SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2003
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-3658
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(Exact name of registrant as specified in its charter)
Incorporated in California | 95-1068610 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1 First American Way, Santa Ana, California 92707-5913
(Address of principal executive offices) (Zip Code)
(714) 800-3000
Registrants telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Common | New York Stock Exchange | |
Rights to Purchase Series A Junior Participating Preferred |
New York Stock Exchange | |
(Title of each class) | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R. § 229.405) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark if the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨
The aggregate market value of voting stock held by non-affiliates was $1,980,352,642 by reference to the closing price of the Registrants common stock as of the last business of the Registrants most recently completed second fiscal quarter.
On March 10, 2004, there were 79,502,164 shares of Common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement with respect to the 2004 annual meeting of the shareholders are incorporated by reference in Part III of this report. The definitive proxy statement will be filed no later than 120 days after the close of Registrants fiscal year.
PART I
CERTAIN STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K, INCLUDING THOSE RELATING TO CORPORATE OFFICE EXPANSION, LITIGATION, DIVIDENDS, FUNDING FOR CORPORATE OFFICE EXPANSION, INSURANCE REGULATION AND OTHER REGULATIONS, CASH REQUIREMENTS AND FUNDING FOR NON-QUALIFIED SUPPLEMENTAL BENEFITS ARE FORWARD LOOKING. RISKS AND UNCERTAINTIES EXIST THAT MAY CAUSE RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE THE ANTICIPATED RESULTS TO DIFFER FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS INCLUDE: INTEREST RATE FLUCTUATIONS; CHANGES IN THE PERFORMANCE OF THE REAL ESTATE MARKETS; LIMITATIONS ACCESS TO PUBLIC RECORDS AND OTHER DATA; GENERAL VOLATILITY IN THE CAPITAL MARKETS; CHANGES IN APPLICABLE GOVERNMENT REGULATIONS; CONSOLIDATION AMONG THE COMPANYS SIGNIFICANT CUSTOMERS AND COMPETITORS; THE COMPANYS CONTINUED ABILITY TO IDENTIFY BUSINESSES TO BE ACQUIRED; CHANGES IN THE COMPANYS ABILITY TO INTEGRATE BUSINESSES WHICH IT ACQUIRES; AND OTHER FACTORS DESCRIBED IN THIS ANNUAL REPORT ON FORM 10-K. THE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE THEY ARE MADE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE FORWARD-LOOKING STATEMENTS TO REFLECT CIRCUMSTANCES OR EVENTS THAT OCCUR AFTER THE DATE THE FORWARD-LOOKING STATEMENTS ARE MADE.
Item 1. Business.
The Company
The First American Corporation (the Company) was organized in 1894 as Orange County Title Company, succeeding to the business of two title abstract companies founded in 1889 and operating in Orange County, California. In 1924, the Company commenced issuing title insurance policies. In 1986, the Company began a diversification program by acquiring and developing business information companies closely related to the real estate transfer and closing process. In 1998, the Company expanded its diversification program to include business information companies outside of the real estate transfer and closing process. The Company is a California corporation and has its executive offices at 1 First American Way, Santa Ana, California 92707-5913. The Companys telephone number is (714) 800-3000. Unless the context otherwise indicates, the Company, as used herein, refers to The First American Corporation and its subsidiaries.
General
The First American Corporation (the Company), through its subsidiaries, is engaged in the business of providing business information and related products and services. The Company has seven reporting segments that fall within two primary business groups, financial services and information technology. The financial services group includes title insurance, specialty insurance and trust and other services. The title insurance segment issues residential and commercial title insurance policies, provides escrow services, equity loan services, tax-deferred exchanges and other related products. The specialty insurance segment issues property and casualty insurance policies and provides home warranties. The trust and other services segment provides investment advisory and trust and thrift services. The information technology group includes mortgage information, property information, credit information, and screening information. The mortgage information segment provides tax monitoring, flood zone certification, default management services, document preparation and other real estate related services. The property information segment provides property database services and appraisal services. The credit information segment provides mortgage credit and specialized credit reporting services. The screening information segment provides resident screening, pre-employment screening, substance abuse management and testing, consumer direct location services and motor vehicle reporting. Financial information regarding each of the Companys business segments is included in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data of Part II of this report.
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The Company believes that it holds the number one market share position for many of its products and services, including but not limited to, flood zone determinations, based on the number of flood zone certification reports issued; tax monitoring services, based on the number of loans under service; mortgage credit reporting services, based on the number of credit reports issued; automotive credit reporting services, based on the number of credit reports issued; default management services, based on the number of foreclosure/bankruptcy cases reported; property database services, based on the number of inquiries; and resident screening, based on the number of reports issued. The Company also believes that it holds the number two market share position for title insurance, based on operating revenues; home warranty services, based on the number of home protection contracts under service; and drug testing, based on the number of reports issued.
Substantially all of the revenues for the Companys title insurance and mortgage information segments result from resales and refinancings of residential real estate and, to a lesser extent, from commercial transactions and the construction and sale of new housing. Over one-half of the revenues in the Companys property information and credit information segments also depend on real estate activity. The remaining portion of the property information and credit information revenues, as well as the revenues for the Companys specialty insurance, trust and other services, and screening information segments are isolated from the volatility of real estate transactions. Real estate activity is cyclical in nature and is affected greatly by the cost and availability of long-term mortgage funds. Real estate activity and, in turn, a large portion of the Companys 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 Companys operations into areas outside of the traditional real estate transfer and closing process.
The Financial Services Group
Title Insurance Segment
Overview of Title Insurance Industry
Title to, and the priority of interests in, real estate are determined in accordance with applicable laws. In most real estate transactions, mortgage lenders and purchasers of real estate want to be protected from loss or damage in the event that title is not as represented. In most parts of the United States, title insurance has become accepted as the most efficient means of providing such protection.
Title Policies. Title insurance policies insure the interests of owners and their lenders in the title to real property against loss by reason of adverse claims to ownership of, or to defects, liens, encumbrances or other matters affecting such title which exist at the time a title insurance policy is issued and which were not excluded from the coverage of a title insurance policy. Title insurance policies are issued on the basis of a title report, which is prepared after a search of the public records, maps, documents and prior title policies to ascertain the existence of easements, restrictions, rights of way, conditions, encumbrances or other matters affecting the title to, or use of, real property. In certain instances, a visual inspection of the property is also made. To facilitate the preparation of title reports, copies of public records, maps, documents and prior title policies may be compiled and indexed to specific properties in an area. This compilation is known as a title plant.
The beneficiaries of title insurance policies are generally real estate buyers and mortgage lenders. A title insurance policy indemnifies the named insured and certain successors in interest against title defects, liens and encumbrances existing as of the date of the policy and not specifically excepted from its provisions. The policy typically provides coverage for the real property mortgage lender in the amount of its outstanding mortgage loan balance and for the buyer in the amount of the purchase price of the property, but in some cases might insure for a greater amount where the buyer anticipates constructing improvements on the property. Coverage under a title insurance policy issued to a real property mortgage lender generally terminates upon the sale of the insured property unless the owner carries back a mortgage or makes certain warranties as to the title.
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Before issuing title policies, title insurers seek to limit their risk of loss by accurately performing title searches and examinations. The major expenses of a title company relate to such searches and examinations, the preparation of preliminary reports or commitments and the maintenance of title plants, and not from claim losses as in the case of property and casualty insurers.
The Closing Process. Title insurance is essential to the real estate closing process in most transactions involving real property mortgage lenders. In a typical residential real estate sale transaction, title insurance is generally ordered on behalf of an insured by a real estate broker, lawyer, developer, lender or closer involved in the transaction. Once the order has been placed, a title insurance company or an agent conducts a title search to determine the current status of the title to the property. When the search is complete, the title company or agent prepares, issues and circulates a commitment or preliminary title report (commitment) to the parties to the transaction. The commitment summarizes the current status of the title to the property, identifies the conditions, exceptions and/or limitations that the title insurer intends to attach to the policy and identifies items appearing on the title that must be eliminated prior to closing.
The closing function, sometimes called an escrow in western states, is often performed by a lawyer, an escrow company or a title insurance company or agent (such person or entity, the closer). Once documentation has been prepared and signed, and mortgage lender payoff demands are in hand, the transaction is closed. The closer records the appropriate title documents and arranges the transfer of funds to pay off prior loans and extinguish the liens securing such loans. Title policies are then issued insuring the priority of the mortgage of the real property mortgage lender in the amount of its mortgage loan and the buyer in the amount of the purchase price. The time lag between the opening of the title order and the issuance of the title policy is usually between 30 and 90 days. The seller and the buyer bear the risk during this time lag. Any matter affecting title which is discovered during this period would have to be dealt with to the title insurers satisfaction or the insurer would except the matter from the coverage afforded by the title policy. Before a closing takes place, however, the closer would request that the title insurer provide an update to the commitment to discover any adverse matters affecting title and, if any are found, would work with the seller to eliminate them so that the title insurer would issue the title policy subject only to those exceptions to coverage which are acceptable to the buyer and the buyers lender.
Issuing the Policy: Direct vs. Agency. A title policy can be issued directly by a title insurer or indirectly on behalf of a title insurer through agents which are not themselves licensed as insurers. Where the policy is issued by a title insurer, the search is performed by or at the direction of the title insurer, and the premium is collected and retained by the title insurer. Where the policy is issued by an agent, the agent performs the search, examines the title, collects the premium and retains a portion of the premium. The remainder of the premium is remitted to the title insurer as compensation for bearing the risk of loss in the event a claim is made under the policy. The percentage of the premium retained by an agent varies from region to region. A title insurer is obligated to pay title claims in accordance with the terms of its policies, regardless of whether it issues its policy directly or indirectly through an agent.
Premiums. The premium for title insurance is due and earned in full when the real estate transaction is closed. Premiums are generally calculated with reference to the policy amount. The premium charged by a title insurer or an agent is subject to regulation in most areas. Such regulations vary from state to state.
The Companys Title Insurance Operations
Overview. The Company, through First American Title Insurance Company and its subsidiaries, transacts the business of title insurance through a network of both direct operations and agents. Through this network, the Company issues policies in all states (except Iowa) and the District of Columbia. In Iowa, the Company provides abstracts of title only, because title insurance is not permitted. The Company also offers title services in Australia, the Bahama Islands, Canada, Guam, Hong Kong, Ireland, Mexico, New Zealand, Puerto Rico, South Korea, the United Kingdom, the U.S. Virgin Islands and other countries abroad.
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Based on industry statistics showing premiums written in 2002, the Company had the largest or second largest share of the title insurance market in 30 states and in the District of Columbia, and had a national market share of 22.6%. Industry statistics for 2003 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 mortgage lenders. As title agents contribute a large portion of the Companys revenues, the Company also markets its title insurance services to independent agents. The Companys marketing efforts emphasize the quality and timeliness of its services, process innovation and its national presence.
While virtually all personnel in the Companys title insurance business assist in marketing efforts, the Company maintains a sales force of more than 1,000 persons dedicated solely to marketing. This sales force, which is located throughout the Companys branch office network, not only markets the Companys title insurance services, but also certain of the Companys other products. The Company provides its sales personnel with training in selling techniques, and each branch manager is responsible for hiring the sales staff and ensuring that sales personnel under his or her supervision are properly trained. In addition to this sales force, the Company has approximately 90 salespeople in its national commercial services division. One of the responsibilities of the sales personnel of this division is the coordination of marketing efforts directed at large real estate lenders and companies developing, selling, buying or brokering properties on a multistate basis. The Company also supplements the efforts of its sales force through general advertising in various trade and professional journals.
The Companys 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 Companys revenues, the Company believes that the acceptance of title insurance in foreign markets has increased in recent years. Accordingly, the Company plans to continue its international sales efforts, particularly in Canada, the United Kingdom and Australia.
Underwriting. Before a title insurance policy is issued, a number of underwriting decisions are made. For example, matters of record revealed during the title search may require a determination as to whether an exception should be taken in the policy. The Company believes that it is important for the underwriting function to operate efficiently and effectively at all decision making levels so that transactions may proceed in a timely manner. To perform this function, the Company has underwriters at the branch level, the regional level and the national level.
Agency Operations. The relationship between the Company and each agent is governed by an agency agreement which states the conditions under which the agent is authorized to issue title insurance policies on behalf of the Company. The agency agreement also prescribes the circumstances under which the agent may be liable to the Company if a policy loss is attributable to error of the agent. Such agency agreements typically have a term of one to five years and are terminable immediately for cause.
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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 agents 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 Companys 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.
The Company has significantly enhanced its investment in title plants through three business combinations. The first was the formation of a limited liability corporation (LLC) with Experian Group on January 1, 1998. Experian Group contributed to the LLC its real estate information division, which the Company believes is the nations leading operator of title plants. The second business combination was the acquisition of Data Tree in June 1998. Data Tree is a supplier of database management and document imaging systems. The third business combination was the formation of Data Trace Information Services. This business is 80.0% owned by the Companys subsidiary, FARES, and 20.0% owned by LandAmerica. Data Trace Information Services is a provider of comprehensive title information delivery systems.
The Companys 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 managements 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.
In settling claims, the Company occasionally purchases and ultimately sells the interest of the insured in the real property or the interest of the claimant adverse to the insured. These assets, which totaled $42.7 million at December 31, 2003, are carried at the lower of cost or fair value, less costs to sell, and are included in Other assets in the Companys consolidated balance sheets.
Reinsurance and Coinsurance. The Company assumes and distributes large title insurance risks through mechanisms of reinsurance and coinsurance. In reinsurance agreements, in 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
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above the portion retained by the primary insurer. The primary insurer, however, remains liable for the total risk in the event that the reinsurer does not meet its obligation. As a general rule, the Company does not retain more than $40.0 million of primary risk on any single policy. 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 Companys reinsurance activities account for less than 1.0% of its total title insurance operating revenues.
Competition. The title insurance business is highly competitive. The number of competing companies and the size of such companies varies in the different areas in which the Company conducts business. Generally, in areas of major real estate activity, such as metropolitan and suburban localities, the Company competes with many other title insurers. Approximately 75 title insurance underwriters are members of the American Land Title Association, the title insurance industrys national trade association. The Companys major nationwide competitors in its principal markets include Fidelity National Title Insurance Company (which also includes Chicago Title, Ticor Title Insurance Company and Security Union Title Insurance Company) Landamerica (which includes Lawyers Title Insurance Company, Commonwealth Land Title Insurance Company and Transnation Title Insurance Company, Stewart Title Guaranty Company and Old Republic Title Insurance Group. In addition to these nationwide competitors, numerous agency operations throughout the country provide aggressive competition on the local level.
The Company believes that competition for title insurance business is based primarily on the quality and timeliness of service, because parties to real estate transactions are usually concerned with time schedules and costs associated with delays in closing transactions. In those states where prices are not established by regulatory authorities, the price of title insurance policies is also an important competitive factor. The Company believes that it provides quality service in a timely manner at competitive prices.
Specialty Insurance Segment
Home Warranties. The Companys 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 92.3% of its home warranty business, which is operated as a second tier subsidiary, with the balance owned by management of that subsidiary. The Companys home warranty business issues one-year warranties that protect homeowners against defects in household systems and appliances, such as plumbing, water heaters and furnaces. The Companys home warranty subsidiary currently charges approximately $245 to $420 for its basic home warranty contract. Optional coverage is available for air conditioners, pools, spas, washers, dryers, refrigerators and other items for charges ranging from approximately $25 to $160. For an additional charge, coverage is renewable annually at the option of the homeowner upon approval by the home warranty subsidiary. Fees for the warranties are paid at the closing of the home purchase and are recognized monthly over a 12-month period. Home warranties are marketed through real estate brokers and agents. This business has continually expanded nationally and is currently licensed in 40 states. The principal competitor of the Companys home warranty business is American Home Shield, a subsidiary of Service Master L.P.
Property and Casualty Insurance. The Company offers property and casualty insurance through its subsidiaries First American Property and Casualty Insurance Company and First American Specialty Insurance Company. First American Property and Casualty Insurance Company conducts its business utilizing the Companys distribution channels, allowing for cross selling through existing closing-service activities. First American Specialty Insurance Company conducts its business utilizing a network of brokers in California.
Trust and Other Services Segment
Investment Advisory and Trust and Thrift Services. The Company offers investment advisory services through its SEC registered investment management firm that manages equity and fixed-income securities.
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
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which its subsidiary trust operation was merged. During August 1999, this subsidiary converted from a state-chartered bank to a federal savings bank. As of December 31, 2003, the trust operation was administering fiduciary and custodial assets having a market value in excess of $2.3 billion.
During 1988, the Company, through a majority-owned subsidiary, acquired an industrial bank (the Thrift), formerly known as an industrial loan corporation, that accepts thrift deposits and uses deposited funds to originate and purchase loans secured by commercial properties primarily in Southern California. As of December 31, 2003, the Thrift had approximately $76.6 million of demand deposits and $105.2 million of loans outstanding.
Loans made or acquired during the current year, by the Thrift, ranged in amount from $15,050 to $2,887,500. The average loan balance outstanding at December 31, 2003, was $430,471. Loans are made only on a secured basis, at loan-to-value percentages no greater than 75.0%. The Thrift specializes in making commercial real estate loans. In excess of 99.5% of the Thrifts loans are made on a variable rate basis. The average yield on the Thrifts loan portfolio as of December 31, 2003, was 7.77%. 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 Thrifts primary competitors in the Southern California commercial real estate lending market are local community banks, other thrift and loan companies and, to a lesser extent, commercial banks. The Thrifts average loan is approximately 12.5 years in duration.
The performance of the Thrifts loan portfolio is evaluated on an ongoing basis by management of the Thrift. The Thrift places a loan on non-accrual status when two payments become past due. When a loan is placed on non-accrual status, the Thrifts 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 non-accrual loans that would have been recognized during the year ended December 31, 2003, if all of such loans had been current in accordance with their original terms, totaled $8,094.
The following table sets forth the amount of the Thrifts non-performing assets as of the dates indicated:
Year Ended December 31 | |||||||||||||||
2003 |
2002 |
2001 |
2000 |
1999 | |||||||||||
(in thousands) | |||||||||||||||
Nonperforming Assets: |
|||||||||||||||
Loans accounted for on a nonaccrual basis |
$ | 53 | $ | 65 | $ | 94 | $ | 89 | $ | 707 | |||||
Total |
$ | 53 | $ | 65 | $ | 94 | $ | 89 | $ | 707 | |||||
Based on a variety of factors concerning the creditworthiness of its borrowers, the Thrift determined that it had $52,928 of potential problem loans in existence as of December 31, 2003.
The Thrifts 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 Thrifts current allowance for loan losses is an adequate allowance against foreseeable losses.
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The following table provides certain information with respect to the Thrifts allowance for loan losses as well as charge-off and recovery activity.
Year Ended December 31 |
||||||||||||||||||||
2003 |
2002 |
2001 |
2000 |
1999 |
||||||||||||||||
(in thousands, except percentages) | ||||||||||||||||||||
Allowance for Loan Losses: |
||||||||||||||||||||
Balance at beginning of year |
$ | 1,170 | $ | 1,050 | $ | 1,020 | $ | 905 | $ | 1,150 | ||||||||||
Charge-offs: |
||||||||||||||||||||
Real estatemortgage |
| | (140 | ) | | (346 | ) | |||||||||||||
Assigned lease payments |
| (3 | ) | (2 | ) | (2 | ) | | ||||||||||||
| (3 | ) | (142 | ) | (2 | ) | (346 | ) | ||||||||||||
Recoveries: |
||||||||||||||||||||
Real estatemortgage |
| | | 9 | | |||||||||||||||
Assigned lease payments |
| | | | | |||||||||||||||
| | | 9 | | ||||||||||||||||
Net charge-offs |
| (3 | ) | (142 | ) | 7 | (346 | ) | ||||||||||||
Provision for losses |
120 | 123 | 172 | 108 | 101 | |||||||||||||||
Balance at end of year |
$ | 1,290 | $ | 1,170 | $ | 1,050 | $ | 1,020 | $ | 905 | ||||||||||
Ratio of net charge-offs during the year to average loans outstanding during the year |
.00 | % | .00 | % | .14 | % | (.01 | %) | .40 | % | ||||||||||
The adequacy of the Thrifts 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 Thrifts 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 Thrifts allowance for loan losses and the percent of loans in each category to total loans at the dates indicated.
Year Ended December 31 | |||||||||||||||||||||||||
2003 |
2002 |
2001 |
2000 |
1999 | |||||||||||||||||||||
Allowance |
% of Loans |
Allowance |
% of Loans |
Allowance |
% of Loans |
Allowance |
% of Loans |
Allowance |
% of Loans | ||||||||||||||||
(in thousands, except percentages) | |||||||||||||||||||||||||
Loan Categories: |
|||||||||||||||||||||||||
Real estate-mortgage |
$ | 1,289 | 100 | $ | 1,159 | 100 | $ | 1,036 | 100 | $ | 1,002 | 100 | $ | 904 | 100 | ||||||||||
Other |
1 | | 11 | | 14 | | 18 | | 1 | | |||||||||||||||
$ | 1,290 | 100 | $ | 1,170 | 100 | $ | 1,050 | 100 | $ | 1,020 | 100 | $ | 905 | 100 | |||||||||||
The Information Technology Group
Mortgage Information Segment
The mortgage information segment provides tax monitoring, flood zone certification, default management services, and other real estate related services.
Tax Monitoring. 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
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acquisition of Transamericas tax monitoring business in October 2003, the Company believes that it is the 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 lenders mortgage loans for the life of such loans. In general, providers of tax monitoring services, such as the Companys 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 Companys 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 fee charged to service each mortgage loan varies from region to region, but generally falls within the $45 to $130 price range and is paid in full at the time the contract is executed. The Company recognizes revenues from tax service contracts over the estimated duration of the contracts. However, income taxes are paid on the entire fee in the year the fee is received. Historically, the Company has maintained minimal reserves for losses relating to its tax monitoring service because its losses have been negligible.
Flood Zone Certification. In January 1995, the Company acquired Flood Data Services, Inc. (now a subsidiary of First American Real Estate Solutions LLC). 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. In October 2003, the Company acquired Transamericas flood zone determination business. This acquisition enhanced the Companys number one market share position for flood zone determinations in the United States, based on the number of flood zone determination reports issued.
Default Management Services. The default management business supports mortgage servicers and financial institutions in the handling of loss mitigation, foreclosure, REO and claims processing. With the acquisition in 2001 of LFC Nationwide, a leading provider of property preservation and field inspections, the Company believes it is now the nations leading provider of default management services, based on the number of foreclosure/bankruptcy cases reported.
Property Information Segment
This business was established in January 1998 when the Company and its real estate information service subsidiaries (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 80.0% 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 20.0% ownership interest. RES is believed to be the nations foremost supplier of core real estate data, providing, among other things, property valuation information, title information, tax information and imaged title documents.
Adding to this business, in June 1998, the Company acquired Data Tree Corporation. Data Tree is a supplier of database management and document imaging systems to county recorders, other governmental agencies and the title industry.
In July 2000, the Company combined its Smart Title Solutions division with the Datatrace division of LandAmerica Financial Group, Inc (LandAmerica). The combined entity, Data Trace Information Services, is 80.0% owned by the Companys subsidiary, FARES, and 20.0% owned by LandAmerica. The Company believes that Data Trace Information Services is the nations most advanced and comprehensive title information delivery system.
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In August 2000, the Company combined its RES division with the Intellitech real estate information business of Transamerica Corporation to form a new entity, First American Real Estate Solutions, L.P. This joint venture is 80.0% owned by the Companys subsidiary, FARES, and 20.0% by Transamerica Corporation. The Company believes that this joint venture is the nations largest database of property characteristic information, supplying data and decision-support products to the real estate and mortgage finance industry.
In June 2002, the Company acquired Tri County Tax Research, Inc., a provider of tax searches for title companies in the Detroit, Michigan metropolitan area. In July of 2002, the Company acquired Current Status, Inc., a provider of property tax searches for customers in the New Jersey and Western Pennsylvania markets. These acquisitions strengthened the Companys existing tax information business.
In September 2002, the Company added to its property valuation information business by acquiring SourceOne Services, Corp., a provider of real estate valuation services in the form of Broker Price Opinions (BPO). The Company believes that SourceOne Services Corp. is the largest provider of BPO services to the default market and the second largest provider of BPO services in the United States.
