In September 1999, the Company moved its executive offices to one of the newly constructed office buildings at MacArthur Place in Santa Ana, California. The Orange County branch and certain other operations of the Company's title insurance segment moved into the two other buildings constructed on the site later in 1999. The three new buildings are in a campus environment and total approximately 210,000 square feet. The Company continues to own the two adjacent buildings in Santa Ana, California, which previously housed its executive offices. That location, comprising approximately 105,000 square feet of floor space, continues as the home of the Company's trust and banking division. In addition, there are plans to move certain other divisions into that complex as their existing leases expire. The Company also owns an 18,000 square foot building located across the street from that complex. This building is currently used primarily for storage.
The Company's title insurance subsidiary, First American, and its subsidiaries, own or lease buildings or office space in more than 900 locations throughout the United States and abroad, principally for their respective title operations.
Interest rate declines, which started in the fourth quarter of 1997, continued throughout 1998. This, coupled with higher consumer confidence, led to nationwide record-setting residential resale and refinance transactions, which, together with the particularly strong California real estate market, resulted in record-setting revenues and net income for the Company in 1998.
Operating revenues from direct title operations increased 1.5% in 2000 over 1999 and decreased 2.8% in 1999 from 1998. The increase in 2000 over 1999 was attributable to an increase in the average revenues per order closed, offset in part by a decrease in the number of title orders closed by the Company's direct title operations. The decrease in 1999 from 1998 was attributable to a decrease in the number of title orders closed by the Company's direct title operations, offset in part by an increase in the average revenues per order closed. The Company's direct title operations closed 975,000, 1,119,900 and 1,210,200 title orders during 2000, 1999 and 1998, respectively, representing a decrease of 12.9% in 2000 from 1999 and 7.5% in 1999 from 1998. These decreases were primarily due to the significant decline in refinance transactions mentioned above. The average revenues per order closed were $1,111, $953, and $907 for 2000, 1999 and 1998, respectively, representing an increase of 16.6% in 2000 over 1999 and 5.1% in 1999 over 1998. These increases were primarily attributable to appreciating home values, an increased mix of resale activity and, primarily in 2000, a resurgence in commercial real estate transactions. Operating revenues from agency title operations decreased 9.5% in 2000 from 1999 and increased 12.6% in 1999 over 1998. These fluctuations were primarily attributable to the same factors affecting direct title operations mentioned above, compounded by the inherent delay in the reporting of transactions by agents.
Real estate information operating revenues decreased 3.0% in 2000 from 1999 and 8.7% in 1999 from 1998. These fluctuations were primarily attributable to the same factors affecting title insurance mentioned above, offset in part by acquisition activity. In addition, the decrease in 1999 from 1998 was also due to a $22.7 million reduction in tax service operating revenues attributable to the change in revenue recognition policy (see Note 1 to the consolidated financial statements). Operating revenues of $32.1 million and $19.3 million were contributed by new acquisitions in 2000 and 1999, respectively.
Salaries and other personnel costs--A summary by segment of the Company's salaries and other personnel costs is as follows:
The Company's title insurance segment (primarily direct operations) is labor intensive; accordingly, a major variable expense component is salaries and other personnel costs. This expense component is affected by two competing factors: the need to monitor personnel changes to match corresponding or anticipated new orders, and the need to provide quality service. In addition, this segment's growth in operations that specialize in builder and lender business has created ongoing fixed costs required to service accounts.
Title insurance personnel expenses decreased 1.1% in 2000 from 1999 and increased 10.7% in 1999 over 1998. The decrease in 2000 from 1999 was primarily due to cost-containment measures, which included staff reductions in the production area (consistent with the decrease in open orders), the restructuring of the Company's principal pension plan and the consolidation of certain administrative functions within the Company's regional structure, offset in part by personnel costs associated with new acquisitions. The restructuring of the Company's pension plan contributed $11.8 million to the decrease in title personnel expenses (see Note 11 to the consolidated financial statements). Personnel expenses associated with new acquisitions totaled $36.6 million for 2000. The increase in 1999 over 1998 was primarily due to the relatively high number of employees added during the latter part of 1998 and the beginning of 1999 in order to service the volume of orders processed during those periods. The Company initiated personnel and other cost-reduction programs in response to the subsequent decrease in business volume; however, because of separation costs, the benefits of these reductions were not fully realized until 2000. Contributing to the increase in salaries and other personnel costs in 1999 were $20.8 million of personnel costs associated with new acquisitions. The Company's direct title operations opened 1,240,700, 1,334,100, and 1,585,400 title orders in 2000, 1999 and 1998, respectively, representing a decrease of 7.0% in 2000 from 1999 and 15.9% in 1999 from 1998.
