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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
THE FIRST AMERICAN FINANCIAL CORPORATION
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
[LOGO of FIRST AMERICAN FINANCIAL CORPORATION]
HOME OFFICE: 114 East Fifth Street, Santa Ana, CA 92701-4642 (714) 558-3211
MAILING ADDRESS: Post Office Box 267, Santa Ana, CA 92702-0267
TO THE SHAREHOLDERS OF
THE FIRST AMERICAN FINANCIAL CORPORATION
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of The First
American Financial Corporation, a California corporation (the "Corporation"),
will be held on April 23, 1998, at 2:00 p.m., at the main office of First
American Title Insurance Company, 114 East Fifth Street, Santa Ana,
California, for the following purposes:
(1) Electing a board of directors to serve for the ensuing year;
(2) Approving an amendment to The First American Financial Corporation
1996 Stock Option Plan that would increase by 1,000,000 the number
of Common shares that may be issued pursuant to stock options to be
awarded under that plan in the future; and
(3) Transacting such other business as may come before the meeting or any
adjournments thereof.
Only shareholders of record at the close of business on March 5, 1998, are
entitled to notice of and to vote at the meeting.
It is hoped that you will be present at the meeting; however, please sign,
date, indicate your vote on, and return promptly, the enclosed proxy card in
the accompanying envelope, addressed to the Corporation's Transfer Agent,
First American Trust Company, Attention: Trust Operations, Post Office Box
267, Santa Ana, California 92702-9975, which will accept and tabulate the
proxies. If you attend the meeting, you may, of course, personally vote your
shares. You also have the right to revoke a proxy at any time before it is
exercised.
[LOGO of SIGNATURE]
Mark R Arnesen, Secretary
Santa Ana, California
March 23, 1998
[LOGO of FIRST AMERICAN FINANCIAL CORPORATION]
PROXY STATEMENT
SOLICITATION OF PROXIES BY THE BOARD OF DIRECTORS
Proxies of the holders of Common shares of The First American Financial
Corporation, a California corporation (the "Corporation"), are solicited by
its Board of Directors for use at the Annual Meeting of Shareholders to be
held on April 23, 1998, and at any adjournments thereof. The enclosed proxy
card represents the shares that you are eligible to vote at the meeting.
Shares represented by a properly executed and returned proxy will be voted at
the meeting in accordance with the directions noted thereon or, if no
directions are indicated, they will be voted in favor of the proposals in the
notice set forth herein. A shareholder giving a proxy has the power to revoke
it by attending the meeting and electing to vote in person, or by filing with
the Secretary, prior to the meeting, a written revocation or a duly executed
proxy bearing a later date. The approximate date on which this proxy statement
and the enclosed proxy card were first sent to shareholders of the Corporation
is March 26, 1998.
Shareholders of record at the close of business on March 5, 1998 (the
"Record Date"), are eligible to vote at the meeting. The only outstanding
class of stock of the Corporation is its $1 par value Common. Each shareholder
is entitled to one vote per share of Common stock held as of the Record Date.
With respect to the election of directors, voting may be cumulative as
described below. As of the Record Date, there were 17,394,042 shares of Common
stock outstanding and entitled to vote.
VOTING PROCEDURES
In the event any shareholder entitled to vote for the election of directors
gives notice at the meeting prior to voting of a decision to cumulate votes
for a candidate or candidates and the name(s) of such candidate(s) has (have)
been placed in nomination prior to voting, every shareholder may cumulate
votes and (i) give one candidate the number of votes equal to the number of
directors to be elected (which is 16) multiplied by the number of shares held
by such shareholder, or (ii) distribute such number of votes among as many
candidates as such shareholder shall choose. Regardless of whether the voting
for directors is cumulative, those candidates receiving the highest number of
votes, up to the number of directors to be elected, shall be elected directors
of the Corporation. As indicated on the enclosed proxy card, a proxy confers
upon the appointees discretionary authority to cumulate and distribute, as the
appointees shall choose, the aggregate cumulative votes in respect of the
shares represented among those nominees as to which the shareholder has not
withheld authority. In accordance with California law and the Articles and
Bylaws of the Corporation, abstentions and broker nonvotes (discussed below)
neither have the effect of votes in opposition to, nor in favor of, the
election of a director.
Votes at the Annual Meeting of Shareholders will be tabulated by the
inspector(s) of election, who shall be appointed by the Chairman of the
meeting and who shall not be candidates for election to the Board of
Directors. Questions as to the qualifications of the voters, validity of
proxies or other matters pertaining to the vote shall be decided by the
inspector(s), subject to any ruling by the Chairman. The inspector(s) of
election will treat Common shares represented by a properly signed and
returned proxy as present at the Annual Meeting of Shareholders for the
purpose of determining a quorum, without regard to whether the proxy is marked
as casting
1
a vote or withholding a vote. The inspector(s) of election will treat Common
shares represented by "broker nonvotes" (i.e., Common shares held in record
name by brokers or nominees as to which (i) instructions have not been
received from the beneficial owners or other persons entitled to vote, (ii)
the broker or nominee does not have discretionary voting power under
applicable Securities and Exchange Commission rules or the instrument under
which it serves in such capacity, and (iii) the record holder has indicated on
the proxy card or otherwise notified the Corporation that such record holder
does not have authority to vote on that matter) as present for the purpose of
determining a quorum.
The affirmative vote of the holders of a majority of the shares present at
the meeting is required for the adoption of the proposed amendment of The
First American Financial Corporation 1996 Stock Option Plan (the "Plan"). The
proposed amendment is set forth below in Item 2 of this proxy statement.
Abstentions and broker nonvotes with regard to that item will have the same
effect as votes cast against the adoption of the Plan.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information with respect to the only persons
known to the Corporation to be beneficial owners of 5% or more of its voting
securities, based upon information received from such persons as of the Record
Date. For purposes of this Proxy Statement, beneficial ownership of securities
is defined in accordance with the rules of the Securities and Exchange
Commission and in general means the power to vote or dispose of securities,
regardless of any economic interest therein.
COMMON STOCK
BENEFICIALLY OWNED
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NAMES AND ADDRESSES NUMBER OF
OF SHAREHOLDERS SHARES PERCENT
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EQSF Advisers, Inc. 1,258,050(1) 7.23%
M. J. Whitman Advisers, Inc. 205,650(1) 1.18%
737 Third Avenue
New York, New York
Kennedy Enterprises, L.P. 1,089,218(2) 6.26%
Parker S. Kennedy 18,904(3) .11%
114 East Fifth Street
Santa Ana, California
First American Trust Company 2,546,271(4) 14.64%
Trustee of the Corporation's
Qualified Retirement Plans Trusts
421 No. Main Street
Santa Ana, California
(1) As of December 31, 1997, sole voting and dispositive power with respect to
the number of shares set forth in the table (adjusted to reflect the
"three-for-two" stock split that occurred during January 1998), based on
statements contained in Schedule 13G filed jointly by EQSF Advisers, Inc.
("EQSF"), M. J. Whitman Advisers, Inc. ("MJWA"), and Martin J. Whitman
with the Securities and Exchange Commission ("SEC"). That Schedule 13G
indicates that the shares were acquired in the ordinary course of business
and are held (i) by EQSF on behalf of Third Avenue Value Fund, Inc., as to
1,222,050 shares, and on behalf of Third
2
Avenue Small-Cap Value Fund as to 36,000 shares, and (ii) by MJWA on behalf
of various clients for whom MJWA acts as investment adviser as to an
aggregate of 205,650 shares, and that the shares are not held with the
purpose or effect of changing or influencing control of the Corporation.
