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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 THE FIRST AMERICAN FINANCIAL CORPORATION APPEARS HERE]
(R)
THE 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 22, 1999, 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 Restated Articles of Incorporation of
the Corporation to increase the number of authorized Common shares
from 108,000,000 to 180,000,000 such shares;
(3) Approving an amendment to The First American Financial Corporation
1996 Stock Option Plan that would increase by 3,000,000 the number
of Common shares that may be issued pursuant to stock options to be
awarded under that plan in the future; and
(4) 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 4, 1999, 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.
/s/ MARK R ARNESEN
Mark R Arnesen, Secretary
Santa Ana, California
March 22, 1999
The First American Financial Corporation
Home Office: 114 East Fifth Street, Santa Ana, CA 92701-4642 (714) 558-3211
Mailing Address: P.O. Box 267, Santa Ana, CA 92702-0267
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 22, 1999, 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 of the Corporation, 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 24, 1999.
Shareholders of record at the close of business on March 4, 1999 (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 60,250,455 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 14) multiplied by the number of Common
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 Common shares represented among those nominees as to which the
shareholder has not withheld authority. 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 (the "SEC") 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 outstanding Common
shares entitled to vote is required for the adoption of the proposed amendment
of the Restated Articles of Incorporation of the Corporation. The affirmative
vote of a majority of the outstanding Common shares present in person or
represented by proxy at the meeting is required for the adoption of the
proposed amendment of The First American Financial Corporation 1996 Stock
Option Plan. The proposed amendments are set forth below in Items 2 and 3 of
this proxy statement. Abstentions and broker nonvotes with regard to these
proposals will have the same effect as votes cast against the adoption of the
proposed amendments.
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 SEC and in general means the
power to vote or dispose of securities, regardless of any economic interest
therein. Shares subject to options exercisable within 60 days are treated as
outstanding when determining the amount and percentage beneficially owned by a
person or entity.
Common Stock
Beneficially Owned
--------------------
Names and Addresses Number of
of Shareholders Shares Percent
------------------- ------------ -------
EQSF Advisers, Inc. 3,108,000(1) 5.16%
M. J. Whitman Advisers, Inc. 368,090(1) .61%
767 Third Avenue
New York, New York
Kennedy Enterprises, L.P. 3,223,155(2) 5.35%
Parker S. Kennedy 84,081(3) .14%
114 East Fifth Street
Santa Ana, California
First American Trust Company 8,068,911(4) 13.39%
Trustee of the Corporation's
Qualified Retirement Plans Trusts
421 North Main Street
Santa Ana, California
(1) As of December 31, 1998, sole voting and dispositive power with respect to
the number of shares set forth in the table, based on statements contained
in amended Schedule 13G filed jointly by EQSF Advisers, Inc. ("EQSF"),
M. J. Whitman Advisers, Inc. ("MJWA"), and Martin J. Whitman with the SEC.
The amended
2
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 3,000,000 shares, and on behalf of Third Avenue Small-Cap Value
Fund as to 108,000 shares, and (ii) by MJWA on behalf of various clients
for whom MJWA acts as investment adviser as to an aggregate of 368,090
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 7,981 of such
shares, which are allocated to his account 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. See note (4) below. Of the other shares set forth
in the table, 2,600 are owned by Mr. Kennedy directly and 73,500 are
shares he has the right to acquire within 60 days pursuant to stock
options awarded under employee incentive compensation plans.
(4) Of the shares set forth in the table, 6,027,742 are held by the Trust
Company pursuant to the Corporation's Employee Profit Sharing and Stock
Ownership Plan, and 1,634,954 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,
406,215 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 eight 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 62 Chairman and Chief Executive Officer 1988
Arnel and Affiliates
Diversified Investment Company
Gary J. Beban 52 Senior Executive Managing Director 1996
CB Richard Ellis, Inc.
