FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,September 30, 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
THE FIRST AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
| ||
|
Incorporated in California | 95-1068610 | |
(State or other jurisdiction of
| (I.R.S. Employer Identification No.) |
1 First American Way, Santa Ana, California | 92707-5913 | |
(Address of principal executive offices) | (Zip Code) |
(714) 800-3000
|
|
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the 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.
Yesx No¨
Indicate by check mark if the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yesx No¨
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports to be filed by Section 12,13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes¨ No¨
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
$1 par value - 76,231,151 shares78,233,349 as of May 6 ,November 7, 2003
INFORMATION INCLUDED IN REPORT
Part I: |
| |||
Item 1. | Financial Statements | |||
| ||||
B. Condensed Consolidated Statements of Income and Comprehensive Income | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||
Item 3. | ||||
Item 4. | ||||
Part II: |
| |||
Item 6. | ||||
|
Part I:Financial Information
Item 1: Financial Statements
Item 1: | Financial Statements |
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
Condensed Consolidated Balance Sheets
(Unaudited)(in thousands, except percentage and share data)
September 30, 2003 | December 31, 2002 | |||||||||||||||
($000) | ($000) | |||||||||||||||
March 31, 2003 | December 31, 2002 | (unaudited) | ||||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | $ | 942,874,000 |
| $ | 900,863,000 |
| $ | 1,255,870 | $ | 900,863 | ||||||
Accounts and accrued income receivable, net |
| 345,773,000 |
|
| 299,040,000 |
| 385,103 | 299,040 | ||||||||
Investments: | ||||||||||||||||
Deposits with savings and loan associations and banks |
| 26,104,000 |
|
| 38,328,000 |
| 55,681 | 38,328 | ||||||||
Debt securities |
| 320,251,000 |
|
| 309,864,000 |
| 377,172 | 309,864 | ||||||||
Equity securities |
| 36,219,000 |
|
| 36,931,000 |
| 44,611 | 36,931 | ||||||||
Other long-term investments |
| 186,618,000 |
|
| 142,392,000 |
| 211,835 | 142,392 | ||||||||
| 569,192,000 |
|
| 527,515,000 |
| 689,299 | 527,515 | |||||||||
Loans receivable, net |
| 108,111,000 |
|
| 108,162,000 |
| 105,726 | 108,162 | ||||||||
Property and equipment, at cost: | ||||||||||||||||
Land |
| 43,237,000 |
|
| 43,185,000 |
| 43,291 | 43,185 | ||||||||
Buildings |
| 181,332,000 |
|
| 183,045,000 |
| 191,954 | 183,045 | ||||||||
Furniture and equipment |
| 267,044,000 |
|
| 270,004,000 |
| 290,578 | 270,004 | ||||||||
Capitalized software |
| 288,434,000 |
|
| 284,537,000 |
| 329,267 | 284,537 | ||||||||
| 780,047,000 |
|
| 780,771,000 |
| 855,090 | 780,771 | |||||||||
Less—accumulated depreciation and amortization |
| (352,103,000 | ) |
| (347,695,000 | ) | ||||||||||
Less - accumulated depreciation and amortization | (396,698 | ) | (347,695 | ) | ||||||||||||
| 427,944,000 |
|
| 433,076,000 |
| 458,392 | 433,076 | |||||||||
Title plants and other indexes |
| 381,686,000 |
|
| 375,401,000 |
| 394,794 | 375,401 | ||||||||
Deferred income taxes |
| 14,089,000 |
|
| 20,951,000 |
| 46,672 | 20,951 | ||||||||
Goodwill, net |
| 559,269,000 |
|
| 563,991,000 |
| 714,993 | 563,991 | ||||||||
Other assets |
| 189,035,000 |
|
| 169,046,000 |
| 233,285 | 169,046 | ||||||||
$ | 3,537,973,000 |
| $ | 3,398,045,000 |
| $ | 4,284,134 | $ | 3,398,045 | |||||||
Liabilities and Stockholders' Equity | ||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Demand deposits | $ | 84,888,000 |
| $ | 84,473,000 |
| $ | 74,266 | $ | 84,473 | ||||||
Accounts payable and accrued liabilities |
| 470,710,000 |
|
| 539,069,000 |
| 692,232 | 539,069 | ||||||||
Deferred revenue |
| 375,312,000 |
|
| 358,747,000 |
| 452,522 | 358,747 | ||||||||
Reserve for known and incurred but not reported claims |
| 367,812,000 |
|
| 360,305,000 |
| 404,478 | 360,305 | ||||||||
Income taxes payable |
| 45,913,000 |
|
| 1,518,000 |
| 73,584 | 1,518 | ||||||||
Notes and contracts payable |
| 431,011,000 |
|
| 425,705,000 |
| 459,387 | 425,705 | ||||||||
Mandatorily redeemable preferred securities of the Company’s subsidiary trust whose sole assets are the Company’s $100,000 8.5% deferrable interest subordinated notes due 2012 | 100,000 | 100,000 | ||||||||||||||
Minority interests in consolidated subsidiaries |
| 172,739,000 |
|
| 163,639,000 |
| 251,530 | 163,639 | ||||||||
Mandatorily redeemable preferred securities of the Company's subsidiary trust whose sole assets are the Company's $100,000,000 8.5% deferrable interest subordinated notes due 2012 |
| 100,000,000 |
|
| 100,000,000 |
| ||||||||||
Stockholders' equity: | ||||||||||||||||
Preferred stock, $1 par value | ||||||||||||||||
Authorized—500,000 shares; outstanding—none | ||||||||||||||||
Common stock, $1 par value | ||||||||||||||||
Authorized—180,000,000 shares | ||||||||||||||||
Outstanding—75,937,000 and 73,636,000 shares |
| 75,937,000 |
|
| 73,636,000 |
| ||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Preferred stock, $1 par value Authorized - 500,000 shares; outstanding - none | ||||||||||||||||
Common stock, $1 par value Authorized - 180,000,000 shares Outstanding - 77,843,000 and 73,636,000 shares | 77,843 | 73,636 | ||||||||||||||
Additional paid-in capital |
| 405,891,000 |
|
| 359,644,000 |
| 439,947 | 359,644 | ||||||||
Retained earnings |
| 1,067,752,000 |
|
| 987,768,000 |
| 1,317,647 | 987,768 | ||||||||
Accumulated other comprehensive loss |
| (59,992,000 | ) |
| (56,459,000 | ) | (59,302 | ) | (56,459 | ) | ||||||
| 1,489,588,000 |
|
| 1,364,589,000 |
| 1,776,135 | 1,364,589 | |||||||||
$ | 3,537,973,000 |
| $ | 3,398,045,000 |
| $ | 4,284,134 | $ | 3,398,045 | |||||||
See notes to condensed consolidated financial statements.