In February 2003, the Company acquired Infinity Information Solutions, Inc., a provider of lien release information. This strategic acquisition enhances the Companys offering of products and services to mortgage lenders.
In June 2003, the Company added to its title information business with the acquisition of Abstracters Information Services, Inc., (AIS). AIS is one of the leading title abstracting companies in New York. This acquisition strengthens the Companys title information services presence in the Northeast region.
Credit Information Segment
The Companys mortgage credit reporting service provides credit information reports for mortgage lenders throughout the United States. These reports are derived from two or more credit bureau sources and are summarized and prepared in a standard form acceptable to mortgage loan originators and secondary mortgage purchasers. The Companys 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 a division of First American Real Estate Solutions LLC). 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, based on the number of credit reports issued. The credit information segment also provides specialized credit reports. This service provides credit information reports to non-mortgage lenders, such as auto lenders, as well as direct to consumers. The specialized reports are derived from two or more credit bureau sources and are summarized and prepared in an acceptable form. This service also provides subprime-consumer information and includes a database of credit records on consumers with flawed credit histories. This information is used to provide data to credit grantors such as furniture and appliance retailers, pay-day loan and check-advance stores, rent-to-own retailers and others.
Screening Information
The Companys screening information segment is comprised entirely of First Advantage Corporation, a public company whose shares of Class A common stock trade on the Nasdaq National Market System under the ticker symbol FADV. As of December 31, 2003, the Company owned all of First Advantages outstanding Class B common stock, which constitutes approximately 76.7% of the economic interest and 97.4% of the voting interest of First Advantage.
First Advantages business is organized into three business segments: Enterprise Screening, Risk Mitigation and Consumer Direct. First Advantages Enterprise Screening segment offers employment screening services,
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such as criminal records and credit checks; occupational health services, such as drug testing and employee assistance programs; and resident screening services, such as eviction record, credit and criminal records checks. First Advantages Risk Management segment provides automated access to motor vehicle records from all 50 states and the District of Columbia and investigative services designed to detect and expose workers compensation, disability and liability insurance fraud. First Advantage, through its Consumer Direct segment, also provides location, verification and screening services directly to consumers through the Internet.
The Companys screening information segment serves a wide variety of clients throughout the United States, including nearly a quarter of those businesses comprising the Fortune 1000, many major real estate investment trusts and property management companies, a number of the top providers of transportation services, insurance companies, governmental agencies, non-profit organizations and health care providers. Insurance carriers and agents purchase a substantial proportion of the segments risk mitigation products. Larger employers and transportation companies are major consumers of the segments employment screening and occupational health services. Multifamily housing property management companies and landlords of all sizes are represented in the resident screening business customer base.
Acquisitions
Commencing in the 1960s, the Company initiated a growth program with a view to becoming a nationwide provider of title insurance. This program included expansion into new geographic markets through internal growth and selective acquisitions. In 1986 the Company began expanding into other real estate business information services. In 1998 the Company expanded its diversification program to include business information companies outside of the real estate transfer and closing process. To date, the Company has made numerous strategic acquisitions designed to expand not only its direct title operations, but also the range of services it can provide to its customers.
Regulation
The title insurance business is heavily regulated by state insurance regulatory authorities. These authorities generally possess broad powers with respect to the licensing of title insurers, the types and amounts of investments that title insurers may make, insurance rates, forms of policies and the form and content of required annual statements, as well as the power to audit and examine title insurers. Under state laws, certain levels of capital and surplus must be maintained and certain amounts of securities must be segregated or deposited with appropriate state officials. Various state statutes require title insurers to defer a portion of all premiums in a reserve for the protection of policyholders and to segregate investments in a corresponding amount. Further, most states restrict the amount of dividends and distributions a title insurer may make to its shareholders.
In 1999, the Company entered into the property casualty insurance business through the acquisitions of Great Pacific Insurance Company (included in the acquisition of National Information Group) and Five Star Holdings, Inc. The property and casualty business is subject to regulation by government agencies in the states in which they transact business. The nature and extent of such regulation may vary from jurisdiction to jurisdiction, but typically involves prior approval of the acquisition of control of an insurance company, regulation of certain transactions entered into by an insurance company with any of its affiliates, the payment of dividends by an insurance company, approval of premium rates and policy forms for many lines of insurance, standards of solvency and minimum amounts of capital and surplus which must be maintained. In order to issue policies on a direct basis in a state, the property and casualty insurer must generally be licensed by such state. In certain circumstances, such as dealings initiated directly by citizens or placements through licensed surplus lines brokers, it may conduct business without being admitted and without being subject to rate and/or policy forms approval. The Company is currently licensed to write property and casualty insurance in 46 states and the District of Columbia.
The Companys home warranty business also is subject to regulation by insurance authorities in the states in which it conducts such business. The Companys trust company and industrial loan company are both subject to
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regulation by the Federal Deposit Insurance Corporation. In addition, as a federal savings bank, the Companys trust company is regulated by the United States Department of the Treasurys Office of Thrift Supervision, and the Companys 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 Companys financial statements as available for sale. In addition to the Companys investment strategy, state laws impose certain restrictions upon the types and amounts of investments that may be made by the Companys regulated subsidiaries.
Employees
The following table provides a summary of the total number of employees as of December 31, 2003:
Business |
Number of employees | |
Title Insurance |
18,421 | |
Specialty Insurance |
849 | |
Trust and Other Services |
111 | |
Mortgage Information |
5,017 | |
Property Information |
3,064 | |
Credit Information |
931 | |
Screening Information |
1,202 | |
Corporate |
207 | |
Total |
29,802 | |
Risk Factors
You should carefully consider each of the following risk factors and the other information contained in this Annual Report on Form 10-K. The Company faces risks other than those listed here, including those that are unknown to the Company and others of which the Company may be aware but, at present, consider immaterial. Because of the following factors, as well as other variables affecting the Companys operating results, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.
Certain recurring trends generally result in a decrease in the demand for the Companys products
Demand for the Companys products generally decreases as the number of real estate transactions in which the Companys products are purchased decreases. The Company has found that the number of real estate transactions in which the Companys products are purchased decreases in the following situations:
| when mortgage interest rates are high; |
| when the mortgage fund supply is limited; and |
| when the United States economy is weak. |
The Company believes that this trend will recur.
Changes in government regulation could prohibit or limit the Companys operations
The Companys title insurance, property and casualty insurance, home warranty, thrift, trust and investment businesses are regulated by various federal, state and local governmental agencies. Many of the Companys other
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businesses operate within statutory guidelines. Changes in the applicable regulatory environment or statutory guidelines could prohibit or restrict the Companys existing or future operations. Such restrictions may restrict the Companys ability to implement rate increases, acquire assets or businesses or otherwise have a negative impact on the Companys ability to generate revenue and earnings.
The Company may be subject to increased regulation regarding the use of personal information
Certain data and services the Company provides are subject to regulation by various federal, state and local regulatory authorities. Compliance with existing federal, state and local laws and regulations has not had a material adverse effect on the Companys results of operations or financial condition to date. Nonetheless, federal, state and local laws and regulations in the United States designed to protect the public from the misuse of personal information in the marketplace and adverse publicity or potential litigation concerning the commercial use of such information may increasingly affect the Companys operations and could result in substantial regulatory compliance expense, litigation expense and a loss of revenue.
The Company may not be able to pursue its acquisition strategy.
The Company intends to continue to grow through acquisitions. The Company may not be able to identify suitable acquisition candidates or complete acquisitions on satisfactory terms. A number of the Companys competitors also have adopted the strategy of expanding and diversifying through acquisitions. The Company will continue to experience competition in its effort to execute on its acquisition strategy. As a result, the Company may be unable to continue to make acquisitions or may be forced to pay more for the companies the Company is able to acquire.
The integration of companies the Company acquires may be difficult and may result in a failure to realize some of the anticipated potential benefits of acquisitions.
When companies are acquired, the Company may not be able to integrate or manage these businesses so as to produce returns that justify the investment. Any difficulty in successfully integrating or managing the operations of the businesses could have a material adverse effect on the Companys business, financial condition, results of operations or liquidity, and could lead to a failure to realize any anticipated synergies. The Companys management also will be required to dedicate substantial time and effort to the integration of its acquisitions. These efforts could divert managements focus and resources from other strategic opportunities and operational matters.
The Companys earnings may be reduced if acquisition projections are inaccurate
The Companys earnings have improved since 1991 in large part because of the Companys acquisition and integration of non-title insurance businesses. These businesses generally have higher margins than the title insurance businesses. For example, pre-tax margins for the title insurance and services segment were 11.1% in 2003, while pre-tax margins for the segments in the Companys information technology group in the same year were 27.6%. The success or failure of acquisitions in this group has depended in large measure upon the accuracy of the Companys projections. These projections are not always accurate. Inaccurate projections have historically led to lower than expected earnings.
As a holding company, the Company depend on distributions from the Companys subsidiaries, and if distributions from the Companys subsidiaries are materially impaired, the Companys ability to declare and pay dividends may be adversely affected
First American is a holding company whose primary assets are the securities of its operating subsidiaries. The Companys ability to pay dividends is dependent on the ability of the Companys subsidiaries to pay dividends or repay funds to us. If the Companys operating subsidiaries are not able to pay dividends or repay
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funds, the Company may not be able to declare and pay dividends to its shareholders. Moreover, pursuant to insurance and other regulations under which the Companys insurance subsidiaries operate, the amount of dividends, loans and advances available is limited. Under such regulations, the maximum amount of dividends, loans and advances available to us from the Companys insurance subsidiaries in 2004 is $313.4 million
Certain provisions of the Companys charter and rights plan may make a takeover of our company difficult even if such takeover could be beneficial to some of the Companys shareholders
The Companys restated articles of incorporation authorize the issuance of blank check preferred stock with such designations, rights and preferences as may be determined from time to time by the Companys board of directors. Accordingly, the Companys board is empowered, without further shareholder action, to issue shares or series of preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights, including the ability to receive dividends, of the Companys common shareholders. The issuance of such preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control. In conjunction with the rights plan discussed below, the Company has authorized the issuance of the Companys Series A Junior Participating Preferred Shares. Although the Company has no present intention of issuing any additional shares or series of preferred stock, the Company cannot guarantee that it will not make such an issuance in the future.
The Company has adopted a rights plan which could, alone or in combination with the Companys restated articles of incorporation, discourage transactions involving actual or potential changes of control, including transactions that otherwise could involve payment of a premium over prevailing market prices to the Companys shareholders for their common shares.
Available Information
The Company maintains a website, www.firstam.com, which includes financial and other information for investors. The Companys annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the Investors page of our website as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission. The Companys website and the information contained therein or connected thereto are not intended to be incorporated into this annual report on Form 10-K, or any other filing with the Securities and Exchange Commission unless the Company expressly incorporates such materials.
Item 2. Properties.
In September 1999, the Company moved its executive offices to one of the newly constructed office buildings at MacArthur Place in Santa Ana, California. The Orange County branch and certain other operations of the Companys title insurance segment moved into the two other buildings constructed on the site later in 1999. The three new buildings are in a campus environment and total approximately 210,000 square feet. In the first quarter of 2004, the Company began the expansion of its office campus. This expansion will add two 4-story office buildings totaling 225,000 square feet, and a two-story, free standing, 50,000 square foot technology center. The construction is estimated to be completed by the third quarter of 2005.
The Company continues to own the two adjacent buildings in Santa Ana, California, which previously housed its executive offices. That location, comprising approximately 105,000 square feet of floor space, continues as the home of the companys trust and banking division and the Companys property and casualty insurance division. The Company also owns an 18,000 square foot building located across the street from that complex. This building is currently used primarily for storage.
The Companys title insurance subsidiary, First American, and its subsidiaries, own or lease buildings or office space in more than 900 locations throughout the United States and abroad, principally for their respective title operations.
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The Companys mortgage information business, houses its national operations in a leased 231,000 square foot office building in Dallas, Texas. In 1999, the Company completed the construction of two office buildings in Poway, California. These two buildings, which primarily house the Companys credit reporting business, total approximately 152,000 square feet and are located on a 17 acre parcel of land. In addition, the Companys mortgage information, credit information and property information businesses lease office space in more than 75 locations throughout the United States, principally for their respective operations.
The Companys 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.
The screening information business houses its executive offices in a leased 20,800 square foot building in St. Petersburg, Florida. In addition, this business owns or leases more than 30 offices throughout the United States, principally for its screening information operations.
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 related to its operations. While the ultimate disposition of each proceeding is not determinable, the Company does not believe that any of such proceedings will have a material adverse effect on its financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
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PART II
Item 5. Market for Registrants Common Stock and Related Stockholder Matters.
Common Stock Market Prices and Dividends
The Companys common stock trades on the New York Stock Exchange (ticker symbol FAF). The approximate number of record holders of common stock on March 9, 2004 was 3,584.
High and low stock prices and dividends for the last two years were as follows:
2003 |
2002 | |||||||||||
Quarter Ended |
High-low range |
Cash dividends |
High-low range |
Cash dividends | ||||||||
March 31 |
$ | 24.73$21.72 | $ | .10 | $ | 21.80$17.71 | $ | .08 | ||||
June 30 |
$ | 27.85$24.67 | $ | .10 | $ | 23.10$20.42 | $ | .08 | ||||
September 30 |
$ | 27.25$23.36 | $ | .15 | $ | 22.20$16.54 | $ | .08 | ||||
December 31 |
$ | 30.64$25.38 | $ | .15 | $ | 22.50$18.98 | $ | .10 |
While the Company expects to continue its policy of paying regular quarterly cash dividends, future dividends will be dependent on future earnings, financial condition and capital requirements. The payment of dividends is subject to the restrictions described in Note 2 to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of Part II of this report.
Plan Category |
Number of securities to be issued upon exercise of outstanding options (a) |
Weighted-average exercise price of outstanding options (b) |
Number of securities column (a)) (c) | ||||
(in thousands, except weighted-average exercise price) | |||||||
Equity compensation plans approved by security holders (1)(3) |
8,078 | $ | 18.71 | 6,349 | |||
Equity compensation not approved by security holders (2) |
268 | $ | 19.79 | | |||
8,346 | $ | 18.75 | 6,349 | ||||
(1) | Consists of The First American Corporation 1996 Stock Option Plan and The First American Corporation 1997 Directors Stock Plan. See Note 14 to the Companys consolidated financial statements for additional information. |
(2) | Includes shares related to plans assumed by the Company in the purchase of Credit Management Solutions, Inc. and the business combination with National Information Group. See Note 14 to the Companys consolidated financial statements for additional information. |
(3) | Includes 2,455,000 shares available to be issued under the Companys stock purchase plan. See Note 13 to the Companys consolidated financial statements for additional information. |
Recent Sales of Unregistered Securities
In the last three years, the Company has not issued unregistered shares of its common stock.
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Item 6. Selected Financial Data.
The selected consolidated financial data for the Company for the five-year period ended December 31, 2003, has been derived from the audited Consolidated Financial Statements. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto, Item 1BusinessAcquisitions, and Item 7Managements Discussion and AnalysisResults of Operations.
The First American Corporation and Subsidiary Companies
Year Ended December 31 |
||||||||||||||||||||
2003 |
2002 |
2001 |
2000 |
1999 |
||||||||||||||||
(in thousands, except percentages, per share amounts and employee data) | ||||||||||||||||||||
Revenues |
$ | 6,213,714 | $ | 4,704,209 | $ | 3,750,723 | $ | 2,934,255 | $ | 2,988,169 | ||||||||||
Income before cumulative effect of a change in accounting for tax service contracts (Note A) |
$ | 451,022 | $ | 234,367 | $ | 167,268 | $ | 82,223 | $ | 88,643 | ||||||||||
Cumulative effect of a change in accounting for tax service contracts (Note A) |
| | | | $ | (55,640 | ) | |||||||||||||
Net income |
$ | 451,022 | $ | 234,367 | $ | 167,268 | $ | 82,223 | $ | 33,003 | ||||||||||
Total assets |
$ | 4,892,111 | $ | 3,398,045 | $ | 2,837,263 | $ | 2,199,737 | $ | 2,116,414 | ||||||||||
Notes and contracts payable |
$ | 553,888 | $ | 425,705 | $ | 415,341 | $ | 219,838 | $ | 196,815 | ||||||||||
Mandatorily redeemable preferred securities |
$ | 100,000 | $ | 100,000 | $ | 100,000 | $ | 100,000 | $ | 100,000 | ||||||||||
Stockholders equity |
$ | 1,879,520 | $ | 1,364,589 | $ | 1,104,452 | $ | 870,237 | $ | 815,991 | ||||||||||
Return on average stockholders equity (Note B) |
27.8 | % | 19.0 | % | 16.9 | % | 9.8 | % | 10.9 | % | ||||||||||
Cash dividends on common shares |
$ | 34,008 | $ | 24,570 | $ | 18,210 | $ | 15,256 | $ | 15,840 | ||||||||||
Per share of common stock (Note C) |
||||||||||||||||||||
Basic: |
||||||||||||||||||||
Income before cumulative effect of a change in accounting for tax service contracts |
$ | 5.89 | $ | 3.27 | $ | 2.51 | $ | 1.29 | $ | 1.37 | ||||||||||
Cumulative effect of a change in accounting for tax service contracts |
| | | | (.86 | ) | ||||||||||||||
Net income |
$ | 5.89 | $ | 3.27 | $ | 2.51 | $ | 1.29 | $ | .51 | ||||||||||
Diluted: |
||||||||||||||||||||
Income before cumulative effect of a change in accounting for tax service contracts |
$ | 5.22 | $ | 2.92 | $ | 2.27 | $ | 1.24 | $ | 1.34 | ||||||||||
Cumulative effect of a change in accounting for tax service contracts |
| | | | (.84 | ) | ||||||||||||||
Net income |
$ | 5.22 | $ | 2.92 | $ | 2.27 | $ | 1.24 | $ | .50 | ||||||||||
Stockholders equity |
$ | 23.84 | $ | 18.53 | $ | 16.08 | $ | 13.62 | $ | 12.54 | ||||||||||
Cash dividends |
$ | .50 | $ | .34 | $ | .27 | $ | .24 | $ | .24 | ||||||||||
Number of common shares outstanding |
||||||||||||||||||||
Weighted average during the year |
||||||||||||||||||||
Basic |
76,632 | 71,594 | 66,568 | 63,680 | 64,669 | |||||||||||||||
Diluted |
87,775 | 82,567 | 75,834 | 66,050 | 66,351 | |||||||||||||||
End of year |
78,826 | 73,636 | 68,694 | 63,887 | 65,068 | |||||||||||||||
Title orders opened (Note D) |
2,511 | 2,184 | 1,930 | 1,241 | 1,334 | |||||||||||||||
Title orders closed (Note D) |
2,021 | 1,696 | 1,405 | 975 | 1,120 | |||||||||||||||
Number of employees |
29,802 | 24,886 | 22,597 | 20,346 | 20,065 |
Note AResulted from the adoption of Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, which became effective January 1, 1999, and applied to the Companys tax service operations.
Note BReturn on average stockholders equity for 1999 excludes the cumulative effect of a change in accounting for tax service contracts from both net income and stockholders equity.
Note CPer share information relating to net income is based on weighted-average number of shares outstanding for the years presented. Per share information relating to stockholders equity is based on shares outstanding at the end of each year.
Note DTitle order volumes are those processed by the direct title operations of the Company and do not include orders processed by agents.
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
Critical Accounting Policies. The Companys management considers the accounting policies described below to be critical in preparing the Companys consolidated financial statements. These policies require management to make estimates and judgments that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures of contingencies. See Note 1 to the consolidated financial statements for a more detailed description of the Companys accounting policies.
Revenue recognition. Title premiums on policies issued directly by the Company are recognized on the effective date of the title policy, and for policies issued by independent agents, when notice of issuance is received from the agent. Revenues from home warranty contracts are recognized ratably over the 12-month duration of the contracts. Revenues from property and casualty insurance policies are recognized ratably over the 12-month duration of the policies. The Companys tax service division, which is included in the mortgage information segment, defers its tax service fee and recognizes that fee as revenue ratably over the expected service period. The amortization rates applied to recognize the revenues assume a 10-year contract life and are adjusted to reflect prepayments. The Company reviews its tax service contract portfolio on a quarterly basis to determine if there have been changes in contract lives and/or changes in the number and/or timing of prepayments and adjusts the rates accordingly to reflect current trends. For all other products, revenues are recognized at the time of delivery, as the Company has no significant ongoing obligation after delivery.
Provision for title losses. The Company provides for estimated title insurance losses by a charge to expense when the related premium revenue is recognized. The amount charged to expense (the loss rate), as well as the adequacy of the ending reserves, is determined by the Company based on historical experience and other factors, including changes and trends in the type of title insurance policies issued, the real estate market and the interest rate environment. Management monitors the adequacy of the estimated loss reserves on a quarterly basis using a variety of techniques, including actuarial models, and adjusts the loss rate as necessary.
Purchase accounting and impairment testing for goodwill and other intangible assets. Pursuant to Statement of Financial Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), the Company is required to perform an annual impairment test for goodwill and other intangible assets by reporting unit. This annual test, which the Company elected to perform every September 30, utilizes a variety of valuation techniques, all of which require management to make estimates and judgments, and includes discounted cash flow analysis, market approach valuations and the use of third-party valuation advisors. Certain of these valuation techniques are also utilized by the Company in accounting for business combinations, primarily in the determination of the fair value and estimated lives of acquired assets and liabilities. The Companys reporting units, for purposes of applying the provisions of SFAS 142, are title insurance, home warranty, property and casualty insurance, trust and other services, mortgage origination products and services, mortgage servicing products and services, property information services, conventional credit information, sub-prime credit information, pre-employment and drug screening, tenant screening and motor vehicle reporting. In accordance with the provisions of SFAS 142, the Company completed the required annual impairment testing for goodwill and other intangible assets for the years ended December 31, 2003 and 2002, and determined that there was no impairment.
Income taxes. The Company estimates its quarterly effective income tax rate based upon a variety of factors including, but not limited to, the expected revenues and resulting pretax income for the year, the composition and geographic mix of the pretax income and the ratio of permanent differences to pretax income. Any changes to the estimated rate are made prospectively in accordance with Accounting Principles Board Opinions No. 28, Interim Financial Reporting. Additionally, management makes estimates as to the amount of reserves, if any, that are necessary for known and potential tax exposures.
Depreciation and amortization lives for assets. Management is required to estimate the useful lives of several asset classes, including capitalized data, internally developed software and other intangible assets. The
19
estimation of useful lives requires a significant amount of judgment related to matters such as future changes in technology, legal issues related to allowable uses of data and other matters.
OverviewThe majority of the revenues in the Companys title insurance and mortgage information segments depend, in large part, upon the level of real estate activity and the cost and availability of mortgage funds. Revenues for these segments result primarily from resales and refinancings of residential real estate and, to a lesser extent, from commercial transactions and the construction and sale of new housing. Over one-half of the revenues in the Companys property information and credit information segments also depend on real estate activity. The remaining portion of the property information and credit information revenues, as well as the revenues for the Companys specialty insurance, trust and other services, and screening information segments, are isolated from the volatility of real estate transactions. Traditionally, the greatest volume of real estate activity, particularly residential resale, has occurred in the spring and summer months. However, changes in interest rates, as well as other economic factors, can cause fluctuations in the traditional pattern of real estate activity.
During the second half of 2000, mortgage interest rates began to decline, fueling an increase in refinance activity. This trend continued into the fourth quarter of 2000 and resulted in a high inventory of open orders going into the first quarter of 2001. This, coupled with record levels of refinance activity as a result of the continuation of low mortgage interest rates, as well as the high demand for residential resale and new home sales, resulted in an exceptionally strong 2001. Mortgage originations totaled $2.03 trillion in 2001, up from $1.02 trillion in 2000. The favorable trends present during 2001 continued into 2002. Refinance activity remained at high levels, with existing and new-home-sale activity surpassing 2001 levels. Mortgage originations reached $2.79 trillion in 2002, with refinance activity comprising 66.4% of the total. Mortgage interest rates remained low through the first three quarters of 2003, fueling new record-setting refinance activity, but began to rise during the fourth quarter of the year. Existing and new-home-sale activity also reached new record levels. Mortgage originations totaled $3.91 trillion in 2003, with refinance activity comprising 71.3% of the total. The increase in mortgage interest rates that began in the fourth quarter of 2003 resulted in a low inventory of open orders going into 2004. This, together with the expectation of a relatively stable to marginally increasing mortgage interest rate environment in 2004, will most likely result in a return to more traditional, seasonal real estate patterns in 2004, where the greatest volume of real estate activity will occur in the spring and summer months.