Commercial Real Estate Brokerage
J. David Chatham 48 President and Chief Executive Officer 1989
Chatham Holdings Corporation
Real Estate Development and Associated
Industries
William G. Davis 69 Counsel 1992
Tory Tory DesLauriers & Binnington
Director
Canadian Imperial Bank of Commerce
Premier of Province of Ontario (Canada)
(1971- 1985)
James L. Doti 52 President and Professor of Economics 1993
Chapman University
Lewis W. Douglas, Jr. 74 Oil Exploration 1971(1)
Paul B. Fay, Jr. 80 President 1967
The Fay Improvement Company
Financial Consulting and Business
Ventures
D. P. Kennedy 80 Chairman of the Board 1956
The First American Financial Corporation
Parker S. Kennedy 51 President 1987(2)
The First American Financial Corporation
Chairman of the Board
First American Title Insurance Company,
a subsidiary of the Corporation
Anthony R. Moiso 59 President and Chief Executive Officer 1990
Rancho Mission Viejo, LLC
Ranching and Real Estate Development
Frank O'Bryan 65 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)
4
Director
Name Age Principal Occupation Since
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Roslyn B. Payne 52 President 1988
Jackson Street Partners, Ltd.
Real Estate Venture Capital and Investments
D. Van Skilling 65 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 59 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, DST Systems, Inc.,
and Rockwell International Corporation; Mr. Beban--CB Richard Ellis Services,
Inc.; 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.; and Mr. Skilling--Lamson and Sessions Inc.
The Board of Directors held seven meetings during 1998. Directors who
attended less than 75% of the aggregate of such meetings and meetings of
committees of which they are members are Messrs. Argyros and Moiso.
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 Audit 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, overseeing the Corporation's "Year 2000" readiness program, and
determining the nature of other services to be performed by, and fees to be
paid to, the independent auditor. During 1998, the Audit Committee met seven
times.
The Board of Directors also has a Compensation Committee, the members of
which are Messrs. Beban, Chatham, Davis, Doti, Douglas and Fay. The
Compensation Committee establishes compensation rates and procedures with
respect to senior management of the Corporation and its subsidiaries,
including bonus awards. During 1998, the Compensation Committee met three
times.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Prior to May 27, 1998, the Corporation indirectly owned 17,053 common shares
of its second-tier subsidiary, First American Title Guaranty Holding Company
("Title Guaranty"). These shares represented 80% of the issued and outstanding
common shares of Title Guaranty. Prior to that date, Director Roslyn B. Payne
5
owned 475 common shares of Title Guaranty. These shares represented 2.2% of
the issued and outstanding common shares of Title Guaranty. On May 27, 1998,
the Corporation acquired all the issued and outstanding Title Guaranty common
shares that it did not own prior to such date, at an agreed price of $2,231.10
per share, in exchange for Common shares of the Corporation valued at their
closing price of $63.875 on April 8, 1998. Mrs. Payne did not participate in
negotiating the price for the Title Guaranty shares or in setting the value of
the Corporation's shares. Such price and value were established by arm's
length negotiations between the managements of the Corporation and Title
Guaranty. Mrs. Payne tendered all of her Title Guaranty common shares in this
exchange and received 16,591 Common shares of the Corporation. (Such closing
price would be the equivalent of $21.292 per share and the number of Common
shares of the Corporation received by Mrs. Payne in this exchange would be
49,773 as adjusted for the "three-for-one" stock split that occurred during
July 1998.)
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%
- ------------------------------------------------------------------------------
DIRECTORS
George L. Argyros 167,425(2) --
Gary J. Beban 14,196 --
J. David Chatham 19,024 --
William G. Davis 13,950 --
James L. Doti 18,450 --
Lewis W. Douglas, Jr. 27,021 --
Paul B. Fay, Jr. 82,467 --
D. P. Kennedy 53,965(3) --
Parker S. Kennedy 3,307,236(3)(4) 5.5%
Anthony R. Moiso 24,483 --
Frank O'Bryan 20,055 --
Roslyn B. Payne 63,957 --
D. Van Skilling 8,007 --
Virginia Ueberroth 73,500(5) --
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Mark R Arnesen 36,597(4) --
Craig I. DeRoy 51,146 --
Thomas A. Klemens 115,620(4) --
All Directors and Executive Officers as a
Group (17 persons) 4,097,099 6.8%
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 Trust Company, as trustee of, the
Corporation's Employee Profit Sharing and Stock Ownership Plan: 7,846
shares for D. P. Kennedy; 7,981 shares for Parker S. Kennedy; 5,333 shares
for Mark R Arnesen; 129 shares for Craig I. DeRoy and 2,411 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, J. David Chatham and D. Van Skilling, 13,500 shares; and for
D. P. Kennedy 42,000 shares; for Parker S. Kennedy 73,500 shares; for J.
David Chatham and D. Van Skilling 6,750 shares; for Thomas A. Klemens
60,000 shares; for Craig I. DeRoy 35,000 shares; and for Mark R Arnesen
16,500 shares, which those persons have rights to 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, 735,291 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, 2,600 are owned by Parker S.