(2) The subject shares are held by Kennedy Enterprises, L.P., a California
limited partnership, of which Parker S. Kennedy, President of the
Corporation, is the sole general partner (the "Partnership"). The limited
partnership agreement pursuant to which the Partnership was formed
provides that the General Partner has all powers of a general partner as
provided in the California Uniform Limited Partnership Act, provided that
the General Partner is not permitted to cause the partnership to sell,
exchange or hypothecate any of its shares of stock of the Corporation
without the prior written consent of all of the limited partners.
Mr. Kennedy's father, D. P. Kennedy, is one of the limited partners as
well as an executive officer of the Corporation.
(3) Parker S. Kennedy has sole voting and dispositive power with respect to
the number of shares set forth in the table, except as to 2,644 of such
shares, which are allocated to his account and held by the Corporation's
wholly owned subsidiary, First American Trust Company, as trustee of the
Corporation's Employee Profit Sharing and Stock Ownership Plan. See note
(4) below. Of the other shares set forth in the table, 1,260 are owned by
Mr. Kennedy directly, and 15,000 are shares he has the right to acquire
within 60 days pursuant to stock options awarded under employee incentive
compensation plans. In addition to the shares set forth in the table,
306,000 shares are held by a wholly owned subsidiary of the Corporation
whose 21-member board of directors has the power to direct the disposition
of such shares. The subsidiary's board members include Parker S. Kennedy,
D. P. Kennedy, Thomas A. Klemens and all of the persons who are directors
of the Corporation. An additional 14,742 shares are held by a nonprofit
corporation whose five-member board of directors, which includes Parker S.
Kennedy, D. P. Kennedy and Thomas A. Klemens, has the power to direct the
disposition of such shares.
(4) Of the shares set forth in the table, 2,171,310 are held by the
Corporation's wholly owned subsidiary, First American Trust Company (the
"Trust Company"), pursuant to the Corporation's Employee Profit Sharing
and Stock Ownership Plan, and 374,961 are held by the Trust Company as
trustee of the Corporation's 401(k) Savings Plan. Both of these plans
require the trustee to vote the shares as directed by the employees to
whose accounts the shares have been allocated. Shares as to which no
directions are received are not voted. In addition to the shares set forth
in the table, 135,405 shares are held by the Trust Company as trustee of
the Corporation's Pension Trust, as part of the diversified investment
fund of that trust. Parker S. Kennedy, Mark R Arnesen and Thomas A.
Klemens, who also are executive officers of the Corporation, serve on a
committee composed of five members, a majority of which may, under the
terms of the trust agreement governing the trust, and subject to the
fiduciary requirements of the Employee Retirement Income Security Act of
1974, direct the disposition of the securities held by the trustee.
ITEM 1. ELECTION OF DIRECTORS
The directors of the Corporation are elected annually. The Board of
Directors nominates persons to stand for election as directors. Unless
otherwise specified, each proxy that is duly executed and returned will be
voted in favor of the election of the following persons, if they are then
available and willing to serve. If any of the nominees should be unable or
decline to serve at the time of the meeting, the discretionary authority
provided in each duly executed proxy will be exercised to vote for a
substitute or substitutes. The Board of Directors has no reason to believe
that any substitute will be required. All nominees are at present directors of
the Corporation.
3
The following schedule sets forth the nominees and certain information
concerning each of them:
DIRECTOR
NAME AGE PRINCIPAL OCCUPATION SINCE
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George L. Argyros 61 Chairman and Chief Executive Officer 1988
Arnel and Affiliates
Diversified Investment Company
Gary J. Beban 51 President and Senior Operating Officer 1996
CB Commercial Real Estate Group, Inc.
Commercial Real Estate Brokerage
J. David Chatham 47 President and Chief Executive Officer 1989
Chatham Holdings Corporation
Real Estate Development and Associated
Industries
William G. Davis 68 Counsel 1992
Tory Tory DesLauriers & Binnington
Director
Canadian Imperial Bank of Commerce
Premier of Province of Ontario (Canada)
(1971- 1985)
James L. Doti 51 President and Professor of Economics 1993
Chapman University
Lewis W. Douglas, Jr. 73 Oil Exploration 1971(1)
Paul B. Fay, Jr. 79 President 1967
The Fay Improvement Company
Financial Consulting and Business
Ventures
Dale F. Frey 65 Private Investor (1997 to date) 1997
Chairman and President
General Electric Investment Corporation
Investments (1984-1997)
D. P. Kennedy 79 Chairman of the Board 1956
The First American Financial Corporation
and First American Title Insurance
Company,
a subsidiary of the Corporation
Parker S. Kennedy 50 President 1987(2)
The First American Financial Corporation
and First American Title Insurance
Company,
a subsidiary of the Corporation
Anthony R. Moiso 58 President and Chief Executive Officer 1990
Rancho Mission Viejo
Ranching and Real Estate Development
R. J. Munzer 80 Private Investor (1984 to date) 1962
Chairman of the Board
Petrolane Incorporated
Oil Field Services, Liquified Petroleum
Gas
Distribution and Automotive Services
(1971-1984)
4
DIRECTOR
NAME AGE PRINCIPAL OCCUPATION SINCE
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Frank O'Bryan 64 Chairman of the Board 1994
WMC Mortgage Corporation
Mortgage Lender (1997 to date)
Chairman of the Board
Spring Mountain Group
Escrow and Savings and Loan Holding Company
(1985-1997)
Roslyn B. Payne 51 President 1988
Jackson Street Partners, Ltd.
Real Estate Venture Capital and Investments
D. Van Skilling 64 Chairman and Chief Executive Officer 1998
Experian Information Solutions, Inc.
Information Services and Solutions for Direct Marketing
and Credit Industries (1996 to date)
Executive Vice President
TRW Inc. (1989-1996)
Diversified Automotive, Aerospace and Information Services
Virginia Ueberroth 58 President 1988
Ueberroth Family Foundation
(1) Mr. Douglas also was a director of the Corporation during the period 1961-
1967.
(2) Parker S. Kennedy is D. P. Kennedy's son.
Certain nominees serve as directors of other publicly held companies as
follows: Mr. Argyros--The Newhall Land and Farming Company, Apria Healthcare
Group Inc., Rockwell International Corporation and USCS International, Inc.;
Mr. Beban--CB Commercial Real Estate Services Group; Mr. Davis--The Seagram
Company Ltd., Magna International Inc. and International Comfort Products
Corporation; Dr. Doti--Fleetwood Enterprises, Inc., Remedy Temp, Inc., and
Standard Pacific Corp.; Mr. Fay--Vestaur Securities Inc.; Mr. Frey--After
Market Technology, Inc., Community Health Systems, Inc., Roadway Express,
Inc., USF&G Corporation, Praxair, Inc., and Promus Hotel Corporation; and Mr.
Skilling--Lamson and Sessions Inc.
The Board of Directors held six meetings during 1997. Directors who attended
less than 75% of the aggregate of such meetings and meetings of committees of
which they are members are Messrs. Munzer and O'Bryan.
The Board of Directors has an Audit Committee, the members of which are
Messrs. Chatham, Doti, Fay, Moiso and O'Bryan, and Mrs. Ueberroth. The
functions performed by the Committee include selecting the Corporation's
independent auditor, directing and supervising investigations into matters
within the scope of its duties, reviewing with the independent auditor the
plan and results of its audit, reviewing internal auditing procedures and
results, and determining the nature of other services to be performed by, and
fees to be paid to, the independent auditor. During 1997, the Audit Committee
met twice.
The Board of Directors also has a Compensation Committee, the members of
which are Messrs. Beban, Chatham, Davis, Doti, Douglas and Fay. This Committee
establishes compensation rates and procedures with respect to senior
management of the Corporation and its subsidiaries, including bonus awards.