Consumer information personnel expenses increased 14.9% in both 2000 over 1999 and 1999 over 1998. These increases were primarily attributable to additional personnel required to service the increased business volume and acquisition activity. The increase for 2000 was offset in part by a $0.8 million reduction in personnel expenses related to the restructuring of the Company's pension plan. Personnel expenses associated with new acquisitions were $4.8 million and $2.7 million for 2000 and 1999, respectively.
Corporate personnel expenses decreased $20.6 million in 2000 from 1999. This decrease was primarily attributable to a reduction of $23.7 million resulting from the restructuring of the Company's pension plan.
Premiums retained by agents--A summary of agent retention and agent revenues is as follows:
Corporate other operating expenses decreased 67.7% in 2000 from 1999 and increased 98.9% in 1999 over 1998. The decrease in 2000 from 1999 was primarily due to $10.8 million of nonrecurring, merger-related charges incurred in the NAIG acquisition in 1999, Y2K costs incurred in 1999 and a reduction in costs in 2000 resulting from the Company's cost-containment programs. The increase in 1999 over 1998 was primarily attributable to the $10.8 million of charges incurred in the NAIG acquisition as well as Y2K costs.
Provision for title losses and other claims--A summary by segment of the Company's provision for title losses and other claims is as follows:
Income before income taxes, minority interests and cumulative effect of a change in accounting principle--A summary by segment is as follows:
Income taxes--The Company's effective income tax rate, which includes a provision for state income and franchise taxes for noninsurance subsidiaries, was 35.5%, 36.7% and 35.2% for 2000, 1999 and 1998, respectively. The differences in the effective tax rate were primarily due to changes in the ratio of permanent differences to income before income taxes and minority interests and changes in state income and franchise taxes resulting from fluctuations in the Company's noninsurance subsidiaries' contribution to pretax profits. Information regarding items included in the reconciliation of the effective rate with the federal statutory rate is contained in Note 10 to the consolidated financial statements.
Minority interests--Minority interests in net income of consolidated subsidiaries decreased $2.1 million in 2000 from 1999 and $16.0 million in 1999 from 1998. These fluctuations were primarily due to the relative change in the operating results of the Company's joint venture with Experian.
Net income--Net income and per share information are summarized as follows:
Cash provided by operating activities amounted to $141.4 million, $173.2 million and $361.6 million for 2000, 1999 and 1998, respectively, after net claim payments of $135.4 million, $119.3 million and $100.9 million, respectively. The principal nonoperating uses of cash and cash equivalents for the three-year period ended December 31, 2000, were for capital expenditures, additions to the investment portfolio, company acquisitions in 2000 and 1999, dividends and the repayment of debt. The most significant nonoperating sources of cash and cash equivalents were proceeds from the sales and maturities of certain investments, proceeds in 2000 and 1999 from the sale-leaseback of certain property and equipment and proceeds in 1998 from the issuance of senior debentures. The net effect of all activities on total cash and cash equivalents was a decrease of $49.1 million for 2000, a decrease of $31.3 million for 1999 and an increase of $197.9 million for 1998.
Pursuant to various insurance and other regulations, the maximum amount of dividends, loans and advances available to the Company in 2001 from its insurance subsidiaries is $138.2 million. Such restrictions have not had, nor are they expected to have, an impact on the Company's ability to meet its cash obligations (see Note 2 to the consolidated financial statements).
To the Board of Directors and Stockholders of The First American Corporation:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of The First American Corporation and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The Company classifies its debt and equity securities portfolio as available-for-sale and, accordingly, includes unrealized gains and losses, net of related tax effects, as a component of other comprehensive income. Realized gains and losses on investments are determined using the specific- identification method.
Effective January 1, 1999, the Company adopted Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires the Company to capitalize interest costs incurred and certain payroll-related costs of employees directly associated with developing software in addition to incremental payments to third parties. The adoption of SOP 98-1 did not have a material effect on the Company's financial condition or results of operations.
Goodwill recognized in business combinations is amortized over its estimated useful life ranging from 10 to 40 years. Other intangibles, which include customer lists and covenants not to compete, are amortized over their estimated useful lives, ranging from 3 to 20 years. The Company periodically evaluates the amortization period assigned to each intangible asset to ensure that there have not been any events or circumstances that warrant revised estimates of useful lives.
The Company periodically reviews the carrying value of goodwill, loans receivable and other long-lived assets for impairment when events or circumstances warrant such a review.
A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans receivable are measured at the present value of expected future cash flows discounted at the loan's effective interest rate. As a practical expedient, the loan may be valued based on its observable market price or the fair value of the collateral, if the loan is collateral-dependent.