3
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
Condensed Consolidated Statements of Income and Comprehensive Income
(Unaudited)(in thousands, except per share amounts)
For the Three Months Ended September 30 | For the Nine Months Ended September 30 | |||||||||||||||||||||||
For the Three Months Ended March 31 | 2003 | 2002 | 2003 | 2002 | ||||||||||||||||||||
2003 | 2002 | (unaudited) | (unaudited) | |||||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Operating revenues | $ | 1,304,863,000 |
| $ | 1,023,340,000 |
| $ | 1,681,446 | $ | 1,179,116 | $ | 4,499,863 | $ | 3,287,037 | ||||||||||
Investment and other income |
| 24,567,000 |
|
| 18,803,000 |
| 29,535 | 22,858 | 81,892 | 61,237 | ||||||||||||||
Net realized investment gains |
| 12,545,000 |
|
| 59,000 |
| ||||||||||||||||||
Net realized investment gains (losses) | 5,761 | (5,888 | ) | 19,893 | (18,456 | ) | ||||||||||||||||||
| 1,341,975,000 |
|
| 1,042,202,000 |
| 1,716,742 | 1,196,086 | 4,601,648 | 3,329,818 | |||||||||||||||
Expenses | ||||||||||||||||||||||||
Salaries and other personnel costs |
| 407,217,000 |
|
| 345,325,000 |
| 490,152 | 381,074 | 1,337,138 | 1,090,317 | ||||||||||||||
Premiums retained by agents |
| 365,709,000 |
|
| 284,294,000 |
| 477,504 | 322,148 | 1,251,997 | 915,281 | ||||||||||||||
Other operating expenses |
| 293,387,000 |
|
| 237,358,000 |
| 348,528 | 264,458 | 969,719 | 745,645 | ||||||||||||||
Provision for policy losses and other claims |
| 67,239,000 |
|
| 47,099,000 |
| 89,464 | 58,215 | 236,106 | 158,011 | ||||||||||||||
Depreciation and amortization |
| 26,015,000 |
|
| 24,148,000 |
| 27,134 | 23,662 | 79,704 | 72,894 | ||||||||||||||
Premium taxes |
| 10,456,000 |
|
| 7,199,000 |
| 14,348 | 8,889 | 36,814 | 24,481 | ||||||||||||||
Interest |
| 8,459,000 |
|
| 8,220,000 |
| 8,853 | 8,618 | 26,165 | 25,554 | ||||||||||||||
| 1,178,482,000 |
|
| 953,643,000 |
| 1,455,983 | 1,067,064 | 3,937,643 | 3,032,183 | |||||||||||||||
Income before income taxes and minority interests |
| 163,493,000 |
|
| 88,559,000 |
| 260,759 | 129,022 | 664,005 | 297,635 | ||||||||||||||
Income taxes |
| 56,000,000 |
|
| 31,000,000 |
| 92,100 | 42,800 | 231,200 | 100,100 | ||||||||||||||
Income before minority interests |
| 107,493,000 |
|
| 57,559,000 |
| 168,659 | 86,222 | 432,805 | 197,535 | ||||||||||||||
Minority interests |
| 19,913,000 |
|
| 13,484,000 |
| 26,812 | 18,863 | 75,902 | 45,980 | ||||||||||||||
Net income |
| 87,580,000 |
|
| 44,075,000 |
| $ | 141,847 | $ | 67,359 | $ | 356,903 | $ | 151,555 | ||||||||||
Other comprehensive loss, net of tax | ||||||||||||||||||||||||
Unrealized loss on securities |
| (433,000 | ) |
| (535,000 | ) | ||||||||||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||
Unrealized gain (loss) on securities | 992 | (313 | ) | 4,212 | (5,323 | ) | ||||||||||||||||||
Minimum pension liability adjustment |
| (3,100,000 | ) |
| (2,275,000 | ) | (2,005 | ) | (875 | ) | (7,055 | ) | (3,250 | ) | ||||||||||
| (3,533,000 | ) |
| (2,810,000 | ) | (1,013 | ) | (1,188 | ) | (2,843 | ) | (8,573 | ) | |||||||||||
Comprehensive income | $ | 84,047,000 |
| $ | 41,265,000 |
| $ | 140,834 | $ | 66,171 | $ | 354,060 | $ | 142,982 | ||||||||||
Net income per share (Note 2): | ||||||||||||||||||||||||
Basic | $ | 1.18 |
| $ | 0.63 |
| $ | 1.83 | $ | 0.94 | $ | 4.69 | $ | 2.13 | ||||||||||
Diluted | $ | 1.05 |
| $ | 0.57 |
| $ | 1.62 | $ | 0.84 | $ | 4.15 | $ | 1.91 | ||||||||||
Cash dividends per share | $ | .10 |
| $ | .07 |
| $ | .10 | $ | .08 | $ | .30 | $ | .23 | ||||||||||
Weighted average number of shares (Note 2): | ||||||||||||||||||||||||
Basic |
| 74,159,000 |
|
| 69,995,000 |
| 77,660 | 71,827 | 76,080 | 71,092 | ||||||||||||||
Diluted |
| 85,098,000 |
|
| 80,985,000 |
| 88,395 | 82,679 | 87,155 | 82,112 | ||||||||||||||
See notes to condensed consolidated financial statements.
4
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)(in thousands)
For the Nine Months Ended September 30 | ||||||||||||||||
For the Three Months Ended March 31 | 2003 | 2002 | ||||||||||||||
2003 | 2002 | (unaudited) | ||||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income | $ | 87,580,000 |
| $ | 44,075,000 |
| $ | 356,903 | $ | 151,555 | ||||||
Adjustments to reconcile net income to cash provided by operating activities— | ||||||||||||||||
Adjustments to reconcile net income to cash provided by operating activities- | ||||||||||||||||
Provision for policy losses and other claims |
| 67,239,000 |
|
| 47,099,000 |
| 236,106 | 158,011 | ||||||||
Depreciation and amortization |
| 26,015,000 |
|
| 24,148,000 |
| 79,704 | 72,894 | ||||||||
Minority interests in net income |
| 19,913,000 |
|
| 13,484,000 |
| 75,902 | 45,980 | ||||||||
Net investment gains |
| (12,545,000 | ) |
| (59,000 | ) | ||||||||||
Net investment (gains) losses | (19,893 | ) | 18,456 | |||||||||||||
Other, net |
| (15,343,000 | ) |
| (7,908,000 | ) | (47,724 | ) | (28,475 | ) | ||||||
Changes in assets and liabilities excluding effects of company acquisitions and noncash transactions— | ||||||||||||||||
Changes in assets and liabilities excluding effects of company acquisitions and noncash transactions- | ||||||||||||||||
Claims paid, net of recoveries |
| (63,604,000 | ) |
| (36,500,000 | ) | (196,499 | ) | (141,968 | ) | ||||||
Net change in income tax accounts |
| 49,298,000 |
|
| 14,591,000 |
| 50,768 | (2,776 | ) | |||||||
Increase in accounts and accrued income receivable |
| (49,014,000 | ) |
| (17,662,000 | ) | (74,128 | ) | (42,862 | ) | ||||||
Decrease in accounts payable and accrued liabilities |
| (27,878,000 | ) |
| (17,862,000 | ) | ||||||||||
Increase in accounts payable and accrued liabilities | 134,558 | 73,074 | ||||||||||||||
Increase in deferred revenue |
| 16,450,000 |
|
| 12,910,000 |
| 93,600 | 50,366 | ||||||||
Other, net |
| (15,271,000 | ) |
| (20,783,000 | ) | (30,072 | ) | (23,737 | ) | ||||||
Cash provided by operating activities |
| 82,840,000 |
|
| 55,533,000 |
| 659,225 | 330,518 | ||||||||
Cash flows from investing activities: | ||||||||||||||||
Net cash effect of company acquisitions/dispositions |
| (9,929,000 | ) |
| (11,257,000 | ) | (111,540 | ) | (31,767 | ) | ||||||
Net decrease (increase) in deposits with banks |
| 12,224,000 |
|
| (9,496,000 | ) | ||||||||||
Net increase in deposits with banks | (16,856 | ) | (13,132 | ) | ||||||||||||
Net decrease (increase) in loans receivable |
| 51,000 |
|
| (1,003,000 | ) | 2,436 | (4,768 | ) | |||||||
Purchases of debt and equity securities |
| (59,904,000 | ) |
| (57,978,000 | ) | (242,885 | ) | (250,568 | ) | ||||||
Proceeds from sales of debt and equity securities |
| 37,547,000 |
|
| 7,314,000 |
| 138,099 | 60,811 | ||||||||
Proceeds from maturities of debt securities |
| 12,772,000 |
|
| 36,274,000 |
| 41,466 | 111,388 | ||||||||
Net decrease in other investments |
| 5,009,000 |
|
| 2,392,000 |
| 45,468 | 15,913 | ||||||||
Capital expenditures |
| (21,932,000 | ) |
| (20,662,000 | ) | (81,387 | ) | (70,997 | ) | ||||||
Purchases of capitalized data |
| (4,820,000 | ) |
| (3,477,000 | ) | (14,794 | ) | (13,472 | ) | ||||||
Proceeds from sale of property and equipment |
| 607,000 |
|
| 134,000 |
| 3,067 | 2,934 | ||||||||
Cash used for investing activities |
| (28,375,000 | ) |
| (57,759,000 | ) | (236,926 | ) | (193,658 | ) | ||||||
Cash flows from financing activities: | ||||||||||||||||
Net change in demand deposits |
| 415,000 |
|
| 733,000 |
| (10,207 | ) | (3,149 | ) | ||||||
Proceeds from issuance of debt |
| 7,030,000 |
|
| 677,000 |
| 19,398 | 6,543 | ||||||||
Repayment of debt |
| (8,548,000 | ) |
| (5,072,000 | ) | (38,342 | ) | (19,096 | ) | ||||||