During 1997, the Compensation Committee met three times.
5
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information received by the Corporation as of
the Record Date with respect to beneficial ownership of the Corporation's
Common shares by current directors, nominees for director, executive officers
and by all directors and executive officers as a group. The number of shares
stated as being beneficially owned is determined according to the rules of the
SEC, and is not necessarily indicative of beneficial ownership for any other
purpose. Under such rules, beneficial ownership includes any shares as to
which the individual has sole or shared voting or investment power, and also
any shares the individual has, or will have, the right to acquire within 60
days after the Record Date for the Annual Meeting of Shareholders through the
exercise of any stock option or other right.
COMMON SHARES
BENEFICIALLY OWNED (1)
PERCENT OF
NUMBER SHARES OUTSTANDING,
NAME OF SHARES IF GREATER THAN 1%
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DIRECTORS
George L. Argyros 42,706(2) --
Gary J. Beban 2,482 --
J. David Chatham 3,982 --
William G. Davis 2,400 --
James L. Doti 3,900 --
Lewis W. Douglas, Jr. 6,538 --
Paul B. Fay, Jr. 25,020 --
Dale F. Frey 2,716 --
D. P. Kennedy 11,374(3)(4) --
Parker S. Kennedy 1,108,122(3)(4)(5) 6.4%
Anthony R. Moiso 5,692 --
R. J. Munzer 9,658(6) --
Frank O'Bryan 4,216 --
Roslyn B. Payne(7) 7,978 --
D. Van Skilling 200 --
Virginia Ueberroth 20,460 --
EXECUTIVE OFFICERS WHO ARE NOT
DIRECTORS
Mark R Arnesen 11,703(5) --
Craig I. DeRoy 16,601 --
Thomas A. Klemens 36,443(4)(5) --
All Directors and Executive Officers
as a Group (19 persons) 1,322,191 7.6%
(1) Unless otherwise indicated, sole voting and dispositive power (or shared
power with the named person's spouse). The shares set forth in the table
include the following shares allocated to the following individuals'
accounts in, and held by the Corporation's wholly owned subsidiary, First
American Trust Company (the "Trust Company"), as trustee of, the
Corporation's Employee Profit Sharing and Stock Ownership Plan: 2,754
shares for D. P. Kennedy; 2,644 shares for Parker S. Kennedy; 1,769 shares
for Mark R Arnesen; 43 shares for Craig I. DeRoy and 799 shares for Thomas
A. Klemens. These individuals do not currently have dispositive power with
respect to these shares. The share amounts shown in the table also
include, for each director other than Messrs. D. P. Kennedy, Parker S.
Kennedy, and D. Van Skilling, 2,250 shares; and for D. P. Kennedy 6,000
shares; for Parker S. Kennedy 15,000 shares; for Thomas A. Klemens and
Craig I. DeRoy 12,000 shares each and for Mark R. Arnesen 3,000 shares,
which those persons have rights to
6
acquire within 60 days of the Record Date for the Annual Meeting of
Shareholders pursuant to stock options awarded under the Corporation's
compensation plans.
(2) In addition to the shares set forth in the table, 246,997 shares are held
by a nonprofit corporation whose four-member board of directors, which
includes George L. Argyros and his wife, has the power to direct the voting
and the disposition of such shares.
(3) Of the shares set forth in the table, 1,260 are owned by Parker S. Kennedy
directly and 1,089,218 are held by Kennedy Enterprises, L.P., a California
limited partnership, of which Mr. Kennedy is the sole general partner (the
"Partnership"). The limited partnership agreement pursuant to which the
Partnership was formed provides that the General Partner has all powers of
a general partner as provided in the California Uniform Limited Partnership
Act, provided that the General Partner is not permitted to cause the
partnership to sell, exchange or hypothecate any of its shares of stock of
the Corporation without the prior written consent of all of the limited
partners. Mr. Kennedy's father, D. P. Kennedy, is one of the limited
partners.
(4) In addition to the shares set forth in the table, 306,000 shares are held
by a wholly owned subsidiary of the Corporation whose 21-member board of
directors, which includes D. P. Kennedy, Parker S. Kennedy and Thomas A.
Klemens, has the power to direct the disposition of such shares, and 14,742
shares are held by a nonprofit corporation whose five-member board of
directors, which includes D. P. Kennedy, Parker S. Kennedy and Thomas A.
Klemens, has the power to direct the disposition of such shares.
(5) In addition to the shares set forth in the table, 135,405 shares are held
by the Trust Company as trustee of the Corporation's Pension Trust, as part
of the diversified investment fund of the trust. Parker S. Kennedy, Mark R
Arnesen and Thomas A. Klemens serve on a committee composed of five
members, a majority of which may, under the terms of the trust agreement
governing the trust, and subject to the fiduciary requirements of the
Employee Retirement Income Security Act of 1974, direct the disposition of
the securities held by the trustee.
(6) In addition to the shares set forth in the table, 12,000 shares are held by
a nonprofit corporation whose five-member board of directors is composed of
R. J. Munzer and his wife and children. In his capacity as an officer of
that corporation, Mr. Munzer has the power, as do certain other officers,
any of whom may act alone, to direct the voting and the disposition of such
shares.
(7) In addition to the shares set forth in the table, Roslyn B. Payne owns 475
shares of common stock of First American Title Guaranty Holding Company,
which is a second-tier subsidiary of the Corporation. These shares
represent 2.2% of the total number of such shares that are issued and
outstanding.
7
EXECUTIVE COMPENSATION
The following tables set forth certain compensation awarded to, earned by,
or paid to the executive officers of the Corporation who were serving as such
at the end of, or who retired during, the Corporation's last completed fiscal
year, which ended December 31, 1997 (the "named executive officers"), for all
services rendered in all capacities to the Corporation and its subsidiaries
during the years covered in the tables:
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------ -------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING
PRINCIPAL SALARY(1) BONUS(2) COMPENSATION(3) OPTIONS(4) ALL OTHER
POSITION YEAR ($) ($) ($) (# OF SHARES) COMPENSATION(5)($)
--------- ---- --------- -------- --------------- ------------- ------------------
D. P.
Kennedy 1997 301,850(6) 148,184 -- -- 147,853(7)
Chairman 1996 301,300(6) 118,250 -- 30,000 128,659(7)
1995 299,780(6) -0- -- -- 125,088(7)
Parker S.
Kennedy 1997 401,120(8) 253,966 -- -- 2,998
President 1996 376,100(8) 192,075 -- 37,500 598
1995 325,860 -0- -- -- 598
Thomas A.
Klemens 1997 227,696(9) 226,256 -- -- 2,998
Executive
Vice
President, 1996 196,120(9) 188,250 -- 30,000 598
Chief
Financial
Officer 1995 173,825(9) 80,625 -- -- 598
Craig I.
DeRoy 1997 220,896 226,256 -- -- 2,998
Executive
Vice
President, 1996 190,920 180,600 -- 30,000 454
General
Counsel 1995 168,825 70,500 -- -- 454
Mark R
Arnesen 1997 130,920 62,346 -- -- 2,923
Vice
President,
Secretary, 1996 118,920 38,388 -- 7,500 454
Corporate
Counsel 1995 109,680 25,969 -- -- 454
(1) Includes, in addition to regular salary, a fee of $150 for each meeting of
the Board of Directors attended by the named executive officer during the
years covered in the table.
(2) Consists of cash bonuses and the dollar value of noncash (stock) bonuses.