Operating revenuesA summary by segment of the Companys operating revenues is as follows:
2003 |
% |
2002 |
% |
2001 |
% | ||||||||||
(in thousands, except percentages) | |||||||||||||||
Financial Services: |
|||||||||||||||
Title Insurance: |
|||||||||||||||
Direct operations |
$ | 2,264,925 | 37 | $ | 1,803,775 | 39 | $ | 1,463,303 | 40 | ||||||
Agency operations |
2,138,059 | 35 | 1,589,817 | 34 | 1,185,691 | 32 | |||||||||
4,402,984 | 72 | 3,393,592 | 73 | 2,648,994 | 72 | ||||||||||
Specialty Insurance |
207,287 | 3 | 143,307 | 3 | 112,054 | 3 | |||||||||
Trust and Other Services |
39,546 | 1 | 41,737 | 1 | 39,882 | 1 | |||||||||
4,649,817 | 76 | 3,578,636 | 77 | 2,800,930 | 76 | ||||||||||
Information Technology: |
|||||||||||||||
Mortgage Information |
642,684 | 11 | 479,288 | 10 | 407,006 | 11 | |||||||||
Property Information |
366,271 | 6 | 259,315 | 6 | 210,975 | 6 | |||||||||
Credit Information |
246,987 | 4 | 215,337 | 5 | 194,981 | 5 | |||||||||
Screening Information |
166,430 | 3 | 100,702 | 2 | 49,094 | 2 | |||||||||
1,422,372 | 24 | 1,054,642 | 23 | 862,056 | 24 | ||||||||||
$ | 6,072,189 | 100 | $ | 4,633,278 | 100 | $ | 3,662,986 | 100 | |||||||
20
Financial Services. Operating revenues from direct title operations increased 25.6% in 2003 over 2002 and 23.3% in 2002 over 2001. These increases reflect the growth in the number of title orders closed by the Companys direct operations, as well as increases in the average revenues per order closed. The Companys direct title operations closed 2,021,000, 1,696,100 and 1,404,600 title orders during 2003, 2002 and 2001, respectively, increases of 19.2% in 2003 over 2002 and 20.8% in 2002 over 2001. The average revenues per order closed were $1,121, $1,063 and $1,042 for 2003, 2002 and 2001, respectively, increases of 5.5% in 2003 over 2002 and 2.0% in 2002 over 2001. The increases noted in closed orders were primarily attributable to the relative changes in real estate activity year-over-year, as mentioned above. The increases in average revenues per order closed primarily reflect increasing real estate values. Operating revenues from agency title operations increased 34.5% in 2003 over 2002 and 34.1% in 2002 over 2001. These increases were primarily attributable to the same factors affecting direct title operations compounded by the inherent delay in the reporting of transactions by agents.
Specialty insurance operating revenues increased 44.7% in 2003 over 2002 and 27.9% in 2002 over 2001. These increases were primarily attributable to geographic expansion at the Companys home warranty division and market share growth at the property and casualty insurance division.
Information Technology. Mortgage information operating revenues increased 34.1% in 2003 over 2002 and 17.8% in 2002 over 2001. These increases were primarily attributable to the same factors affecting title insurance mentioned above, as well as acquisition activity. Operating revenues of $48.0 million and $14.9 million were contributed by new acquisitions in 2003 and 2002, respectively. In addition, during 2003 and 2002, the Companys tax service division accelerated its deferred revenue amortization rates to reflect the increase in refinance activity. This change resulted in increased operating revenues of $9.4 million in 2003 and $6.5 million in 2002.
Property information operating revenues increased 41.3% in 2003 over 2002 and 22.9% in 2002 over 2001. These increases were primarily due to the same favorable real estate conditions that benefited the title insurance and mortgage information segments, as well as market share growth and acquisition activity. Operating revenues of $52.4 million and $15.5 million were contributed by new acquisitions in 2003 and 2002, respectively.
Credit information operating revenues increased 14.7% in 2003 over 2002 and 10.4% in 2002 over 2001. The increase in 2003 over 2002 was primarily due to the growth in demand for credit information in the housing sector, offset in part by a $6.2 million reduction in revenues as a result of the sale of the Companys subsidiary, FASTRAC Systems, Inc., in August 2002. The increase in 2002 over 2001 was also primarily due to the growth in demand for credit information in the housing sector, and operating revenues of $9.2 million contributed by new acquisitions.
Screening information operating revenues increased 65.3% in 2003 over 2002 and 105.1% in 2002 over 2001. These increases were primarily attributable to $56.0 million and $49.8 million of operating revenues contributed by new acquisitions for the respective periods.
Investment and other incomeInvestment and other income totaled $105.8 million, $89.8 million and $81.1 million in 2003, 2002 and 2001, respectively, an increase of $16.0 million, or 17.8% in 2003 over 2002, and $8.7 million, or 10.8% in 2002 over 2001. The increase in 2003 over 2002 was primarily due to a $16.5 million increase in equity in earnings of unconsolidated affiliates. The increase in 2002 over 2001 was also primarily due to an $18.3 million increase in equity in earnings of unconsolidated affiliates, offset, in part, by a $9.6 million decrease in net interest and other income, primarily as a result of lower yields on cash equivalents and the Companys investment portfolio due to the lower interest rate environment. See Note 10 to the consolidated financial statements for additional information.
Net realized investment gains/lossesNet realized investment gains totaled $35.7 million in 2003, compared with net realized investment losses of $18.9 million in 2002 and gains of $6.6 million in 2001. The current year total
21
included the recognition of a previously deferred gain totaling $14.2 million relating to the sale of the Companys Contour Software, Inc. subsidiary in the first quarter of 2001. This gain was initially deferred due to the uncertainty relating to the realizability of the consideration received. In the fourth quarter of 2003, management concluded that, based upon the current financial condition and expected future performance of the acquirer, the realization of the consideration was assured and, therefore, recognition of the gain appropriate. Also included in the current year total was a $13.1 million realized gain associated with the merger of the Companys Credit Online business with DealerTrack Holdings, Inc. The prior year investment losses included a $13.6 million loss resulting from the write-down of WorldCom bonds; a $2.6 million loss associated with the sale of the Companys subsidiary, FASTRAC Systems, Inc.; and $2.3 million of losses due to the restructuring of the 1031 tax-deferred exchange investment portfolio, which was managed by the Companys Capital Management division.
Salaries and other personnel costsA summary by segment of the Companys salaries and other personnel costs is as follows:
2003 |
% |
2002 |
% |
2001 |
% | ||||||||||
(in thousands, except percentages) | |||||||||||||||
Financial Services: |
|||||||||||||||
Title insurance |
$ | 1,246,198 | 69 | $ | 1,076,727 | 71 | $ | 893,615 | 71 | ||||||
Specialty Insurance |
38,506 | 2 | 33,424 | 2 | 29,021 | 2 | |||||||||
Trust and Other Services |
14,922 | 1 | 14,260 | 1 | 12,234 | 1 | |||||||||
1,299,626 | 72 | 1,124,411 | 74 | 934,870 | 74 | ||||||||||
Information Technology: |
|||||||||||||||
Mortgage Information |
210,033 | 12 | 156,999 | 10 | 129,383 | 10 | |||||||||
Property Information |
127,832 | 7 | 102,614 | 7 | 95,910 | 8 | |||||||||
Credit Information |
61,226 | 3 | 63,795 | 4 | 57,034 | 4 | |||||||||
Screening Information |
54,333 | 3 | 31,985 | 2 | 20,795 | 2 | |||||||||
453,424 | 25 | 355,393 | 23 | 303,122 | 24 | ||||||||||
Corporate |
46,503 | 3 | 43,391 | 3 | 25,459 | 2 | |||||||||
$ | 1,799,553 | 100 | $ | 1,523,195 | 100 | $ | 1,263,451 | 100 | |||||||
Financial Services. The Companys title insurance segment comprised 95.9% of total salaries and other personnel costs for the Financial Services group. The title insurance segment (primarily direct operations) is labor intensive; accordingly, a major variable expense component is salaries and other personnel costs. This expense component is affected by two competing factors: the need to monitor personnel changes to match corresponding or anticipated new orders, and the need to provide quality service. In addition, this segments growth in operations that specialize in builder and lender title business has created ongoing fixed costs required to service accounts.
Title insurance personnel expenses increased 15.7% in 2003 over 2002 and 20.5% in 2002 over 2001. The increase in 2003 over 2002 was primarily attributable to $29.3 million of personnel costs associated with new acquisitions, $12.0 million of increased employee benefit costs, incremental labor costs incurred to service the increase in business volume and increased commissions associated with the increase in closed orders. The increase in 2002 over 2001 was primarily due to $36.1 million of increased employee benefit costs, $28.2 million of personnel costs associated with new acquisitions, $26.5 million in expenses related to the implementation of the Companys FAST title production system, incremental labor costs incurred to service the increase in business volume and increased commissions associated with the increase in closed orders. The increase in employee benefit costs was primarily the result of the Companys discretionary match related to the 401(k) plan, which is profit driven and increases as profits escalate. This match increased $5.8 million in 2003 over 2002 and $16.9 million in 2002 over 2001. Also contributing to the overall increase in employee benefit costs were increases in
22
health care costs of $6.2 million in 2003 over 2002 and $11.5 million in 2002 over 2001. The Companys direct title operations opened 2,511,000, 2,184,200 and 1,930,300 orders in 2003, 2002 and 2001, respectively, representing an increase of 15.0% in 2003 over 2002 and 13.2% in 2002 over 2001. From an efficiency standpoint, title insurance personnel costs as a percentage of title insurance operating revenues were 28.3% in 2003, 31.7% in 2002 and 33.7% in 2001.
Information Technology. Personnel expenses in total for the Information Technology group increased 27.6% in 2003 over 2002 and 17.2% in 2002 over 2001. These increases were primarily due to personnel expenses associated with new acquisitions, costs incurred to service the increase in business volume and increased employee benefit costs. Personnel costs associated with new acquisitions totaled $51.1 million in 2003 and $19.1 million in 2002. Employee benefit costs increased $9.8 million in 2003 over 2002 and $12.6 million in 2002 over 2001. From an efficiency standpoint, personnel costs for the Information Technology group as a percentage of operating revenues were 31.9% in 2003, 33.7% in 2002 and 35.2% in 2001.
Corporate. Corporate personnel expenses increased $3.1 million in 2003 over 2002 and $17.9 million in 2002 over 2001. The increase in 2002 over 2001 was primarily attributable to an increase of $13.3 million in employee benefit costs, increased technology personnel costs and higher general costs associated with the support effort needed to service the Companys expanded national and international operations.
Premiums retained by agentsA summary of agent retention and agent revenues is as follows:
2003 |
2002 |
2001 |
||||||||||
(in thousands, except percentages) | ||||||||||||
Agent retention |
$ | 1,729,104 | $ | 1,292,297 | $ | 960,215 | ||||||
Agent revenues |
$ | 2,138,059 | $ | 1,589,817 | $ | 1,185,691 | ||||||
% retained by agents |
80.9 | % | 81.3 | % | 81.0 | % | ||||||
The premium split between underwriter and agents is in accordance with their respective agency contracts and can vary from region to region due to divergencies in real estate closing practices, as well as rating structures. As a result, the percentage of title premiums retained by agents varies due to the geographical mix of revenues from agency operations.
Other operating expensesA summary by segment of the Companys other operating expenses is as follows:
2003 |
% |
2002 |
% |
2001 |
% | ||||||||||
(in thousands, except percentages) | |||||||||||||||
Financial Services: |
|||||||||||||||
Title Insurance |
$ | 715,725 | 54 | $ | 584,604 | 56 | $ | 474,127 | 55 | ||||||
Specialty Insurance |
23,316 | 2 | 11,596 | 1 | 14,270 | 2 | |||||||||
Trust and Other Services |
13,219 | 1 | 12,658 | 1 | 13,873 | 2 | |||||||||
752,260 | 57 | 608,858 | 58 | 502,270 | 59 | ||||||||||
Information Technology: |
|||||||||||||||
Mortgage Information |
177,234 | 14 | 159,211 | 15 | 140,199 | 16 | |||||||||
Property Information |
131,896 | 10 | 86,039 | 8 | 73,809 | 9 | |||||||||
Credit Information |
129,367 | 10 | 107,781 | 10 | 101,323 | 12 | |||||||||
Screening Information |
97,034 | 7 | 61,037 | 6 | 26,499 | 3 | |||||||||
535,531 | 41 | 414,068 | 39 | 341,830 | 40 | ||||||||||
Corporate |
32,084 | 2 | 26,199 | 3 | 9,504 | 1 | |||||||||
$ | 1,319,875 | 100 | $ | 1,049,125 | 100 | $ | 853,604 | 100 | |||||||
23
Financial Services. The Companys title insurance segment comprised 95.1% of total other operating expenses for the Financial Services group. Title insurance other operating expenses (principally direct operations) increased 22.4% in 2003 over 2002 and 23.3% in 2002 over 2001. These increases were primarily due to incremental costs (i.e., messenger costs, reproduction costs, title plant maintenance costs, etc.) associated with servicing the increases in total order volume and costs associated with new acquisitions. Other operating expenses associated with new acquisitions were $19.6 million in 2003 and $9.6 million in 2002. Title insurance other operating expenses as a percentage of title insurance operating revenues were 16.3% in 2003, 17.2% in 2002 and 17.9% in 2001.
Information Technology. Other operating expenses for the Information Technology group increased 29.3% in 2003 over 2002 and 21.1% in 2002 over 2001. These increases were primarily due to costs associated with servicing the increase in business volume and costs associated with new acquisitions. Other operating expenses associated with new acquisitions were $66.2 million in 2003 and $57.0 million in 2002. Information Technology other operating expenses as a percentage of operating revenues were 37.7% in 2003, 39.3% in 2002 and 39.7% in 2001.
Corporate. Corporate other operating expenses increased $5.9 million in 2003 over 2002 and $16.7 million in 2002 over 2001. The increase in 2002 over 2001 was primarily due to $15.0 million of technology expenses, primarily consulting and outsourcing costs, required to expand the Companys e-commerce capabilities, and higher general costs associated with the support effort needed to service the Companys expanded national and international operations.
Provision for title losses and other claimsA summary by segment of the Companys provision for title losses and other claims is as follows:
2003 |
% |
2002 |
% |
2001 |
% | ||||||||||
(in thousands, except percentages) | |||||||||||||||
Title Insurance |
$ | 179,681 | 55 | $ | 135,622 | 60 | $ | 113,812 | 63 | ||||||
Specialty Insurance: |
|||||||||||||||
Home Warranty |
56,769 | 18 | 50,881 | 23 | 47,661 | 26 | |||||||||
Property and Casualty Insurance |
62,777 | 19 | 26,168 | 12 | 10,838 | 6 | |||||||||
119,546 | 37 | 77,049 | 35 | 58,499 | 32 | ||||||||||
All other segments |
25,177 | 8 | 11,918 | 5 | 8,335 | 5 | |||||||||
$ | 324,404 | 100 | $ | 224,589 | 100 | $ | 180,646 | 100 | |||||||
The provision for title insurance losses, expressed as a percentage of title insurance operating revenues (excluding the one-time 2001 adjustment mentioned below), was 4.1% in 2003, 4.0% in 2002 and 4.0% in 2001. During the third quarter of 2001, the Company recorded a $7.9 million adjustment to a purchase accounting estimate for loss reserves at one of its title insurance subsidiaries, which was purchased in 1998. This adjustment strengthened loss reserves to reflect subsequent adverse development.
The provision for specialty insurance losses reflects home warranty claims and property and casualty insurance claims. The provision for home warranty claims, expressed as a percentage of home warranty operating revenues, was 48.9% in 2003, 49.8% in 2002 and 53.1% in 2001. The rate decreases were primarily due to a decrease in the average cost per claim, which was primarily due to the elimination of higher-cost contractors that were servicing claims in new geographic areas.
The provision for property and casualty insurance claims, expressed as a percentage of property and casualty insurance operating revenues, was 63.6% in 2003, 63.8% in 2002 and 52.0% in 2001. The rate for 2003 excludes $5.0 million of catastrophe losses related to the Southern California wildfires, which represents the
24
Companys deductible on its reinsurance treaty. The increase in 2002 over 2001 was primarily due to the shift in the lines of property and casualty insurance written from lender-placed insurance, which typically carries lower loss ratios (but higher expense ratios), to preferred homeowners insurance, which generally carries higher loss ratios (but lower expense ratios). The Company exited the lender-placed insurance business in 2001.
Depreciation and amortizationDepreciation and amortization increased 18.2% in 2003 over 2002 and decreased 10.6% in 2002 from 2001. The increase in 2003 over 2002 was primarily due to an increase in the amortization of intangibles as a result of acquisition activity and an increase in amortization of capitalized data and software. The decrease in 2002 was primarily due to the elimination of goodwill amortization as a result of implementing SFAS No. 142. See Note 5 to the consolidated financial statements. Depreciation and amortization, as well as capital expenditures, are summarized in Note 20 to the consolidated financial statements.
Premium taxesA summary by pertinent segment of the Companys premium taxes is as follows:
2003 |
% |
2002 |
% |
2001 |
% | ||||||||||
(in thousands, except percentages) | |||||||||||||||
Title Insurance |
$ | 46,211 | 90 | $ | 31,045 | 90 | $ | 22,762 | 92 | ||||||
Specialty Insurance |
5,324 | 10 | 3,613 | 10 | 2,078 | 8 | |||||||||
$ | 51,535 | 100 | $ | 34,658 | 100 | $ | 24,840 | 100 | |||||||
Insurers are generally not subject to state income or franchise taxes. However, in lieu thereof, a premium tax is imposed on certain operating revenues, as defined by statute. Tax rates and bases vary from state to state; accordingly, the total premium tax burden is dependent upon the geographical mix of operating revenues. The Companys underwritten title company (noninsurance) subsidiaries are subject to state income tax and do not pay premium tax. Accordingly, the Companys total tax burden at the state level for the title insurance segment is composed of a combination of premium taxes and state income taxes. Premium taxes as a percentage of title insurance operating revenues remained relatively constant at approximately 1.0%.
InterestInterest expense increased 7.4% in 2003 over 2002 and 11.7% in 2002 over 2001. These increases were primarily due to an increase in acquisition-related debt, and for 2002, the issuance of the Companys $210.0 million senior convertible debentures in April of 2001.
Income before income taxes and minority interestsA summary by segment is as follows:
2003 |
% |
2002 |
% |
2001 |
% | |||||||||||||
(in thousands, except percentages) | ||||||||||||||||||
Financial Services: |
||||||||||||||||||
Title Insurance |
$ | 494,946 | 52 | $ | 271,720 | 48 | $ | 173,654 | 44 | |||||||||
Specialty Insurance |
30,125 | 3 | 24,465 | 4 | 11,929 | 3 | ||||||||||||
Trust and Other Services |
9,683 | 1 | 13,548 | 2 | 12,269 | 3 | ||||||||||||
534,754 | 56 | 309,733 | 54 | 197,852 | 50 | |||||||||||||
Information Technology: |
||||||||||||||||||
Mortgage Information |
238,508 | 25 | 146,849 | 26 | 129,751 | 33 | ||||||||||||
Property Information |
105,339 | 11 | 71,459 | 12 | 35,321 | 9 | ||||||||||||
Credit Information |
64,291 | 7 | 39,266 | 7 | 30,062 | 8 | ||||||||||||
Screening Information |
4,505 | 1 | 2,459 | 1 | (286 | ) | | |||||||||||
412,643 | 44 | 260,033 | 46 | 194,848 | 50 | |||||||||||||
947,397 | 100 | 569,766 | 100 | 392,700 | 100 | |||||||||||||
Corporate |
(108,675 | ) | (119,859 | ) | (63,160 | ) | ||||||||||||
$ | 838,722 | $ | 449,907 | $ | 329,540 | |||||||||||||
25
The Companys title insurance profit margins vary according to a number of factors, including the volume, composition (residential or commercial) and type (resale, refinancing or new construction) of real estate activity. Commercial transactions tend to generate higher revenues and greater profit margins than residential transactions. Profit margins from refinancing activities are lower than those from resale activities because in many states there are premium discounts on, and cancellation rates are higher for, refinancing transactions. Cancellations of title orders adversely affect profits because costs are incurred in opening and processing such orders, but revenues are not generated. Also, the Companys direct title insurance business has significant fixed costs in addition to its variable costs. Accordingly, profit margins from the Companys direct title insurance business improve as the volume of title orders closed increases. Title insurance profit margins are also affected by the percentage of operating revenues generated by agency operations. Profit margins from direct operations are generally higher than from agency operations due primarily to the large portion of the premium that is retained by the agent.
Most of the businesses that are included in the Information Technology group are database intensive, with a relatively high proportion of fixed costs. As such, profit margins generally improve as revenues increase. Revenues for the mortgage information segment, like title insurance, are primarily dependent on the level of real estate activity and the cost and availability of mortgage funds. Revenues from the property information segment are, in part, dependent on real estate activity, but are less cyclical than title insurance and mortgage information revenues as a result of a significant subscription-based revenue stream. Revenues for the credit information segment are, in part, impacted by real estate activity, but also by the consumer and automobile sectors.
In general, the title insurance business is a lower-margin business when compared with the Companys other segments. The lower margins reflect the high fixed cost of producing title evidence, whereas the corresponding revenues are subject to regulatory and competitive pricing constraints.
Corporate expenses include investment gains and losses, personnel and other operating expenses associated with the Companys corporate facilities, certain technology initiatives and unallocated interest expense.
Income taxesThe Companys effective income tax rate, which includes a provision for state income and franchise taxes for noninsurance subsidiaries, was 34.8%, 33.3% and 35.7% for 2003, 2002 and 2001, respectively. The differences in the effective tax rate were primarily due to changes in the ratio of permanent differences to income before income taxes and minority interests and changes in state income and franchise taxes resulting from fluctuations in the Companys noninsurance subsidiaries contribution to pretax profits. Information regarding items included in the reconciliation of the effective rate with the federal statutory rate is contained in Note 11 to the consolidated financial statements.
Minority interestsMinority interests in net income of consolidated subsidiaries increased $30.1 million in 2003 over 2002 and $20.9 million in 2002 over 2001. These increases were primarily due to the relative increases in the operating results of the Companys joint venture with Experian.
Net incomeNet income and per share information are summarized as follows (see Note 12 to the consolidated financial statements):
2003 |
2002 |
2001 | |||||||
(in thousands, except per share amounts) | |||||||||
Net income |
$ | 451,022 | $ | 234,367 | $ | 167,268 | |||
Per share of common stock: |
|||||||||
Net income: |
|||||||||
Basic |
$ | 5.89 | $ | 3.27 | $ | 2.51 | |||
Diluted |
$ | 5.22 | $ | 2.92 | $ | 2.27 | |||
Weighted-average shares: |
|||||||||
Basic |
76,632 | 71,594 | 66,568 | ||||||
Diluted |
87,775 | 82,567 | 75,834 | ||||||
26
Liquidity and Capital Resources
Cash provided by operating activities amounted to $830.1 million, $540.6 million and $388.2 million for 2003, 2002 and 2001, respectively, after net claim payments of $269.5 million, $193.1 million and $153.4 million, respectively. The principal nonoperating uses of cash and cash equivalents for the three-year period ended December 31, 2003, were for the $375 million acquisition of Transamericas flood determination and tax reporting businesses, other company acquisitions, capital expenditures, additions to the investment portfolio, dividends, distributions to minority shareholders and the repayment of debt. The most significant nonoperating sources of cash and cash equivalents were proceeds from the issuance of the Companys $210.0 million senior convertible debentures in 2001 (see Note 8 to the consolidated financial statements), proceeds from the issuance of other debt and proceeds from the sales and maturities of certain investments. The net effect of all activities on total cash and cash equivalents was an increase of $212.7 million for 2003, $255.6 million for 2002 and $344.3 million for 2001.