Proceeds from exercise of stock options |
| 4,502,000 |
|
| 3,406,000 |
| 14,978 | 7,521 | ||||||||
Proceeds from the issuance of stock to employee benefit plans |
| 1,774,000 |
|
| 1,264,000 |
| 4,676 | 3,113 | ||||||||
Distributions to minority shareholders |
| (10,031,000 | ) |
| (6,424,000 | ) | (35,467 | ) | (24,063 | ) | ||||||
Cash dividends |
| (7,596,000 | ) |
| (5,702,000 | ) | (22,328 | ) | (17,205 | ) | ||||||
Cash used for financing activities |
| (12,454,000 | ) |
| (11,118,000 | ) | (67,292 | ) | (46,336 | ) | ||||||
Net increase (decrease) in cash and cash equivalents |
| 42,011,000 |
|
| (13,344,000 | ) | ||||||||||
Cash and cash equivalents —Beginning of year |
| 900,863,000 |
|
| 645,240,000 |
| ||||||||||
Net increase in cash and cash equivalents | 355,007 | 90,524 | ||||||||||||||
Cash and cash equivalents - Beginning of year | 900,863 | 645,240 | ||||||||||||||
—End of first quarter | $ | 942,874,000 |
| $ | 631,896,000 |
| ||||||||||
- End of third quarter | $ | 1,255,870 | $ | 735,764 | ||||||||||||
Supplemental information: | ||||||||||||||||
Cash paid during the first quarter for: | ||||||||||||||||
Cash paid during the first nine months for: | ||||||||||||||||
Interest | $ | 6,357,000 |
| $ | 1,452,000 |
| $ | 23,327 | $ | 18,641 | ||||||
Premium taxes | $ | 17,124,000 |
| $ | 9,127,000 |
| $ | 37,477 | $ | 24,563 | ||||||
Income taxes | $ | 7,825,000 |
| $ | 16,146,000 |
| $ | 183,909 | $ | 101,992 | ||||||
Noncash investing and financing activities: | ||||||||||||||||
Shares issued for employee benefit plans | $ | 42,272,000 |
| $ | 17,491,000 |
| $ | 42,376 | $ | 17,491 | ||||||
Liabilities incurred in connection with company acquisitions | $ | 13,840,000 |
| $ | 8,827,000 |
| $ | 109,490 | $ | 46,927 | ||||||
Company acquisitions in exchange for common stock | $ | 26,380,000 |
| $ | 22,480 | $ | 34,880 |
See notes to condensed consolidated financial statements.
5
THE FIRST AMERICAN CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Basis of Condensed Consolidated Financial Statements
The condensed consolidated financial information included in this report has been prepared in conformity with the accounting principles and practices reflected in the consolidated financial statements included in the annual report filed with the Securities and Exchange Commission for the preceding calendar year. All adjustments are of a normal recurring nature and are, in the opinion of management, necessary to a fair statement of the consolidated results for the interim periods. Certain 2002 amounts have been reclassified to conform to the 2003 presentation. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
Note 2 – Earnings Per Share
For the Three Months Ended March 31 | For the Three Months Ended September 30 | For the Nine Months Ended September 30 | ||||||||||||||||
(in thousands, except per share amounts) | 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Numerator: | ||||||||||||||||||
Net Income-numerator for basic net income per share | $ | 141,847 | $ | 67,359 | $ | 356,903 | $ | 151,555 | ||||||||||
Effect of dilutive securities | ||||||||||||||||||
Add: Convertible debt – interest expense (net of tax) | 1,700 | 1,748 | 5,134 | 5,282 | ||||||||||||||
2003 | 2002 | |||||||||||||||||
Net Income–numerator for dilutive net income per share | $ | 143,547 | $ | 69,107 | $ | 362,037 | $ | 156,837 | ||||||||||
Numerator: | ||||||||||||||||||
Net Income—numerator for basic net income per share | $ | 87,580,000 | $ | 44,075,000 | ||||||||||||||
Effect of dilutive securities | ||||||||||||||||||
Convertible debt—interest expense (net of tax) |
| 1,723,000 |
| 1,773,000 | ||||||||||||||
Denominator: | ||||||||||||||||||
Weighted average shares-denominator For basic net income per share | 77,660 | 71,827 | 76,080 | 71,092 | ||||||||||||||
Net Income—numerator for dilutive net income per share | $ | 89,303,000 | $ | 45,848,000 | ||||||||||||||
Denominator | ||||||||||||||||||
Weighted average shares—denominator For basic net income per share |
| 74,159,000 |
| 69,995,000 | ||||||||||||||
Effect of dilutive securities: | ||||||||||||||||||
Employee stock options |
| 2,496,000 |
| 2,396,000 | 2,365 | 2,333 | 2,650 | 2,464 | ||||||||||
Convertible debt |
| 8,443,000 |
| 8,594,000 | 8,370 | 8,519 | 8,425 | 8,556 | ||||||||||
Denominator for diluted net income per share |
| 85,098,000 |
| 80,985,000 | 88,395 | 82,679 | 87,155 | 82,112 | ||||||||||
Basic net income per share | $ | 1.18 | $ | 0.63 | $ | 1.83 | $ | 0.94 | $ | 4.69 | $ | 2.13 | ||||||
Diluted net income per share | $ | 1.05 | $ | 0.57 | $ | 1.62 | $ | 0.84 | $ | 4.15 | $ | 1.91 | ||||||
Antidilutive stock options | 320 | 2,549 | 1,346 | 3,624 | ||||||||||||||
For the three months ended March 31, 2003 and 2002, respectively, 3,414,000 and 3,818,000 stock options were excluded from the computation of diluted earnings per share due to their antidilutive effect.
Note 3 – Stock Options
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 issuedIssued 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:
6
For the Three Months Ended March 31, | For the Three Months Ended September 30 | For the Nine Months Ended September 30 | ||||||||||||||||||||
(in thousands, except per share amounts) | 2003 | 2002 | 2003 | 2002 | ||||||||||||||||||
Net Income: | ||||||||||||||||||||||
As reported | $ | 141,847 | $ | 67,359 | $ | 356,903 | $ | 151,555 | ||||||||||||||
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of tax | (1,960 | ) | (1,418 | ) | (4,916 | ) | (3,190 | ) | ||||||||||||||
2003 | 2002 | |||||||||||||||||||||
Pro forma | $ | 139,887 | $ | 65,941 | $ | 351,987 | $ | 148,365 | ||||||||||||||
Net income: | ||||||||||||||||||||||
As reported | $ | 87,580,000 | $ | 44,075,000 | ||||||||||||||||||
Pro forma | $ | 86,463,000 | $ | 42,842,000 | ||||||||||||||||||
Earnings per share: | ||||||||||||||||||||||
As reported | ||||||||||||||||||||||
Basic | $ | 1.18 | $ | 0.63 | ||||||||||||||||||
Diluted | $ | 1.05 | $ | 0.57 | ||||||||||||||||||
Pro forma | ||||||||||||||||||||||
Net income per share: | ||||||||||||||||||||||
As reported: | ||||||||||||||||||||||
Basic | $ | 1.17 | $ | 0.61 | $ | 1.83 | $ | 0.94 | $ | 4.69 | $ | 2.13 | ||||||||||
Diluted | $ | 1.04 | $ | 0.55 | $ | 1.62 | $ | 0.84 | $ | 4.15 | $ | 1.91 | ||||||||||
Pro forma: | ||||||||||||||||||||||
Basic | $ | 1.80 | $ | 0.92 | $ | 4.63 | $ | 2.09 | ||||||||||||||
Diluted | $ | 1.60 | $ | 0.82 | $ | 4.10 | $ | 1.87 |
Note 4 – Business Combinations
During the three months ended March 31,On June 5, 2003, the Company formed First Advantage Corporation, which was created through the merger of First American Corporation’s 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 US SEARCH hold approximately 20 percent 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 percent of the total shares of First Advantage. Approximately $3.0 million of intangible assets with definite lives and $54.4 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 5 acquisitions during the current year. The aggregate purchase price of these acquisition was $8.5 million in cash, $9.2 million in notes payable and .7 million shares, valued at $13.0 million of First Advantage’s Class A common stock. The purchase price of each acquisition was allocated to the assets acquired three companies.and liabilities assumed using a variety of valuation techniques including discounted cash flow analysis. As a result of these acquisitions, First Advantage recorded approximately $4.1 million of intangible assets with definite lives and $25.5 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 $1.6 million.
In addition to the acquisitions discussed above, the Company acquired 26 companies during the nine months ended September 30, 2003. These acquisitions were not material individually or in the aggregate. Two of theOf these acquisitions, 23 have been included in the Company’s title insurance segment and onethree are in the Company’s property information segment. The aggregate purchase price was $8.4$91.9 million in cash, and $6.2$31.8 million in notes payable.payable and .9 million shares, valued at $22.5 million, of the Company’s common stock. The purchase price for each 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 acquisitions, the Company has preliminarily recorded approximately $5.3$11.4 million of intangible assets with definite lives and $5.8$70.5 million of goodwill. The Company is awaiting information necessary to finalize the purchase accounting adjustments for these acquisitions and the final purchase price allocations could change the recorded intangible asset and goodwill amounts.
Note 5 – Segment Information
TheIn order to report financial results in a manner consistent with the reporting responsibilities of the Company’s management, the Company hasestablished 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 Information Technology Group includes Mortgage Information, Property Information, Credit Information and Screening Information. Selected financial information by reporting segment is as follows:
For the three months ended March 31, 2003 | Revenues | Income (loss) before income taxes and minority interests | Depreciation and amortization | Capital expenditures | |||||||||
Financial Services | |||||||||||||
Title Insurance and Services | $ | 944,391,000 | $ | 86,766,000 |
| $ | 9,312,000 | $ | 9,611,000 | ||||
Specialty Insurances |
| 48,584,000 |
| 5,839,000 |
|
| 422,000 |
| 204,000 | ||||
Trust and Other Services |
| 9,851,000 |
| 2,441,000 |
|
| 229,000 |
| 8,000 | ||||
| 1,002,826,000 |
| 95,046,000 |
|
| 9,963,000 |
| 9,823,000 | |||||
Information Technology | |||||||||||||
Mortgage Information |
| 141,877,000 |
| 45,797,000 |
|
| 3,795,000 |
| 2,556,000 | ||||
Property Information |
| 87,441,000 |
| 23,443,000 |
|
| 5,482,000 |
| 3,041,000 | ||||
Credit Information |
| 78,046,000 |
| 26,607,000 |
|
| 3,145,000 |
| 1,243,000 | ||||
Screening Information |
| 31,618,000 |
| 515,000 |
|
| 1,785,000 |
| 1,504,000 | ||||
| 338,982,000 |
| 96,362,000 |
|
| 14,207,000 |
| 8,344,000 | |||||
| 1,341,808,000 |
| 191,408,000 |
|
| 24,170,000 |
| 18,167,000 | |||||
Corporate |
| 167,000 |
| (27,915,000 | ) |
| 1,845,000 |
| 3,765,000 | ||||
$ | 1,341,975,000 | $ | 163,493,000 |
| $ | 26,015,000 | $ | 21,932,000 | |||||
For the three months ended September 30, 2003:
For the three months ended March 31, 2002 | Revenues | Income (loss) before income taxes and minority interests | Depreciation and amortization | Capital expenditures | ||||||||||||||||||||||
(in thousands)
| Revenues | Income (loss) before income taxes and minority interests | Depreciation and amortization | Capital expenditures | ||||||||||||||||||||||
Financial Services | ||||||||||||||||||||||||||
Title Insurance and Services | $ | 751,141,000 | $ | 39,652,000 |
| $ | 11,801,000 | $ | 9,444,000 | $ | 1,262,666 | $ | 167,478 | $ | 9,357 | $ | 12,862 | |||||||||
Specialty Insurances |
| 31,567,000 |
| 5,682,000 |
|
| 293,000 |
| 509,000 | |||||||||||||||||
Specialty Insurance | 58,524 | 8,741 | 505 | 261 | ||||||||||||||||||||||
Trust and Other Services |
| 11,136,000 |
| 4,225,000 |
|
| 291,000 |
| 13,000 | 10,529 | 2,960 | 190 | 121 | |||||||||||||
| 793,844,000 |
| 49,559,000 |
|
| 12,385,000 |
| 9,966,000 | ||||||||||||||||||
1,331,719 | 179,179 | 10,052 | 13,244 | |||||||||||||||||||||||
Information Technology | ||||||||||||||||||||||||||
Mortgage Information |
| 109,552,000 |
| 31,505,000 |
|
| 2,136,000 |
| 1,832,000 | 166,624 | 64,733 | 3,464 | 3,140 | |||||||||||||
Property Information |
| 58,473,000 |
| 11,645,000 |
|
| 4,374,000 |
| 2,775,000 | 105,001 | 26,976 | 6,075 | 10,720 | |||||||||||||
Credit Information |
| 56,632,000 |
| 12,653,000 |
|
| 2,809,000 |
| 3,199,000 | 64,354 | 14,987 | 2,787 | 72 | |||||||||||||
Screening Information |
| 22,754,000 |
| 782,000 |
|
| 558,000 |
| 919,000 | 47,644 | 2,525 | 2,395 | 1,890 | |||||||||||||
| 247,411,000 |
| 56,585,000 |
|
| 9,877,000 |
| 8,725,000 | 383,623 | 109,221 | 14,721 | 15,822 | ||||||||||||||
| 1,041,255,000 |
| 106,144,000 |
|
| 22,262,000 |
| 18,691,000 | 1,715,342 | 288,400 | 24,773 | 29,066 | ||||||||||||||
Corporate |
| 947,000 |
| (17,585,000 | ) |
| 1,886,000 |
| 1,971,000 | 1,400 | (27,641 | ) | 2,361 | 1,421 | ||||||||||||
$ | 1,042,202,000 | $ | 88,559,000 |
| $ | 24,148,000 | $ | 20,662,000 | $ | 1,716,742 | $ | 260,759 | $ | 27,134 | $ | 30,487 | ||||||||||
For the three months ended September 30, 2002:
(in thousands)
| Revenues | Income (loss) before income taxes and minority interests | Depreciation and amortization | Capital expenditures | ||||||||||
Financial Services | ||||||||||||||
Title Insurance and Services | $ | 868,298 | $ | 80,026 | $ | 10,218 | $ | 11,296 | ||||||
Specialty Insurance | 40,156 | 6,014 | 496 | 565 | ||||||||||
Trust and Other Services | 9,635 | 2,443 | 259 | 143 | ||||||||||
918,089 | 88,483 | 10,973 | 12,004 | |||||||||||
Information Technology | ||||||||||||||
Mortgage Information | 120,759 | 39,188 | 2,666 | 2,645 | ||||||||||
Property Information | 76,058 | 21,405 | 5,262 | 2,757 | ||||||||||
Credit Information | 56,213 | 10,943 | 2,178 | 2,614 | ||||||||||
Screening Information | 26,786 | 1,120 | 679 | 1,148 | ||||||||||
279,816 | 72,656 | 10,785 | 9,164 | |||||||||||
1,197,905 | 161,139 | 21,758 | 21,168 | |||||||||||
Corporate | (1,819 | ) | (32,117 | ) | 1,904 | 2,845 | ||||||||
$ | 1,196,086 | $ | 129,022 | $ | 23,662 | $ | 24,013 | |||||||
For the nine months ended September 30, 2003:
(in thousands)
| Revenues | Income (loss) before income taxes and minority interests | Depreciation and amortization | Capital expenditures | |||||||||
Financial Services | |||||||||||||
Title Insurance and Services | $ | 3,307,986 | $ | 394,279 | $ | 27,940 | $ | 35,381 | |||||
Specialty Insurance | 161,170 | 22,821 | 1,417 | 1,061 | |||||||||
Trust and Other Services | 30,637 | 8,403 | 634 | 145 | |||||||||
3,499,793 | 425,503 | 29,991 | 36,587 | ||||||||||
Information Technology | |||||||||||||
Mortgage Information | 469,437 | 173,183 | 10,986 | 11,067 | |||||||||
Property Information | 297,599 | 82,809 | 17,054 | 15,636 | |||||||||
Credit Information | 214,181 | 59,565 | 8,797 | 4,572 | |||||||||
Screening Information | 116,636 | 6,258 | 5,965 | 4,647 | |||||||||
1,097,853 | 321,815 | 42,802 | 35,922 | ||||||||||
4,597,646 | 747,318 | 72,793 | 72,509 | ||||||||||
Corporate | 4,002 | (83,313 | ) | 6,911 | 8,878 | ||||||||
$ | 4,601,648 | $ | 664,005 | $ | 79,704 | $ | 81,387 | ||||||