Officers of the Corporation, its subsidiaries and lower-tier subsidiaries
are eligible for such bonuses, which are awarded during the year following
the fiscal year to which the bonus relates, based on an evaluation by the
Compensation Committee of the Board of Directors of the performance of the
individual and the Corporation during the preceding fiscal year. For
services rendered during 1997, 1996 and 1995, respectively, 364, 288 and
237 individuals were awarded cash and/or stock bonuses. During the three
years covered in the table, an average of 73,439 shares of stock has been
awarded annually to all participants in the Corporation's Stock Bonus
Plan. With respect to services rendered during 1997, Parker S. Kennedy
received an award of 1,260 Common shares having a fair market value of
$53,966 on the date of the award, D. P. Kennedy received an award of 1,125
such shares having a fair market value of $48,184 on the date of the
award, Thomas A. Klemens and Craig I. DeRoy each received an award of
1,080 such shares having a fair market value of $46,256 on the date of the
awards, and Mark R Arnesen received an award of 405 such shares having a
fair market value of $17,346. During 1997, Parker S. Kennedy received an
award of 1,650 Common shares having a fair
8
market value of $42,075 on the date of the award, D. P. Kennedy and Thomas
A. Klemens each received awards of 1,500 such shares having a fair market
value of $38,250 on the date of the awards, Craig I. DeRoy received 1,200
such shares having a fair market value of $30,600, and Mark R Arnesen
received 525 such shares having a fair market value of $13,388 with respect
to services rendered during 1996. During 1996, neither D. P. Kennedy nor
Parker S. Kennedy received bonus awards, Thomas A. Klemens received an
award of 1,500 Common shares having a fair market value of $25,625 on the
date of the award, Craig I. DeRoy received an award of 1,200 such shares
having a fair market value of $20,500, and Mark R Arnesen received an award
of 525 such shares having a fair market value of $8,969 with respect to
services rendered during 1995. All share amounts have been adjusted to
reflect the "three-for-two" stock split that occurred during January 1998.
(3) Certain incidental perquisites or other personal benefits for executive
officers of the Corporation (not otherwise disclosed in this Proxy
Statement) may result from expenses incurred by the Corporation or its
subsidiaries in the interest of attracting and retaining qualified
personnel. The incremental cost to the Corporation and its subsidiaries of
providing such incidental perquisites or other personal benefits for any
executive officer named in the Summary Compensation Table did not, for any
fiscal year covered, exceed the lesser of $50,000 or 10% of the total of
annual salary and bonus reported for such year for the named executive
officer. In accordance with the rules of the Securities and Exchange
Commission governing disclosure of executive compensation, the amounts of
such perquisites or other personal benefits are not included in the table.
(4) The number of shares underlying the stock options disclosed in the table
have been adjusted to reflect the "three-for-two" stock split that
occurred during January 1998.
(5) Consists of the matching contributions made by the Corporation to the
named executive officer's account in the Corporation's 401(k) Savings Plan
during or with respect to the covered fiscal year, plus the dollar value
of insurance premiums paid by, or on behalf of, the Corporation during the
covered fiscal year with respect to term life insurance for the benefit of
such officer.
(6) The compensation shown in the "Salary" column of the table includes fees
totaling $950, $400 and $1,700, which were earned by D. P. Kennedy for
services he rendered as a director of subsidiaries of the Corporation
during 1997, 1996 and 1995, respectively.
(7) The amounts shown in the last column of the Summary Compensation Table
include, for each fiscal year covered, the distributions made to D. P.
Kennedy from the Corporation's Pension Plan, which are required under
provisions of the Internal Revenue Code of 1986, as amended (the "Code").
See "Pension Plan" below. The compensation shown also includes cash and
the value of stock, aggregating $43,164, $28,031 and $24,802, distributed
to D. P. Kennedy during 1997, 1996 and 1995, respectively, from his
accounts in the Corporation's Profit Sharing Plan attributable to
contributions made by the Corporation and its participating subsidiaries
in years prior to those covered in the table and earnings on the
contributions. The distributions were required to be made under provisions
of the Code.
(8) The compensation shown in the "Salary" column of the table includes fees
totaling $200 in each of the years 1997 and 1996, which were earned by
Parker S. Kennedy for services he rendered as a director of subsidiaries
of the Corporation. Mr. Kennedy did not earn such fees during 1995.
(9) The compensation shown in the "Salary" column of the table includes fees
totaling $6,800, $5,200 and $5,000, which were earned by Mr. Klemens for
services he rendered as a director of subsidiaries of the Corporation
during 1997, 1996 and 1995, respectively.
9
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE-MONEY OPTIONS AT
NUMBER OF SHARES VALUE FISCAL YEAR-END (2) FISCAL YEAR-END ($)(2)
ACQUIRED ON REALIZED ------------------------- -------------------------
NAME EXERCISE (1) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ---------------- -------- ----------- ------------- ----------- -------------
D. P.
Kennedy -- -- 6,000 24,000 193,000 772,000
Parker
S.
Kennedy -- -- 7,500 30,000 241,250 965,000
Thomas
A.
Klemens -- -- 6,000 24,000 193,000 772,000
Craig
I.
DeRoy -- -- 6,000 24,000 193,000 772,000
Mark R
Arnesen -- -- 1,500 6,000 48,250 193,000
(1) Each of the options disclosed in the table is exercisable in 20% annual
increments commencing April 24, 1997, the first anniversary date of the
grant.
(2) The value of unexercised options is based on the difference between the
adjusted $49.25 closing price of the Corporation's Common shares on the
New York Stock Exchange on December 31, 1997, and the adjusted exercise
price of $17.083. All prices and share amounts have been adjusted to
reflect the "three-for-two" stock split that occurred during January 1998.
PENSION PLAN
ANNUAL PENSION BENEFITS
REMUNERATION
(FINAL AVERAGE PAY*) YEARS OF BENEFIT SERVICE
-------------------- --------------------------------------------------
5 10 20 30 40 50
$100,000 $ 5,350 $11,450 $23,650 $ 35,850 $ 48,050 $ 60,250
125,000 6,725 14,388 29,713 45,038 60,363 75,688
150,000 8,100 17,325 35,775 54,225 72,675 91,125
175,000 9,475 20,263 41,838 63,413 84,988 106,563
200,000 10,850 23,200 47,900 72,600 97,300 122,000
225,000 12,225 26,138 53,963 81,788 109,613 137,438
250,000 13,600 29,075 60,025 90,975 121,925 152,875
275,000 or more 14,975 32,013 66,088 100,163 134,238 168,313
--------
* Final Average Pay is defined as the highest consecutive five-year average
salary during the last ten years of employment.
The above table sets forth estimated annual benefits (assuming such benefits
will be paid in the form of a life annuity) at various compensation levels and
years of service under the Corporation's pension plans. Subject to certain
conditions of age and tenure, all regular employees of the Corporation and
participating subsidiaries are eligible to join the Corporation's qualified
Pension Plan. In order to participate, during plan years ending on or prior to
December 31, 1994, an employee was required to contribute 1 1/2% of pay
(salary, plus cash bonuses, commissions and other pay) to the plan. As a
result of amendments to the Pension Plan that were adopted in 1994, during
plan years commencing after December 31, 1994, an employee is not required to
contribute to the plan in order to participate. A participant generally vests
in his accrued benefit attributable to the Corporation's contributions upon
the completion of three years of service or, if earlier, the attainment of
normal retirement age while an employee. Normal retirement age is defined
under the plan as the later of the employee's attainment of
10
age 65 or his third anniversary of participation in the plan. Upon retirement
at normal retirement age, an employee receives full monthly benefits which are
equal to (when calculated as a life annuity): (i) for years of credited
service with the company as of December 31, 1994, 1% of the first $1,000 and 1
1/4% of remaining final average pay (i.e., the average of the monthly "pay,"
as defined above, during the five highest paid consecutive calendar years out
of the last ten years prior to retirement) times the number of years of
credited service as of December 31, 1994; and (ii) with respect to a
participant's credited service for plan years subsequent to December 31, 1994,
3/4% of the first $1,000 and 1% of the remaining final average pay times the
number of years of credited service subsequent to December 31, 1994. An
employee receives reduced benefits upon retirement prior to age 65 with at
least three years of service, and an employee cannot begin receiving monthly
benefits under the plan prior to attaining age 55. The plan is funded by the
Corporation based on actuarial determinations of the amount required to
provide the stated benefits. The table is based on retirement at age 65 or
later, with contributions having been made by the employee in each year of
credited service prior to 1995. The benefits are not subject to deduction for
Social Security payments or any other offsets. Currently, D. P. Kennedy,
Parker S. Kennedy, Thomas A. Klemens, Craig I. DeRoy and Mark R Arnesen have
49, 21, 12, 4 and 12 years, respectively, of credited service.