Kennedy directly and 3,223,155 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, 406,215 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
eight 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.
(5) In addition to the shares set forth in the table, 3,000 shares are held by
a nonprofit corporation whose six-member board of directors is composed of
Virginia Ueberroth and her husband and children. In her capacity as an
officer of that corporation, Mrs. Ueberroth 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
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 the Corporation's last completed fiscal year, which ended
December 31, 1998 (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
Other Annual Underlying All Other
Salary(1) Bonus(2) Compensation(3) Options (4) Compensation(5)
Name and Principal Position Year ($) ($) ($) (# of shares) ($)
- --------------------------- ---- --------- -------- --------------- ------------- ---------------
D. P. Kennedy 1998 317,300(6) 155,000 -- 30,000 175,794(7)
Chairman 1997 301,850(6) 148,184 -- -- 147,853(7)
1996 301,300(6) 118,250 -- 90,000 128,659(7)
Parker S. Kennedy 1998 401,120(8) 457,200 -- 30,000 5,626
President 1997 401,120(8) 253,966 -- -- 2,998
1996 376,100(8) 192,075 -- 112,500 598
Thomas A. Klemens 1998 262,700(9) 411,326 -- 30,000 5,398
Executive Vice President, 1997 227,696(9) 226,256 -- -- 2,998
Chief Financial Officer 1996 196,120(9) 188,250 -- 90,000 598
Craig I. DeRoy 1998 255,900 411,326 -- 30,000 5,398
Executive Vice President, 1997 220,896 226,256 -- -- 2,998
General Counsel 1996 190,920 180,600 -- 90,000 454
Mark R Arnesen 1998 142,920 112,000 -- 15,000 5,398
Vice President, Secretary, 1997 130,920 62,346 -- -- 2,923
Corporate Counsel 1996 118,920 38,388 -- 22,500 454
(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 performance of the individual and the
Corporation during the preceding fiscal year. For services rendered during
1998, 1997 and 1996, respectively, 498, 364 and 288 individuals were
awarded cash and/or stock bonuses. During the three years covered in the
table, an average of 194,250 Common shares has been awarded annually to
all participants in the Corporation's Stock Bonus Plan. With respect to
services rendered during 1998, Parker S. Kennedy received an award of
2,600 Common shares having a fair market value of $57,200, D. P. Kennedy
received an award of 2,500 such shares having a fair market value of
$55,000, Thomas A. Klemens and Craig I. DeRoy each received an award of
2,333 such shares having a fair market value of $51,326, and Mark R
Arnesen received an award of 1,000 such shares having a fair market value
of $22,000. With respect to services rendered during 1997, Parker S.
Kennedy received an award of 3,780 Common shares having a fair market
value of $53,966, D. P. Kennedy received an award of
8
3,375 such shares having a fair market value of $48,184, Thomas A. Klemens
and Craig I. DeRoy each received an award of 3,240 such shares having a
fair market value of $46,256, and Mark R Arnesen received an award of 1,215
such shares having a fair market value of $17,346. With respect to services
rendered during 1996, Parker S. Kennedy received an award of 4,950 Common
shares having a fair market value of $42,075, D. P. Kennedy and Thomas A.
Klemens each received awards of 4,500 such shares having a fair market
value of $38,250, Craig I. DeRoy received 3,600 such shares having a fair
market value of $30,600, and Mark R Arnesen received 1,575 such shares
having a fair market value of $13,388. All share amounts have been adjusted
to reflect the "three-for-two" and "three-for-one" stock splits that
occurred during January and July 1998, respectively.
(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 for each of the named executive
officers did not exceed the lesser of $50,000 or 10% of each officer's
annual salary and bonus reported for each year. In accordance with the
rules of the SEC 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" and "three-for-one"
stock splits that occurred during January and July 1998, respectively.
(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 $1,400, $950 and $400, which were earned by D. P. Kennedy for
services he rendered as a director of subsidiaries of the Corporation
during 1998, 1997 and 1996, 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 $64,561, $43,164 and $28,031, distributed
to D. P. Kennedy during 1998, 1997 and 1996, 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 1998, 1997 and 1996, which were earned
by Parker S. Kennedy for services he rendered as a director of
subsidiaries of the Corporation.