Notes and contracts payable, as a percentage of total capitalization, was 23.0% as of December 31, 2003, as compared with 25.6% as of the prior year end. This decrease was primarily attributable to the increase in the capital base primarily due to net income for the year. Notes and contracts payable are more fully described in Note 8 to the consolidated financial statements. In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement became effective for the current year and establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The implementation of this statement required the Company to reclassify its Mandatorily redeemable preferred securities of the Companys subsidiary trust whose sole assets are the Companys $100.0 million 8.5% deferrable interest subordinated notes due 2012 as debt.
In the first quarter of 2004, the Company began the expansion of its corporate office campus. This expansion will add two 4-story office buildings totaling 225,000 square feet, and a single-story, free-standing, 50,000 square foot technology center. The construction is estimated to be completed by the third quarter of 2005 with an estimated total cost of $69.0 million. The Company anticipates funding the corporate office expansion with internally generated funds.
On October 1, 2003, the Company completed the previously announced acquisition of Transamerica Finance Corporations real estate tax service and flood hazard certification business for a net purchase price of $375.0 million. The acquisition was made through the Companys 80.0% owned joint venture with Experian. There was no debt assumed in the transaction and the purchase price was funded with $125.0 million of existing cash at the joint venture, a $200.0 million contribution from the Company and a $50.0 million contribution from Experian.
On October 12, 2001, the Company entered into a credit agreement that provided for a $200.0 million line of credit. This agreement supercedes the Companys prior credit agreements and expires in October 2006. Under 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 Companys line of credit was unused at December 31, 2003. The Companys publicly traded subsidiary, First Advantage Corporation also has a bank credit agreement that provides for a $15.0 million collateralized line of credit. Under the terms of that credit agreement, First Advantage Corporation is required to satisfy certain financial requirements. The line of credit remains in effect until July 2006 and had a balance due of $9.0 million at December 31, 2003.
Off-balance sheet arrangements and contractual obligations. The Company administers escrow and trust deposits as a service to its customers. Escrow deposits totaled $4.5 billion and $5.6 billion at December 31, 2003 and 2002, respectively, of which $260.2 million and $176.6 million were held at certain of the Companys subsidiaries. The remaining escrow deposits were held at third-party financial institutions. Trust deposits totaled $2.3 billion and $1.9 billion at December 31, 2003 and 2002, respectively, and were held at the Companys trust subsidiary. Escrow and trust deposits are not considered assets of the Company and, therefore, are not included in the accompanying consolidated balance sheets. However, the Company remains contingently liable for the disposition of these deposits.
27
In addition, The Company facilitates tax-deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code. As a facilitator and intermediary, the Company holds the proceeds from sales transactions until a qualified acquisition occurs. Like-kind exchange deposits totaled $1.1 billion and $978.0 million at December 31, 2003 and 2002, respectively. The Company also facilitates tax deferred reverse exchanges pursuant to Revenue Procedure 2000-37. These exchanges require the Company, using the customers funds, to acquire the qualifying property on behalf of the customer and take temporary title to the customers property until a qualifying acquisition occurs. Reverse exchange property totaled $229.4 million and $154.6 million at December 31, 2003 and 2002, respectively. Due to the structure utilized to facilitate these transactions, like-kind exchanges and reverse exchanges are not considered assets of the Company and, therefore, are not included in the accompanying consolidated balance sheets. However, the Company remains contingently liable for the transfers of property, disbursements of proceeds and the return on the proceeds at the agreed upon rate.
A summary, by due date, of the Companys total contractual obligations at December 31, 2003, is as follows:
Notes and contracts payable |
Operating leases |
Mandatorily reedemable preferred securities |
Total | |||||||||
(in thousands) | ||||||||||||
2004 |
$ | 55,049 | $ | 167,962 | | $ | 223,011 | |||||
2005 |
49,719 | 129,652 | | 179,371 | ||||||||
2006 |
46,931 | 86,323 | | 133,254 | ||||||||
2007 |
18,326 | 52,484 | | 70,810 | ||||||||
2008 |
223,949 | 29,628 | | 253,577 | ||||||||
Later Years |
159,914 | 33,840 | $ | 100,000 | 293,754 | |||||||
$ | 553,888 | $ | 499,889 | $ | 100,000 | $ | 1,153,777 | |||||
Pursuant to various insurance and other regulations, the maximum amount of dividends, loans and advances available to the Company in 2004 from its insurance subsidiaries is $313.4 million. Such restrictions have not had, nor are they expected to have, an impact on the Companys ability to meet its cash obligations. See Note 2 to the consolidated financial statements.
Due to the Companys 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 Companys financial position will enable management to react to future opportunities for acquisitions or other investments in support of the Companys continued growth and expansion.
28
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Companys primary exposure to market risk relates to interest rate risk associated with certain other financial instruments. Although the Company monitors its risk associated with fluctuations in interest rates, it does not currently use derivative financial instruments to hedge these risks. The table below provides information about certain assets and liabilities that are sensitive to changes in interest rates and presents cash flows and the related weighted average interest rates by expected maturity dates. The Company is also subject to equity price risk as related to its equity securities. At December 31, 2003, the Company had equity securities with a book value of $49.6 million and fair value of $45.8 million. Although the Company has operations in certain foreign countries, these operations, in the aggregate, are not material to the Companys financial condition or results of operations.
2004 |
2005 |
2006 |
2007 |
2008 |
Thereafter |
Total |
Fair Value |
|||||||||||||||||||||
(in thousands except percentages) |
||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||
Deposits with Savings and Loans |
||||||||||||||||||||||||||||
Book Value |
$ | 57,945 | $ | 57,945 | $ | 57,945 | ||||||||||||||||||||||
Ave. Interest Rate |
2.12 | % | 100.0 | % | ||||||||||||||||||||||||
Debt Securities |
||||||||||||||||||||||||||||
Book Value |
$ | 24,183 | 22,129 | 40,161 | 32,097 | 30,005 | 189,155 | $ | 337,730 | $ | 350,475 | |||||||||||||||||
Ave. Interest Rate |
4.49 | % | 5.57 | % | 4.93 | % | 4.55 | % | 4.57 | % | 5.06 | % | 103.8 | % | ||||||||||||||
Loans Receivable |
||||||||||||||||||||||||||||
Book Value |
$ | 385 | 5 | 996 | 46 | 1,271 | 102,525 | $ | 105,228 | $ | 105,304 | |||||||||||||||||
Ave. Interest Rate |
8.72 | % | 0.00 | % | 8.66 | % | 7.83 | % | 9.32 | % | 7.01 | % | 100.1 | % | ||||||||||||||
Liabilities |
||||||||||||||||||||||||||||
Variable Rate Demand Deposits |
||||||||||||||||||||||||||||
Book Value |
$ | 19,784 | $ | 19,784 | $ | 19,784 | ||||||||||||||||||||||
Ave. Interest Rate |
1.75 | % | 100.0 | % | ||||||||||||||||||||||||
Fixed Rate Demand Deposits |
||||||||||||||||||||||||||||
Book Value |
$ | 35,473 | 10,121 | 6,271 | 2,613 | 2,318 | $ | 56,796 | $ | 57,121 | ||||||||||||||||||
Ave. Interest Rate |
2.95 | % | 3.10 | % | 3.37 | % | 4.95 | % | 3.77 | % | 100.6 | % | ||||||||||||||||
Notes Payable |
||||||||||||||||||||||||||||
Book Value |
$ | 55,049 | 49,719 | 46,931 | 18,326 | 223,949 | 159,914 | $ | 553,888 | $ | 564,505 | |||||||||||||||||
Ave. Interest Rate |
7.91 | % | 7.62 | % | 8.19 | % | 8.79 | % | 4.52 | % | 6.10 | % | 101.9 | % | ||||||||||||||
Mandatorily Redeemable Preferred Securities |
||||||||||||||||||||||||||||
Book Value |
$ | 100,000 | $ | 100,000 | $ | 100,000 | ||||||||||||||||||||||
Ave. Interest Rate |
8.50 | % | 8.50 | % | 100.0 | % |
Item 8. Financial Statements and Supplementary Data
Separate financial statements for subsidiaries not consolidated and 50% or less owned persons accounted for by the equity method have been omitted because, if considered in the aggregate, they would not constitute a significant subsidiary.
29
Page No. | ||||||
31 | ||||||
Financial Statements: |
||||||
32 | ||||||
33 | ||||||
34 | ||||||
35 | ||||||
36 | ||||||
60 | ||||||
Financial Statement Schedules: |
||||||
I. |
Summary of InvestmentsOther than Investments in Related Parties | 61 | ||||
III. |
Supplementary Insurance Information | 62 | ||||
IV. |
Reinsurance | 64 | ||||
V. |
Valuation and Qualifying Accounts | 65 |
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.
30
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
The First American Corporation:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of The First American Corporation and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Companys management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 5 to the financial statements, in 2002, the Company changed its method of accounting for goodwill and other intangible assets as required by Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets.
As discussed in Note 9 to the financial statements, in 2003, the Company changed the classification of its mandatorily redeemable preferred securities as required by Statement of Financial Accounting Standards No. 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
PricewaterhouseCoopers LLP
San Francisco, California
March 11, 2004
31
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except percentage and share data)
December 31 |
||||||||
2003 |
2002 |
|||||||
ASSETS | ||||||||
Cash and cash equivalents |
$ | 1,113,530 | $ | 900,863 | ||||
Accounts and accrued income receivable, less allowances ($55,112 and $50,782) |
347,035 | 299,040 | ||||||
Investments: |
||||||||
Deposits with savings and loan associations and banks |
57,945 | 38,328 | ||||||
Debt securities |
350,475 | 309,864 | ||||||
Equity securities |
45,758 | 36,931 | ||||||
Other long-term investments |
233,794 | 142,392 | ||||||
687,972 | 527,515 | |||||||
Loans receivable |
105,228 | 108,162 | ||||||
Property and equipment, at cost: |
||||||||
Land |
43,327 | 43,185 | ||||||
Buildings |
187,167 | 183,045 | ||||||
Furniture and equipment |
286,337 | 270,004 | ||||||
Capitalized software |
364,658 | 284,537 | ||||||
Lessaccumulated depreciation |
(403,473 | ) | (347,695 | ) | ||||
478,016 | 433,076 | |||||||
Title plants and other indexes |
426,086 | 375,401 | ||||||
Deferred income taxes |
141,622 | 20,951 | ||||||
Goodwill, net (Note 5) |
1,253,080 | 563,991 | ||||||
Other assets |
339,542 | 169,046 | ||||||
$ | 4,892,111 | $ | 3,398,045 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Demand deposits |
$ | 76,580 | $ | 84,473 | ||||
Accounts payable and accrued liabilities: |
||||||||
Accounts payable |
72,315 | 51,701 | ||||||
Salaries and other personnel costs |
227,193 | 165,454 | ||||||
Pension costs and other retirement plans |
218,249 | 170,327 | ||||||
Other |
301,258 | 151,587 | ||||||
819,015 | 539,069 | |||||||
Deferred revenue |
719,503 | 358,747 | ||||||
Reserve for known and incurred but not reported claims |
435,852 | 360,305 | ||||||
Income taxes payable |
4,017 | 1,518 | ||||||
Notes and contracts payable |
553,888 | 425,705 | ||||||
Mandatorily redeemable preferred securities of the Companys subsidiary trust whose sole assets are the Companys $100,000,000 8.5% Deferrable interest subordinated notes Due 2012 (Note 9) |
100,000 | 100,000 | ||||||
Minority interests in consolidated subsidiaries |
303,736 | 163,639 | ||||||
Commitments and contingencies (Note 15) |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $1 par value |
||||||||
Authorized500,000 shares; OutstandingNone |
||||||||
Common stock, $1 par value |
||||||||
Authorized180,000,000 shares Outstanding78,826,000 and 73,636,000 shares |
78,826 | 73,636 | ||||||
Additional paid-in capital |
463,610 | 359,644 | ||||||
Retained earnings |
1,399,940 | 987,768 | ||||||
Accumulated other comprehensive loss |
(62,856 | ) | (56,459 | ) | ||||
Total stockholders equity |
1,879,520 | 1,364,589 | ||||||
$ | 4,892,111 | $ | 3,398,045 | |||||
32
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share amounts)
Year Ended December 31 |
||||||||||||
2003 |
2002 |
2001 |
||||||||||
Revenues: |
||||||||||||
Operating revenues |
$ | 6,072,189 | $ | 4,633,278 | $ | 3,662,986 | ||||||
Investment and other income |
105,808 | 89,823 | 81,093 | |||||||||
Net realized investment gains (losses) |
35,717 | (18,892 | ) | 6,644 | ||||||||
6,213,714 | 4,704,209 | 3,750,723 | ||||||||||
Expenses: |
||||||||||||
Salaries and other personnel costs |
1,799,553 | 1,523,195 | 1,263,451 | |||||||||
Premiums retained by agents |
1,729,104 | 1,292,297 | 960,215 | |||||||||
Other operating expenses |
1,319,875 | 1,049,125 | 853,604 | |||||||||
Provision for title losses and other claims |
324,404 | 224,589 | 180,646 | |||||||||
Depreciation and amortization |
114,424 | 96,829 | 108,348 | |||||||||
Premium taxes |
51,535 | 34,658 | 24,840 | |||||||||
Interest |
36,097 | 33,609 | 30,079 | |||||||||
5,374,992 | 4,254,302 | 3,421,183 | ||||||||||
Income before income taxes and minority interests |
838,722 | 449,907 | 329,540 | |||||||||
Income taxes |
292,000 | 149,900 | 117,500 | |||||||||
Income before minority interests |
546,722 | 300,007 | 212,040 | |||||||||
Minority interests |
95,700 | 65,640 | 44,772 | |||||||||
Net income |
451,022 | 234,367 | 167,268 | |||||||||
Other comprehensive income (loss), net of tax: (Note 17) |
||||||||||||
Unrealized gain (loss) on securities |
3,831 | (1,199 | ) | (3,852 | ) | |||||||
Minimum pension liability adjustment |
(10,228 | ) | (41,644 | ) | (14,733 | ) | ||||||
(6,397 | ) | (42,843 | ) | (18,585 | ) | |||||||
Comprehensive income |
$ | 444,625 | $ | 191,524 | $ | 148,683 | ||||||
Per share amounts: (Note 12) |
||||||||||||
Basic |
$ | 5.89 | $ | 3.27 | $ | 2.51 | ||||||
Diluted |
$ | 5.22 | $ | 2.92 | $ | 2.27 | ||||||
Weighted-average common shares outstanding: (Note 12) |
||||||||||||
Basic |
76,632 | 71,594 | 66,568 | |||||||||
Diluted |
87,775 | 82,567 | 75,834 | |||||||||
See Notes to Consolidated Financial Statements
33
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
Shares |
Common Stock |
Additional paid-in capital |
Retained earnings |
Accumulated other comprehensive income (loss) |
Total |
||||||||||||||||||
Balance at December 31, 2000 |
63,887 | $ | 63,887 | $ | 172,468 | $ | 628,913 | $ | 4,969 | $ | 870,237 | ||||||||||||
Net income for 2001 |
167,268 | 167,268 | |||||||||||||||||||||
Cash dividends on common shares |
(18,210 | ) | (18,210 | ) | |||||||||||||||||||
Shares issued in connection with company acquisitions |
3,510 | 3,510 | 79,304 | 82,814 | |||||||||||||||||||
Shares issued in connection with option, benefit and savings plans |
1,337 | 1,337 | 20,556 | 21,893 | |||||||||||||||||||
Purchase of Company shares |
(40 | ) | (40 | ) | (925 | ) | (965 | ) | |||||||||||||||
Other comprehensive loss |
(18,585 | ) | (18,585 | ) | |||||||||||||||||||
Balance at December 31, 2001 |
68,694 | 68,694 | 271,403 | 777,971 | (13,616 | ) | 1,104,452 | ||||||||||||||||
Net income for 2002 |
234,367 | 234,367 | |||||||||||||||||||||
Cash dividends on common shares |
(24,570 | ) | (24,570 | ) | |||||||||||||||||||
Shares issued in connection with company acquisitions |
3,094 | 3,094 | 58,257 | 61,351 | |||||||||||||||||||
Shares issued in connection with option, benefit and savings plans |
1,848 | 1,848 | 29,984 | 31,832 | |||||||||||||||||||
Other comprehensive loss |
(42,843 | ) | (42,843 | ) | |||||||||||||||||||
Balance at December 31, 2002 |
73,636 | 73,636 | 359,644 | 987,768 | (56,459 | ) | 1,364,589 | ||||||||||||||||
Net income for 2003 |
451,022 | 451,022 | |||||||||||||||||||||
Cash dividends on common shares |
(38,850 | ) | (38,850 | ) | |||||||||||||||||||
Shares issued in connection with company acquisitions |
1,067 | 1,067 | 27,413 | 28,480 | |||||||||||||||||||
Shares issued in connection with option, benefit and savings plans |
4,123 | 4,123 | 76,553 | 80,676 | |||||||||||||||||||
Other comprehensive loss |
(6,397 | ) | (6,397 | ) | |||||||||||||||||||
Balance at December 31, 2003 |
78,826 | $ | 78,826 | $ | 463,610 | $ | 1,399,940 | $ | (62,856 | ) | $ | 1,879,520 | |||||||||||
See Notes to Consolidated Financial Statements.
34
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31 |
||||||||||||
2003 |
2002 |
2001 |
||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income |
$ | 451,022 | $ | 234,367 | $ | 167,268 | ||||||
Adjustments to reconcile net income to cash provided by operating activities: |
||||||||||||
Provision for title losses and other claims |
324,404 | 224,589 | 180,646 | |||||||||
Depreciation and amortization |
114,424 | 96,829 | 108,348 | |||||||||
Minority interests in net income |
95,700 | 65,640 | 44,772 | |||||||||
Investment (gains) losses |
(35,717 | ) | 18,892 | (6,644 | ) | |||||||
Other, net |
(59,789 | ) | (43,337 | ) | (12,166 | ) | ||||||
Changes in assets and liabilities excluding effects of company acquisitions and noncash transactions: |
||||||||||||
Claims paid, including assets acquired, net of recoveries |
(269,468 | ) | (193,105 | ) | (153,373 | ) | ||||||
Net change in income tax accounts |
(4,975 | ) | (8,376 | ) | 39,232 | |||||||
Increase in accounts and accrued income receivable |
(17,443 | ) | (17,223 | ) | (63,668 | ) | ||||||
Increase in accounts payable and accrued liabilities |
161,140 | 95,531 | 68,920 | |||||||||
Increase in deferred revenue |
129,507 | 66,047 | 30,383 | |||||||||
Other, net |
(58,685 | ) | 753 | (15,471 | ) | |||||||
Cash provided by operating activities |
830,120 | 540,607 | 388,247 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Net cash effect of company acquisitions/dispositions |
(499,038 | ) | (51,450 | ) | (18,935 | ) | ||||||
Net (increase) decrease in deposits with banks |
(13,768 | ) | (11,905 | ) | 4,427 | |||||||
Purchases of debt and equity securities |
(320,134 | ) | (284,776 | ) | (188,738 | ) | ||||||
Proceeds from sales of debt and equity securities |
232,941 | 116,701 | 52,147 | |||||||||
Proceeds from maturities of debt securities |
52,857 | 127,187 | 89,746 | |||||||||
Net decrease in other long-term investments |
42,110 | 24,859 | 13,025 | |||||||||
Net decrease (increase) in loans receivable |
2,934 | (3,898 | ) | (9,812 | ) | |||||||
Capital expenditures |
(98,963 | ) | (94,672 | ) | (129,221 | ) | ||||||
Purchases of capitalized data |
(19,866 | ) | (17,745 | ) | (12,583 | ) | ||||||
Net proceeds from sale of property and equipment |
3,373 | 3,661 | 4,299 | |||||||||
Cash used for investing activities |
(617,554 | ) | (192,038 | ) | (195,645 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Net change in demand deposits |
(7,893 | ) | (6,812 | ) | 9,996 | |||||||
Proceeds from issuance of notes |
177,117 | 9,919 | 212,717 | |||||||||
Repayment of debt |
(152,722 | ) | (40,414 | ) | (34,235 | ) | ||||||
Purchase of Company shares |
| | (965 | ) | ||||||||
Proceeds from exercise of stock options |
26,500 | 8,401 | 10,566 | |||||||||
Proceeds from issuance of stock to employee benefit plans |
5,989 | 4,433 | 160 | |||||||||
Contributions from minority shareholders |
58,000 | | | |||||||||
Distributions to minority shareholders |
(72,882 | ) | (43,903 | ) | (28,296 | ) | ||||||
Cash dividends |
(34,008 | ) | (24,570 | ) | (18,210 | ) | ||||||
Cash provided by (used for) financing activities |
101 | (92,946 | ) | 151,733 | ||||||||
Net increase in cash and cash equivalents |
212,667 | 255,623 | 344,335 | |||||||||
Cash and cash equivalentsBeginning of year |
900,863 | 645,240 | 300,905 | |||||||||
Cash and cash equivalentsEnd of year |
$ | 1,113,530 | $ | 900,863 | $ | 645,240 | ||||||
SUPPLEMENTAL INFORMATION: |
||||||||||||
Cash paid during the year for: |
||||||||||||
Interest |
$ | 36,276 | $ | 33,281 | $ | 28,323 | ||||||
Premium taxes |
$ | 46,723 | $ | 30,655 | $ | 20,349 | ||||||
Income taxes |
$ | 296,227 | $ | 157,528 | $ | 93,361 | ||||||
Noncash investing and financing activities: |
||||||||||||
Shares issued for benefits plans |
$ | 48,187 | $ | 18,998 | $ | 11,167 | ||||||
Company acquisitions in exchange for common stock |
$ | 28,480 | $ | 61,351 | $ | 82,814 | ||||||
Purchase of minority interest |
$ | | $ | | $ | 1,322 | ||||||
Liabilities in connection with company acquisitions |
$ | 330,599 | $ | 55,761 | $ | 34,596 |
See Notes to Consolidated Financial Statements
35
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Description of the Company:
The First American Corporation (the Company), through its subsidiaries, is engaged in the business of providing business information and related products and services. The Company has seven reporting segments that fall within two primary business groups, financial services and information technology. The Financial Services group includes title insurance and services, specialty insurance, and trust and other services. The title insurance and services segment issues residential and commercial title insurance policies, provides escrow services, equity loan services, tax-deferred exchanges and other related products and services. The specialty insurance segment issues property and casualty insurance policies and provides home warranties. The trust and other services segment provides investment advisory and trust and thrift services. The Information Technology group includes mortgage information, property information, credit information and screening information. The mortgage information segment provides tax monitoring, flood zone certification, default management services and other real estate related services. The property information segment provides property database services and appraisal services. The credit information segment provides mortgage credit and specialized credit reporting services. The screening information segment provides resident screening, pre-employment screening, substance abuse management and testing, consumer direct location services and motor vehicle reporting.
Significant Accounting Policies:
Principles of consolidation
The consolidated financial statements include the accounts of The First American Corporation and all controlled subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain 2001 and 2002 amounts have been reclassified to conform to the 2003 presentation. In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). This interpretation requires the consolidation of variable interest entities (VIEs) created or acquired if certain conditions are met. During December 2003, the FASB issued FIN 46 revised (FIN 46R) to defer the implementation date for pre-existing VIEs that are not special purpose entities until the end of the first interim or annual period ending after December 15, 2003. For VIEs that are not special purpose entities, companies must apply FIN 46R no later than the end of the first reporting period ending after March 15, 2004. The adoption of FIN 46 as revised by FIN 46R did not have a material impact on the Companys financial condition or results of operations.
Cash equivalents
The Company considers cash equivalents to be all short-term investments that have an initial maturity of 90 days or less and are not restricted for statutory deposit or premium reserve requirements. The carrying amount for cash equivalents is a reasonable estimate of fair value due to the short-term maturity of these investments.
Investments
Deposits with savings and loan associations and banks are short-term investments with initial maturities of more than 90 days. The carrying amount of these investments is a reasonable estimate of fair value due to their short-term nature.
Debt securities are carried at fair value and consist primarily of investments in obligations of the United States Treasury, various corporations, certain state and political subdivisions and mortgage-backed securities.
36
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Equity securities are carried at fair value and consist primarily of investments in marketable common stocks of corporate entities.