The compensation levels shown in the Pension Plan table are less than those
set forth in the Summary Compensation Table because the Internal Revenue Code
of 1986, as amended (the "Code"), limits the maximum amount of pay that may be
considered in determining benefits under the tax-qualified Pension Plan, and
the Corporation's Pension Restoration Plan, which is described below, does not
make up for these limits for pay exceeding $275,000. As established by the Tax
Reform Act of 1986, the limit on pay that could be recognized by tax-qualified
retirement plans was $200,000 in 1989 and was adjusted for inflation for each
year through 1993, when the limit was $235,840. The Omnibus Budget
Reconciliation Act of 1993 decreased this limit to $150,000 for plan years
beginning in 1994. The $150,000 limit will also be adjusted for inflation for
years after 1994, but only in increments of $10,000. Effective January 1,
1997, the limit was increased to $160,000. The highest final average pay that
could be considered in determining benefits accruing under the Pension Plan
before 1994 is $219,224 and the highest final average pay that can currently
be considered in determining benefits accruing after 1993 is $154,000.
During 1996, the Corporation adopted an unfunded, nonqualified plan designed
to make up for the benefit accruals that are restricted by the indexed
$150,000 pay limit (the "Pension Restoration Plan"). However, in order to
limit its expense, the Pension Restoration Plan does not make up for benefit
accruals on compensation exceeding $275,000. The Pension Restoration Plan also
makes up for benefits that cannot be paid from the Pension Plan because of
limitations imposed by Code Section 415 and related regulations. Vesting of
benefits payable to an employee under the Pension Restoration Plan occurs at
the same time that vesting occurs for that employee in his or her Pension Plan
benefits. The Pension Restoration Plan is effective as of January 1, 1994, but
only covers employees who were participants in the Pension Plan on that date,
which, as noted above, is the date as of which the pay limit for the Pension
Plan was reduced from $235,840 to $150,000.
Pursuant to the provisions of the Code, during 1997, 1996 and 1995,
respectively, mandatory distributions totaling $101,227, $98,348 and $98,006
were made to D. P. Kennedy from the Pension Plan. As stated in note (7) of the
Summary Compensation Table set forth above, these amounts are included in the
last column of such table.
SUPPLEMENTAL BENEFIT PLAN
The Corporation maintains an Executive Supplemental Benefit Plan (the
"Executive Plan") which it believes will assist it in attracting and retaining
highly qualified individuals for upper management positions. The Executive
Plan provides retirement benefits for, and pre-retirement death benefits with
respect to, certain
11
key management personnel selected by the Board of Directors. Under the
Executive Plan, upon retirement at normal retirement date (the later of age 65
or, unless waived by the Board of Directors, completion of 10 years of
service), a participant receives a joint life and 50% survivor annuity benefit
equal to 35% of "final average compensation." "Final average compensation" is
the average annual compensation, composed of base salary, plus cash and stock
bonuses, for those three calendar years of the preceding 10 years of
employment in which it is the highest. The benefit is reduced by 5% for each
year prior to normal retirement date in which retirement occurs and, until age
70, increased by 5% (compounded in order to approximate the annuitized value
of the benefit had retirement occurred at age 65) for each year after such
date in which retirement occurs (the "annuitized benefit"). With respect to
such postponed retirement, the Executive Plan takes into account covered
compensation received until age 70, so that the retirement benefit of an
executive who retires after normal retirement date is determined as the
greater of the annuitized benefit or the benefit calculated using final
average compensation (as defined above) until age 70.
To be eligible to receive benefits under the Executive Plan, a participant
must be at least age 55, have been employed by the Corporation or a subsidiary
for at least 10 years and, unless waived by the Board of Directors, covered by
the Executive Plan for at least five years. A pre-retirement death benefit is
provided consisting of 10 annual payments, each of which equals 50% of final
average compensation. Vesting of rights under the Executive Plan is
accelerated in the event of a "change in control" (as defined in the plan) of
the Corporation.
Currently 46 employees, including D. P. Kennedy, Parker S. Kennedy, Thomas
A. Klemens, Craig I. DeRoy and Mark R Arnesen, have been selected to
participate in the Executive Plan. The annual benefit payable under the
Executive Plan to D. P. Kennedy in the event of his retirement is $108,936.
The estimated annual benefits payable under the Executive Plan to Parker S.
Kennedy, Thomas A. Klemens, Craig I. DeRoy and Mark R Arnesen upon retirement
at normal retirement age, assuming compound annual increases of 5.0% in the
relevant portions of compensation shown above in the Summary Compensation
Table, are $313,377, $247,197, $258,626 and $138,204, respectively.
The plan is unfunded. The Corporation purchases insurance, of which it is
the owner and beneficiary, on the lives of the plan participants. This
insurance is designed to recover, over the life of the plan, costs incurred by
the Corporation with respect to it.
DIRECTORS' COMPENSATION
Each director who is not an employee of the Corporation or its subsidiaries
receives annual compensation of $20,000, a fee of $1,000 for attending each
meeting of the Board of Directors, and $500 for attending each committee
meeting. Each director who is such an employee receives a fee of $150 for
attending each meeting of the Board. Directors are reimbursed for their
expenses incurred in attending meetings of the Board and its committees. For
fiscal year 1997, each non-employee director was awarded an option to purchase
2,250 Common shares of the Corporation at an exercise price of $21.583 per
share. These options become exercisable on April 24, 1998.
Pursuant to Item 402(a)(9) of Regulation S-K of the Securities and Exchange
Commission under the Securities Exchange Act of 1934 (the "Exchange Act"), the
following Report of the Compensation Committee on Executive Compensation and
the Comparative Cumulative Total Return to Shareholders graph shall not be
deemed to be incorporated by reference into any previous filing by the
Corporation under either the Securities Act of 1933 (the "Securities Act") or
the Exchange Act that incorporates future Securities Act or Exchange Act
filings in whole or in part by reference.
12
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
COMPENSATION POLICY
The Corporation's compensation program, which has been endorsed by the
Compensation Committee, is designed to enhance shareholder value by providing
that a large part of the executive compensation be related to the performance
of the Corporation as well as to the contribution of each individual officer.
The Corporation's policy is further designed to develop and administer
programs that will (i) attract and retain key executives critical to the long-
term success of the Corporation, (ii) provide median compensation levels that
are competitive with those of the Corporation's competitors, (iii) motivate
executives to enhance long-term shareholder value in the Corporation, and (iv)
integrate the Corporation's compensation programs with its annual planning and
measurement processes. The annual bonus programs include a cash bonus program
as well as stock option and stock bonus plans designed to encourage and create
ownership and retention of the Corporation's shares by the key employees.