(9) The compensation shown in the "Salary" column of the table includes fees
totaling $6,800 in each of the years 1998 and 1997, and $5,200 in the year
1996, which were earned by Mr. Klemens for services he rendered as a
director of subsidiaries of the Corporation during those years.
9
Option Grants Table
Individual Grants(1)
------------------------------------------------- Potential Realizable Value
Number of % of Total at Assumed Annual Rates
Securities Options Exercise of Stock Price Appreciation
Underlying Granted to or Base for Option Term
Options Granted Employees in Price Expiration ---------------------------
Name (# of Shares) Fiscal Year ($/Sh)(2) Date 5% ($) 10% ($)
- ---- --------------- ------------ --------- ---------- ------------ --------------
D. P. Kennedy 30,000 .745% 23.583 4/23/08 444,937 1,127,557
Parker S. Kennedy 30,000 .745% 23.583 4/23/08 444,937 1,127,557
Thomas A. Klemens 30,000 .745% 23.583 4/23/08 444,937 1,127,557
Craig I. DeRoy 30,000 .745% 23.583 4/23/08 444,937 1,127,557
Mark R Arnesen 15,000 .373% 23.583 4/23/08 222,468 563,778
(1) Each of the options disclosed in the table is exercisable in 20% annual
increments commencing April 23, 1999, the first anniversary date of the
grant. All prices and share amounts have been adjusted to reflect the
"three-for-one" stock split that occurred during July 1998.
(2) Section 4.2 of the plan pursuant to which the options disclosed in the table
were awarded allows the Compensation Committee discretion to exchange
outstanding options for new, lower-priced options, provided that the lower
exercise price is not less than the "fair market value," as defined in the
plan, of the shares at the time such new options are granted.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values(1)
Number of Securities Value of Unexercised In-The-
Underlying Unexercised Money Options at Fiscal
Number of Shares Value Options at Fiscal Year-End Year-End ($)(3)
Acquired on Realized -------------------------- ----------------------------
Name Exercise (2) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ---------------- -------- ----------- ------------- ----------- -------------
D. P. Kennedy 18,000 -0- 18,000 84,000 475,758 1,683,534
Parker S. Kennedy -- -- 45,000 97,500 1,189,395 2,040,353
Thomas A. Klemens -- -- 36,000 84,000 951,516 1,683,534
Craig I. DeRoy 25,000 506,645 11,000 84,000 290,741 1,683,534
Mark R Arnesen -- -- 9,000 28,500 237,879 484,949
(1) All prices and share amounts have been adjusted to reflect the "three-for-
two" and "three-for-one" stock splits that occurred during January and
July 1998, respectively.
(2) Each of the options disclosed in the table is exercisable in 20% annual
increments commencing on the first anniversary date of the grant.
(3) The value of each unexercised option is based on the difference between
the closing price of the Corporation's Common shares on the New York Stock
Exchange on December 31, 1998, which was $32.125, and the adjusted
exercise price of such option.
10
Pension Plan
Annual Pension Benefits
Remuneration
(Final Average Pay*) Years of Benefit Service
-------------------- -------------------------------------------------
5 10 20 30 40 50
$100,000 $ 5,100 $11,200 $23,400 $35,600 $ 47,800 $ 60,000
125,000 6,413 14,075 29,400 44,725 60,050 75,375
150,000 7,725 16,950 35,400 53,850 72,300 90,750
175,000 9,038 19,825 41,400 62,975 84,550 106,125
200,000 10,350 22,700 47,400 72,100 96,800 121,500
225,000 11,663 25,575 53,400 81,225 109,050 136,875
250,000 12,975 28,450 59,400 90,350 121,300 152,250
275,000 or more 14,288 31,325 65,400 99,475 133,550 167,625
--------
* Final Average Pay is defined in the plan 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 Pension 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 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 with at
least three years of participation in the plan may elect to retire after
attaining age 55, but prior to age 65, and receive reduced benefits. 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 50, 22, 13, 5 and 13 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 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
11
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 was $219,224 and the highest final
average pay that can currently be considered in determining benefits accruing
after 1993 is $156,000.