The Company provides for title insurance losses based upon its historical experience by a charge to expense when the related premium revenue is recognized. Title insurance losses and other claims associated with ceded reinsurance are provided for as the Company remains contingently liable in the event that the reinsurer does not satisfy its obligations. The reserve for known and incurred but not reported claims reflects management's best estimate of the total costs required to settle all claims reported to the Company and claims incurred but not reported. The process applied to estimated claim costs is subject to many variables, including changes and trends in the type of title insurance policies issued, the real estate market and the interest rate environment. It is reasonably possible that a change in the estimate will occur in the future.
The Company provides for claims losses relating to its home warranty and property and casualty insurance businesses based on the average cost per claim as applied to the total of new claims incurred. The average cost per home warranty claim is calculated using the average of the most recent 12 months of claims experience. The average cost per property and casualty claim is calculated using historical claims experience.
Title Insurance -- Title premiums on policies issued directly by the Company are recognized on the effective date of the title policy and escrow fees are recorded upon close of the escrow. Revenues from title policies issued by independent agents are recorded when notice of issuance is received from the agent.
Basic earnings per share are computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the weighted-average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if potential dilutive common shares had been issued.
Assets and liabilities of the trusts and escrows administered by the Company are not included in the consolidated balance sheets.
Pursuant to insurance and other regulations of the various states in which the Company's insurance subsidiaries operate, the amount of dividends, loans and advances available to the Company is limited, principally for the protection of policyholders. Under such statutory regulations, the maximum amount of dividends, loans and advances available to the Company from its insurance subsidiaries in 2001 is $138.2 million.
net income for the years ended December 31, 2000, 1999 and 1998 was $54.8 million, $71.2 million and $137.3 million, respectively.
The amortized cost and estimated fair value of debt securities at December 31, 2000, by contractual maturities, are as follows:
Real estate loans are collateralized by properties located primarily in Southern California. The average yield on the Company's loan portfolio was 10.0% for the years ended December 31, 2000 and 1999. Average yields are affected by amortization of discounts on loans purchased from other institutions, prepayment penalties recorded as income, loan fees amortized to income and the market interest rates charged by thrift and loan institutions.
Activity in the reserve for known and incurred but not reported claims is summarized as follows:
"Other" primarily represents reclassifications to the reserve for assets acquired in connection with claim settlements and purchase accounting adjustments related to company acquisitions. Claims activity associated with reinsurance is not material and, therefore, not presented separately.
In April 1999, the Company paid off the fixed-rate indebtedness portion of the 1997 amended credit agreement. The $75.0 million line of credit established under the amended credit agreement remains in effect. In July 1999, the Company entered into a new credit agreement that provided for an additional $100.0 million line of credit. Under the terms of the credit agreements, the Company is required to maintain minimum levels of capital and earnings and meet predetermined debt-to-capitalization ratios. Both lines of credit expire in July 2002 and were unused at December 31, 2000.
To finance certain acquisitions, the Company has issued debt that is convertible into shares of its common stock. This debt, which is included in other notes and contracts payable, is convertible at the option of each note holder at a conversion price of $30 per share. At December 31, 2000, there was $29.8 million of convertible debt outstanding with a weighted-average interest rate of 7.5%.
At December 31, 2000, the Company had various foreign net operating loss carryforwards totaling approximately $5.4 million, which carry forward indefinitely.
Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." In accounting for its plan, the Company, as allowable under the provisions of SFAS No. 123, applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." As a result of this election, the Company does not recognize compensation expense for its stock option plans. Had the Company determined compensation cost based on the fair value for its stock options at grant date, as set forth under SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts as follows:
The fair value of each option grant is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2000, 1999 and 1998, respectively; dividend yield of 2.1%, 1.5% and 1.0%; expected volatility of 51.4%, 39.6%, and 36.0%; risk-free interest rate of 5.2%, 5.8%, and 5.7%; and expected life of nine years, seven years and seven years.
The Company leases certain office facilities, automobiles and equipment under operating leases, which, for the most part, are renewable. The majority of these leases also provide that the Company will pay insurance and taxes. In December 2000, the Company's subsidiary, First American Real Estate Information Services, Inc. and, in 1999, the Company entered into sale- leaseback agreements with regard to certain furniture and equipment with a net book value of $30.7 million and $65.7 million, respectively. Proceeds from the sales which amounted to $33.8 million and $80.1 million and gains of $3.1 million and $14.4 million for the years ended December 31, 2000 and 1999, respectively, have been included in deferred revenue and will be amortized over the life of the
On April 22, 1997, the Company issued and sold $100.0 million of 8.5% trust preferred securities, due in 2012, through its wholly owned subsidiary, First American Capital Trust. In connection with the subsidiary's issuance of the preferred securities, the Company issued to the subsidiary trust 8.5% subordinated interest notes, due in 2012. The sole assets of the subsidiary are and will be the subordinated interest notes. The Company's obligations under the subordinated interest notes and related agreements, taken together, constitute a full and unconditional guarantee by the Company of the subsidiary's obligations under the preferred securities. Distributions payable on the securities are included as interest expense in the Company's consolidated income statements.