RESPONSIBILITIES OF THE COMPENSATION COMMITTEE
The Compensation Committee was established in 1979, and is composed of six
independent directors, none of whom is a former or current officer or employee
of the Corporation or any of its subsidiaries. The Committee reviews and
approves the base salaries, as well as the annual bonus programs, incentive
plans and executive benefit plans. The Committee as needed engages
compensation and benefits-consulting firms to assist the Committee in the
performance of its duties. For the year 1997, the Committee analyzed the
reasonableness of the compensation paid to executive officers and analyzed the
Corporation's compensation and benefit programs. In addition, the Committee
reviewed information on general compensation trends of related companies. For
the purpose of this analysis, the Committee used the group of companies whose
returns to shareholders compose the peer group index shown in the performance
graph below. The Committee also reviewed published compensation surveys for
comparative results against the Corporation's compensation level. The
Committee has reviewed the compensation of the Corporation's executive
officers for 1997, and believes that the compensation for all executive
officers is reasonable in view of the Corporation's performance and industry
compensation levels. Measures used for determining the appropriate level of
compensation for executive officers include competitive position, profit,
profit retention (ratio of profits to revenue), and ability to select and
develop executive replacement personnel.
CEO COMPENSATION
In December 1996, the Compensation Committee increased Parker S. Kennedy's
base salary for the year 1997 to $400,020 from its previous level of $375,000.
Mr. Kennedy's salary for the year 1997 was, in the opinion of the Committee,
within the median salary range for chief executive officers in the group of
comparable companies. When determining the appropriate salary level, the
Committee considered the Corporation's improved performance during the year
1996, as compared with the prior year.
13
Reflecting the Committee's commitment to relating a portion of each of the
executive officers' compensation to the annual results of the Corporation,
Parker S. Kennedy received a cash bonus of $200,000, representing 50% of his
1997 base salary, to reward his leadership for the year 1997. Mr. Kennedy also
was awarded 1,260 shares of the Corporation's Common stock for his performance
during 1997.
COMPENSATION COMMITTEE
Lewis W. Douglas, Jr., Chairman
Gary J. Beban
J. David Chatham
The Hon. William G. Davis
James L. Doti
Paul B. Fay, Jr.
14
COMPARATIVE CUMULATIVE TOTAL RETURN TO SHAREHOLDERS
Since December 3, 1993, the Corporation's Common shares have been listed and
trading on the New York Stock Exchange under the trading symbol "FAF."
Previously, such shares were traded on the national over-the-counter market
and were designated and quoted on the National Association of Securities
Dealers Automated Quotations National Market System ("NASDAQ-NMS") under the
trading symbol "FAMR." The following graph compares the yearly percentage
change in the cumulative total shareholder return on the Corporation's Common
shares, assuming reinvestment of dividends, with the corresponding changes in
the cumulative total returns of the Standard & Poor's 500 Composite Stock
Price Index, the Standard & Poor's Financial Index and a peer group index
consisting of the following six companies: Alleghany Corp., Fidelity National
Financial, Inc., Lawyers Title Corp., Old Republic International Corp.,
Reliance Group Holdings, Inc., and Stewart Information Services Corp., in each
case assuming reinvestment of dividends. The cumulative total shareholder
return of the peer group of companies has been included in the graph to
provide a comparison with other publicly held companies having subsidiaries
that transact the business of title insurance on a nationwide basis.
COMPARISON OF SEVEN YEAR CUMULATIVE TOTAL RETURN*
AMONG THE FIRST AMERICAN FINANCIAL CORPORATION**, S&P 500 COMPOSITE INDEX**,
S&P FINANCIAL INDEX** AND CUSTOM PEER GROUP**
PERFORMANCE GRAPH APPEARS HERE
THE FIRST
AMERICAN CUSTOM S&P S&P 500
Measurement Period FINANCIAL PEER FINANCIAL COMPOSITE
(Fiscal Year Covered) CORP. GROUP INDEX INDEX
- ------------------- ---------- --------- --------- ----------
Measurement Pt-12/31/90 $ 100 $100 $100 $100
FYE 12/31/91 $ 176 $144 $146 $130
FYE 12/31/92 $ 401 $199 $175 $140
FYE 12/31/93 $ 543 $230 $189 $155
FYE 12/30/94 $ 275 $197 $182 $157
FYE 12/29/95 $ 438 $312 $280 $215
FYE 12/31/96 $ 687 $342 $379 $265
FYE 12/31/97 $1,253 $508 $562 $353
* Adjusted for reinvestment of dividends. Stock price performance shown is not
indicative of future performance.
**As calculated by Bloomberg Financial Services, to include the reinvestment of
dividends.
15
EXECUTIVE OFFICERS
NAME POSITION HELD AGE
---- ------------- ---
D. P. Kennedy Chairman 79
Parker S. Kennedy President 50
Thomas A. Klemens Executive Vice President, 47
Chief Financial Officer
Craig I. DeRoy Executive Vice President, 45
General Counsel
Mark R Arnesen Vice President, Secretary, 45
Corporate Counsel
All officers of the Corporation are appointed annually by the Board of
Directors subsequent to its election.
D. P. Kennedy has been Chairman of the Corporation since 1993, and served as
its President from 1963 to 1993. Parker S. Kennedy, who is D. P. Kennedy's
son, has been President of the Corporation since 1993, and served as its
Executive Vice President from 1986 to 1993. He has been employed by the
Corporation's subsidiary, First American Title Insurance Company ("First
American"), since 1977 and became a Vice President of that company in 1979.
During 1983, he was appointed its Executive Vice President, and in 1989 was
appointed its President. Thomas A. Klemens has been Executive Vice President,
Chief Financial Officer of the Corporation since 1996, served as its Vice
President, Chief Financial Officer from 1993 to 1996, and served as its
principal accounting officer from 1992 to 1993. Mr. Klemens has been employed
by First American as Vice President since 1985, and served as its Controller
from 1985 to 1993 and as its Chief Financial Officer from 1993 to 1998. Craig
I. DeRoy has been Executive Vice President, General Counsel of the Corporation
since 1996, and served as its Vice President, General Counsel from 1993 to
1996. Mr. DeRoy has been employed by First American as Vice President, General
Counsel since 1993. Mr. DeRoy was the principal shareholder and chief
executive officer of Corporate Risk Management, Inc., an environmental and
regulatory consulting firm whose business constituted his principal occupation
from 1992 until his employment by the Corporation and First American in 1993.
From 1990 to 1992, Mr. DeRoy served as Executive Vice President and chief
operating officer of First Environmental Review Insurance Company, where he
helped pioneer a new form of property insurance coverage for environmental
risks. Mark R Arnesen has been Vice President, Secretary and Corporate Counsel
of the Corporation and First American since 1992, has been employed by First
American since 1979, and has been a Vice President of the latter company since
1989.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Rules adopted by the Securities and Exchange Commission ("SEC") under
Section 16(a) of the Securities Exchange Act of 1934 require the Corporation's
officers and directors, and persons who own more than ten percent of the
issued and outstanding Common shares of the Corporation, to file reports of
their ownership, and changes in ownership, of such securities with the SEC on
SEC Forms 3, 4 or 5, as appropriate. Officers, directors and greater-than-ten-
percent shareholders are required by the SEC's regulations to furnish the
Corporation with copies of all forms they file pursuant to Section 16(a).
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that they were not
required to file a Form 5 to report previously unreported ownership or changes
in ownership, the Corporation believes that, during its fiscal year ending
December 31, 1997, its officers,
16
directors and greater-than-ten-percent beneficial owners complied with all
filing requirements under Section 16(a), except that Director George L.