For the nine months ended September 30, 2002:
(in thousands)
| Revenues | Income (loss) before income taxes and minority interests | Depreciation and amortization | Capital expenditures | ||||||||||
Financial Services | ||||||||||||||
Title Insurance and Services | $ | 2,427,531 | $ | 169,788 | $ | 33,361 | $ | 37,297 | ||||||
Specialty Insurance | 107,843 | 17,855 | 1,442 | 1,604 | ||||||||||
Trust and Other Services | 32,421 | 11,255 | 821 | 209 | ||||||||||
2,567,795 | 198,898 | 35,624 | 39,110 | |||||||||||
Information Technology | ||||||||||||||
Mortgage Information | 339,808 | 100,245 | 7,047 | 7,043 | ||||||||||
Property Information | 196,814 | 48,070 | 14,274 | 8,527 | ||||||||||
Credit Information | 164,968 | 30,827 | 8,083 | 7,782 | ||||||||||
Screening Information | 74,240 | 3,868 | 1,963 | 2,823 | ||||||||||
775,830 | 183,010 | 31,367 | 26,175 | |||||||||||
3,343,625 | 381,908 | 66,991 | 65,285 | |||||||||||
Corporate | (13,807 | ) | (84,273 | ) | 5,903 | 5,712 | ||||||||
$ | 3,329,818 | $ | 297,635 | $ | 72,894 | $ | 70,997 | |||||||
Note 6 – Goodwill and Other Intangible Assets
The Company’s reporting units for purposes of the annual testing for impairment of goodwill 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, and tenant screening.
A reconciliation of the changes in the carrying amount of net goodwill, by operating segment, for the threenine months ended March 31,September 30, 2003, is as follows:follows (in thousands):
Balance as of December 31, 2002 | Acquired (Disposed of) During the Period | Impairment Losses | Balance as of March 31, 2003 | |||||||||||||||||||||||
Balance as of December 31, 2002 | Acquired (Disposed of) During the Period | Impairment Losses | Balance as of September 30, 2003 | |||||||||||||||||||||||
Financial Services | ||||||||||||||||||||||||||
Title Insurance and Services | $ | 149,013,000 | $ | — |
| $ | — | $ | 149,013,000 | $ | 149,013 | $ | 47,394 | $ | — | $ | 196,407 | |||||||||
Specialty Insurances |
| 19,794,000 |
| — |
|
| — |
| 19,794,000 | 19,794 | — | — | 19,794 | |||||||||||||
Trust and Other Services |
| — |
| — |
|
| — |
| — | — | — | — | — | |||||||||||||
Information Technology | ||||||||||||||||||||||||||
Mortgage Information |
| 72,423,000 |
| — |
|
| — |
| 72,423,000 | 72,423 | 297 | — | 72,720 | |||||||||||||
Property Information |
| 124,678,000 |
| 5,840,000 |
|
| — |
| 130,518,000 | 124,678 | 24,583 | — | 149,261 | |||||||||||||
Credit Information |
| 86,900,000 |
| (10,562,000 | ) |
| — |
| 76,338,000 | 86,900 | (10,562 | ) | — | 76,338 | ||||||||||||
Screening Information |
| 111,183,000 |
| — |
|
| — |
| 111,183,000 | 111,183 | 89,290 | — | 200,473 | |||||||||||||
$ | 563,991,000 | $ | (4,722,000 | ) | $ | — | $ | 559,269,000 | $ | 563,991 | $ | 151,002 | $ | — | $ | 714,993 | ||||||||||
The Company had $30.4$44.9 million of intangible assets includingincluded in “Other assets” at March 31,September 30, 2003, with definite lives ranging from three to seven 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.
8
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 is effective for interim periods beginning after June 15, 2003 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 Company’s subsidiary trust whose sole assets are the Company’s $100,000,000 8.5% deferrable interest subordinated notes due 2012” as debt. As a result of the change in classification, the Company’s debt-to-total capitalization ratio was increased. This change has not had any other impact on the Company’s financial condition or results of operations.
Item 2. Management’s DiscussionNote 8 – Subsequent Events
On October 1, 2003, the Company completed the previously announced acquisition of the real estate tax service and Analysisflood hazard certification businesses of Transamerica Finance Corporation for a net cash purchase price of $375 million. The Company will combine the new companies with its existing tax service and flood certification businesses, which are included in the Company’s mortgage information and services segment.
The Company is in the process of analyzing the fair value of the assets acquired and liabilities assumed utilizing a variety of valuation techniques including third party valuation advisors. This process should be substantially completed by the end of 2003 and is expected to result in the Company recording goodwill and other intangible assets of approximately $400 million.
In January 2003, the Financial Condition and ResultsAccounting Standards Board (FASB) issued Interpretation No. 46, “Consolidation of OperationsVariable Interest Entities” (FIN 46). The purpose of FIN 46 is to establish guidance for consolidation of variable interest entities that function to support the activities of the primary beneficiary. In October 2003, the FASB issued FIN 46-6, “Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities” deferring the effective date for applying the FIN 46 provisions until periods that end after December 15, 2003. The adoption of FIN 46 will have not have a material impact on the Company’s financial condition or results of operations.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Certain statements made in this 10-Q, including those relating to anticipated cash requirements, are forward looking. Risks and uncertainties exist which may cause results to differ materially from those set forth in these forward-looking statements. Factors that could cause the anticipated results to differ from those described in the forward-looking statements include: interest rate fluctuations; changes in the performance of the real estate markets; general volatility in the capital markets; changes in applicable government regulations; consolidation among the Company’s significant customers and competitors; the Company’s continued ability to identify businesses to be acquired; changes in the Company’s ability to integrate businesses which it acquires; and other factors described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Securities and Exchange Commission. The forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those policies used in theThe preparation of the Company’s financial statements that requirerequires management to make estimates and judgments that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosure of contingencies. A summary of thesethe significant critical accounting policies of the Company can be found in Management’s Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
Additionally, pursuant to SFAS 142, the Company is required to perform an annual impairment test for goodwill and other intangible assets. This impairment test is performed utilizing a variety of valuation techniques, all which require management to make estimates and judgments, and include 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.