The Rights will be exercisable and will trade separately from the common shares only if a person or group, with certain exceptions, acquires beneficial ownership of 15.0% or more of the Company's common shares or commences a tender or exchange offer that would result in such person or group beneficially owning 15.0% or more of the common shares then outstanding. The Company may redeem the Rights at $0.001 per Right at any time prior to the occurrence of one of these events. All Rights expire on October 23, 2007.
Each Right will entitle its holder to purchase, at the Right's then-current exercise price, preferred share fractions (or other securities of the Company) having a value of twice the Right's exercise price. This amounts to the right to buy preferred share fractions of the Company at half price. Rights owned by the party triggering the exercise of Rights will be void and, therefore, will not be exercisable.
On May 19, 1999, the State of California, the controller and insurance commissioner of the State of California filed a class action suit in the state court in Sacramento. Initially, the action sought to certify as a class of defendants all title and escrow companies doing business in California from 1970 to the present, including certain of the Company's subsidiaries. The plaintiffs allege that the defendants: failed to give unclaimed property to the State of California on a timely basis; charged California home buyers and other escrow customers fees for services that were never performed or which cost less than the amount charged; and devised and carried out schemes, known as earnings credits, with financial institutions to receive interest on escrow funds deposited by defendants with financial institutions in demand deposits.
Since the initial filing of the suit, the California Attorney General's Office, on behalf of the State, the controller and the insurance commissioner, indicated that it would not seek to certify a class of defendents, but would instead amend its suit to name an unspecified number of title underwriters and underwritten title companies. To date, the Attorney General has neither amended the suit nor, to the Company's knowledge taken steps to progress with it, including the service of process on any party. The Attorney General, however, has entered into settlement discussions with various title insurance underwriters, including certain of the Company's subsidiaries. Additionally, the Attorney General indicated that it will address issues pertaining to escheat obligations through routine audits conducted by the controller's office, rather than through litigation.
As a result of the two transactions mentioned above, the Company recognized a net gain of $5.7 million and recorded goodwill of $48.9 million.
In addition, during the year ended December 31, 2000, the Company acquired 16 companies. The purchase method of accounting was used for all of the acquisitions.
The acquisitions accounted for under the purchase method of accounting were individually not material and are included in the following business segments; 13 in the title insurance segment, one in the real estate
On January 1, 1998, the Company formed a limited liability corporation (LLC) with Experian Group (Experian). The purpose of the LLC is to combine certain operations of the Company's subsidiary, First American Real Estate Information Services, Inc. (FAREISI), with Experian's Real Estate Solutions division, a supplier of core real estate data, providing, among other things, property valuation information, title and tax information and imaged title documents. The LLC is 80% owned by the Company and 20% owned by Experian. The Company treated the transaction as an acquisition of the assets and liabilities of Experian's Real Estate Solutions division in consideration for a 20% interest in FAREISI. As a result of the transaction, the Company recognized an investment gain of $32.4 million in the first quarter 1998. The operating results of the LLC are included in the Company's consolidated financial statements commencing January 1, 1998.
The Company's operations include three reportable segments: title insurance and services, real estate information and services and consumer information and services. The title insurance segment issues policies, which are insured statements of the condition of title to real property, and provides other related services. The real estate information segment provides to lender customers the status of tax payments on real property securing their loans, mortgage credit information derived from at least two credit bureau sources, flood zone determination reports that provide information on whether or not a property is in a special flood hazard area, as well as other real estate- related information services. The consumer information segment provides home warranties, which protect homeowners against defects in home fixtures; automotive tracking services; resident screening; pre-employment screening; property and casualty insurance; trust and banking services; investment advisory and other related services.
The Company's real estate-related segments are cyclical in nature, with the spring and summer months historically being the strongest. However, interest rate adjustments by the Federal Reserve Board, as well as other economic factors, can cause unusual fluctuations in the Company's quarterly operating results. See Management's Discussion and Analysis on pages 15-21 for further discussion of the Company's results of operations.
All financial results presented include the effect of the 1999 acquisition of NAIG accounted for under the pooling of interest method of accounting.
Note B--Amount represents net $1,000,000 in purchase accounting adjustments, $2,471,000 reclassification from the reserve for assets acquired in connection with claim settlements.
Note B--Amount represents $355,000 in purchase accounting adjustments, net of a reclassification of $3,951,000 to the reserve for assets acquired in connection with claim settlements.