Argyros was late in filing a report on Form 4 covering a purchase of Common
shares made by him during February 1996 as trustee of an irrevocable trust for
the benefit of his parents.
ITEM 2. PROPOSAL TO AMEND THE CORPORATION'S 1996 STOCK OPTION PLAN
The shareholders will be asked to approve a proposal to amend the
Corporation's 1996 Stock Option Plan (the "Plan") to increase by 1,000,000 the
number of Common shares available for grant thereunder (the "Proposed
Amendment").
GENERAL
The Board of Directors adopted the Plan on February 21, 1996, and the Plan
was approved by the shareholders of the Corporation on April 24, 1996. The
Plan is intended to assist the Corporation in attracting, retaining and
motivating the best qualified officers and other key employees and to enhance
the long-term mutuality of interest between the Corporation's shareholders and
its officers and key employees through the grant to officers and other key
employees of the Corporation and its subsidiaries ("Employees") of options to
purchase the Common shares of the Corporation, par value $1.00 per share (the
"Stock"). The principal features of the Plan are summarized below, but such
summary is qualified in its entirety by reference to the full text of the
Plan, a copy of which will be furnished to shareholders without charge upon
request in writing to the Secretary at the Corporation's address indicated on
the first page of this proxy statement.
Under the Plan, the Compensation Committee of the Board (the "Committee")
may grant stock options to Employees. There are currently approximately 400
Employees who are potentially eligible for participation under the Plan. The
number of grantees selected to participate may vary from year to year.
Although the Committee has previously granted options to purchase Stock to
Employees under the Plan, the Committee has not identified specific
individuals who will be receiving a grant of options under the Plan in the
immediate future and therefore it is not possible at this time to determine
the benefits that may be provided to the Corporation's executive officers and
other Employees.
Originally, the maximum number of Common shares of the Corporation that
could be subject to options outstanding at any time under the Plan was
1,250,000. That number was adjusted by the Committee to 1,875,000 to account
for the "three-for-two" stock split that occurred in January 1998. If there is
a further stock split, stock dividend, recapitalization, or other relevant
change affecting the Corporation's Common shares, appropriate adjustments may
be made by the Committee in the number of shares that may be issued in the
future and in the numbers of shares and option exercise prices under all
outstanding grants made before such event. If shares under a grant are not
issued, those shares will again be available for inclusion in future grants.
No more than 15 percent of the Common shares authorized under the Plan may be
issued to an individual Employee.
THE PROPOSED AMENDMENT
If the Proposed Amendment is approved, Section 5.1 of the Plan will be
amended to read as follows:
"Number. Subject to the provisions of Section 5.3, the number of shares of
Stock subject to Options under the Plan may not exceed 2,875,000 shares. The
shares to be delivered under the Plan may consist, in whole or in part, of
treasury Stock or authorized but unissued Stock, not reserved for any other
purpose."
17
REASON FOR THE AMENDMENT
As discussed above, the aggregate number of Common shares that may presently
be issued under the Plan is 1,875,000. Of that aggregate number, 1,005,700
shares have been issued pursuant to exercise of, or remain subject to, options
previously awarded under the Plan. The Proposed Amendment would enable the
Corporation to award options to a broader group of officers and key employees
than would otherwise be feasible given the limited number of shares remaining
available for grant under the Plan, which amount, in the opinion of the
Committee, is insufficient to continue to meet the goals of the Plan outlined
above.
GRANTS UNDER THE PLAN
The Committee may grant to Employees nonqualified options and options
qualifying as incentive stock options under the Internal Revenue Code of 1986,
as amended (the "Code"). The exercise price of either a nonqualified stock
option or an incentive stock option will be no less than the fair market value
of the Common shares on the date of grant. The fair market value of the
Corporation's Common shares on March 20, 1998, was $65.50 per share. To
exercise an option, an Employee may pay the exercise price in cash or, if
permitted by the Committee, by delivering previously acquired Common shares of
the Corporation or a combination of such shares and cash.
The term of each option will be fixed by the Committee but may not exceed 10
years from the date of grant. The Committee will determine the time or times
when each option may be exercised. Options may be made exercisable in
installments, and the exercisability of options may be accelerated by the
Committee.
In the event of termination of employment by reason of long-term disability
or death, any option held by the Employee may thereafter be exercised in full
for a period of one year. In the event of an Employee's termination of
employment for "cause" (as defined in the Plan), any options held by him will
be forfeited. In the event of an Employee's termination of employment by
reason of "retirement" (as defined in the Plan), any options held by him will
be exercisable, to the extent exercisable at the date of termination, for a
period of 90 days. In the event of an Employee's termination of employment for
any reason other than retirement, disability, death or cause, any options held
by him will be exercisable, to the extent exercisable at the date of
termination, for a period of five days. Notwithstanding the above, no option
shall be exercisable following the stated term of such option.
The Plan provides that, in the event of a "change in control" (as defined in
the Plan), each outstanding option shall become fully exercisable.
Options awarded under the Plan are not transferable except by will or the
laws of descent and distribution and may be exercised only by the grantee
during his lifetime. The Board may terminate or suspend the Plan at any time
but such termination or suspension will not affect any stock options then
outstanding under the Plan. Unless earlier terminated by action of the Board,
the Plan will continue in effect until February 21, 2006, but options granted
prior to that date will continue in effect until they expire in accordance
with their terms. The Board may also amend the Plan in any respect. It is
presently intended that all material amendments to the Plan will be submitted
to the shareholders for their approval to the extent required by Rule 16b-3
promulgated by the Securities and Exchange Commission (the "SEC") under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or the
federal tax laws applicable to incentive stock options. The Committee may
amend the term of any option theretofore granted, retroactively or
prospectively, but no such amendment will adversely affect the option without
the holder's consent.
18
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of the principal federal income tax
consequences to participants in the Plan based on federal income tax laws
currently in effect. This summary is not intended to cover all tax
consequences that may apply to such participants or to the Corporation, such
as those under applicable state, local or foreign tax laws.
An individual will not recognize income upon the grant of a nonqualified
option. The individual will generally recognize ordinary income upon the
exercise of a nonqualified option, in which event the Corporation will receive
a tax deduction equal to the amount of income recognized, provided that any
applicable tax reporting requirements are satisfied. The amount of such
ordinary income and deduction is generally the excess, if any, of the fair
market value on the exercise date of the Common shares acquired over the
aggregate exercise price paid. Any ordinary income recognized by an individual
upon the exercise of a nonqualified option will increase his tax basis for the
shares received. Upon a subsequent sale or exchange of such shares, the
individual will recognize capital gain or loss to the extent of the difference
between the selling price of such shares and his tax basis in such shares.
An individual generally will not recognize income upon either the grant of
an incentive stock option or upon the exercise of the incentive stock option
(but such exercise is not exempt from the alternative minimum tax). The
individual will recognize gain or loss, depending on his basis in the stock
(which is generally equal to the exercise price paid for the shares), upon the
sale or other disposition of the Common shares acquired upon exercise. If
certain statutory holding periods are met and the individual has been an
employee of the Corporation at all times from the grant of the incentive stock
option to the day three months before such exercise (or twelve months in the
case of termination of employment due to disability), such gain or loss will
be long-term capital gain or loss and the Corporation will not be entitled to
any federal income tax deduction. If the holding periods are not met, the
individual will generally be required to report as ordinary income for the
year in which such sale or disposition occurred the excess, with certain
adjustments, of the fair market value of the underlying shares on the date of
exercise of the incentive stock option over the exercise price thereof. The
Corporation will be entitled to a tax deduction equal to the amount of
ordinary income so reported by such individual.