OVERVIEW
ElevatedRecord-setting levels of mortgage applications in the fourthsecond quarter of 20022003 produced strongrecord-breaking order closings for the Company in the currentthird quarter which contributedof 2003. This, coupled with operating efficiencies resulting from technology enhancements and related infrastructure cost-cutting initiatives, as well as other expense reductions in reaction to the slowdown in new refinance transactions, resulted in record-breaking quarterly results for the Company for the three months ended September 30, 2003. Mortgage application levels remained seasonally strong in the third quarter of 2003, although down from the record levels of the second quarter of 2003. The decrease from the second quarter was due to a record-breaking first quarterslowdown in refinance transactions as a result of increasing mortgage interest rates. The Company began to reduce expenses in the real estate-related segmentsthird quarter of 2003 in reaction to the Company’s Financial Servicesslowdown in refinance transactions and Information Technology groups.will continue to monitor expenses and personnel in relation to new incoming orders. Net income for the three months ended March 31,September 30, 2003, was $87.6$141.8 million, or $1.05$1.62 per diluted share. Netshare, compared with net income of $67.4 million, or $0.84 per diluted share for the three months ended March 31, 2002September 30, 2002. Net income for the nine months ended September 30, 2003, was $44.1$356.9 million, or $0.57$4.15 per diluted share. The current year quarter includes a realized pretax gain on the mergershare, compared with net income of the Company’s Credit Online business with DealerTrack Holdings, Inc. of $13.1$151.6 million, $8.0 million on an after-tax basis, or $0.09$1.91 per diluted share.
9share for the nine months ended September 30, 2002.
OPERATING REVENUES
Set forth below is a summary of operating revenues for each of the Company’s segments.segments (in thousands, except percentages).
Three Months Ended March 31 | ||||||||||||||||||||||||||||||
($000) | Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||||||||
2003 | % | 2002 | % | 2003 | % | 2002 | % | 2003 | % | 2002 | % | |||||||||||||||||||
Financial Services: | ||||||||||||||||||||||||||||||
Title Insurance: | ||||||||||||||||||||||||||||||
Direct operations | $ | 484,308 | 37 | $ | 387,174 | 38 | $ | 654,861 | 39 | $ | 464,893 | 40 | $ | 1,721,134 | 38 | $ | 1,271,670 | 39 | ||||||||||||
Agency operations |
| 448,996 | 34 |
| 356,797 | 35 | 589,632 | 35 | 393,034 | 33 | 1,547,386 | 35 | 1,128,453 | 34 | ||||||||||||||||
| 933,304 | 71 |
| 743,971 | 73 | 1,244,493 | 74 | 857,927 | 73 | 3,268,520 | 73 | 2,400,123 | 73 | |||||||||||||||||
Specialty Insurance |
| 46,144 | 4 |
| 29,312 | 3 | 55,180 | 3 | 37,426 | 3 | 152,213 | 3 | 100,318 | 3 | ||||||||||||||||
Trust and Other Services |
| 9,905 | 1 |
| 11,156 | 1 | 10,523 | 1 | 9,647 | 1 | 30,630 | 1 | 32,341 | 1 | ||||||||||||||||
| 989,353 | 76 |
| 784,439 | 77 | 1,310,196 | 78 | 905,000 | 77 | 3,451,363 | 77 | 2,532,782 | 77 | |||||||||||||||||
Information Technology: | ||||||||||||||||||||||||||||||
Mortgage Information |
| 139,108 | 11 |
| 108,130 | 11 | 163,473 | 10 | 119,718 | 10 | 459,837 | 10 | 336,378 | 10 | ||||||||||||||||
Property Information |
| 82,280 | 6 |
| 55,110 | 5 | 97,952 | 6 | 71,024 | 6 | 278,254 | 6 | 183,587 | 6 | ||||||||||||||||
Credit Information |
| 62,528 | 5 |
| 52,999 | 5 | 62,200 | 3 | 56,642 | 5 | 193,844 | 4 | 160,189 | 5 | ||||||||||||||||
Screening Information |
| 31,594 | 2 |
| 22,662 | 2 | 47,625 | 3 | 26,732 | 2 | 116,565 | 3 | 74,101 | 2 | ||||||||||||||||
| 315,510 | 24 |
| 238,901 | 23 | 371,250 | 22 | 274,116 | 23 | 1,048,500 | 23 | 754,255 | 23 | |||||||||||||||||
Total | $ | 1,304,863 | 100 | $ | 1,023,340 | 100 | ||||||||||||||||||||||||
Total Operating Revenues | $ | 1,681,446 | 100 | $ | 1,179,116 | 100 | $ | 4,499,863 | 100 | $ | 3,287,037 | 100 | ||||||||||||||||||
Financial Services. Operating revenues from direct title operations increased 25.1%40.9% and 35.3% for the current quarterthree and nine months ended September 30, 2003, respectively, when compared with the same periodperiods of the prior year. This increase wasThese increases were primarily due to an increase in the number of title orders closed by the Company’s direct operations and an increase in the average revenues per order closed.operations. The Company’s direct operations closed 455,700589,300 and 1,578,100 title orders during the current three and nine month period, an increaseperiods, respectively, increases of 16.0%38.7% and 31.6% when compared with 393,000 title orders425,000 and 1,199,500 closed during the same periodperiods of the prior year. This increase wasThese increases were primarily due to the high level of real estate activity. The average revenues per order closed were $1,063 forfactors mentioned above in the three months ended March 31, 2003, an increase of 7.9% when compared with $985 for the three months ended March 31, 2002. This increase was primarily due to appreciating home values.Overview section. Operating revenues from agency operations increased 25.8%50.0% and 37.1% for the current quarterthree and nine months ended September 30, 2003, respectively, when compared with the same periodperiods of the prior year. This increase wasThese fluctuations were primarily due to the same factorfactors affecting direct title operations as well asand to the timing of the reporting of agency remittances. Specialty insurance operating revenues increased 57.4%47.4% and 51.7% for the current quarterthree and nine months ended September 30, 2003, respectively, when compared with the same period of the prior year. This increase was primarily due to market share growth at the property and casualty insurance division and geographic expansion at the Company’s home warranty division. Trust and other services operating revenues decreased 11.2% for the current quarter when compared with the same period of the prior year. This decrease was primarily attributable to a reduction in fees earned do to the declining values of the investment portfolios managed by this segment.
Information Technology. Operating revenues for the mortgage information, property information and credit information segments increased 28.7%, 49.3% and 18.0%, respectively, for the three months ended March 31, 2003, when compared with the same periodperiods of the prior year. These increases were primarily due to geographic expansion at the high levelCompany’s home warranty division and market share growth at the property and casualty insurance division.
Information Technology. Mortgage information operating revenues increased 36.6% and 36.7% for the three and nine months ended September 30, 2003, respectively, when compared with the same periods of the prior year. These increases were primarily due to market share gains and to the increase in real estate activity. Property information operating revenues increased 37.9% and 51.6% for the three and nine months ended September 30, 2003, respectively, when compared with the same periods of the prior year. These increases were primarily attributable to market share gains, the increase in real estate activity, and for the property information segment, $12.2$15.1 million and $44.5 million of operating revenues contributed by new acquisitions. Credit information operating revenues increased 9.8% and 21.0% for the three and nine months ended September 30, 2003, respectively, when compared with the same periods of the prior year. These increases were primarily due to an increase in the demand for mortgage credit information offset in part by a $6.2 million reduction in operating revenues for the nine months ended September 30, 2003, due to the previously announced sale of the Company’s subsidiary, FASTRAC Systems, Inc., in the latter part of the third quarter of 2002. Screening information operating revenues increased 39.4%78.2% and 57.3% for the three and nine months ended March 31,September 30, 2003, respectively, when compared with the same periodperiods of the prior year. This increase wasThese increases were primarily attributable to $6.8$19.9 million and $37.3 million of operating revenues contributed by new acquisitions.acquisitions for the respective periods.