Other long-term investments consist primarily of investments in affiliates, which are accounted for under the equity method of accounting; and notes receivable and other investments, which are carried at the lower of cost or fair value less costs to sell.
The Company classifies its debt and equity securities portfolio as available-for-sale. This portfolio is continually monitored for differences between the cost and estimated fair value of each security. If the Company believes that a decline in the value of a debt or equity security is temporary in nature, it records the decline as an unrealized loss in stockholders equity. If the decline is believed to be other than temporary, the debt or equity security is written down to the carrying value and a realized loss is recorded on the Companys statement of income. Managements assessment of a decline in value includes, among other things, its current judgment as to the financial position and future prospects of the entity that issued the security. If that judgment changes in the future, the Company may ultimately record a realized loss after having initially concluded that the decline in value was temporary.
Property and equipment
Property and equipment includes computer software acquired or developed for internal use and for use with the Companys products. Software development costs, which include capitalized interest costs incurred and certain payroll-related costs of employees directly associated with developing software, in addition to incremental payments to third parties, are capitalized from the time technological feasibility is established until the software is ready for use.
Depreciation on buildings and on furniture and equipment is computed using the straight-line method over estimated useful lives of 25 to 40 and 3 to 10 years, respectively. Capitalized software costs are amortized using the straight-line method over estimated useful lives of 3 to 10 years.
Title plants and other indexes
Title plants and other indexes include the Companys title plants, flood zone databases and capitalized real estate data. Title plants and flood zone databases are carried at original cost, with the costs of daily maintenance (updating) charged to expense as incurred. Because properly maintained title plants and flood zone databases have indefinite lives and do not diminish in value with the passage of time, no provision has been made for depreciation or amortization. Capitalized real estate data, which is primarily used by the Companys property information segment, is amortized using the straight-line method over estimated useful lives of 5 to 15 years. The Company continually analyzes its title plant and other indexes for impairment. This analysis includes, but is not limited to, the effects of obsolescence, duplication, demand and other economic factors.
Assets acquired in connection with claim settlements
In connection with settlement of title insurance and other claims, the Company sometimes purchases mortgages, deeds of trust, real property or judgment liens. These assets, sometimes referred to as salvage
37
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
assets, are carried at the lower of cost or fair value less costs to sell and are included in Other assets in the Companys consolidated balance sheets. The balance for these assets was $42.7 million and $41.6 million at December 31, 2003 and 2002, respectively.
Goodwill
On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). This statement addresses financial accounting and reporting for goodwill and other intangible assets. In accordance with the provisions of SFAS 142, goodwill is no longer amortized but is rather tested annually for impairment. The Company has selected September 30 as the annual valuation date to test goodwill for impairment.
Impairment of long-lived assets and loans receivable
On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (SFAS 144). This standard requires that the Company test long-lived assets for impairment whenever there are recognized events or changes in circumstances that could affect the carrying value of the long-lived assets. In accordance with SFAS 144, management uses estimated expected future cash flows (undiscounted and excluding interest costs) to measure the recoverability of long-lived assets held and used. As of December 31, 2003 and 2002, no indications of impairment were identified. SFAS 144 also requires that long-lived assets classified as held for sale be carried at the lower of cost or market as of the date the criteria established by SFAS 144 have been met. As of December 31, 2003 and 2002, no long-lived assets were classified as held for sale.
Loans receivable are impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans receivable are measured at the present value of expected future cash flows discounted at the loans 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. As of December 31, 2003 and 2002, no indications of impairment of loans receivable were identified.
Reserve for known and incurred but not reported claims
The Company provides for title insurance and property and casualty 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 Company provides for claims losses relating to its home warranty business based on the average cost per claim as applied to the total of new claims incurred. The average cost per home warranty claim is calculated using the average of the most recent 12 months of claims experience.
The reserve for known and incurred but not reported claims reflects managements 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 claim costs is subject to many variables, including, for title insurance, changes and trends in the type of title insurance policies issued, the real estate market and the interest rate environment. Management monitors the adequacy of the estimated loss reserves on a quarterly basis using a variety of techniques, including actuarial models, and adjusts the loss rates as necessary.
38
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Operating revenues
Financial Services GroupTitle premiums on policies issued directly by the Company are recognized on the effective date of the title policy and escrow fees are recorded upon close of the escrow. Revenues from title policies issued by independent agents are recorded when notice of issuance is received from the agent.
Revenues from home warranty contracts are recognized ratably over the 12-month duration of the contracts. Revenues from property and casualty insurance policies are recognized ratably over the 12-month duration of the policies.
Interest on loans with the Companys thrift subsidiary is recognized on the outstanding principal balance on the accrual basis. Loan origination fees and related direct loan origination costs are deferred and recognized over the life of the loan. Revenues earned by the other products in the trust and other services segment are recognized at the time of delivery, as the Company has no significant ongoing obligation after delivery.
Information Technology GroupThe Companys tax service operations defer the tax service fee and recognize that fee as revenue ratably over the expected service period. The amortization rates applied to recognize the revenues assume a 10-year contract life and are adjusted to reflect prepayments. The Company reviews its tax service contract portfolio quarterly to determine if there have been changes in contract lives and/or changes in the number and/or timing of prepayments. Accordingly, the Company may adjust the rates to reflect current trends. Revenues earned by the other products in the Information Technology group are recognized at the time of delivery, as the Company has no significant ongoing obligation after delivery.
Premium taxes
Title insurance, property and casualty insurance and home warranty companies, like other types of insurers, are generally not subject to state income or franchise taxes. However, in lieu thereof, most states impose a tax based primarily on insurance premiums written. This premium tax is reported as a separate line item in the consolidated statements of income in order to provide a more meaningful disclosure of the taxation of the Company.
Income taxes
Taxes are based on income for financial reporting purposes and include deferred taxes applicable to temporary differences between the financial statement carrying amount and the tax basis of certain of the Companys assets and liabilities.
Earnings per share
Basic earnings per share are computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that net income is increased by the effect of interest expense, net of tax, on the Companys convertible debt; and the weighted-average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if dilutive stock options had been exercised and the debt had been converted.
Risk of real estate market
Real estate activity is cyclical in nature and is affected greatly by the cost and availability of long-term mortgage funds. Real estate activity and, in turn, the majority of the Companys revenues can be adversely affected during periods of high interest rates and/or limited money supply.
39
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Use of estimates
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the statements. Actual results could differ from the estimates and assumptions used.
Escrow and trust deposits
The Company administers escrow and trust deposits as a service to its customers. Escrow deposits totaled $4.5 billion and $5.6 billion at December 31, 2003 and 2002, respectively, of which $260.2 million and $176.6 million were held at certain of the Companys subsidiaries. The remaining escrow deposits were held at third party financial institutions. Trust deposits totaled $2.3 billion and $1.9 billion at December 31, 2003 and 2002, respectively, and were held at the Companys trust subsidiary. Escrow and trust deposits are not considered assets of the Company and, therefore, are not included in the accompanying consolidated balance sheets. However, the Company remains contingently liable for the disposition of these deposits.
Like-kind exchanges
The Company facilitates tax-deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code. As a facilitator and intermediary, the Company holds the proceeds from sales transactions until a qualified acquisition occurs. Like-kind exchange deposits totaled $1.1 billion and $978.0 million at December 31, 2003 and 2002, respectively. The Company also facilitates tax-deferred reverse exchanges pursuant to Revenue Procedure 2000-37. These exchanges require the Company, using the customers funds, to acquire the qualifying property on behalf of the customer and take temporary title to the customers property until a qualifying acquisition occurs. Reverse exchange property totaled $229.4 million and $154.6 million at December 31, 2003 and 2002, respectively. Due to the structure utilized to facilitate these transactions, like-kind exchanges and reverse exchanges are not considered assets of the Company and, therefore, are not included in the accompanying consolidated balance sheets. However, the Company remains contingently liable for the transfers of property, disbursements of proceeds and the return on the proceeds at the agreed upon rate
NOTE 2. Statutory Restrictions on Investments and Stockholders Equity:
Investments carried at $31.7 million were on deposit with state treasurers in accordance with statutory requirements for the protection of policyholders at December 31, 2003.
Pursuant to insurance and other regulations of the various states in which the Companys insurance subsidiaries operate, the amount of dividends, loans and advances available to the Company is limited, principally for the protection of policyholders. Under such statutory regulations, the maximum amount of dividends, loans and advances available to the Company from its insurance subsidiaries in 2004 is $313.4 million.
The Companys title insurance subsidiary, First American Title Insurance Company, maintained statutory capital and surplus of $746.6 million and $651.3 million at December 31, 2003 and 2002, respectively. Statutory net income for the years ended December 31, 2003, 2002 and 2001, was $229.9 million, $132.0 million and $118.7 million, respectively.
The National Association of Insurance Commissioners established certain statutory accounting practices, which became effective January 1, 2001. Adoption of the practices did not have a material impact on the Companys statutory financial condition or results of operations.
40
THE FIRST AMERICAN 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 follows:
Amortized Cost |
Gross unrealized |
Estimated fair value | |||||||||||
gains |
losses |
||||||||||||
(in thousands) | |||||||||||||
December 31, 2003 |
|||||||||||||
U.S. Treasury securities |
$ | 74,669 | $ | 2,399 | $ | (120 | ) | $ | 76,948 | ||||
Corporate securities |
136,574 | 7,464 | (287 | ) | 143,751 | ||||||||
Obligations of states and political subdivisions |
79,726 | 3,713 | (200 | ) | 83,239 | ||||||||
Mortgage-backed securities |
46,761 | 633 | (857 | ) | 46,537 | ||||||||
$ | 337,730 | $ | 14,209 | $ | (1,464 | ) | $ | 350,475 | |||||
December 31, 2002 |
|||||||||||||
U.S. Treasury securities |
$ | 31,190 | $ | 2,256 | | $ | 33,446 | ||||||
Corporate securities |
155,683 | 9,400 | $ | (700 | ) | 164,383 | |||||||
Obligations of states and political subdivisions |
72,525 | 3,251 | (257 | ) | 75,519 | ||||||||
Mortgage-backed securities |
35,188 | 1,405 | (77 | ) | 36,516 | ||||||||
$ | 294,586 | $ | 16,312 | $ | (1,034 | ) | $ | 309,864 | |||||
The amortized cost and estimated fair value of debt securities at December 31, 2003, by contractual maturities, are as follows:
Amortized cost |
Estimated fair value | |||||
(in thousands) | ||||||
Due in one year or less |
$ | 24,183 | $ | 24,505 | ||
Due after one year through five years |
117,959 | 123,178 | ||||
Due after five years through ten years |
102,913 | 108,576 | ||||
Due after ten years |
45,914 | 47,679 | ||||
290,969 | 303,938 | |||||
Mortgage-backed securities |
46,761 | 46,537 | ||||
$ | 337,730 | $ | 350,475 | |||
41
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The cost and estimated fair value of investments in equity securities are as follows:
Gross unrealized |
Estimated fair value | ||||||||||||
Cost |
gains |
losses |
|||||||||||
(in thousands) | |||||||||||||
December 31, 2003 |
|||||||||||||
Preferred stock: |
|||||||||||||
Other |
$ | 2,925 | $ | 312 | $ | (1 | ) | $ | 3,236 | ||||
Common stocks: |
|||||||||||||
Corporate securities |
46,625 | 4,707 | (8,914 | ) | 42,418 | ||||||||
Other |
81 | 34 | (11 | ) | 104 | ||||||||
$ | 49,631 | $ | 5,053 | $ | (8,926 | ) | $ | 45,758 | |||||
December 31, 2002 |
|||||||||||||
Preferred stock: |
|||||||||||||
Other |
$ | 4,085 | $ | 56 | $ | (168 | ) | $ | 3,973 | ||||
Common stocks: |
|||||||||||||
Corporate securities |
43,079 | 5,164 | (15,979 | ) | 32,264 | ||||||||
Other |
882 | 24 | (212 | ) | 694 | ||||||||
$ | 48,046 | $ | 5,244 | $ | (16,359 | ) | $ | 36,931 | |||||
The fair value of debt and equity securities was estimated using quoted market prices. Sales of debt and equity securities resulted in realized gains of $7.0 million, $2.2 million and $0.6 million; and realized losses of $3.1 million, $4.8 million and $0.6 million for the years ended December 31, 2003, 2002 and 2001, respectively.
In accordance with the enhanced disclosure provisions of Emerging Issues Task Force Issue No. 03-1, The Meaning of Other-Than Temporary Impariment and Its Application to Certain Investments, the Company, at December 31, 2003 had gross unrealized losses of $1.5 million from debt securities that had been in an unrealized loss position for less than 12 months. The fair value of those debt securities that had been in an unrealized loss position for less than 12 months is $16.1 million. At December 31, 2003, the Company had gross unrealized losses of $8.9 million from equity securities that had been in an unrealized loss position for 12 months or greater. The fair value of those equity securities that had been in an unrealized loss position for 12 months or greater was $19.3 million.
NOTE 4. Loans Receivable:
Loans receivable are summarized as follows:
December 31 |
||||||||
2003 |
2002 |
|||||||
(in thousands) | ||||||||
Real estatemortgage |
$ | 109,340 | $ | 113,853 | ||||
Other |
8 | 25 | ||||||
109,348 | 113,878 | |||||||
Unearned income on lease contracts |
(3 | ) | ||||||
Allowance for loan losses |
(1,290 | ) | (1,170 | ) | ||||
Participations sold |
(2,588 | ) | (4,361 | ) | ||||
Deferred loan fees, net |
(242 | ) | (182 | ) | ||||
$ | 105,228 | $ | 108,162 | |||||
42
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Real estate loans are collateralized by properties located primarily in Southern California. The average yield on the Companys loan portfolio was 8.0% and 9.0% for the years ended December 31, 2003 and 2002, respectively. 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 $105.3 million and $108.4 million at December 31, 2003 and 2002, respectively, and was estimated based on the discounted value of the future cash flows using the current rates being offered for loans with similar terms to borrowers of similar credit quality.
The allowance for loan losses is maintained at a level that is considered appropriate by management to provide for known risks in the portfolio.
The aggregate annual maturities for loans receivable in each of the five years after December 31, 2003, are as follows:
Year |
(in thousands) | ||
2004 |
$ | 385 | |
2005 |
$ | 5 | |
2006 |
$ | 996 | |
2007 |
$ | 46 | |
2008 |
$ | 1,271 |
NOTE 5. Goodwill and Other Intangible Assets:
On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). This statement addresses financial accounting and reporting for goodwill and other intangibles and superceded Accounting Principles Board Opinions No. 17, Intangible Assets. SFAS 142 addresses how goodwill and other intangible assets should be accounted for in the financial statements. Pursuant to SFAS 142, the Companys goodwill and intangible assets that have indefinite lives will not be amortized but rather will be tested at least annually for impairment. SFAS 142 requires that goodwill and other intangible assets be allocated to various reporting units that are either operating segments or one reporting unit below the operating segment. The Companys reporting units, for purposes of applying the provisions of SFAS 142, are title insurance, home warranty, property and casualty insurance, trust and other services, mortgage origination products and services, mortgage servicing products and services, property information services, conventional credit information, subprime credit information, pre-employment and drug screening, tenant screening and motor vehicle reporting.
The SFAS 142 impairment testing process includes two phases. The first phase (Test 1) compares the fair value of each reporting unit to its book value. The fair value of each reporting unit is determined by using discounted cash flow analysis, market approach valuations and third-party valuation advisors. If the fair value of the reporting unit exceeds its book value, the goodwill is not considered impaired and no additional analysis is required. However, if the book value is greater than the fair value, a second test (Test 2) must be completed to determine if the fair value of the goodwill exceeds the book value. The fair value of the goodwill is determined by discounted cash flow analysis and appraised values. If the fair value is less than the book value, an impairment is considered to exist.
43
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company has determined that its flood zone certification database, which is included in Title plants and other indexes, is an intangible asset with an indefinite life. Accordingly, this asset is not amortized but rather tested annually for impairment by comparing the fair value of the database with its carrying value. In addition, the Company had $113.6 million of intangible assets included in Other assets at December 31, 2003, with definite lives ranging from three to ten years. These assets, comprised primarily of customer lists and noncompete agreements, are being amortized in a manner consistent with periods prior to the adoption of SFAS 142.
In accordance with the provisions of SFAS 142, the Company completed the required annual impairment tests of goodwill and intangible assets with indefinite lives for the years ended December 31, 2003 and 2002, and determined that there was no impairment.
A reconciliation of the changes in the carrying amount of net goodwill, by operating segment, as of December 31, 2003, is as follows:
Balance as of January 1, 2003 |
Acquired/(disposed of) during the year |
Impairment losses |
Balance as of December 31, 2003 | |||||||||
(in thousands) | ||||||||||||
Financial Services: |
||||||||||||
Title Insurance |
$ | 149,013 | $ | 111,139 | | $ | 260,152 | |||||
Specialty Insurances |
19,794 | | | 19,794 | ||||||||
Trust and Other Services |
| | | | ||||||||
Information Technology: |
||||||||||||
Mortgage Information |
72,423 | 473,189 | | 545,612 | ||||||||
Property Information |
124,678 | 25,721 | | 150,399 | ||||||||
Credit Information |
86,900 | (14,450 | ) | | 72,450 | |||||||
Screening Information |
111,183 | 93,490 | | 204,673 | ||||||||
$ | 563,991 | $ | 689,089 | | $ | 1,253,080 | ||||||
Pro forma net income and earnings per share, adjusted to add back the amortization of goodwill, net of income taxes, is as follows:
2003 |
2002 |
2001 | |||||||
(in thousands except per share amounts) | |||||||||
Reported net income |
$ | 451,022 | $ | 234,367 | $ | 167,268 | |||
Add back: Goodwill amortization |
| | 15,061 | ||||||
Adjusted net income |
$ | 451,022 | $ | 234,367 | $ | 182,329 | |||
Basic earnings per share: |
|||||||||
Reported net income |
$ | 5.89 | $ | 3.27 | $ | 2.51 | |||
Goodwill amortization |
| | 0.23 | ||||||
Adjusted net income |
$ | 5.89 | $ | 3.27 | $ | 2.74 | |||
Diluted earnings per share: |
|||||||||
Reported net income |
$ | 5.22 | $ | 2.92 | $ | 2.27 | |||
Goodwill amortization |
| | 0.20 | ||||||
Adjusted net income |
$ | 5.22 | $ | 2.92 | $ | 2.47 | |||
44
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 6. Demand Deposits:
Passbook and investment certificate accounts are summarized as follows:
December 31 | ||||||
2003 |
2002 | |||||
(in thousands except percentages) | ||||||
Passbook accounts |
$ | 19,784 | $ | 20,227 | ||
Certificate accounts: |
||||||
Less than one year |
35,473 | 43,639 | ||||
One to five years |
21,323 | 20,607 | ||||
56,796 | 64,246 | |||||
$ | 76,580 | $ | 84,473 | |||
Annualized interest rates: |
||||||
Passbook accounts |
2% | 2%-3% | ||||
Certificate accounts |
2%-7% | 2%-7% | ||||
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 $57.1 million and $65.1 million at December 31, 2003 and 2002, respectively, and was estimated based on the discounted value of future cash flows using a discount rate approximating current market for similar liabilities.
NOTE 7. Reserve for Known and Incurred But Not Reported Claims:
Activity in the reserve for known and incurred but not reported claims is summarized as follows:
December 31 |
||||||||||||
2003 |
2002 |
2001 |
||||||||||
(in thousands) | ||||||||||||
Balance at beginning of year |
$ | 360,305 | $ | 314,777 | $ | 284,607 | ||||||
Provision related to: |
||||||||||||
Current year |
324,406 | 224,058 | 181,346 | |||||||||
Prior years |
(2 | ) | 531 | (700 | ) | |||||||
324,404 | 224,589 | 180,646 | ||||||||||
Payments related to: |
||||||||||||
Current year |
151,590 | 97,729 | 90,442 | |||||||||
Prior years |
117,896 | 79,888 | 61,079 | |||||||||
269,486 | 177,617 | 151,521 | ||||||||||
Other |
20,629 | (1,444 | ) | 1,045 | ||||||||
Balance at end of year |
$ | 435,852 | $ | 360,305 | $ | 314,777 | ||||||
Other primarily represents reclassifications to the reserve for assets acquired in connection with claim settlements and purchase accounting adjustments related to company acquisitions. Included in Other for 2003 was a $16.0 million purchase accounting adjustment related to the acquisition of Transamerica Finance Corporations tax monitoring and flood zone certification businesses. Claims activity associated with reinsurance is not material and, therefore, not presented separately. Current year payments include $133.3 million, $79.8 million and $69.1 million in 2003, 2002 and 2001, respectively, that relate to the Companys non-title insurance operations.
45
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 8. Notes and Contracts Payable:
December 31 | ||||||
2003 |
2002 | |||||
(in thousands) | ||||||
4.5% senior convertible debentures, due April 2008 |
$ | 210,000 | $ | 210,000 | ||
7.55% senior debentures, due April 2028 |
99,558 | 99,540 | ||||
Trust deed notes with maturities through 2023, collateralized by land and buildings with a net book value of $63,117, weighted-average interest rate of 5.5% |
62,360 | 152 | ||||
Other notes and contracts payable with maturities through 2013, weighted-average interest rate of 5.5% |
181,970 | 116,013 | ||||
$ | 553,888 | $ | 425,705 | |||
The Company has $210.0 million of senior convertible debentures due in 2008. The debentures are convertible into common shares of the Company at $28 per share. The Company may redeem some or all of the debentures at any time on or after April 15, 2004. The Company has also issued debt that is convertible into shares of its common stock to finance certain acquisitions. This debt, which is included in Other notes and contracts payable, is convertible at the option of each note holder at a conversion price of $30 per share. The balance of this convertible debt was $24.5 million and $28.9 million at December 31, 2003 and 2002, respectively.
In October 2003, the Company obtained a $55.0 million loan collateralized by its corporate headquarters. This loan will be repaid over a 20-year period and requires the Company to maintain certain minimum levels of capital and earnings.
The Company has one primary bank credit agreement that provides for a $200.0 million unsecured line of credit. Under the terms of the credit agreement, the Company is required to maintain certain minimum levels of capital and earnings and meet predetermined debt-to-capitalization ratios. The line of credit remains in effect until October 2006 and was unused at December 31, 2003 and 2002. The Companys publicly traded subsidiary, First Advantage Corporation also has a bank credit agreement that provides for a $15.0 million collateralized line of credit. Under the terms of that credit agreement, First Advantage Corporation is required to satisfy certain financial requirements. The line of credit remains in effect until July 2005 and had a balance due of $9.0 million at December 31, 2003.
The aggregate annual maturities for notes and contracts payable in each of the five years after December 31, 2003, are as follows:
Year |
(in thousands) | ||
2004 |
$ | 55,049 | |
2005 |
$ | 49,719 | |
2006 |
$ | 46,931 | |
2007 |
$ | 18,326 | |
2008 |
$ | 223,949 |
The fair value of notes and contracts payable was $564.5 million and $442.4 million at December 31, 2003 and 2002, 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 Companys notes and contracts payable was 5.5% and 6.0% at December 31, 2003 and 2002, respectively.
46
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 9. Mandatorily Redeemable Preferred Securities:
On April 22, 1997, the Company issued and sold $100.0 million of 8.5% trust preferred securities, due in 2012, through its wholly owned subsidiary, First American Capital Trust. In connection with the subsidiarys issuance of the preferred securities, the Company issued to the subsidiary trust 8.5% subordinated interest notes due in 2012. The sole assets of the subsidiary are and will be the subordinated interest notes. The Companys obligations under the subordinated interest notes and related agreements, taken together, constitute a full and unconditional guarantee by the Company of the subsidiarys obligations under the preferred securities. Distributions payable on the securities are included as interest expense in the Companys consolidated income statements.
In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement was effective for interim periods beginning after June 15, 2003 and establishes standards regarding the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The implementation of this statement required the Company to reclassify its Mandatorily redeemable preferred securities as debt. As a result of the change in classification, the Companys debt-to-total capitalization ratio increased. This change has not had any other impact on the Companys financial condition or results of operations.
The fair value of the Companys mandatorily redeemable preferred securities was $100.0 million at December 31, 2003 and 2002 and was estimated based on the current rates offered to the Company for debt of the same type and remaining maturity.
NOTE 10. Investment and Other Income:
The components of investment and other income are as follows:
2003 |
2002 |
2001 | |||||||
(in thousands) | |||||||||
Interest: |
|||||||||
Cash equivalents and deposits with savings and loan associations and banks |
$ | 9,359 | $ | 7,204 | $ | 15,837 | |||
Debt securities |
19,999 | 19,242 | 17,118 | ||||||
Other long-term investments |
2,877 | 5,786 | 11,826 | ||||||
Dividends on marketable equity securities |
1,435 | 1,328 | 1,504 | ||||||
Equity in earnings of unconsolidated affiliates |
59,789 | 43,337 | 25,013 | ||||||
Other |
12,349 | 12,926 | 9,795 | ||||||
$ | 105,808 | $ | 89,823 | $ | 81,093 | ||||
47
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 11. Income Taxes:
Income taxes are summarized as follows:
2003 |
2002 |
2001 | |||||||||
(in thousands) | |||||||||||
Current: |
|||||||||||
Federal |
$ | 247,779 | $ | 118,748 | $ | 101,665 | |||||
State |
43,727 | 23,560 | 9,181 | ||||||||
Foreign |
6,964 | 2,609 | 2,136 | ||||||||
298,470 | 144,917 | 112,982 | |||||||||
Deferred: |
|||||||||||
Federal |
(4,697 | ) | 6,587 | 3,526 | |||||||
State |
(1,773 | ) | (1,604 | ) | 992 | ||||||
(6,470 | ) | 4,983 | 4,518 | ||||||||
$ | 292,000 | $ | 149,900 | $ | 117,500 | ||||||
Income taxes differ from the amounts computed by applying the federal income tax rate of 35.0%. A reconciliation of this difference is as follows:
2003 |
2002 |
2001 |
||||||||||
(in thousands) | ||||||||||||
Taxes calculated at federal rate |
$ | 260,091 | $ | 134,494 | $ | 99,669 | ||||||
Tax exempt interest income |
(1,005 | ) | (748 | ) | (1,291 | ) | ||||||
Tax effect of minority interests |
1,249 | 1,837 | 1,146 | |||||||||
State taxes, net of federal benefit |
28,670 | 13,767 | 7,430 | |||||||||
Exclusion of certain meals and entertainment expenses |
5,990 | 5,222 | 4,661 | |||||||||
Other items, net |
(2,995 | ) | (4,672 | ) | 5,885 | |||||||
$ | 292,000 | $ | 149,900 | $ | 117,500 | |||||||
48
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The primary components of temporary differences that give rise to the Companys net deferred tax assets are as follows:
December 31 |
||||||||
2003 |
2002 |
|||||||
(in thousands) | ||||||||
Deferred tax assets: |
||||||||
Deferred revenue |
$ | 195,476 | $ | 87,705 | ||||
Employee benefits |
48,516 | 34,993 | ||||||
Bad debt reserves |
19,181 | 16,531 | ||||||
Loss reserves |
35,764 | 14,044 | ||||||
Accumulated other comprehensive income |
31,464 | 26,613 | ||||||
Net operating loss carryforward |
50,171 | 16,742 | ||||||
Excess capital losses |
3,554 | | ||||||
Other |
8,406 | 5,920 | ||||||
392,532 | 202,548 | |||||||
Deferred tax liabilities: |
||||||||
Depreciable and amortizable assets |
131,948 | 112,177 | ||||||
Investment gain |
17,261 | 17,418 | ||||||
Claims and related salvage |
55,794 | 39,424 | ||||||
Other |
2,478 | 2,052 | ||||||
207,481 | 171,071 | |||||||
Net deferred tax asset before valuation allowance |
185,051 | 31,477 | ||||||
Valuation allowance |
(43,429 | ) | (10,526 | ) | ||||
Net deferred tax asset |
$ | 141,622 | $ | 20,951 | ||||
For the year 2003, domestic and foreign pretax income from continuing operations was $727.1 million and $15.9 million, respectively.
The exercise of stock options represents a tax benefit and has been reflected as a reduction of taxes payable and an increase to the additional paid-in capital account. The benefits recorded were $5.8 million, $1.5 million and $2.6 million for the years ended December 31, 2003, 2002 and 2001, respectively.
At December 31, 2003, the Company had available net operating-loss carryforwards totaling approximately $130.4 million for income tax purposes, of which $10.4 million has an indefinite expiration. The remaining $120.0 million begins to expire at various times beginning in 2008 and ending in 2023.
The valuation allowance relates primarily to deferred tax assets for federal and state net operating-loss carryforwards relating to acquisitions consummated by First Advantage. Utilization of the pre-acquisition net operating losses is subject to limitations by the Internal Revenue Code and State jurisdictions. The Company evaluates the realizability of its deferred tax assets by assessing the valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are the Companys forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. To the extent that the related tax benefits are realized in subsequent years, they will be applied to reduce goodwill arising from the acquisitions.
49
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 12. Earnings Per Share:
The Companys potential dilutive shares are stock options and convertible debt. Stock options are reflected in diluted earnings per share by application of the treasury-stock method and convertible debt is reflected in diluted earnings per share by application of the if-converted method. A reconciliation of net income and weighted average shares outstanding is as follows:
2003 |
2002 |
2001 | |||||||
(in thousands, except per share data) | |||||||||
Numerator: |
|||||||||
Net incomenumerator for basic net income per share |
$ | 451,022 | $ | 234,367 | $ | 167,268 | |||
Effect of dilutive securities: |
|||||||||
Convertible debtinterest expense (net of tax) |
6,823 | 7,017 | 5,247 | ||||||
Numerator for diluted net income per share |
$ | 457,845 | $ | 241,384 | $ | 172,515 | |||
Denominator |
|||||||||
Weighted-average sharesdenominator |
76,632 | 71,594 | 66,568 | ||||||
Effect of dilutive securities: |
|||||||||
Employee stock options |
2,754 | 2,436 | 3,073 | ||||||
Convertible debt |
8,389 | 8,537 | 6,193 | ||||||
Denominator for diluted net income per share |
87,775 | 82,567 | 75,834 | ||||||
Net income per share: |
|||||||||
Basic |
$ | 5.89 | $ | 3.27 | $ | 2.51 | |||
Diluted |
$ | 5.22 | $ | 2.92 | $ | 2.27 | |||
For the three years ended December 31, 2003, 2002 and 2001, 1.0 million, 3.6 million and 2.8 million options, respectively, were excluded from the weighted-average diluted common shares outstanding due to their antidilutive effect.
NOTE 13. Employee Benefit Plans:
In December 2003, the Financial Accounting Standards Board revised Statement of Financial Accounting Standards (SFAS) No. 132, Employers Disclosures About Pensions and Other Post Retirement Benefits to require additional disclosures related to pensions and post retirement benefits. The Company has implemented the revised disclosures in these financial statements.
The Company has benefit plans covering substantially all employees, including a 401(k) savings plan (the Savings Plan), an employee stock purchase plan and a defined benefit pension plan.
The Savings Plan allows for employee-elective contributions up to the maximum deductible amount as determined by the Internal Revenue Code. The Company makes discretionary contributions to the Savings Plan based on profitability, as well as contributions of the participants. The Companys expense related to the Savings Plan amounted to $48.4 million, $39.6 million and $16.0 million for the years ended December 31, 2003, 2002 and 2001, respectively. The Savings Plan allows the participants to purchase the Companys stock as one of the investment options. The Savings Plan held 9,982,000 and 8,906,000 shares of the Companys common stock, representing 12.7% and 12.0% of the total shares outstanding at December 31, 2003 and 2002, respectively.
50
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The employee stock purchase plan allows eligible employees to purchase common stock of the Company at 85% of the closing price on the last day of each month. There were 283,000 and 245,000 shares issued in connection with the plan for the years ending December 31, 2003 and 2002, respectively. At December 31, 2003, there were 2,455,000 shares reserved for future issuances.
The Companys defined benefit pension plan is a noncontributory, qualified, defined benefit plan with benefits based on the employees years of service. The Companys policy is to fund all accrued pension costs. Contributions are intended to provide not only for benefits attributable to past service, but also for those benefits expected to be earned in the future. The Company also has nonqualified, unfunded supplemental benefit plans covering certain key management personnel. Benefits under these plans are anticipated to be funded with proceeds from life insurance policies purchased by the Company on the lives of the executives.
The following table provides a reconciliation of the changes in the defined benefit plan and supplemental benefit plan obligations, fair value of assets, a statement of the funded status and a summary of the amounts recognized in the consolidated financial statements as of December 31, 2003 and 2002:
December 31 |
||||||||||||||||
2003 |
2002 |
|||||||||||||||
Defined benefit pension plans |
Unfunded supplemental benefit plans |
Defined benefit pension plans |
Unfunded supplemental benefit plans |
|||||||||||||
(in thousands) | ||||||||||||||||
Change in projected benefit obligation: |
||||||||||||||||
Benefit obligation at beginning of year |
$ | 227,013 | $ | 73,322 | $ | 183,186 | $ | 59,393 | ||||||||
Service costs |
12,033 | 2,904 | 17,321 | 2,304 | ||||||||||||
Interest costs |
14,789 | 5,535 | 13,484 | 4,709 | ||||||||||||
Plan amendments |
(2,168 | ) | 6 | | | |||||||||||
Actuarial losses |
15,250 | 13,663 | 22,910 | 9,407 | ||||||||||||
Benefits paid |
(14,767 | ) | (3,212 | ) | (9,888 | ) | (2,491 | ) | ||||||||
Projected benefit obligation at end of year |
252,150 | 92,218 | 227,013 | 73,322 | ||||||||||||
Change in plan assets: |
||||||||||||||||
Plan assets at fair value at beginning of year |
147,932 | | 138,247 | | ||||||||||||
Actual return on plan assets |
17,407 | | (12,024 | ) | | |||||||||||
Company contributions |
2,904 | 3,212 | 31,597 | 2,491 | ||||||||||||
Benefits paid |
(14,767 | ) | (3,212 | ) | (9,888 | ) | (2,491 | ) | ||||||||
Plan assets at fair value at end of year |
153,476 | | 147,932 | | ||||||||||||
Reconciliation of funded status: |
||||||||||||||||
Funded status of the plans |
(98,674 | ) | (92,218 | ) | (79,081 | ) | (73,322 | ) | ||||||||
Unrecognized net actuarial loss |
101,267 | 37,262 | 93,806 | 25,476 | ||||||||||||
Unrecognized prior service cost |
(7,791 | ) | 464 | (9,783 | ) | 818 | ||||||||||
Unrecognized net transition (asset) obligation |
(7 | ) | | (28 | ) | | ||||||||||
Prepaid (accrued) pension cost |
(5,205 | ) | (54,492 | ) | 4,914 | (47,028 | ) | |||||||||
Amounts recognized in the consolidated financial statements consist of: |
||||||||||||||||
Accrued benefit liability |
(96,778 | ) | (68,483 | ) | (76,728 | ) | (55,328 | ) | ||||||||
Intangible asset |
| 463 | (29 | ) | 818 | |||||||||||
Minimum pension liability adjustment |
91,573 | 13,528 | 81,671 | 7,482 | ||||||||||||
$ | (5,205 | ) | $ | (54,492 | ) | $ | 4,914 | $ | (47,028 | ) | ||||||
51
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Net periodic pension cost for the Companys defined benefit pension and supplemental benefit plans includes the following components:
2003 |
2002 |
2001 |
||||||||||
(in thousands) | ||||||||||||
Expense: |
||||||||||||
Service cost |
$ | 14,937 | $ | 19,625 | $ | 17,015 | ||||||
Interest cost |
20,324 | 18,193 | 15,737 | |||||||||
Actual return on plan assets |
(14,046 | ) | (14,795 | ) | (15,926 | ) | ||||||
Amortization of net transition obligation |
(22 | ) | (22 | ) | 309 | |||||||
Amortization of prior service cost |
(3,802 | ) | (3,632 | ) | (3,632 | ) | ||||||
Amortization of net loss |
6,309 | 2,707 | 742 | |||||||||
$ | 23,700 | $ | 22,076 | $ | 14,245 | |||||||
The projected benefit obligation for the defined benefit plans and the unfunded supplemental benefit plans was determined using the following weighted-average assumptions:
December 31 |
||||||
2003 |
2002 |
|||||
Defined benefit pension plan |
||||||
Discount rate |
6.25 | % | 6.75 | % | ||
Rate of return on plan assets |
9.00 | % | 9.00 | % | ||
Unfunded supplemental benefit plans |
||||||
Discount rate |
6.25 | % | 6.75 | % |
The asset allocation for the Companys defined benefit pension plan trust is as follows:
Target allocation |
Percentage of plan assets at December 31 |
||||||||
2004 |
2003 |
2002 |
|||||||
Asset category |
|||||||||
Domestic equities |
52 | % | 52 | % | 51 | % | |||
Fixed income |
46 | % | 46 | % | 46 | % | |||
Cash |
2 | % | 2 | % | 3 | % |
Included in the domestic equities amount above are common shares of the Company with a market value of $12.1 million as of December 31, 2003.
NOTE 14. Stock Option Plans:
On April 24, 1996, the Company implemented The First American Corporation 1996 Stock Option Plan (the Stock Option Plan). Under the Stock Option Plan, options are granted to certain employees to purchase the Companys common stock at a price no less than the market value of the shares on the date of the grant. The maximum number of shares that may be subject to options is 14,625,000. Currently, outstanding options become exercisable in one to five years, and expire ten years from the grant date. On April 24, 1997, the Company implemented The First American Corporation 1997 Directors Stock Plan (the Directors Plan). The Directors
52
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Plan is similar to the employees Stock Option Plan, except that the maximum number of shares that may be subject to options is 1,800,000 and the maximum number of shares that may be purchased pursuant to options granted shall not exceed 6,750 shares during any consecutive 12-month period.
In May 2001, in connection with the purchase of Credit Management Solutions, Inc. (CMSI), the Company adjusted the outstanding CMSI stock options to substitute common shares of the Company for the shares of CMSI that were issuable upon exercise of those options. The shares and exercise price for the CMSI options were adjusted by an exchange factor, with the result being that the CMSI options became exercisable with respect to 900,000 common shares of the Company at exercise prices ranging from $3.96 to $43.58.
In May 1999, in connection with the Companys business combination with National Information Group (NAIG), which was accounted for under the pooling-of-interests method of accounting, the Company adjusted the outstanding NAIG stock options to substitute Common shares of the Company for the shares of NAIG that were issuable upon exercise of those options. At December 31, 2003, 14,430 common shares of the Company were issuable pursuant to exercise of the remaining outstanding adjusted NAIG options with exercise prices ranging from $7.65 to $15.58.
Effective December 15, 2002, the Company adopted Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, which amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 148). In accounting for its plans, the Company, as allowable under the provisions of SFAS 148, applies Accounting Principles Board Opinions No. 25, Accounting for Stock issued to Employees. As a result of this election, the Company does not recognize compensation expense for its stock option plans. Had the Company determined compensation cost based on the fair value for its stock options at grant date, net income and earnings per share would have been reduced to the pro forma amounts as follows:
2003 |
2002 |
2001 | |||||||
(in thousands, except per share amounts) | |||||||||
Net income: |
|||||||||
As reported |
$ | 451,022 | $ | 234,367 | $ | 167,268 | |||
Pro forma |
$ | 441,517 | $ | 229,434 | $ | 157,609 | |||
Earnings per share: |
|||||||||
As reported |
|||||||||
Basic |
$ | 5.89 | $ | 3.27 | $ | 2.51 | |||
Diluted |
$ | 5.22 | $ | 2.92 | $ | 2.27 | |||
Pro forma |
|||||||||
Basic |
$ | 5.76 | $ | 3.20 | $ | 2.37 | |||
Diluted |
$ | 5.11 | $ | 2.86 | $ | 2.15 |
The fair value of each option grant is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2003, 2002 and 2001, respectively; dividend yield of 1.8%, 1.9% and 1.4%; expected volatility of 45.1%, 48.9% and 53.6%; risk-free interest rate of 4.2%, 4.2% and 5.4%; and expected life of seven years, seven years and eight years.
53
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Transactions involving stock options are summarized as follows:
Number outstanding |
Weighted-average exercise price | |||||
(in thousands, except weighted-average exercise price) | ||||||
Balance at December 31, 2000 |
9,798 | $ | 15.45 | |||
Granted during 2001 |
1,288 | $ | 18.82 | |||
Exercised during 2001 |
(1,009 | ) | $ | 11.17 | ||
Forfeited during 2001 |
(371 | ) | $ | 18.88 | ||
Balance at December 31, 2001 |
9,706 | $ | 16.22 | |||
Granted during 2002 |
508 | $ | 17.41 | |||
Exercised during 2002 |
(802 | ) | $ | 11.08 | ||
Forfeited during 2002 |
(466 | ) | $ | 17.73 | ||
Balance at December 31, 2002 |
8,946 | $ | 16.66 | |||
Granted during 2003 |
1,652 | $ | 23.45 | |||
Exercised during 2003 |
(2,011 | ) | $ | 13.30 | ||
Forfeited during 2003 |
(241 | ) | $ | 18.66 | ||
Balance at December 31, 2003 |
8,346 | $ | 16.66 | |||
Stock options outstanding and exercisable at December 31, 2003, are summarized as follows:
Outstanding |
Exercisable | |||||||||||
Range of Exercise Prices |
Options |
Average remaining life in years |
Average price |
Options |
Average price | |||||||
(options in thousands) | ||||||||||||
$ 3.95$13.00 |
2,483 | 5.5 | $ | 10.09 | 1,269 | $ | 9.47 | |||||
$13.01$23.57 |
2,386 | 7.9 | $ | 19.57 | 626 | $ | 17.34 | |||||
$23.58$24.00 |
2,511 | 4.3 | $ | 23.58 | 2,504 | $ | 23.58 | |||||
$24.01$43.58 |
966 | 8.2 | $ | 26.38 | 242 | $ | 28.98 | |||||
$ 3.95$43.58 |
8,346 | 6.1 | $ | 18.75 | 4,641 | $ | 19.16 | |||||
NOTE 15. Commitments and Contingencies:
Lease commitments
The Company leases certain office facilities, automobiles and equipment under operating leases, which, for the most part, are renewable. The majority of these leases also provide that the Company will pay insurance and taxes. In December 2000, the Companys subsidiary, First American Real Estate Information Services, Inc. and, in 1999, the Company entered into sale-leaseback agreements with regard to certain furniture and equipment with a net book value of $30.7 million and $65.7 million, respectively. Proceeds from the sales, which amounted to $33.8 million and $80.1 million and gains of $3.1 million and $14.4 million for the years ended December 31, 2000 and 1999, respectively, have been included in Deferred revenue and will be amortized over the life of the leases. Under the agreements, the Companys subsidiary and the Company agreed to lease the equipment for three to five years with minimum annual lease payments of $3.3 million and $9.3 million, respectively. At the end of the term of the leases, the Company has the option to acquire the equipment or return it to the lessor.
54
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Future minimum rental payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2003, are as follows:
Year |
(in thousands) | ||
2004 |
$ | 167,962 | |
2005 |
129,652 | ||
2006 |
86,323 | ||
2007 |
52,484 | ||
2008 |
29,628 | ||
Later years |
33,840 | ||
$ | 499,889 | ||
Total rental expense for all operating leases and month-to-month rentals was $205.6 million, $178.2 million and $162.5 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Other commitments and guarantees
In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others (FIN 45). This interpretation clarifies the requirements relating to the guarantors accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of FIN 45 were effective for fiscal years ending after December 15, 2002. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on the Companys financial condition or results of operations.
The Company and Experian Information Solutions, Inc. (Experian) are parties to a joint venture that resulted in the creation of the Companys First American Real Estate Solutions, LLC (FARES) subsidiary. Pursuant to the terms of the joint venture, Experian has the right to sell to the Company its interest in FARES at a purchase price determined pursuant to a specified formula based on the after-tax earnings of FARES. Experian may only exercise this right if the purchase price is greater than $80.0 million and less than $160.0 million. As of December 31, 2003, the purchase price exceeded $160.0 million and, therefore, Experians right was not exercisable as of such date. In addition to the agreement with Experian, the Company is also party to several other agreements that require the Company to purchase some or all of the minority shares of certain less-than-100.0% owned subsidiaries if certain conditions are met. The total potential purchase price related to those agreements that have met the necessary conditions as of December 31, 2003, was not material.
The Company also guarantees the obligations of certain of its subsidiaries. These obligations are included in the Companys consolidated balance sheets as of December 31, 2003.
NOTE 16. Stockholders Equity:
On October 23, 1997, the Company adopted a Shareholder Rights Plan (the Rights Plan). Under the Rights Plan, after the close of business on November 15, 1997, each holder of the Companys 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.
55
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Rights will be exercisable and will trade separately from the common shares only if a person or group, with certain exceptions, acquires beneficial ownership of 15.0% or more of the Companys common shares or commences a tender or exchange offer that would result in such person or group beneficially owning 15.0% or more of the common shares then outstanding. The Company may redeem the Rights at $0.001 per Right at any time prior to the occurrence of one of these events. All Rights expire on October 23, 2007.
Each Right will entitle its holder to purchase, at the Rights then-current exercise price, preferred share fractions (or other securities of the Company) having a value of twice the Rights exercise price. This amounts to the right to buy preferred share fractions of the Company at half price. Rights owned by the party triggering the exercise of Rights will be void and, therefore, will not be exercisable.
In addition, if, after any person has become a 15.0%-or-more stockholder, the Company is involved in a merger or other business combination transaction with another person in which the Companys common shares are changed or converted, or if the Company sells 50.0% or more of its assets or earning power to another person, each Right will entitle its holder to purchase, at the Rights then-current exercise price, common stock of such other person (or its parent) having a value of twice the Rights exercise price.
NOTE 17. Other Comprehensive Income:
Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.
Components of other comprehensive income are as follows:
Unrealized gains on securities |
Minimum pension liability adjustment |
Accumulated other comprehensive income (loss) |
||||||||||
(in thousands) | ||||||||||||
Balance at December 31, 2000 |
$ | 6,541 | $ | (1,572 | ) | $ | 4,969 | |||||
Pretax change |
(5,928 | ) | (22,665 | ) | (28,593 | ) | ||||||
Tax effect |
2,076 | 7,932 | 10,008 | |||||||||
Balance at December 31, 2001 |
2,689 | (16,305 | ) | (13,616 | ) | |||||||
Pretax change |
28 | (64,068 | ) | (64,040 | ) | |||||||
Tax effect |
(1,227 | ) | 22,424 | 21,197 | ||||||||
Balance at December 31, 2002 |
1,490 | (57,949 | ) | (56,459 | ) | |||||||
Pretax change |
4,709 | (15,810 | ) | (11,101 | ) | |||||||
Tax effect |
(878 | ) | 5,582 | 4,704 | ||||||||
Balance at December 31, 2003 |
$ | 5,321 | $ | (68,177 | ) | $ | (62,856 | ) | ||||
The change in unrealized gains on debt and equity securities includes reclassification adjustments of $3.9 million and $(2.6) million of net realized gains (losses) for the years ended December 31, 2003 and 2002, respectively. There were no reclassification adjustments in 2001.
NOTE 18. Litigation.
The Company and certain of its subsidiaries on October 2, 2002, settled the lawsuit filed against certain of the Companys subsidiaries by the state of California in the California state court in Sacramento, California. On or about September 18, 2002, the Company and certain of its subsidiaries settled a related class action lawsuit filed in the state court in the county of Los Angeles, California.
56
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
These lawsuits involved allegations that certain subsidiaries of the Company and certain of their competitors failed to turn over unclaimed property to the state of California on a timely basis; charged California home buyers and other escrow customers fees for services that were never performed or that cost less than the amount charged; and devised and carried out programs, known as earnings credits, with financial institutions to receive interest on escrow funds placed in demand deposits.
Under the terms of the settlements, the Company will pay up to $5.5 million to certain customers in the form of cash refunds and discounts against future title insurance and escrow services. The settlements further required the Company to pay approximately $2.5 million to specified governmental agencies; counsel to the class action plaintiffs; and the Consumer Protection Prosecution Trust Fund, a trust fund established to assist consumers in protecting their rights.
