
Statement on Form S-4 dated September 18, 1997.
*(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) 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)(e) 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.
EXHIBIT INDEX--(CONTINUED)
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
*(10)(f) 1996 Stock Option Plan, incorporated by reference
herein from Exhibit 4 of Registration Statement on
Form S-8 dated December 30, 1996.
*(10)(g) 1997 Directors' Stock Plan, incorporated by reference
herein from Exhibit 4.1 of Registration Statement on
Form S-8 dated December 11, 1997.
(10)(h) 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.
(21) Subsidiaries of the registrant.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule.