In 1999, the Company completed the construction of two office buildings in Poway, California. These two buildings, which are owned by the Company’s title insurance subsidiary and are leased to First Advantage for use by its lender services segment, total approximately 152,000 square feet and are located on a 17 acre parcel of land.
Purchase accounting and impairment testing for goodwill and other intangible assets. Pursuant to Statement of Financial Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), the Company is required to perform an annual impairment test for goodwill and other indefinite-lived intangible assets by reporting unit. This annual test, which the Company has elected to perform every September 30, utilizes a variety of valuation techniques, all of which require management to make estimates and judgments, and includes discounted cash flow analysis, market approach valuations and the use of third-party valuation advisors. Certain of these valuation techniques are also utilized by the Company in accounting for business combinations, primarily in the determination of the fair value of acquired assets and liabilities. The Company’s reporting units, for purposes of applying the provisions of SFAS 142, are title insurance, home warranty, property and casualty insurance, trust and other services, mortgage origination products and services, mortgage servicing products and services, property information services, lender services, data services, dealer services, employer services, multifamily services and investigative and litigation services. 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, 2005 and 2004, and determined that there was no impairment of value.
The continuation of relatively low mortgage interest rates through the first three quarters of 2003 fueled record-setting refinance activity. Existing and new-home-sale activity also reached record levels. Mortgage originations, based on Mortgage Bankers Association statistics, totaled $3.81 trillion in 2003, with refinance activity comprising 66% of the total. The increase in mortgage interest rates that began in the fourth quarter of 2003 resulted in a low inventory of open orders going into 2004. This, together with an increasing mortgage interest rate environment during the first half of 2004, resulted in a decline in mortgage originations and a return to a more traditional, seasonal real estate pattern, where the greatest volume of real estate activity occurs in the spring and summer months. However, as a result of new acquisitions, declining mortgage interest rates in the second half of the year and an increase in the average revenues per title order closed, operating revenues increased in 2004 when compared with 2003. Mortgage originations totaled $2.86 trillion in 2004, with refinance transactions comprising 44% of the total. Mortgage interest rates declined slightly during the second half of 2004 but began to increase in 2005. The favorable interest rate environment present during the second half of 2004 resulted in a relatively high inventory of open orders going into 2005. However, as a result of an increase in interest rates in 2005, mortgage originations decreased in 2005. This decrease primarily reflected a slowdown in refinance activity. Resale transactions and commercial transactions remained relatively strong during the year. The strength in these markets, coupled with market share gains and increases in the average revenues per order closed in the Company’s title business, as well as acquisitions activity, resulted in an increase in operating revenues in 2005 when compared with 2004. Mortgage originations totaled $2.42 trillion in 2005, with refinance transactions comprising 39% of the total.
Specialty insurance operating revenues increased 24.9% in 2005 over 2004 and 6.3% in 2004 over 2003. The increase in 2005 over 2004 reflected continued geographic expansion at the Company’s home warranty division as well as market share gains and premium increases at the Company’s property and casualty insurance division. The increase in 2004 over 2003 reflected continued geographic expansion at the Company’s home warranty division, offset in part by a reduction in revenues at the Company’s property and casualty insurance division due to an increase in reinsurance ceded.
Property information operating revenues increased 22.5% in 2005 over 2004 and 9.0% in 2004 over 2003. These increases primarily reflected $34.7 million and $21.6 million of operating revenues contributed by new acquisitions for the respective periods and the continued growth in this segment’s less cyclical subscription-based information businesses, offset in part by the reduction in mortgage originations.
Risk mitigation and business solutions operating revenues increased 25.2% in 2005 over 2004 and 23.1% in 2004 over 2003. These increases were primarily attributable to $87.4 million and $70.8 million of operating revenues contributed by new acquisitions for the respective periods.
Investment and other income-Investment and other income totaled $210.3 million, $141.8 million, and $145.4 million in 2005, 2004 and 2003, respectively, an increase of $68.5 million, or 48.3% in 2005 from 2004, and a decrease of $3.6 million, or 2.5% in 2004 from 2003. The increase in 2005 over 2004 was primarily due to the growth in interest income resulting from a 28% increase in the average investment portfolio balance and higher yields, as well as an increase in equity in earnings of unconsolidated affiliates, which are accounted for under the equity method of accounting. The decrease in 2004 from 2003 was primarily due to a reduction in equity in earnings of unconsolidated affiliates.
Gain on issuance of subsidiary stock-Gain on issuance of subsidiary stock totaled $25.7 million in 2005, $8.5 million in 2004 and $2.3 million in 2003. These amounts represent realized gains relating to the issuance of shares by the Company’s publicly-traded subsidiary, First Advantage Corporation.
Net realized investment gains/losses-Net realized investment gains totaled $9.7 million in 2005, $1.3 million in 2004 and $33.5 million in 2003. The 2005 total included a realized gain of $9.5 million recognized by the Company’s subsidiary, First Advantage Corporation, relating to the completion of an initial public offering by DealerTrack Holdings, Inc., an entity partially owned by First Advantage. The 2003 total included the recognition of a previously deferred gain totaling $14.2 million resulting from the sale of the Company’s Contour Software, Inc. subsidiary in the first quarter of 2001. Also included in the 2003 total was a $13.1 million realized gain associated with the merger of the Company’s Credit Online business with DealerTrack Holdings, Inc.
Title insurance personnel expenses increased 16.9% in 2005 over 2004 and 16.2% in 2004 over 2003. The increase in 2005 over 2004 was primarily due to $105.1 million of personnel costs associated with new acquisitions as well as incremental costs incurred to service the increase in order volume. The Company’s direct title operations opened 2,700,000, 2,518,600, and 2,511,000 orders in 2005, 2004, and 2003, respectively, representing an increase of 7.2% in 2005 over 2004 and 0.3% in 2004 over 2003. The increases in orders year over year primarily reflected acquisition activity and market share increases, offset in part by declining mortgage originations. Also contributing to the increase were costs incurred to service the higher mix of more labor intensive resale and commercial title orders processed during the year. The increase in 2004 over 2003 was primarily due to $139.9 million of personnel costs associated with new acquisitions, incremental costs incurred to service the higher mix of more labor intensive resale and commercial title orders processed during the year and $25.8 million of increased employee benefit costs. The increases in employee benefit costs were primarily the result of increases in health care costs of $16.7 million in 2004 over 2003. Also contributing to the increase in employee benefit costs were increases in the Company’s discretionary match related to the 401(k) plan, which is profit driven and increases as profits escalate. This match can also increase when profits decrease if the number of participants in the plan increases or if the total amount of employee deferral increases. The match increased $8.2 million in 2004 over 2003.
Corporate. Corporate personnel expenses increased 10.1% in 2005 over 2004 and 40.7% in 2004 over 2003. These increases were primarily attributable to an increase in employee benefit costs, increased technology personnel costs and higher general costs associated with the support effort needed to service the Company’s expanded national and international operations. The increase in 2004 over 2003 also reflected costs associated with the implementation of the provisions of Section 404 of the Sarbanes Oxley Act, primarily consisting of internal audit costs.
Information Technology. Other operating expenses for the Information Technology group increased 14.5% in 2005 over 2004 and 10.2% in 2004 over 2003. Excluding other operating expenses of $62.6 million and $84.8 million associated with new acquisitions for the respective periods, other operating expenses for the Information Technology group increased 4.0% in 2005 over 2004 and decreased 5.6% in 2004 from 2003. The increase in 2005 over 2004 was primarily due to $11.1 million of costs related to the Company’s default division. These costs included expenses associated with relocating and consolidating operations, the write down of certain software and other related expenses. Also contributing to the increase in 2005 were $8.9 million in expenses incurred at the risk mitigation and business solutions segment primarily in connection with the Company’s contribution of its credit information group to First Advantage. The decrease in 2004 from 2003 reflected a decline in incremental costs associated with the decline in mortgage origination volume.