The settlements provide that they do not constitute an admission of liability or wrongdoing by the Company or any of its subsidiaries.
The Company is involved in numerous routine legal proceedings related to its operations. While the ultimate disposition of each proceeding is not determinable, the Company does not believe that any of such proceedings will have a material adverse effect on its financial condition or results of operations.
NOTE 19. Business Combinations:
On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141). This statement addresses financial accounting and reporting for business combinations and supercedes Accounting Principles Board Opinions No. 16, Business Combinations. SFAS 141 requires that all business combinations be accounted for under the purchase method of accounting. In applying the purchase method of accounting, the Company undertakes a comprehensive review of the acquired entity to ensure that all identifiable assets and liabilities are properly recorded at their fair value. In determining fair value, the Company utilizes a variety of valuation techniques, including discounted cash flow analysis and outside appraisals, to the extent necessary, given materiality and complexity. All excess purchase price is appropriately recorded as goodwill. The useful lives for all assets recorded in purchase accounting are based on market conditions, contractual terms and other appropriate factors.
On October 1, 2003, the Company acquired the real estate tax monitoring and flood zone certification businesses of Transamerica Finance Corporation for a combined net purchase price of $375 million. These businesses will be integrated with the Companys existing real estate tax monitoring and flood zone certification businesses which are included in the Companys mortgage information and services segment. The purchase price was allocated to the assets acquired and liabilities assumed based on their fair values at October 1, 2003. As a result of this acquisition, the Company recognized approximately $473.0 million of goodwill and $63.6 million of intangible assets with definite lives. The operating results of Transamericas tax monitoring and flood zone certification businesses are included in the Companys consolidated financial statements commencing October 1, 2003. Assuming the acquisition had occurred January 1, 2002, pro forma revenues, net income and net income per diluted share would have been $6.4 billion, $487.2 million and $5.63, respectively, for the year ended December 31, 2003; and $4.9 billion, $264.5 million and $3.29, respectively, for the year ended December 31, 2002.
On June 5, 2003, the Company formed First Advantage Corporation, which was created through the merger of First American Corporations screening information businesses with the operations of US SEARCH.com Inc. Under the terms of the agreement, the former stockholders of US SEARCH received 0.04 of a Class A common share of First Advantage for each share of US SEARCH owned prior to the merger. The former stockholders of
57
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
US SEARCH hold approximately 20% of the total shares of First Advantage. The First American Corporation received Class B common stock, entitling 10 votes for each share, representing approximately 80% of the total shares of First Advantage. Approximately $3.0 million of intangible assets with definite lives and $54.9 million of goodwill was recorded by First Advantage as part of this transaction. The new public company trades Class A common stock as FADV on the NASDAQ National Market System.
First Advantage Corporation completed 9 acquisitions during the current year. The aggregate purchase price of these acquisition was $10.9 million in cash, $11.3 million in notes payable and .9 million shares, valued at $15.2 million, of First Advantages Class A common stock. The purchase price of each acquisition was allocated to the assets acquired and liabilities assumed using a variety of valuation techniques including discounted cash flow analysis. As a result of these transactions, First Advantage recorded approximately $6.1 million of intangible assets with definite lives and $27.6 million of goodwill. In accounting for the First Advantage shares issued in these acquisitions, the Company, whose ownership interest was reduced to approximately 77 percent, recorded a pretax gain of $2.3 million.
In addition to the acquisitions discussed above, the Company completed 30 acquisitions during the year ended December 31, 2003. These acquisitions were individually not material and are included in the following business segments: 25 in the title insurance and services segment, two in the mortgage information segment and three in the property information segment. Their aggregate purchase price was $71.7 million in cash, $53.9 million in notes and 1.1 million shares of the Companys common stock valued at $28.5 million. The purchase price for each was allocated to the assets acquired and liabilities assumed based on estimated fair values and approximately $121.2 million in goodwill and $20.3 million of intangible assets with definite lives was recorded. The operating results of these acquired companies were included in the Companys consolidated financial statements from their respective acquisition dates.
Assuming all of the current year acquisitions had occurred January 1, 2002, pro forma revenues, net income and net income per diluted share would have been $6.6 billion, $498.8 million and $5.72, respectively, for the year ended December 31, 2003; and $5.2 billion, $265.8 million and $3.07, respectively, for the year ended December 31, 2002. All pro forma results include interest expense on acquisition debt. The pro forma results are not necessarily indicative of the operating results that would have been obtained had the acquisitions occurred at the beginning of the periods presented, nor are they necessarily indicative of future operating results.
NOTE 20. Segment Financial Information:
The Company, through its subsidiaries, is engaged in the business of providing business information and related products and services. The Company has seven reporting segments that fall within two primary business groups, financial services and information technology. The Financial Services group includes title insurance, specialty insurance and trust and other services. The title insurance and services segment issues residential and commercial title insurance policies, provides escrow services, equity loan services, tax-deferred exchanges and other related products. The specialty insurance segment issues property and casualty insurance policies and provides home warranties. The trust and other services segment provide investment advisory and trust and thrift services. The Information Technology group includes mortgage information, property information, credit information and screening information. The mortgage information segment provides tax monitoring, flood zone certification, default management services and other real estate related services. The property information segment provides property database services and appraisal services. The credit information segment provides mortgage credit and specialized credit reporting services. The screening information segment provides resident screening, pre-employment screening, substance abuse management and testing, consumer direct location services and motor vehicle reporting.
58
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company provides its title services through both direct operations and agents throughout the United States. It also offers title services in Australia, The Bahama Islands, Canada, Guam, Hong Kong, Ireland, Mexico, New Zealand, Puerto Rico, South Korea, the United Kingdom, the U.S. Virgin Islands and other countries abroad. The international operations account for less than 1% of the Companys income before income taxes and minority interests. Home warranty services are provided in 40 states throughout the United States. Property and casualty insurance is offered nationwide. Trust and other services products are provided in Southern California. The products offered by the four segments included in the Information Technology group are provided nationwide.
Corporate consists primarily of investment gains and losses, personnel and other operating expenses associated with the Companys corporate facilities, certain technology initiatives and unallocated interest expense.
Selected financial information about the Companys operations by segment for each of the past three years is as follows:
Revenues |
Depreciation and amortization |
Income (loss) before income taxes and minority interests |
Assets |
Investment in affiliates |
Capital expenditures | |||||||||||||||
(in thousands) | ||||||||||||||||||||
2003 |
||||||||||||||||||||
Title Insurance |
$ | 4,455,238 | $ | 39,158 | $ | 494,946 | $ | 2,123,388 | $ | 109,168 | $ | 38,978 | ||||||||
Specialty Insurance |
219,837 | 1,929 | 30,125 | 380,663 | | 1,305 | ||||||||||||||
Trust and Other Services |
39,645 | 829 | 9,683 | 156,177 | 3,436 | 206 | ||||||||||||||
Mortgage Information |
668,765 | 19,296 | 238,508 | 1,117,825 | 2,313 | 15,941 | ||||||||||||||
Property Information |
390,151 | 22,847 | 105,339 | 539,882 | 9,337 | 19,798 | ||||||||||||||
Credit Information |
267,074 | 11,838 | 64,291 | 189,389 | 54,528 | 4,949 | ||||||||||||||
Screening Information |
166,536 | 10,166 | 4,505 | 284,007 | | 4,740 | ||||||||||||||
Corporate |
6,468 | 8,361 | (108,675 | ) | 100,780 | | 13,046 | |||||||||||||
$ | 6,213,714 | $ | 114,424 | $ | 838,722 | $ | 4,892,111 | $ | 178,782 | $ | 98,963 | |||||||||
2002 |
||||||||||||||||||||
Title Insurance |
$ | 3,437,726 | $ | 42,092 | $ | 271,720 | $ | 1,618,186 | $ | 66,939 | $ | 45,014 | ||||||||
Specialty Insurance |
153,205 | 1,965 | 24,465 | 282,199 | | 1,829 | ||||||||||||||
Trust and Other Services |
41,687 | 1,091 | 13,548 | 147,039 | 3,558 | 299 | ||||||||||||||
Mortgage Information |
485,206 | 10,161 | 146,849 | 433,471 | | 12,130 | ||||||||||||||
Property Information |
279,754 | 18,729 | 71,459 | 450,355 | 23,787 | 14,096 | ||||||||||||||
Credit Information |
221,761 | 11,355 | 39,266 | 161,964 | 13,457 | 7,732 | ||||||||||||||
Screening Information |
100,888 | 4,050 | 2,459 | 157,051 | | 3,964 | ||||||||||||||
Corporate |
(16,018 | ) | 7,386 | (119,859 | ) | 147,780 | | 9,608 | ||||||||||||
$ | 4,704,209 | $ | 96,829 | $ | 449,907 | $ | 3,398,045 | $ | 107,741 | $ | 94,672 | |||||||||
2001 |
||||||||||||||||||||
Title Insurance |
$ | 2,690,677 | $ | 49,208 | $ | 173,654 | $ | 1,303,832 | $ | 49,000 | $ | 48,197 | ||||||||
Specialty Insurance |
120,558 | 3,671 | 11,929 | 204,326 | | 2,383 | ||||||||||||||
Trust and Other Services |
39,661 | 1,173 | 12,269 | 138,899 | 3,756 | 651 | ||||||||||||||
Mortgage Information |
420,118 | 11,233 | 129,751 | 379,170 | | 21,187 | ||||||||||||||
Property Information |
227,900 | 23,355 | 35,321 | 394,197 | 26,277 | 25,549 | ||||||||||||||
Credit Information |
201,029 | 12,145 | 30,062 | 175,759 | 4,947 | 17,970 | ||||||||||||||
Screening Information |
49,326 | 1,810 | (286 | ) | 58,360 | | 4,122 | |||||||||||||
Corporate |
1,454 | 5,753 | (63,160 | ) | 182,720 | | 9,162 | |||||||||||||
$ | 3,750,723 | $ | 108,348 | $ | 329,540 | $ | 2,837,263 | $ | 83,980 | $ | 129,221 | |||||||||
59
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
QUARTERLY FINANCIAL DATA
(Unaudited)
Quarter Ended | ||||||||||||
March 31 |
June 30 |
September 30 |
December 31 | |||||||||
(in thousands, except per share amounts) | ||||||||||||
Year Ended December 31, 2003 |
||||||||||||
Revenues |
$ | 1,341,975 | $ | 1,542,931 | $ | 1,716,742 | $ | 1,612,066 | ||||
Income before income taxes and minority interests |
$ | 163,493 | $ | 239,753 | $ | 260,759 | $ | 174,717 | ||||
Net income |
$ | 87,580 | $ | 127,476 | $ | 141,847 | $ | 94,119 | ||||
Net income per share: |
||||||||||||
Basic |
$ | 1.18 | $ | 1.67 | $ | 1.83 | $ | 1.20 | ||||
Diluted |
$ | 1.05 | $ | 1.47 | $ | 1.62 | $ | 1.07 | ||||
Year Ended December 31, 2002 |
||||||||||||
Revenues |
$ | 1,042,202 | $ | 1,091,530 | $ | 1,196,086 | $ | 1,374,391 | ||||
Income before income taxes and minority interests |
$ | 88,559 | $ | 80,054 | $ | 129,022 | $ | 152,272 | ||||
Net income |
$ | 44,075 | $ | 40,121 | $ | 67,359 | $ | 82,812 | ||||
Net income per share: |
||||||||||||
Basic |
$ | 0.63 | $ | 0.56 | $ | 0.94 | $ | 1.13 | ||||
Diluted |
$ | 0.57 | $ | 0.51 | $ | 0.84 | $ | 1.01 |
60
SCHEDULE I
1 OF 1
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
SUMMARY OF INVESTMENTSOTHER THAN INVESTMENTS IN RELATED PARTIES
(in thousands)
December 31, 2003
Column A |
Column B |
Column C |
Column D | ||||||
Type of investment |
Cost |
Market value |
Amount at which shown in the balance sheet | ||||||
Deposits with savings and loan associations and banks: |
|||||||||
RegistrantNone |
|||||||||
Consolidated |
$ | 57,945 | $ | 57,945 | $ | 57,945 | |||
Debt securities: |
|||||||||
U.S. Treasury securities |
|||||||||
RegistrantNone |
|||||||||
Consolidated |
$ | 74,669 | $ | 76,948 | $ | 76,948 | |||
Corporate securities |
|||||||||
RegistrantNone |
|||||||||
Consolidated |
$ | 136,574 | $ | 143,751 | $ | 143,751 | |||
Obligations of states and political subdivisions |
|||||||||
RegistrantNone |
|||||||||
Consolidated |
$ | 79,726 | $ | 83,239 | $ | 83,239 | |||
Mortgage-backed securities |
|||||||||
RegistrantNone |
|||||||||
Consolidated |
$ | 46,761 | $ | 46,537 | $ | 46,537 | |||
Total debt securities: |
|||||||||
RegistrantNone |
|||||||||
Consolidated |
$ | 337,730 | $ | 350,475 | $ | 350,475 | |||
Equity securities: |
|||||||||
RegistrantNone |
|||||||||
Consolidated |
$ | 49,631 | $ | 45,758 | $ | 45,758 | |||
Other long-term investments: |
|||||||||
Registrant |
$ | 3,756 | $ | 3,756 | $ | 3,756 | |||
Consolidated |
$ | 233,794 | $ | 233,794 | $ | 233,794 | |||
Total investments: |
|||||||||
Registrant |
$ | 3,756 | $ | 3,756 | $ | 3,756 | |||
Consolidated |
$ | 679,100 | $ | 687,972 | $ | 687,972 | |||
61
SCHEDULE III
1 OF 2
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
BALANCE SHEET CAPTIONS
Column A |
Column B |
Column C |
Column D | ||||||
Segment |
Deferred policy acquisition costs |
Claims reserves |
Deferred revenues | ||||||
2003 |
|||||||||
Title Insurance |
| $ | 367,992 | $ | 6,558 | ||||
Specialty Insurance |
$ | 19,888 | 32,285 | 98,718 | |||||
Trust and Other Services |
| 3 | | ||||||
Mortgage Information |
| 31,620 | 596,274 | ||||||
Property Information |
| 3,952 | 12,727 | ||||||
Credit Information |
| | 3,725 | ||||||
Screening Information |
1,501 | ||||||||
Corporate |
| | | ||||||
Total |
$ | 19,888 | $ | 435,852 | $ | 719,503 | |||
2002 |
|||||||||
Title Insurance |
| $ | 319,826 | $ | 7,356 | ||||
Specialty Insurance |
$ | 22,648 | 19,021 | 90,356 | |||||
Trust and Other Services |
| 3 | | ||||||
Mortgage Information |
| 18,373 | 251,298 | ||||||
Property Information |
| 3,082 | 7,576 | ||||||
Credit Information |
| | 1,938 | ||||||
Screening Information |
223 | ||||||||
Corporate |
| | | ||||||
Total |
$ | 22,648 | $ | 360,305 | $ | 358,747 | |||
62
SCHEDULE III
2 OF 2
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
INCOME STATEMENT CAPTIONS
Column A |
Column F |
Column G |
Column H |
Column I |
Column J |
Column K | ||||||||||||||
Segment |
Operating revenues |
Net investment income |
Loss provision |
Amortization of deferred policy acquisition costs |
Other operating expenses |
Net premiums written | ||||||||||||||
2003 |
||||||||||||||||||||
Title Insurance |
$ | 4,402,984 | $ | 52,254 | $ | 179,814 | $ | 715,725 | ||||||||||||
Specialty Insurance |
207,287 | 12,550 | 119,546 | $ | 2,885 | 20,431 | $ | 139,012 | ||||||||||||
Trust and Other Services |
39,546 | 99 | 29 | 13,219 | ||||||||||||||||
Mortgage Information |
642,684 | 26,081 | 24,229 | 177,234 | ||||||||||||||||
Property Information |
366,271 | 23,880 | 786 | 131,896 | ||||||||||||||||
Credit Information |
246,987 | 20,087 | | 129,367 | ||||||||||||||||
Screening Information |
166,430 | 106 | | 97,034 | ||||||||||||||||
Corporate |
| 6,468 | | | 32,084 | | ||||||||||||||
Total |
$ | 6,072,189 | $ | 141,525 | $ | 324,404 | $ | 2,885 | $ | 1,316,990 | $ | 139,012 | ||||||||
2002 |
||||||||||||||||||||
Title Insurance |
$ | 3,393,592 | $ | 44,134 | $ | 135,622 | $ | 584,604 | ||||||||||||
Specialty Insurance |
143,307 | 9,898 | 77,049 | $ | 11,313 | 283 | $ | 69,412 | ||||||||||||
Trust and Other Services |
41,737 | (51 | ) | 130 | 12,658 | |||||||||||||||
Mortgage Information |
479,288 | 5,919 | 11,975 | 159,211 | ||||||||||||||||
Property Information |
259,315 | 20,440 | 150 | 86,039 | ||||||||||||||||
Credit Information |
215,337 | 6,424 | (348 | ) | 107,781 | |||||||||||||||
Screening Information |
100,702 | 186 | 11 | 61,037 | ||||||||||||||||
Corporate |
| (16,019 | ) | | | 26,199 | | |||||||||||||
Total |
$ | 4,633,278 | $ | 70,931 | $ | 224,589 | $ | 11,313 | $ | 1,037,812 | $ | 69,412 | ||||||||
2001 |
||||||||||||||||||||
Title Insurance |
$ | 2,648,994 | $ | 41,684 | $ | 113,811 | $ | 474,127 | ||||||||||||
Specialty Insurance |
112,054 | 8,504 | 58,499 | $ | 9,365 | 4,905 | $ | 16,982 | ||||||||||||
Trust and Other Services |
39,882 | (221 | ) | 112 | 13,873 | |||||||||||||||
Mortgage Information |
407,006 | 13,110 | 8,748 | 140,199 | ||||||||||||||||
Property Information |
210,975 | 16,925 | (1,099 | ) | 73,809 | |||||||||||||||
Credit Information |
194,981 | 6,048 | 575 | 101,323 | ||||||||||||||||
Screening Information |
49,094 | 233 | | 26,499 | ||||||||||||||||
Corporate |
| 1,454 | | | 9,504 | | ||||||||||||||
Total |
$ | 3,662,986 | $ | 87,737 | $ | 180,646 | $ | 9,365 | $ | 844,239 | $ | 16,982 | ||||||||
63
SCHEDULE IV
1 OF 1
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
REINSURANCE
(in thousands, except percentages)
Segment |
Insurance operating revenues before reinsurance |
Ceded to other companies |
Assumed from other companies |
Insurance operating revenues |
Percentage of amount assumed to operating revenues |
||||||||||
Title Insurance |
|||||||||||||||
2003 |
$ | 4,406,746 | $ | 9,223 | $ | 5,461 | $ | 4,402,984 | 0.1 | % | |||||
2002 |
$ | 3,395,743 | $ | 5,357 | $ | 3,206 | $ | 3,393,592 | 0.1 | % | |||||
2001 |
$ | 2,651,380 | $ | 6,622 | $ | 4,236 | $ | 2,648,994 | 0.2 | % | |||||
Specialty Insurance |
|||||||||||||||
2003 |
$ | 141,456 | $ | 50,572 | | $ | 90,884 | 0.0 | % | ||||||
2002 |
$ | 49,497 | $ | 8,648 | $ | 171 | $ | 41,020 | 0.4 | % | |||||
2001 |
$ | 23,086 | $ | 2,264 | $ | 4 | $ | 20,826 | 0.0 | % | |||||
64
SCHEDULE V
1 OF 3
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Year Ended December 31, 2003
Column A |
Column B |
Column C |
Column D |
Column E | |||||||||||||
Additions |
|||||||||||||||||
Description |
Balance at beginning of period |
Charged to costs and expenses |
Charged to other accounts |
Deductions from reserve |
Balance at end of period | ||||||||||||
Reserve deducted from |
|||||||||||||||||
RegistrantNone |
|||||||||||||||||
Consolidated |
$ | 50,782 | $ | 25,723 | $ | 21,393 | (A) | $ | 55,112 | ||||||||
Reserve for title losses and |
|||||||||||||||||
RegistrantNone |
|||||||||||||||||
Consolidated |
$ | 360,305 | $ | 324,404 | $ | 20,629 | (B) | $ | 269,486 | (B) | $ | 435,852 | |||||
Reserve deducted from loans |
|||||||||||||||||
RegistrantNone |
|||||||||||||||||
Consolidated |
$ | 1,170 | $ | 120 | $ | 1,290 | |||||||||||
Reserve deducted from |
|||||||||||||||||
RegistrantNone |
|||||||||||||||||
Consolidated |
$ | 1,066 | $ | 155 | $ | 19 | (D) | $ | 1,202 | ||||||||
Reserve deducted from |
|||||||||||||||||
RegistrantNone |
|||||||||||||||||
Consolidated |
$ | 2,489 | $ | 1,081 | $ | 3,570 | |||||||||||
Reserve deducted from |
|||||||||||||||||
RegistrantNone |
|||||||||||||||||
Consolidated |
$ | 10,526 | $ | 32,903 | (E) | $ | 43,429 | ||||||||||
Note AAmount represents accounts written off, net of recoveries.
Note BAmount represents net $20,629 in purchase accounting adjustments
Note CAmount represents claim payments, net of recoveries
Note DAmount represents elimination of reserve in connection with disposition and/or revaluation of the related asset.
Note EAmount represents allowance against recognition of future tax benefits related to net operating loss carryforwards.
65
SCHEDULE V
2 OF 3
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Year Ended December 31, 2002
Column A |
Column B |
Column C |
Column D |
Column E | |||||||||||||
Additions |
|||||||||||||||||
Description |
Balance at beginning of period |
Charged to costs and expenses |
Charged to other accounts |
Deductions from reserve |
Balance at end of period | ||||||||||||
Reserve deducted from |
|||||||||||||||||
RegistrantNone |
|||||||||||||||||
Consolidated |
$ | 39,107 | $ | 22,061 | $ | 10,386 | (A) | $ | 50,782 | ||||||||
Reserve for title losses and |
|||||||||||||||||
RegistrantNone |
|||||||||||||||||
Consolidated |
$ | 314,777 | $ | 224,589 | $ | 1,865 | (B) | $ | 180,926 | (C) | $ | 360,305 | |||||
Reserve deducted from |
|||||||||||||||||
RegistrantNone |
|||||||||||||||||
Consolidated |
$ | 1,050 | $ | 123 | $ | 3 | (A) | $ | 1,170 | ||||||||
Reserve deducted from |
|||||||||||||||||
RegistrantNone |
|||||||||||||||||
Consolidated |
$ | 1,101 | $ | 137 | $ | 172 | (D) | $ | 1,066 | ||||||||
Reserve deducted from |
|||||||||||||||||
RegistrantNone |
|||||||||||||||||
Consolidated |
$ | 3,418 | $ | 200 | $ | 1,129 | (D) | $ | 2,489 | ||||||||
Reserve deducted from |
|||||||||||||||||
RegistrantNone Consolidated |
$ | 10,526 | (E) | $ | 10,526 | ||||||||||||
Note AAmount represents accounts written off, net of recoveries.
Note BAmount represents net $1,865 in purchase accounting adjustments
Note CAmount represents claim payments, net of recoveries.
Note DAmount represents elimination of reserve in connection with disposition and/or revaluation of the related asset.
Note EAmount represents allowance against recognition of future tax benefits related to net operating loss carryforwards.
66
SCHEDULE V
3 OF 3
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Year Ended December 31, 2001
Column A |
Column B |
Column C |
Column D |
Column E | |||||||||||||
Additions |
|||||||||||||||||
Description |
Balance at beginning of period |
Charged to costs and |
Charged to other accounts |
Deductions from reserve |
Balance at end of period | ||||||||||||
Reserve deducted from |
|||||||||||||||||
RegistrantNone |
|||||||||||||||||
Consolidated |
$ | 15,477 | $ | 20,353 | $ | 3,277 | $ | 39,107 | |||||||||
Reserve for title losses |
|||||||||||||||||
RegistrantNone |
|||||||||||||||||
Consolidated |
$ | 284,607 | $ | 180,646 | $ | 2,383 | (B) | $ | 152,859 | (C) | $ | 314,777 | |||||
Reserve deducted from |
|||||||||||||||||
RegistrantNone |
|||||||||||||||||
Consolidated |
$ | 1,020 | $ | 172 | $ | 142 | (A) | $ | 1,050 | ||||||||
Reserve deducted from |
|||||||||||||||||
RegistrantNone |
|||||||||||||||||
Consolidated |
$ | 2,192 | $ | 319 | $ | 1,410 | (D) | $ | 1,101 | ||||||||
Reserve deducted from |
|||||||||||||||||
RegistrantNone |
|||||||||||||||||
Consolidated |
$ | 2,600 | $ | 818 | $ | 3,418 | |||||||||||
Note AAmount represents accounts written off, net of recoveries.