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 1998, 1997 and 1996,
respectively, mandatory distributions totaling $105,371, $101,227 and $98,348
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 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 the 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 ten years and, unless waived by the Board of Directors, covered
by the Executive Plan for at least five years. A preretirement 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 Executive
Plan) of the Corporation.
12
Currently 49 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 $374,457, $295,453, $320,746 and $152,347, respectively.
The Executive Plan is unfunded. The Corporation purchases insurance, of
which it is the owner and beneficiary, on the lives of the Executive Plan
participants. This insurance is designed to recover, over the life of the
Executive 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 an employee of the Corporation 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 1998, each nonemployee director was awarded an option to
purchase 6,750 Common shares of the Corporation at an exercise price of
$23.583 per share. These options become exercisable on April 23, 1999.
Pursuant to Item 402(a)(9) of Regulation S-K of the SEC 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.
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.
13
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 Compensation Committee
reviews and approves the base salaries of the executive officers of the
Corporation, as well as the annual bonus programs, incentive plans and
executive benefit plans. The Compensation Committee as needed engages
compensation and benefits-consulting firms to assist the Compensation
Committee in the performance of its duties. For the year 1998, the
Compensation Committee analyzed the reasonableness of the compensation paid to
executive officers and analyzed the Corporation's compensation and benefit
programs. In addition, the Compensation Committee reviewed information on
general compensation trends of related companies. For the purpose of this
analysis, the Compensation Committee used the group of companies whose returns
to shareholders compose the peer group index shown in the performance graph
below. The Compensation Committee also reviewed published compensation surveys
for comparative results against the Corporation's compensation level. The
Compensation Committee has reviewed the compensation of the Corporation's
executive officers for 1998, 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
The Compensation Committee maintained Parker S. Kennedy's base salary for
the year 1998 at $400,020, which also was the level established for the year
1997. Mr. Kennedy's salary for the year 1998 was, in the opinion of the
Compensation Committee, within the median salary range for chief executive
officers in the group of comparable companies. When determining the
appropriate salary level, the Compensation Committee considered the
Corporation's steadily improving performance during the year 1997, as compared
with the prior year, but decided to maintain a conservative approach to base
salary adjustments while maintaining flexibility, through the bonus and stock
option programs, to establish appropriate rewards and incentives in light of
individual and corporate performance.
Reflecting the Compensation Committee's commitment to relating a portion of
each executive officer's compensation to the annual results of the
Corporation, Parker S. Kennedy received a cash bonus of $400,000, representing
100% of his 1998 base salary. This bonus was intended to reward Mr. Kennedy
for his leadership for the year 1998, which resulted in the highest revenues
and net income in the Corporation's history. Mr. Kennedy also was awarded
2,600 Common shares for his performance during 1998 and options to acquire
30,000 Common shares.
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: Chicago Title Corp., Fidelity
National Financial, Inc., LandAmerica Financial Group, Inc., 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 Eight 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
Financial Peer Financial Composite
Corporation Group Index Index
12/31/90 $ 100 $100 $100 $100
12/31/91 $ 176 $144 $146 $130
12/31/92 $ 401 $199 $175 $140
12/31/93 $ 543 $230 $189 $155
12/30/94 $ 275 $197 $182 $157
12/29/95 $ 438 $312 $280 $215
12/31/96 $ 687 $342 $379 $265
12/31/97 $1,253 $508 $562 $353
12/31/98 $2,471 $661 $626 $454
* Adjusted for reinvestment of dividends. Stock price performance
shown is not indicative of future price performance.
** As calculated by Bloomberg Financial Services, to include the
reinvestment of dividends.
15
EXECUTIVE OFFICERS
Name Position Held Age
---- ------------- ---
D. P. Kennedy Chairman 80
Parker S. Kennedy President 51
Thomas A. Klemens Executive Vice President, 48
Chief Financial Officer
Craig I. DeRoy Executive Vice President, 46
General Counsel
Mark R Arnesen Vice President, Secretary, 46
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, in 1989 was
appointed its President, and in 1999 was appointed its Chairman. 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 since 1993 and served as its General
Counsel from 1993 to 1998. 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 SEC under Section 16(a) of the Exchange Act 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, 1998, its officers, directors and greater-than-ten-percent
beneficial owners complied with all filing requirements under Section
16
16(a), except that Director Roslyn B. Payne was late in filing a report on
Form 4 covering her acquisition of Common shares during May 1998 in the
transaction described above in the section entitled "Transactions with
Management and Others."