Corporate. Corporate other operating expenses increased 30.2% in 2005 over 2004 and 28.6% in 2004 over 2003. These increases reflected higher general costs associated with the support effort needed to service the Company’s expanded national and international operations. Also contributing to the increase for 2004 were costs associated with the implementation of the provisions of Section 404 of the Sarbanes Oxley Act, which included increased costs associated with the Company’s independent registered public accounting firm and outside consultants.
The provision for title insurance losses, expressed as a percentage of title insurance operating revenues, was 5.0% in 2005 and 4.1% in both 2004 and 2003. The increased rate for 2005 primarily reflected the claims intensity of policy years 2005 and 2004. The Company started 2005 with a rate of 4.1% that was applied to title insurance operating revenues for the first and second quarters of 2005. Effective July 1, 2005, the Company increased the loss provision rate to 5.0% to reflect an increase in claims intensity. During the fourth quarter 2005, the Company increased the rate to 6.2% as a result of a further increase in claims intensity, ending the year with an average annual rate of 5.0%. The Company anticipates starting the 2006 year applying a loss provision rate of 6.0%. This rate will be reviewed on a quarterly basis and may be adjusted if necessary.
Premium taxes-A summary by pertinent segment of the Company’s premium taxes is as follows:
Insurers are generally not subject to state income or franchise taxes. However, in lieu thereof, a “premium” tax is imposed on certain operating revenues, as defined by statute. Tax rates and bases vary from state to state; accordingly, the total premium tax burden is dependent upon the geographical mix of operating revenues. The Company’s underwritten title company (noninsurance) subsidiaries are subject to state income tax and do not pay premium tax. Accordingly, the Company’s total tax burden at the state level for the title insurance segment is
Interest-Interest expense increased $9.5 million, or 21.6% in 2005 over 2004 and $7.7 million, or 21.4%, in 2004 over 2003. These increases were primarily due to an increase in acquisition-related indebtedness.
The Company’s title insurance profit margins vary according to a number of factors, including the volume, composition (residential or commercial) and type (resale, refinancing or new construction) of real estate activity. Commercial transactions tend to generate higher revenues and greater profit margins than residential transactions. Profit margins from refinancing activities, on a per transaction basis, are lower than those from resale activities because in many states there are premium discounts on, and cancellation rates are higher for refinancing transactions. Cancellations of title orders adversely affect profits because costs are incurred in opening and processing such orders, but revenues are not generated. Also, the Company’s direct title insurance business has significant fixed costs in addition to its variable costs. Accordingly, profit margins from the Company’s direct title insurance business improve as the volume of title orders closed increases. Title insurance profit margins are also affected by the percentage of operating revenues generated by agency operations. Profit margins from direct operations are generally higher than from agency operations due primarily to the large portion of the premium that is retained by the agent.
Most of the businesses that are included in the Information Technology group are database intensive, with a relatively high proportion of fixed costs. As such, profit margins generally improve as revenues increase. Revenues for the mortgage information segment, like title insurance, are primarily dependent on the level of real estate activity and the cost and availability of mortgage funds. Revenues from the property information segment are, in part, dependent on real estate activity, but are less cyclical than title insurance and mortgage information revenues as a result of a significant subscription-based revenue stream. Most of the revenues for the risk mitigation and business solutions segment are unaffected by real estate activity, with the exception of the mortgage credit business, which is dependent on real estate activity.
Minority interests-Minority interests in net income of consolidated subsidiaries increased $8.9 million in 2005 over 2004 and decreased $10.7 million in 2004 over 2003. These changes were primarily due to the fluctuations in the operating results of the Company’s joint venture with Experian, which includes certain companies in the Company’s mortgage information, property information and risk mitigation and business solutions segments.
Cash provided by operating activities amounted to $921.5 million, $678.9 million, and $830.1 million for 2005, 2004, and 2003, respectively, after net claim payments of $373.0 million, $268.0 million, and $269.5 million, respectively. The principal nonoperating uses of cash and cash equivalents for the three-year period ended December 31, 2005, were for company acquisitions, additions to the investment portfolio, capital expenditures, dividends, distributions to minority shareholders, the repayment of debt and the repurchase of Company shares. The most significant nonoperating sources of cash and cash equivalents were proceeds from the issuance of debt, proceeds from the issuance of notes and capital lease, 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 $224.5 million for 2005, $168.8 million for 2004, and $220.2 million for 2003.
Off-balance sheet arrangements and contractual obligations. The Company administers escrow and trust deposits as a service to its customers. Escrow deposits totaled $6.2 billion and $5.4 billion at December 31, 2005 and 2004, respectively, of which $639.9 million and $337.4 million were held at the Company’s trust and thrift division. The escrow deposits held at the Company’s trust and thrift division are included in the accompanying consolidated balance sheets. The remaining escrow deposits were held at third party financial institutions. Trust deposits totaled $3.0 billion and $2.9 billion at December 31, 2005 and 2004, respectively, and were held at the Company’s trust division. Escrow deposits held at third party financial institutions and trust deposits are not considered assets of the Company and, therefore, are not included in the accompanying consolidated balance sheets. However, the Company remains contingently liable for the disposition of these assets.
A summary, by due date, of the Company’s total contractual obligations at December 31, 2005, is as follows:
Pursuant to various insurance and other regulations, the maximum amount of dividends, loans and advances available to the Company in 2005 from its insurance subsidiaries is $336.5 million. Such restrictions have not had, nor are they expected to have, an impact on the Company’s ability to meet its cash obligations. See Note 2 to the consolidated financial statements.
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, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Certain 2003 and 2004 amounts have been reclassified to conform to the 2005 presentation.
On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). This statement addresses financial accounting and
reporting for goodwill and other intangible assets. In accordance with the provisions of SFAS 142, goodwill is no longer amortized but is rather tested at least annually for impairment. The Company has selected September 30 as the annual valuation date to test goodwill for impairment.
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.
Basic earnings per share are computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding. The computation of diluted earnings per share is
similar to the computation of basic earnings per share, except that net income is increased by the effect of interest expense, net of tax, on the Company’s convertible debt; and the weighted-average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if dilutive stock options had been exercised and the debt had been converted.
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS 123R). This standard is a revision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and its related implementation guidance. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). The cost will be recognized over the period during which an employee is required to provide services in exchange for the award. In April 2005, the Securities and Exchange Commission deferred the effective date of SFAS 123R from the first interim period beginning after June 15, 2005 to the next fiscal year beginning after June 15, 2005. The Company will adopt the standard in the first quarter of 2006 and
use the modified prospective method which will require the Company to use the same valuation method currently used for its pro forma disclosures for all unvested options as of December 31, 2005. The Company will be able to use the same valuation method or select a different method for any options granted after December 31, 2005. In addition to stock options, the Company has an employee stock purchase plan that allows eligible employees to purchase common stock of the Company at 85% of the closing price on the last day of each month. Under the provisions of SFAS 123R, commencing the first quarter of 2006 the Company will recognize an expense in the amount equal to the discount. For the twelve months ended December 31, 2005, the amount of the discount was $1.4 million. Based on options outstanding at December 31, 2005, the Company estimates the impact of SFAS 123R will be to reduce diluted earnings per share by $0.08 to $0.10 per share in 2006 depending on the timing of issuance of stock options and the deductibility of the stock-based compensation expense for financial reporting purposes.
The Company administers escrow and trust deposits as a service to its customers. Escrow deposits totaled $6.2 billion and $5.4 billion at December 31, 2005 and 2004, respectively, of which $639.9 million and $337.4 million were held at the Company’s trust and thrift division. The escrow deposits held at the Company’s trust and thrift division are included in the accompanying consolidated balance sheets, with $75.6 million and $43.3 million included in cash and cash equivalents and $564.3 million and $294.1 million included in debt securities at December 31, 2005 and 2004, respectively. The remaining escrow deposits were held at third party financial institutions. Trust deposits totaled $3.0 billion and $2.9 billion at December 31, 2005 and 2004, respectively, and were held at the Company’s trust division. Escrow deposits held at third party financial institutions and trust deposits are not considered assets of the Company and, therefore, are not included in the accompanying consolidated balance sheets. However, the Company remains contingently liable for the disposition of these assets.
totaled $2.6 billion and $1.9 billion at December 31, 2005 and 2004, respectively. Though the Company is the legal and beneficial owner of such proceeds and property, due to the structure utilized to facilitate these transactions the proceeds and property are not considered assets of the Company for accounting purposes and, therefore, are not included in the accompanying consolidated balance sheets. The Company remains contingently liable to the customer for the transfers of property, disbursements of proceeds and a return on the proceeds.
The Company’s title insurance subsidiary, First American Title Insurance Company, maintained statutory capital and surplus of $877.9 million and $746.0 million at December 31, 2005 and 2004, respectively. Statutory net income for the years ended December 31, 2005, 2004 and 2003, was $246.5 million, $130.5 million and $229.9 million, respectively.
The amortized cost and estimated fair value of debt securities at December 31, 2005, by contractual maturities, are as follows:
temporary in nature. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been below cost, the financial condition and near-term prospects of the issuer, and our ability and intent to hold the investment for a period of time sufficient to allow for anticipated recovery.
Real estate loans are collateralized by properties located primarily in Southern California. The average yield on the Company’s loan portfolio was 7.0% for the years ended December 31, 2005 and 2004. Average yields are affected by prepayment penalties recorded as income, loan fees amortized to income and the market interest rates charged by thrift and loan institutions.
In December 2004, the Company entered into a sale-leaseback transaction for certain equipment and capitalized software. This transaction, which totaled $122.0 million, was accounted for as a capital lease. As of December 31, 2005, equipment and capitalized software with a net book value of $36.9 million and $21.3 million, respectively, including accumulated depreciation of $12.0 million and $4.0 million, respectively, were leased under a capital lease. The assets and related obligation have been included in the accompanying consolidated financial statements.
A reconciliation of the changes in the carrying amount of net goodwill, by operating segment, as of December 31, 2005, is as follows:
The Company’s reporting units, for purposes of applying the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (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, lender services, data services, dealer services, employer services, multifamily services and investigative and litigation services.
The Company tests goodwill for impairment at the reporting unit level in accordance with the provisions of SFAS 142. The Company’s annual testing resulted in no impairment charges in 2005 and 2004. If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, goodwill will be evaluated between annual tests.
“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 2005 were $48.6 million in purchase accounting adjustments related to acquisitions in the title insurance and services segment. Included in “Other” for 2003 was a $16.0 million purchase accounting adjustment related to the acquisition of Transamerica Finance Corporation’s tax monitoring and flood zone certification businesses. Claims activity associated with reinsurance is not material and, therefore, not presented separately. Current year payments include $169.0 million, $143.1 million and $133.3 million in 2005, 2004 and 2003, respectively, that relate to the Company’s non-title insurance operations.
In December 2004, the Company entered into a sale-leaseback transaction for certain equipment and capitalized software. The transaction totaled $122.0 million and was accounted for as a capital lease. The capital lease bears interest at a rate of 5.7% and has a base term of two years with three one-year renewal options. The assets and related obligation have been included in the accompanying consolidated financial statements.
The fair value of notes and contracts payable was $862.2 million and $742.5 million at December 31, 2005 and 2004, respectively, and was estimated based on the current rates offered to the Company for debt of the same remaining maturities. The weighted-average interest rate for the Company’s notes and contracts payable was 6.1% and 5.7% at December 31, 2005 and 2004, respectively.
issuance of the preferred securities, the Company issued to the subsidiary trust 8.5% subordinated interest notes due in 2012. The sole assets of the subsidiary are and will be the subordinated interest notes. The Company’s obligations under the subordinated interest notes and related agreements, taken together, constitute a full and unconditional guarantee by the Company of the subsidiary’s obligations under the preferred securities. Distributions payable on the securities are included as interest expense in the Company’s consolidated income statements.
For the years 2005, 2004 and 2003, domestic and foreign pretax income from continuing operations was $769.1 million and $40.6 million, $573.9 million and $18.4 million and $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 $17.1 million, $6.7 million and $5.8 million for the years ended December 31, 2005, 2004 and 2003, respectively.
The Savings Plan allows for employee-elective contributions up to the maximum deductible amount as determined by the Internal Revenue Code. The Company makes discretionary contributions to the Savings Plan based on profitability, as well as contributions of the participants. The Company’s expense related to the Savings Plan amounted to $66.3 million, $58.3 million and $48.4 million for the years ended December 31, 2005, 2004 and 2003, respectively. The Savings Plan allows the participants to purchase the Company’s stock as one of the investment options. The Savings Plan held 11,611,000 and 10,689,000 shares of the Company’s common stock, representing 12.9% and 11.9% of the total shares outstanding at December 31, 2005 and 2004, respectively.
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 240,000, 289,000 and 283,000 shares issued in connection with the plan for the years ending December 31, 2005, 2004 and 2003, respectively. At December 31, 2005, there were 1,902,000 shares reserved for future issuances.
Unrecognized prior service costs are being amortized over the average remaining period of benefit service of participants at the time of the plan change. The benefit obligation and related assets have been measured as of December 31, 2005 for all plans.
Negative financial market returns during 2000 through 2002 resulted in a decline in the fair-market value of plan assets. This, when combined with the declining discount rate assumptions in the last several years, has resulted in a decline in the plans’ funded status. The discount-rate assumption used for pension plan accounting reflects the yield available on high-quality, fixed-income debt securities that match the expected timing of the benefit obligation payments. Consequently, the Company’s accumulated benefit obligation exceeded the fair-market value of the plan assets for the Company’s funded, defined benefit plans.
The Company expects to make cash contributions to its pension plans of approximately $43.5 million during 2006.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:
On April 24, 1996, the Company implemented The First American Corporation 1996 Stock Option Plan (the Stock Option Plan). Under the Stock Option Plan, options are granted to certain employees to purchase the Company’s common stock at a price no less than the market value of the shares on the date of the grant. The maximum number of shares that may be subject to options is 14,625,000. Currently, outstanding options become exercisable in one to five years, and expire ten years from the grant date. On April 24, 1997, the Company implemented The First American Corporation 1997 Directors’ Stock Plan (the Directors’ Plan). The Directors’ Plan is similar to the employees’ Stock Option Plan, except that the maximum number of shares that may be subject to options is 1,800,000 and the maximum number of shares that may be purchased pursuant to options granted shall not exceed 6,750 shares during any consecutive 12-month period.
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 2005, the Company’s subsidiary, First American Real Estate Information Services, Inc. purchased, for $12.8 million, certain furniture and equipment that had been a part of a sale-leaseback transaction entered into in December 2000. In December 2004, the Company purchased, for $35.5 million, certain furniture and equipment that had been part of a sales-leaseback transaction entered into by the Company in December 1999. This equipment, along with additional equipment and software, was subsequently resold and leased back in a transaction that resulted in the Company recording a capitalized lease.
Future minimum rental payments under operating and capital leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2005 are as follows:
Total rental expense for all operating leases and month-to-month rentals was $280.4 million; $259.0 million and $205.6 million for the years ended December 31, 2005, 2004, and 2003, respectively.