INVESTMENT AND OTHER INCOME
Investment and other income totaled $24.6$29.5 million and $81.9 million for the three and nine months ended March 31,September 30, 2003, an increaserespectively, representing increases of $5.8$6.7 million, or 30.7%29.2%, and $20.7 million, or 33.7%, when compared with the same periodperiods of the prior year. ThisThese increases resulted primarily from an increase primarily reflects increasedin earnings from affiliated companies,unconsolidated affiliates, which are accounted for under the equity method of accounting, offset in part by lower yields on cash equivalents and the Company’s investment portfolio due to the current lower rate environment.accounting.
10
NET REALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains totaled $12.5$5.8 million and $19.9 million for the three and nine months ended March 31,September 30, 2003, respectively, compared with $59,000losses totaling $5.9 million and 18.5 million for the same period of the prior year.three and nine months ended September 30, 2002, respectively. The current year quarternine-month period included a $13.1 million realized investment gain associated with the merger of the Company’s Credit Online business with DealerTrack Holdings, Inc. Included in both prior year periods was a $2.6 million loss associated with the sale of the Company’s subsidiary, FASTRAC Systems, Inc., and in the prior year nine-month period, $13.6 million of investment losses resulting from the write-down of WorldCom bonds.
TOTAL OPERATING EXPENSES
Financial Services. Salaries and other personnel costs for the Financial Services group, which primarily reflects the title insurance segment, were $294.7$362.6 million and $976.9 million for the three and nine months ended March 31,September 30, 2003, an increaserespectively, increases of $39.5$80.6 million, or 15.5%28.6%, and $168.3 million, or 20.8%, when compared with the same periodperiods of the prior year. This increase wasThese increases were primarily attributable to incremental labor costs associated withincurred to service the processing and closing of increased order volumes (i.e., overtime,increase in business volume, offset in part time help and commissions) atby operational efficiencies in the title insurance operations, wheresegment which resulted from the Company experienced a 25.9% increase in total order volume for the three months ended March 31, 2003, when compared with the same period of the prior year.Company’s FAST technology and related cost-cutting initiatives. Salaries and other personnel costs as a percentage of operating revenues for the Financial Services group were 29.8%27.7% and 28.3% for the three and nine months ended March 31,September 30, 2003, down from 32.5%respectively, and 31.2% and 31.9% for the same periodrespective periods of the prior year.
Agents retained $365.7$477.5 million or 81.5%and $1.25 billion of title premiums generated by agency operations for the three and nine months ended March 31,September 30, 2003, respectively, which compares with $284.3$322.1 million or 79.7%and $915.3 million for the same periodperiods of the prior year. The change in the percentage of title premiums retained by agents wasranged from 80.9% to 82.0% due to regional variances (i.e., the agency share varies from region to region and thus the geographical mix of agency revenues causes this variation).
Other operating expenses for the Financial Services group, which primarily reflect the title insurance segment, were $161.8$205.2 million and $554.9 million for the three and nine months ended March 31,September 30, 2003, an increaserespectively, increases of $22.2$56.5 million, or 15.9%38.0%, and $124.3 million, or 29.0%, when compared with the same periodperiods of the prior year. This increase wasThese increases were primarily the result of incremental costs incurred to service the increase in business volume. Other operating expenses as a percentage of operating revenues for the Financial Services group were 16.4%15.7% and 16.1% for the three and nine months ended March 31,September 30, 2003, down from 17.8%and 16.4% and 17.0% for the same periodrespective periods of the prior year.
The provision for policy losses and other claims primarily represents title insurance claims, home warranty claims and property and casualty insurance claims. For the title insurance segment, the claims provision as a percentage of title insurance operating revenues was 4.0%4.1% for both the current quarternine-month period and 4.0% for the same period of the prior year. This increase in rate reflects marginal adverse claims development experience for certain prior policy years. For the home warranty segment,business, the claims provision as a percentage of home warranty operating revenues was 44.2%49.5% for the current quarter, down from 47.5%nine-month period and 50.4% for the same period of the prior year. This decrease in rate was primarily due to a reduction in the average cost per claim, which was primarily attributable to the elimination of higher-cost contractors. Invendor contractors that were servicing claims in new geographic areas. For the property and casualty insurance segment,business, the claims provision for losses as a percentage of property and casualty insurance operating revenues was 78.9%66.6% for the current quarter, up from 57.2%nine-month period and 64.6% for the same quarterperiod of the prior year. This increase in rate was due to high claims activity experienced primarily during the currentfirst quarter of 2003 resulting primarily from insured property damaged in Southern California as a result of extraordinarily high winds experienced during the beginning of the quarter.wind conditions.
Premium taxes, which relate to the title insurance and specialty insurance segments, were $10.5$36.8 million and $7.2$24.5 million for the threenine months ended March 31,September 30, 2003 and 2002, respectively. Premium taxes as a percentage of title insurance and specialty insurance operating revenues ranged from 0.9% towere 1.1%. This for the current nine-month period and 1.0% for the same period of the prior year. The slight variation in rate was primarily due to the composition and geographical mix of the operating revenues (i.e., tax rates and bases vary from state to state).
Information Technology.Information technology personnel and other operating expenses were $224.6$251.3 million and $715.6 million for the three and nine months ended March 31,September 30, 2003, an increaserespectively, increases of $46.6$58.3 million, or 26.2%30.2%, and $163.2 million, or 29.6%, when compared with the same periodperiods of the prior year. Excluding acquisitions,acquisition activity, the increase was $34.1increases were $25.9 million, or 19.1%. This increase was13.4% for the current three-month period, and $98.4 million, or 17.8% for the current nine-month period. These increases were primarily due to costs incurred to service the increase in business volume costs incurred to integrate new acquisitions and increased technology costs. Personnel and other operating expenses as a percentage of operating revenues for the Information Technologyinformation technology group were 71.2%67.7% and 68.3% for the three and nine months ended March 31,September 30, 2003, respectively, down from 74.5%70.4% and 73.2% for the same periodperiods of the prior year.
11
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS
Set forth below is a summary of income before income taxes and minority interests for each of the Company’s segments.segments (in thousands except percentages).
