Index First American Profile Financial Highlights Letter to Stockholders First American's Strength in Numbers Title Information and Services Real Estate Information and Services Consumer Information and Services Management's Discussion and Analysis Selected Financial Data Common Stock Prices and Dividends Quarterly Financial Data Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Independent Accountants Officers Board of Directors Primary Companies Stockholder Information Back Cover

notes to consolidated financial statements

 NOTE 18

Business Combinations:

    During the year ended December 31, 2001, the Company completed 16 acquisitions, all accounted for using the purchase method of accounting. In applying the purchase method of accounting, the Company undertakes a comprehensive review of the acquired entity to ensure that all identifiable assets and liabilities are properly recorded at their fair value. In determining fair value, the Company utilizes a variety of valuation techniques, including discounted cash flow analysis and outside appraisals, to the extent necessary, given materiality and complexity. All excess purchase price is appropriately recorded as goodwill. The useful lives for all assets recorded in purchase accounting are based on market conditions, contractual terms and other appropriate factors.

    Out of the 16 current-year acquisitions, the largest was Credit Management Solutions, Inc. (CMSI), a provider of credit automation software and services in a stock-for-stock transaction. As a result of the acquisition, CMSI shareholders received 0.2841 newly issued shares of the Company’s common stock for each CMSI share. The Company issued 2,272,542 shares of common stock. The purchase price was allocated to the assets acquired and liabilities assumed based on the estimated fair values and $46.9 million in goodwill was recorded. CMSI is included in the Company’s consumer information and services segment.

    The 15 remaining acquisitions were individually not material and are included in the following business segments; 12 in the title insurance segment, 2 in the real estate information services segment and 1 in the consumer information segment. Their aggregate purchase price was $20.8 million in cash, $12.0 million in notes and 1,208,942 shares of the Company’s common stock. The purchase price for each was allocated to the assets acquired and liabilities assumed based on estimated fair values and approximately $50.3 million in goodwill was recorded. Goodwill is being amortized on a straight-line basis over its estimated useful life ranging from 20 to 30 years, except as impacted by SFAS No. 142. The operating results of these acquired companies were included in the Company’s consolidated financial statements from their respective acquisition dates.

    Assuming all of the current year acquisitions had occurred January 1, 2000, pro forma revenues, net income and net income per diluted share would have been $3.79 billion, $164.9 million and $2.13, respectively, for the year ended December 31, 2001; and $3.01 billion, $80.7 million and $1.16, respectively, for the year ended December 31, 2000. All pro forma results include amortization of goodwill and interest expense on acquisition debt. The pro forma results are not necessarily indicative of the operating results that would have been obtained had the acquisitions occurred at the beginning of the periods presented, nor are they necessarily indicative of future operating results.

    On July 31, 2000, the Company combined its Smart Title Solutions™ division, which it acquired in the 1998 business combination transaction with Experian, with the Datatrace division of LandAmerica Financial Group, Inc. The combined entity, Data Trace Information Services, is a provider of advanced title information delivery systems. The Company treated this transaction as an acquisition of the assets and liabilities of the Datatrace division in consideration for a 20% interest in its Smart Title Solutions division. The operating results of the combined entities are included in the Company’s consolidated financial statements commencing July 31, 2000.

    On August 2, 2000, the Company combined its First American Real Estate Solutions (RES) division, which it acquired in the 1998 business combination transaction with Experian, with the Intellitech real estate information business of Transamerica Corporation, to form a new entity, First American Real Estate Solutions, L.P. This joint venture, is a provider of property characteristic information, supplying data and decision-support products to the real estate and mortgage finance industries. The Company treated this transaction as an acquisition of the assets and liabilities of the Intellitech division in consideration for a 20% interest in its RES division and $22.5 million in cash. The operating results of the joint venture are included in the Company’s consolidated financial statement commencing August 2, 2000.

    Effective May 14, 1999, the Company completed its merger of National Information Group (NAIG). Under the terms of the definitive merger agreement, each of the NAIG shareholders received .67 of a share of the Company’s common stock for each NAIG common share they owned. To complete the merger, the Company issued 3,004,800 shares, in exchange for 100% of the outstanding common stock of NAIG. The information services provided by NAIG include outsourcing services, flood zone determination services, real estate tax tracking, hazard and motor vehicle insurance tracking, lender-placed insurance and flood insurance. This merger was accounted for under the pooling-of-interests method of accounting and, as a result, the Company has restated all previously reported results to reflect this merger. Included in “Other operating expenses” for the 12 months ended December 31, 1999, were mergerrelated charges of $10.8 million, $7.0 million after tax, or $0.10 per diluted share. These nonrecurring charges include severance payments, lease terminations and consulting services.