Note BAmount represents net $2,383 in purchase accounting adjustments
Note CAmount represents claim payments, net of recoveries.
Note DAmount represents elimination of reserve in connection with disposition and/or revaluation of the related asset.
67
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
Item 9A. Controls and Procedures
The Companys President and Chief Financial Officer, after evaluating the effectiveness of the Companys disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, have concluded that, as of the end of the fiscal year covered by this report on Form 10-K, the Companys disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports filed or submitted under such Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms.
There was no change in the Companys internal control over financial reporting during the quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
PART III
The information required by Items 10 through 14 of this report is set forth in the sections entitled Election of Directors, Executive Officers, Section 16(a) Beneficial Ownership Reporting Compliance, Executive Compensation, Stock Option Grants and Exercises, Pension Plan, Supplemental Benefit Plan, Deferred Compensation Plan, Change of Control Arrangements, Directors Compensation, Codes of Ethics, Compensation Committee Interlocks and Insider Participation, Report of the Compensation Committee on Executive Compensation, Comparative Cumulative Total Return to Shareholders, Report of the Audit Committee, Who are the largest principal shareholders outside of management?, Security Ownership of Management, Principal Accountant Fees and Services and Transactions with Management and Others in the Companys definitive proxy statement, which sections are incorporated in this report and made a part hereof by reference. The definitive proxy statement will be filed no later than 120 days after the close of Registrants fiscal year.
68
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. & 2. |
Financial Statements and Financial Statement Schedules | |||
The Financial Statements and Financial Statement Schedules filed as part of this report are listed in the accompanying index at page in Item 8 of Part II of this report. | ||||
3. |
Exhibits (Each management contract or compensatory plan or arrangement in which any director or named executive officer of The First American Corporation, as defined by Item 402(a)(3) of Regulation S-K (17 C.F.R. §229.402(a)(3)), participates that is included among the exhibits listed below is identified by an asterisk (*).) | |||
(2) | Agreement and Plan of Merger, dated as of November 17, 1998, among The First American Financial Corporation, National Insurance Group, and Pea Soup Acquisition Corp., incorporated by reference herein from Exhibit 2.1 of Form 8-K filed by National Information Group on November 25, 1998. | |||
(3)(a) | Restated Articles of Incorporation of The First American Financial Corporation dated July 14, 1998, incorporated by reference herein from Exhibit 3.1 of Amendment No. 1, dated July 28, 1998, to the Companys Registration Statement No. 333-53681 on Form S-4. | |||
(3)(b) | Certificate of Amendment of Restated Articles of Incorporation of The First American Financial Corporation dated April 23, 1999, incorporated by reference herein from Exhibit (3) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. | |||
(3)(c) | Certificate of Amendment of Restated Articles of Incorporation of The First American Financial Corporation dated May 11, 2000, incorporated by reference herein from Exhibit 3.1 of Report on Form 8-K dated June 12, 2000. | |||
(3)(d) | Bylaws of The First American Corporation, as amended. | |||
(4)(a) | Rights Agreement, dated as of October 23, 1997, incorporated by reference herein from Exhibit 4 of Registration Statement on Form 8-A dated November 7, 1997. | |||
(4)(b) | Junior Subordinated Indenture, dated as of April 22, 1997, incorporated by reference herein from Exhibit (4.2) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. | |||
(4)(c) | Form of New 8.50% Junior Subordinated Deferrable Interest Debenture, incorporated by reference herein from Exhibit 4.2 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997. | |||
(4)(d) |
Certificate of Trust of First American Capital Trust I, incorporated by reference herein from Exhibit 4.3 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997. | |||
(4)(e) |
Amended and Restated Declaration of Trust of First American Capital Trust I dated as of April 22, 1997, incorporated by reference herein from Exhibit (4.3) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. | |||
(4)(f) |
Form of New 8.50% Capital Security (Liquidation Amount $1,000 per Capital Security), incorporated by reference herein from Exhibit 4.6 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997. |
69
(4)(g) |
Form of New Guarantee Agreement, incorporated by reference herein from Exhibit 4.7 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997. | |||
(4)(h) |
Senior Indenture, dated as of April 7, 1998, between The First American Financial Corporation and Wilmington Trust Company as Trustee, incorporated by reference herein from Exhibit (4) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. | |||
(4)(i) |
Registration Rights Agreement dated as of April 24, 2001, incorporated by reference herein from Exhibit 4.2 of Registration Statement No. 333-65216 on Form S-3 dated July 16, 2001. | |||
(4)(j) |
Indenture dated as of April 24, 2001, incorporated by reference herein from Exhibit 4.3 of Registration Statement No. 333-65216 on Form S-3 dated July 16, 2001. | |||
(4)(k) |
Form of Senior Convertible Debenture, incorporated by reference herein from Exhibit 4.4 of Registration Statement No. 333-65216 on Form S-3 dated July 16, 2001. | |||
*(10)(a) |
Description of Stock Bonus Plan, as amended, incorporated by reference herein from Exhibit (10)(a) of Annual Report on Form 10-K for the fiscal year ended December 31, 1992. | |||
*(10)(b) |
Executive Supplemental Benefit Plan dated April 10, 1986, and Amendment No. 1 thereto dated October 1, 1986, incorporated by reference herein from Exhibit (10)(b) of Annual Report on Form 10-K for the fiscal year ended December 31, 1988. | |||
*(10)(c) | Amendment No. 2, dated March 22, 1990, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(c) of Annual Report on Form 10-K for the fiscal year ended December 31, 1989. | |||
*(10)(d) |
Amendment No. 3, dated July 7, 1998, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(d) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998. | |||
*(10)(e) |
Amendment No. 4, dated March 22, 2000, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(c) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999. | |||
*(10)(f) |
Amendment No. 5, dated July 19, 2000, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(e) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. | |||
*(10)(g) |
Management Supplemental Benefit Plan dated July 20, 1988, incorporated by reference herein from Exhibit (10) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1992. | |||
*(10)(h) |
Amendment No. 1, dated July 7, 1998, to Management Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(f) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998. | |||
*(10)(i) |
Amendment No. 2, dated March 22, 2000, to Management Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(h) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999. | |||
*(10)(j) |
Amendment No. 3, dated July 19, 2000, to Management Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(f) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. | |||
*(10)(k) |
Pension Restoration Plan (effective as of January 1, 1994), incorporated by reference herein from Exhibit (10)(c) of Annual Report on Form 10-K for the fiscal year ended December 31, 1996. |
70
*(10)(l) | Amendment No. 1, dated July 19, 2000, to Pension Restoration Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. | |||
*(10)(m) |
Amendment No. 2, dated August 1, 2001, to Pension Restoration Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. | |||
*(10)(n) |
1996 Stock Option Plan, incorporated by reference herein from Exhibit 4 of Registration Statement No. 333-19065 on Form S-8 dated December 30, 1996. | |||
*(10)(o) |
Amendment No. 1, dated February 26, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(i) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998. | |||
*(10)(p) |
Amendment No. 2, dated June 22, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(j) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998. | |||
*(10)(q) |
Amendment No. 3, dated July 7, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(k) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998. | |||
*(10)(r) |
Amendment No. 4, dated April 22, 1999, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. | |||
*(10)(s) |
Amendment No. 5, dated February 29, 2000, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(o) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998. | |||
*(10)(t) |
Amendment No. 6, dated July 19, 2000, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(b) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. | |||
*(10)(u) |
Amendment No. 7, dated June 4, 2002, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. | |||
*(10)(v) |
Change in Control Agreement (Executive Form) dated November 12, 1999, incorporated by reference herein from Exhibit (10)(p) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999. | |||
*(10)(w) |
Change in Control Agreement (Management Form) dated November 12, 1999, incorporated by reference herein from Exhibit (10)(q) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999. | |||
*(10)(x) | 1997 Directors Stock Plan, incorporated by reference herein from Exhibit 4.1 of Registration Statement No. 333-41993 on Form S-8 dated December 11, 1997. | |||
*(10)(y) |
Amendment No. 1 to 1997 Directors Stock Plan, dated February 26, 1998, incorporated by reference herein from Exhibit (10)(m) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998. | |||
*(10)(z) |
Amendment No. 2 to 1997 Directors Stock Plan, dated July 7, 1998, incorporated by reference herein from Exhibit (10)(n) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998. | |||
*(10)(aa) |
Amendment No. 3, dated July 19, 2000, to 1997 Directors Stock Plan, incorporated by reference herein from Exhibit (10)(c) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. |
71
*(10)(bb) |
The First American Financial Corporation Deferred Compensation Plan dated March 10, 2000, incorporated by reference herein from Exhibit (10)(v) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999. | |||
*(10)(cc) |
Amendment No. 1, dated July 19, 2000, to Deferred Compensation Plan, incorporated by reference herein from Exhibit (10)(d) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. | |||
*(10)(dd) |
Amendment No. 2, dated February 1, 2003, to Deferred Compensation Plan, incorporated by reference herein from Exhibit (10) of Quarterly Report on Form 10-Q for the quarter ended March 31, 2003. | |||
*(10)(ee) |
The First American Financial Corporation Deferred Compensation Plan Trust Agreement dated March 10, 2000, incorporated by reference herein from Exhibit (10)(w) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999. | |||
(10)(ff) |
Contribution and Joint Venture Agreement By and Among The First American Financial Corporation and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. | |||
(10)(gg) |
Amendment No. 1, dated June 30, 2003, to Contribution and Joint Venture Agreement By and Among The First American Financial Corporation and Experian Information Solutions, Inc., et al, dated November 30, 1997, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. | |||
(10)(hh) |
Amendment No. 2, dated September 23, 2003, to Contribution and Joint Venture Agreement By and Among The First American Financial Corporation and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(b) of Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. | |||
(10)(ii) |
Operating Agreement for First American Real Estate Solutions LLC, a California Limited Liability Company, By and Among First American Real Estate Information Services, Inc., and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(b) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. | |||
(10)(jj) |
Data License Agreement dated November 30, 1997, incorporated by reference herein from Exhibit (10)(d) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. | |||
(10)(kk) |
Reseller Services Agreement dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(g) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. | |||
(10)(ll) |
Amendment to Reseller Services Agreement For Resales to Consumers, dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(h) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. | |||
(10)(mm) |
Trademark License Agreement, dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(i) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. | |||
(10)(nn) |
Credit Agreement dated as of October 12, 2001, incorporated by reference herein from Exhibit (10)(b) of Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. | |||
(10)(oo) |
Amendment No. 1, dated as of July 7, 2003, to Credit Agreement. | |||
(10)(pp) |
Amendment No. 2, dated as of October 22, 2003, to Credit Agreement. |
72
(10)(qq) |
Amendment No. 3, dated as of November 26, 2003, to Credit Agreement. | |||
(10)(rr) |
Master Lease Agreement dated as of December 27, 1999, between FATICO 1999 TRUST, as Lessor, and First American Title Insurance Company, as Lessee, incorporated by reference herein from Exhibit (10)(g) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. | |||
(10)(ss) | Agreement of Amendment No. 1 to Master Lease Agreement and Equipment Schedule No. 1, dated as of May 5, 2000, incorporated by reference herein from Exhibit (10)(h) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. | |||
(10)(tt) |
Omnibus Agreement, dated as of December 30, 2003, by and among First American Title Insurance Company, as Lessee and certain lenders, agents and trustees. | |||
(21) |
Subsidiaries of the registrant. | |||
(23) |
Consent of Independent Accountants. | |||
(31)(a) |
Certification by Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Act of 1934. | |||
(31)(b) |
Certification by Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | |||
(32)(a) |
Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. | |||
(32)(b) |
Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. |
(b) Reports on Form 8-K
During the last quarter of the period covered by this report, no reports on Form 8-K were filed.
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE FIRST AMERICAN CORPORATION | ||
(Registrant) | ||
By |
/s/ PARKER S. KENNEDY | |
Parker S. Kennedy President (Principal Executive Officer) | ||
Date: March 15, 2004 | ||
By |
/s/ THOMAS A. KLEMENS | |
Thomas A. Klemens Senior Executive Vice President, Chief Financial Officer (Principal Financial Officer) | ||
Date: March 15, 2004 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
Title |
Date | ||
/s/ D. P. KENNEDY D. P. Kennedy |
Chairman Emeritus and Director | March 15, 2004 | ||
/s/ PARKER S. KENNEDY Parker S. Kennedy |
Chairman, President, CEO and Director | March 15, 2004 | ||
/s/ THOMAS A. KLEMENS Thomas A. Klemens |
Senior Executive Vice President, Chief Financial Officer |
March 15, 2004 | ||
/s/ MAX O. VALDES Max O. Valdes |
Vice President (Principal Accounting Officer) |
March 15, 2004 | ||
/s/ GARY J. BEBAN Gary J. Beban |
Director | March 15, 2004 | ||
/s/ J. DAVID CHATHAM J. David Chatham |
Director | March 15, 2004 | ||
/s/ WILLIAM G. DAVIS William G. Davis |
Director | March 15, 2004 | ||
/s/ JAMES L. DOTI James L. Doti |
Director | March 15, 2004 | ||
/s/ LEWIS W. DOUGLAS, JR. Lewis W. Douglas, Jr. |
Director | March 15, 2004 |
74
Signature |
Title |
Date | ||
/s/ PAUL B. FAY, JR. Paul B. Fay, Jr. |
Director |
March 15, 2004 | ||
/s/ FRANK OBRYAN Frank OBryan |
Director |
March 15, 2004 | ||
/s/ ROSLYN B. PAYNE Roslyn B. Payne |
Director |
March 15, 2004 | ||
/s/ D. VAN SKILLING D. Van Skilling |
Director |
March 15, 2004 | ||
/s/ HERBERT B. TASKER Herbert B. Tasker |
Director |
March 15, 2004 | ||
/s/ VIRGINIA UEBERROTH Virginia Ueberroth |
Director |
March 15, 2004 |
75
Exhibit No. |
Description |
Sequentially Numbered Page | ||
(2) | Agreement and Plan of Merger, dated as of November 17, 1998, among The First American Financial Corporation, National Insurance Group, and Pea Soup Acquisition Corp., incorporated by reference herein from Exhibit 2.1 of Form 8-K filed by National Information Group on November 25, 1998. | |||
(3)(a) | Restated Articles of Incorporation of The First American Financial Corporation dated July 14, 1998, incorporated by reference herein from Exhibit 3.1 of Amendment No. 1, dated July 28, 1998, to the Companys Registration Statement No. 333-53681 on Form S-4. | |||
(3)(b) | Certificate of Amendment of Restated Articles of Incorporation of The First American Financial Corporation dated April 23, 1999, incorporated by reference herein from Exhibit (3) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. | |||
(3)(c) | Certificate of Amendment of Restated Articles of Incorporation of The First American Financial Corporation dated May 11, 2000, incorporated by reference herein from Exhibit 3.1 of Report on Form 8-K dated June 12, 2000. | |||
(3)(d) | Bylaws of The First American Corporation, as amended. | |||
(4)(a) | Rights Agreement, dated as of October 23, 1997, incorporated by reference herein from Exhibit 4 of Registration Statement on Form 8-A dated November 7, 1997. | |||
(4)(b) | Junior Subordinated Indenture, dated as of April 22, 1997, incorporated by reference herein from Exhibit (4.2) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. | |||
(4)(c) | Form of New 8.50% Junior Subordinated Deferrable Interest Debenture, incorporated by reference herein from Exhibit 4.2 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997. | |||
(4)(d) | Certificate of Trust of First American Capital Trust I, incorporated by reference herein from Exhibit 4.3 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997. | |||
(4)(e) | Amended and Restated Declaration of Trust of First American Capital Trust I dated as of April 22, 1997, incorporated by reference herein from Exhibit (4.3) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. | |||
(4)(f) | Form of New 8.50% Capital Security (Liquidation Amount $1,000 per Capital Security), incorporated by reference herein from Exhibit 4.6 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997. | |||
(4)(g) | Form of New Guarantee Agreement, incorporated by reference herein from Exhibit 4.7 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997. | |||
(4)(h) | Senior Indenture, dated as of April 7, 1998, between The First American Financial Corporation and Wilmington Trust Company as Trustee, incorporated by reference herein from Exhibit (4) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. |
76
Exhibit No. |
Description |
Sequentially Numbered Page | ||
(4)(i) | Registration Rights Agreement dated as of April 24, 2001, incorporated by reference herein from Exhibit 4.2 of Registration Statement No. 333-65216 on Form S-3 dated July 16, 2001. | |||
(4)(j) | Indenture dated as of April 24, 2001, incorporated by reference herein from Exhibit 4.3 of Registration Statement No. 333-65216 on Form S-3 dated July 16, 2001. | |||
(4)(k) | Form of Senior Convertible Debenture, incorporated by reference herein from Exhibit 4.4 of Registration Statement No. 333-65216 on Form S-3 dated July 16, 2001. | |||
*(10)(a) | Description of Stock Bonus Plan, as amended, incorporated by reference herein from Exhibit (10)(a) of Annual Report on Form 10-K for the fiscal year ended December 31, 1992. | |||
*(10)(b) | Executive Supplemental Benefit Plan dated April 10, 1986, and Amendment No. 1 thereto dated October 1, 1986, incorporated by reference herein from Exhibit (10)(b) of Annual Report on Form 10-K for the fiscal year ended December 31, 1988. | |||
*(10)(c) | Amendment No. 2, dated March 22, 1990, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(c) of Annual Report on Form 10-K for the fiscal year ended December 31, 1989. | |||
*(10)(d) | Amendment No. 3, dated July 7, 1998, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(d) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998. | |||
*(10)(e) | Amendment No. 4, dated March 22, 2000, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(c) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999. | |||
*(10)(f) | Amendment No. 5, dated July 19, 2000, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(e) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. | |||
*(10)(g) | Management Supplemental Benefit Plan dated July 20, 1988, incorporated by reference herein from Exhibit (10) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1992. | |||
*(10)(h) | Amendment No. 1, dated July 7, 1998, to Management Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(f) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998. | |||
*(10)(i) | Amendment No. 2, dated March 22, 2000, to Management Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(h) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999. | |||
*(10)(j) | Amendment No. 3, dated July 19, 2000, to Management Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(f) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. | |||
*(10)(k) | Pension Restoration Plan (effective as of January 1, 1994), incorporated by reference herein from Exhibit (10)(c) of Annual Report on Form 10-K for the fiscal year ended December 31, 1996. |
77
Exhibit No. |
Description |
Sequentially Numbered Page | ||
*(10)(l) | Amendment No. 1, dated July 19, 2000, to Pension Restoration Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. | |||
*(10)(m) | Amendment No. 2, dated August 1, 2001, to Pension Restoration Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. | |||
*(10)(n) | 1996 Stock Option Plan, incorporated by reference herein from Exhibit 4 of Registration Statement No. 333-19065 on Form S-8 dated December 30, 1996. | |||
*(10)(o) | Amendment No. 1, dated February 26, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(i) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998. | |||
*(10)(p) | Amendment No. 2, dated June 22, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(j) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998. | |||
*(10)(q) | Amendment No. 3, dated July 7, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(k) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998. | |||
*(10)(r) | Amendment No. 4, dated April 22, 1999, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. | |||
*(10)(s) | Amendment No. 5, dated February 29, 2000, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(o) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998. | |||
*(10)(t) | Amendment No. 6, dated July 19, 2000, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(b) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. | |||
*(10)(u) | Amendment No. 7, dated June 4, 2002, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for quarter ended June 30, 2002. | |||
*(10)(v) | Change in Control Agreement (Executive Form) dated November 12, 1999, incorporated by reference herein from Exhibit (10)(p) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999. | |||
*(10)(w) | Change in Control Agreement (Management Form) dated November 12, 1999, incorporated by reference herein from Exhibit (10)(q) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999. | |||
*(10)(x) | 1997 Directors Stock Plan, incorporated by reference herein from Exhibit 4.1 of Registration Statement No. 333-41993 on Form S-8 dated December 11, 1997. | |||
*(10)(y) | Amendment No. 1 to 1997 Directors Stock Plan, dated February 26, 1998, incorporated by reference herein from Exhibit (10)(m) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998. |
78
Exhibit No. |
Description |
Sequentially Numbered Page | ||
*(10)(z) | Amendment No. 2 to 1997 Directors Stock Plan, dated July 7, 1998, incorporated by reference herein from Exhibit (10)(n) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998. | |||
*(10)(aa) | Amendment No. 3, dated July 19, 2000, to 1997 Directors Stock Plan, incorporated by reference herein from Exhibit (10)(c) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. | |||
*(10)(bb) | The First American Financial Corporation Deferred Compensation Plan dated March 10, 2000, incorporated by reference herein from Exhibit (10)(v) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999. | |||
*(10)(cc) | Amendment No. 1, dated July 19, 2000, to Deferred Compensation Plan, incorporated by reference herein from Exhibit (10)(d) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. | |||
*(10)(dd) | Amendment No. 2, dated February 1, 2003, to Deferred Compensation Plan, incorporated by reference herein from Exhibit (10) of Quarterly Report on Form 10-Q for the quarter ended March 31, 2003. | |||
*(10)(ee) | The First American Financial Corporation Deferred Compensation Plan Trust Agreement dated March 10, 2000, incorporated by reference herein from Exhibit (10)(w) of Annual Report on Form 10-K for the fiscal year ended December 31, 1999. | |||
*(10)(ff) | Contribution and Joint Venture Agreement By and Among The First American Financial Corporation and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. | |||
(10)(gg) | Amendment No. 1, dated June 30, 2003, to Contribution and Joint Venture Agreement By and Among The First American Financial Corporation and Experian Information Solutions, Inc., et al, dated November 30, 1997, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. | |||
(10)(hh) | Amendment No. 2, dated September 23, 2003, to Contribution and Joint Venture Agreement By and Among The First American Financial Corporation and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(b) of Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. | |||
(10)(ii) | Operating Agreement for First American Real Estate Solutions LLC, a California Limited Liability Company, By and Among First American Real Estate Information Services, Inc., and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(b) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. | |||
(10)(jj) | Data License Agreement dated November 30, 1997, incorporated by reference herein from Exhibit (10)(d) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. | |||
(10)(kk) | Reseller Services Agreement dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(g) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. | |||
(10)(ll) | Amendment to Reseller Services Agreement For Resales to Consumers, dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(h) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. |
79
Exhibit No. |
Description |
Sequentially Numbered Page | ||
(10)(mm) | Trademark License Agreement, dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(i) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. | |||
(10)(nn) | Credit Agreement dated as of October 12, 2001, incorporated by reference herein from Exhibit (10)(b) of Quarterly Report on Form 10-Q for the quarter ended September 30, 2001. | |||
(10)(oo) | Amendment No. 1, dated as of July 7, 2003, to Credit Agreement. | |||
(10)(pp) | Amendment No. 2, dated as of October 22, 2003, to Credit Agreement. | |||
(10)(qq) | Amendment No. 3, dated as of November 26, 2003, to Credit Agreement. | |||
(10)(rr) | Master Lease Agreement dated as of December 27, 1999, between FATICO 1999 TRUST, as Lessor, and First American Title Insurance Company, as Lessee, incorporated by reference herein from Exhibit (10)(g) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. | |||
(10)(ss) | Agreement of Amendment No. 1 to Master Lease Agreement and Equipment Schedule No. 1, dated as of May 5, 2000, incorporated by reference herein from Exhibit (10)(h) of Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. | |||
(10)(tt) | Omnibus Agreement, dated as of December 30, 2003, by and among First American Title Insurance Company, as Lessee and certain lenders, agents and trustees. | |||
(21) | Subsidiaries of the registrant. | |||
(23) | Consent of Independent Accountants. | |||
(31)(a) | Certification by Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Act of 1934. | |||
(31)(b) | Certification by Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | |||
(32)(a) | Certification by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. | |||
(32)(b) | Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. |
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