Three Months Ended March 31 | Three Months Ended September 30 | Nine Months Ended September 30 | ||||||||||||||||||||||||||||||||||
($000) | 2003 | % | 2002 | % | 2003 | % | 2002 | % | ||||||||||||||||||||||||||||
2003 | % | 2002 | % | |||||||||||||||||||||||||||||||||
Financial Services: | ||||||||||||||||||||||||||||||||||||
Title Insurance | $ | 86,766 |
| 46 | $ | 39,652 |
| 37 | ||||||||||||||||||||||||||||
Specialty Insurance |
| 5,839 |
| 3 |
| 5,682 |
| 5 | ||||||||||||||||||||||||||||
Financial Services | ||||||||||||||||||||||||||||||||||||
Title Insurance and Services | $ | 167,478 | 58 | $ | 80,026 | 50 | $ | 394,279 | 53 | $ | 169,788 | 44 | ||||||||||||||||||||||||
Speciality Insurance | 8,741 | 3 | 6,014 | 4 | 22,821 | 3 | 17,855 | 5 | ||||||||||||||||||||||||||||
Trust and Other Services |
| 2,441 |
| 1 |
| 4,225 |
| 4 | 2,960 | 1 | 2,443 | 1 | 8,403 | 1 | 11,255 | 3 | ||||||||||||||||||||
| 95,046 |
| 50 |
| 49,559 |
| 46 | 179,179 | 62 | 88,483 | 55 | 425,503 | 57 | 198,898 | 52 | |||||||||||||||||||||
Information Technology: | ||||||||||||||||||||||||||||||||||||
Information Technology | ||||||||||||||||||||||||||||||||||||
Mortgage Information |
| 45,797 |
| 24 |
| 31,505 |
| 30 | 64,733 | 23 | 39,188 | 24 | 173,183 | 23 | 100,245 | 26 | ||||||||||||||||||||
Property Information |
| 23,443 |
| 12 |
| 11,645 |
| 11 | 26,976 | 9 | 21,405 | 13 | 82,809 | 11 | 48,070 | 13 | ||||||||||||||||||||
Credit Information |
| 26,607 |
| 14 |
| 12,653 |
| 12 | 14,987 | 5 | 10,943 | 7 | 59,565 | 8 | 30,827 | 8 | ||||||||||||||||||||
Screening Information |
| 515 |
| 0 |
| 782 |
| 1 | 2,525 | 1 | 1,120 | 1 | 6,258 | 1 | 3,868 | 1 | ||||||||||||||||||||
| 96,362 |
| 50 |
| 56,585 |
| 54 | 109,221 | 38 | 72,656 | 45 | 321,815 | 43 | 183,010 | 48 | |||||||||||||||||||||
Total before corporate expenses |
| 191,408 |
| 100 |
| 106,144 |
| 100 | ||||||||||||||||||||||||||||
Total before corporate | 288,400 | 100 | 161,139 | 100 | 747,318 | 100 | 381,908 | 100 | ||||||||||||||||||||||||||||
Corporate expenses |
| (27,915 | ) |
| (17,585 | ) | ||||||||||||||||||||||||||||||
Corporate | (27,641 | ) | (32,117 | ) | (83,313 | ) | (84,273 | ) | ||||||||||||||||||||||||||||
Total | $ | 163,493 |
| $ | 88,559 |
| $ | 260,759 | $ | 129,022 | $ | 664,005 | $ | 297,635 | ||||||||||||||||||||||
In general, the title insurance business is a lower profit margin business when compared to the Company’s other segments. The lower profit margins reflect the high cost of producing title evidence whereas the corresponding revenues are subject to regulatory and competitive pricing restraints. Due to this relatively high proportion of fixed costs, title insurance profit margins generally improve as closed order volumes increase. In addition, title insurance profit margins are affected by the composition (residential or commercial) and type (resale, refinancing or new construction) of real estate activity. Profit margins from resale and new construction transactions are generally higher than from refinancing transactions because in many states there are premium discounts on, and cancellation rates are higher for, refinance transactions. 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 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 and property information segments, like the title insurance segment, are primarily dependent on the level of real estate activity and the cost and availability of mortgage funds. Revenues for the credit information segment are in part impacted by real estate activity, but also by the consumer and automobile sectors. Corporate expenses totaled $27.9 million for the current quarter, an increase of $10.3 million when compared with the same period of the prior year. This increase was primarily due to a $1.7 million increase in technology costs and higher general costs associated with the support effort needed to service the Company’s expanded national and international operations
INCOME TAXES
The effective income tax rate (income tax expense as a percentage of pretax income after minority interest expense) was 39.0%39.3% for the threenine months ended March 31September 30, 2003, and 41.3%39.8% for the same period of the prior year. The decrease in effective rate was primarily attributable to changes in the ratio of permanent differences to pretax profits. A large portion of the Company’s minority interest expense is attributable to a limited liability company subsidiary that,which, for tax purposes, is treated as a partnership; and accordingly,partnership. Accordingly, no income taxes have been provided.
12provided for that portion of the minority interest expense.
MINORITY INTERESTS
Minority interest expense was $19.9$26.8 million and $75.9 million for the three and nine months ended March 31,September 30, 2003, an increaserespectively, increases of $6.4$7.9 million and $29.9 million when compared with the same periodperiods of the prior year. This increase wasThese increases were primarily attributable to the increase in operating results of the Company’s joint venture with Experian.
NET INCOME
Net income for the three and nine months ended March 31,September 30, 2003, was $87.6$141.8 million, or $1.05$1.62 per diluted share.share, and $356.9 million, or $4.15 per diluted share, respectively. Net income for the three and nine months ended March 31,September 30, 2002, was $44.1$67.4 million, or $0.57$0.84 per diluted share. The current year quarter included a realized pretax gain on the merger of the Company’s Credit Online business with DealerTrack Holdings, Inc. of $13.1share, and $151.6 million, $8.0 million on an after-tax basis, or $0.09$1.91 per diluted share.share, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Total cash and cash equivalents increased $42.0$355.0 million and decreased $13.3$90.5 million for the threenine months ended March 31,September 30, 2003 and 2002, respectively. The increase for the current year period as well as for the prior year period was primarily due primarily to cash providedgenerated by operating activities, offset in part by capital expenditures, purchases of debt and equity securities, the cash paid foreffect of company acquisitions, paymentsthe repayment of debt, distributions to minority shareholders and cash dividends. The decrease for the prior-year period was primarily due to purchases of debt and equity securities, capital expenditures, cash paid for company acquisitions, payments to minority shareholders and cash dividends, offset in part by cash provided by operating activities.
Notes and contracts payable as a percentage of total capitalization decreased to 19.7%21.6% at March 31,September 30, 2003 from 20.7%25.6% at December 31, 2002. This decrease was primarily due to an increase in equity due primarily to the net income for the nine months ended September 30, 2003 and debt repayments. 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 period.quarter 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 Company’s subsidiary trust whose sole assets are the Company’s $100,000,000 8.5% deferrable interest subordinated notes due 2012” as debt.
On October 1, 2003, the Company completed the previously announced acquisition of Transamerica Finance Corporation’s real estate tax service and flood hazard certification businesses for a net purchase price of $375.0 million. The acquisition was made through the Company’s 80% 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.
Management believes that all of its anticipated operating cash requirements for the immediate future will be met from internally generated funds.
Item 3 – 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s primary exposure to market risk relates to interest rate risk associated with certain 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 Company is also subject to equity price risk as related to its equity securities. Although the Company has operations in certain foreign countries, these operations, in the aggregate, are not material to the Company’s financial condition or results of operations.
There have been no material changes in the Company’s risk since filing its Form 10K for the year ended December 31, 2002.
Item 4. Controls and Procedures
The Company’s President and Chief Financial Officer, after evaluating the effectiveness of the Company’s 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 quarter covered by this report on Form 10-Q, the Company’s 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 Commission’s rules and forms.
There was no change in the Company’s internal control over financial reporting during the quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II:Other Information
Item 6. | Exhibits and Reports on Form 8-K. |
(a) | Exhibits |
(10 | )(a) | 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. | |
(10 | )(b) | 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. | |
(31 | )(a) | Certification by |
(31 | )(b) |
Part II: Other Information
Item 6. Exhibits and Reports on Form 8-K.
(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. |
13
(b) Reports on Form 8-K
(b) | Reports on Form 8-K |
During the quarterly period covered by this report, the Company filed a report on Form 8-K dated February 12,September 4, 2003 (reporting on fourth quarter(announcing the Company’s intent to acquire Transamerica Finance Corporation’s tax and full year 2002 earnings)flood companies). Subsequent to such quarterly period, the Company filed a report on Form 8-K dated April 23,October 1, 2003 (announcing the completion of the acquisition of Transamerica Finance Corporation’s tax and flood companies) and furnished a report on Form 8-K dated October 22, 2003 (reporting on firstthird quarter 2003 earnings).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE FIRST AMERICAN CORPORATION (Registrant) |
/s/ THOMAS A. KLEMENS |
Thomas A. Klemens
|
/ |
Max O. Valdes
|
Date: May 15,November 14, 2003
14
CERTIFICATIONS
I, Parker S. Kennedy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The First American Corporation (“registrant”);
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
|
|
15
I, Thomas A. Klemens, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The First American Corporation (“ registrant”);
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 1ad-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
|
|
16
EXHIBIT INDEX
Exhibit No. | Description | Sequentially | ||
(10)(a) | Amendment No. | |||
| 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. | |||
(31)(a) | Certification by Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange 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. | |||
| Certification by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. |
17