Under Section 162(m) of the Code, the Corporation may be limited as to
Federal income tax deductions to the extent that total annual compensation in
excess of $1 million is paid to the chief executive officer of the Corporation
or any one of the other four highest paid executive officers who are employed
by the Corporation on the last day of the taxable year. However, certain
"performance-based compensation," the material terms of which are disclosed to
and approved by the Corporation's shareholders, is not subject to this
deduction limitation. The Corporation has structured the Plan with the
intention that compensation resulting from options granted under the Plan
would be qualified performance-based compensation and deductible without
regard to the limitations otherwise imposed by Section 162(m) of the Code.
Under certain circumstances, accelerated vesting or exercise of options
under the Plan in connection with a "change in control" of the Corporation
might be deemed to be an "excess parachute payment" for purposes of the golden
parachute payment provisions of Section 280G of the Code. To the extent it is
so considered, the individual would be subject to an excise tax equal to 20%
of the amount of the excess parachute payment, and the Corporation would be
denied a tax deduction for the excess parachute payment.
FOR THE REASONS SET FORTH IN ITEM 2 ABOVE, THE BOARD OF DIRECTORS
RECOMMENDS A VOTE "FOR" THE PROPOSED AMENDMENT.
19
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
The firm of Price Waterhouse LLP has been selected by the Audit Committee of
the Board of Directors as independent accountants to audit the books and
accounts of the Corporation and its subsidiaries for the year ending December
31, 1998. This firm has served as independent accountants for the Corporation
since 1954.
A representative of Price Waterhouse will be present at the Annual Meeting
of Shareholders with an opportunity to make any desired statement and to
answer any appropriate questions by the shareholders.
SHAREHOLDER PROPOSALS
In order that a proposal by a shareholder be included in the proxy statement
and proxy for the next Annual Meeting of Shareholders of the Corporation, such
proposal must be received no later than November 27, 1998, assuming that the
date of such meeting is not advanced by more than 30 calendar days, or delayed
by more than 90 calendar days, from the date of the current annual meeting. In
such event, the Corporation will provide notice of the date by which such
proposals must be received in order to be included.
GENERAL INFORMATION
THE CORPORATION WILL, UPON THE WRITTEN REQUEST OF ANY PERSON WHO IS A
BENEFICIAL OWNER OF ITS SHARES ON THE RECORD DATE FOR THE FORTHCOMING ANNUAL
MEETING, FURNISH WITHOUT CHARGE A COPY OF ITS ANNUAL REPORT TO THE SECURITIES
AND EXCHANGE COMMISSION ON FORM 10-K FOR THE YEAR 1997 AND WILL FURNISH, AT A
CHARGE OF $10, A COPY OF THE EXHIBITS THERETO. SUCH REQUEST SHOULD CONTAIN A
REPRESENTATION THAT THE PERSON REQUESTING THIS MATERIAL WAS A BENEFICIAL OWNER
OF THE CORPORATION'S SHARES ON THE RECORD DATE AND BE SENT TO THE SECRETARY AT
THE CORPORATION'S ADDRESS INDICATED ON THE FIRST PAGE OF THIS PROXY STATEMENT.
The costs of soliciting proxies will be borne by the Corporation. In
addition to solicitation by mail, officers and regular employees of the
Corporation's subsidiaries may solicit proxies personally, by telephone or
facsimile. Morrow & Company, Inc., 909 Third Avenue, New York, New York 10022,
has been engaged to solicit proxies in such manner at an estimated cost of
$5,500 plus reimbursement of reasonable expenses.
The Board of Directors is not aware of any matters to come before the
meeting other than those set forth on the notice accompanying this Proxy
Statement, and the report of the President. If any other matters come before
the meeting, the holders of the proxies will vote thereon in their discretion.
By Order of the Board of Directors
Mark R Arnesen
Secretary
Santa Ana, California
March 23, 1998
20
[LOGO of FIRST AMERICAN FINANCIAL CORPORATION]
FIRST AMERICAN SQUARE . 114 EAST FIFTH STREET, SANTA ANA, CA 92701-4642
[Logo of The First American Financial Corporation]
Annual Meeting of Shareholders
of The First American
Financial Corporation
Thursday, April 23, 1998
2:00 p.m.
At the main office of
First American Title Insurance Company
114 East Fifth Street, Santa Ana, California 92701
YOUR VOTE IS IMPORTANT TO THE COMPANY
-------------------------------------
Please complete, sign and return your proxy by tearing off the bottom portion of
this sheet
and returning it in the enclosed postpaid envelope.
v FOLD AND DETACH HERE v
- --------------------------------------------------------------------------------
The First American Financial Corporation
FIRST AMERICAN SQUARE . 114 EAST FIFTH ST., SANTA ANA, CA 92701 . (714) 558-3211
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of The First American Financial Corporation hereby
appoints D. P. Kennedy, Parker S. Kennedy and Mark R Arnesen, and each of them,
with power to each of substitution, to attend the annual meeting of the
shareholders of said corporation to be held April 23, 1998, at 2:00 P.M. in the
main office of First American Title Insurance Company, 114 East Fifth Street,
Santa Ana, California, and any adjournments thereof; and thereat to vote the
shares of the undersigned with respect to the election of directors and the
approval of the proposed amendment to The First American Financial Corporation
1996 Stock Option Plan, as indicated on the reverse side hereof, with all powers
which the undersigned would have if acting in person, including the right in
their discretion to cumulate and distribute the aggregate cumulative votes in
respect of such shares as they choose among those nominees as to whom the
undersigned has not withheld authority; and with discretionary authority to act
on such other matters as may properly come before said meeting or any
adjournments or postponements thereof.
THE SHARES REPRESENTED HEREBY SHALL BE VOTED SPECIFICALLY ON THE PROPOSALS
LISTED ON THE REVERSE SIDE HEREOF AS THERE SPECIFIED. WHERE NO SPECIFICATION IS
MADE, SAID SHARES SHALL BE VOTED FOR THE PROPOSALS.
(Continued and to be signed on other side)
[Logo of The First American Financial Corporation]
- --------------------------------------------------------------------------------
(Continued from other side)
The Board of Directors recommends a vote FOR items 1 and 2 listed below.
1. Election of Directors FOR ___ all nominees listed below (except as marked
to the contrary below) WITHHOLD AUTHORITY ___for all nominees listed below
George L. Argyros, Gary J. Beban, J. David Chatham, William G. Davis, James
L. Doti, Lewis W. Douglas, Jr., Paul B. Fay, Jr., Dale F. Frey, D. P.
Kennedy, Parker S. Kennedy, Anthony R. Moiso, R. J. Munzer, Frank O'Bryan,
Roslyn B. Payne, D. Van Skilling and Virginia Ueberroth.
(INSTRUCTION: to withhold authority to vote for any individual nominee(s),
write the name(s) of such nominee(s) on the line below.)
- --------------------------------------------------------------------------------
2. Amendment of 1996 Stock Option Plan to increase by 1,000,000 the number of
Common shares that may be issued pursuant to stock options granted
thereunder.
___ FOR ___ AGAINST ___ ABSTAIN
- ---------------------------- -------------------- Dated.............., 1998
Please sign exactly as name
appears on stock certificate
as shown hereon.
If shares are jointly held, this proxy should be signed by each such joint
owner. Executors, administrators, guardians or others signing in a fiduciary
capacity should state their full title as such. A proxy executed by a
corporation should be signed in its name by its president or any vice president
and attested to by its secretary or an assistant secretary; if otherwise
executed, please furnish proof of authority.
PLEASE SIGN AND RETURN THIS PROXY PROMPTLY IN THE ENCLOSED POSTPAID ENVELOPE.