The Company and Experian Information Solutions, Inc. (Experian) are parties to a joint venture that resulted in the creation of the Company’s First American Real Estate Solutions LLC (FARES) subsidiary. Pursuant to the terms of the joint venture, Experian has the right to sell to the Company its interest in FARES at a purchase price determined pursuant to a specified formula based on the after-tax earnings of FARES. Experian may only exercise this right if the purchase price is less than $160.0 million. As of December 31, 2005, the purchase price exceeded $160.0 million and, therefore, Experian’s right was not exercisable as of such date. In addition to the agreement with Experian, the Company is also party to several other agreements that require the Company to purchase some or all of the minority shares of certain less-than-100.0% owned subsidiaries if certain conditions are met. The total potential purchase price related to those agreements that have met the necessary conditions as of December 31, 2005 was not material.
The change in unrealized gains on debt and equity securities includes reclassification adjustments of $0.8 million, $2.3 million and $3.9 million of net realized gains (losses) for the years ended December 31, 2005, 2004 and 2003, respectively.
The Company’s title insurance, property and casualty insurance, home warranty, thrift, trust and investment businesses are regulated by various federal, state and local governmental agencies. Many of the Company’s other businesses operate within statutory guidelines. Consequently, the Company may from time to time be subject to audit or investigation by such governmental agencies. Currently, governmental agencies are auditing or investigating certain of the Company’s operations. While the ultimate disposition of each audit or investigation is not determinable, the Company does not believe that any such investigations or audits will have a material adverse effect on its financial condition, results of operations or cash flows.
During the year ended December 31, 2005, the Company completed 50 acquisitions. Individually, these acquisitions were not material. Of these acquisitions, 31 have been in the Company’s title insurance segment, 1 in the Company’s mortgage information segment, 3 in the Company’s property information segment and 15 in the Company’s risk mitigation and business solutions segment. The aggregate purchase price of the 35 acquisitions included in the Company’s title insurance, mortgage information and property information segments was $225.2 million in cash, $44.7 million in notes payable and 2.0 million shares of the Company’s common stock valued at $73.3 million. The operating results of these acquired companies were included in the Company’s consolidated financial statements from their respective acquisition dates. The 15 acquisitions included in the Company’s risk mitigation and business solutions segment were completed by the Company’s publicly-traded subsidiary, First Advantage Corporation. The aggregate purchase price of these acquisitions was $108.6 million in cash, $54.9 million in notes payable and 2.0 million shares, valued at $51.0 million, of First Advantage’s Class A common stock. The purchase price of each acquisition was allocated to the assets acquired and liabilities assumed using a variety of valuation techniques including discounted cash flow analysis. As a result of the 50
In addition to the acquisitions discussed above, the Company also purchased the remaining minority interests in 6 companies already included in the Company’s consolidated financial statements and an equity interest in 15 companies. The total purchase price of these transactions was $34.4 million in cash, $16.3 million in notes payable and .4 million in shares of the Company’s common stock valued at $12.4 million. As a result of these transactions, the Company recorded $25.4 million in goodwill.
On September 14, 2005, the Company contributed its credit information group to First Advantage in exchange for approximately 29.1 million shares of First Advantage Class B common stock. All of the parties involved were under common control and accordingly, the transaction was accounted for using historical values and no gain or loss was recognized. First Advantage also issued approximately 1 million Class B shares to the Company in a $20 million debt-to-equity conversion. These transactions increased the Company’s economic ownership interest in First Advantage from 67 percent to 80 percent. The Credit Information Group includes the Company’s mortgage, automotive, consumer and sub-prime credit businesses.
Kingdom, Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania, the Slovak Republic, Turkey, Spain and other territories and countries. The international operations account for less than 1% of the Company’s income before income taxes and minority interests. Home warranty services are provided in 46 states throughout the United States. Property and casualty insurance is offered nationwide. The products offered by the three segments included in the Information Technology group are provided nationwide.