ITEM 2. PROPOSAL TO AMEND THE CORPORATION'S RESTATED ARTICLES OF INCORPORATION
TO INCREASE ITS AUTHORIZED COMMON STOCK
The shareholders will be asked to approve a proposal to amend article SIXTH
of the Corporation's Restated Articles of Incorporation to increase the total
number of authorized Common shares by 72,000,000 shares (the "Proposed
Amendment to Articles").
General
The Board of Directors has approved the Proposed Amendment to Articles.
However, in order to implement the Proposed Amendment to Articles, the
Proposed Amendment to Articles must be approved by the affirmative vote of a
majority of the outstanding Common shares that are entitled to vote. This
means that at least 30,125,228 Common shares must be voted "for" this proposal
in order to approve it.
As of March 4, 1999, of the 108,000,000 Common shares currently authorized,
60,656,670 shares were issued and outstanding. Of the 47,343,330 unissued,
authorized Common shares, 14,534,813 shares have been reserved for issuance
upon the exercise of outstanding options and issuance to the Corporation's
employees participating in The First American Financial Corporation 401(k)
Savings Plan, and 7,200,000 for pending acquisitions. Accordingly, on March 4,
1999, there were only 25,608,517 unreserved Common shares available for
issuance. If this proposal is approved by the shareholders, the Corporation
will have authorized and available for issuance 97,608,517 Common shares
(excluding shares reserved for issuance upon the exercise of options, issuance
to participants in the Corporation's 401(k) Savings Plan and for pending
acquisitions).
The Proposed Amendment to Articles
If the Proposed Amendment to Articles is approved, the first paragraph of
article SIXTH of the Corporation's Restated Articles of Incorporation will be
amended to read as follows:
"SIXTH: This Corporation is authorized to issue two classes of shares, to
be designated Common and Preferred respectively. The number of Common
shares authorized to be issued is 180,000,000. The aggregate par value of
such Common shares is $180,000,000 and the par value of each such share is
$1.00. Each Common share shall have one vote per share. The number of
Preferred shares authorized to be issued is 500,000. The aggregate par
value of such Preferred shares is $500,000 and the par value of each such
share is $1.00. The Board of Directors may fix by resolution the rights,
preferences, privileges and restrictions of any wholly unissued class or
series of shares other than the Common shares, and the series designation
and number of shares to constitute any series (which number may thereafter
in the same manner be increased or decreased), and a certificate of
determination shall then be filed with the California Secretary of State."
If approved by the shareholders, the Proposed Amendment to Articles would
take effect on the date the Proposed Amendment to Articles is accepted for
filing by the California Secretary of State. If approved by the shareholders,
the Proposed Amendment to Articles will be filed immediately following the
Annual Meeting of Shareholders, unless the Board of Directors subsequently
determines that the Proposed Amendment to Articles is not in the best
interests of the Corporation and its shareholders.
17
Reason for the Amendment
The Board of Directors believes that it is in the best interests of the
Corporation and its shareholders to increase the authorized number of Common
shares that may be issued for general corporate purposes. The proposed
increase would provide the Corporation with additional flexibility to raise
capital, to acquire businesses and properties using its Common shares and to
provide appropriate incentives to its officers, directors and employees.
Effect of the Amendment
The authorization of additional Common shares will not affect the terms of
the Common shares, the rights of the holders of outstanding Common shares or
the Corporation's Preferred shares. Unless otherwise required by applicable
law or regulation, all authorized but unissued Common shares (the "Remaining
Authorized Shares") will be issuable, without further approval of the
Corporation's shareholders, on such terms, and for such consideration, as may
be determined by the Board of Directors. As the holders of outstanding Common
shares do not possess preemptive rights, the issuance of any Remaining
Authorized Shares may have the effect of diluting the earnings per share and
book value per share of the Common shares outstanding immediately prior to
such issuance. In addition, upon the issuance of Remaining Authorized Shares
to persons other than existing shareholders, the percentage ownership of a
holder of Common shares in the Corporation will be reduced.
Although the purpose of seeking an increase in the number of authorized
Common shares is not intended for anti-takeover purposes, the Board of
Directors could issue and sell Remaining Authorized Shares and Preferred
shares so as to dilute the stock ownership of a person that is seeking to
obtain control of the Corporation. This power may have the effect of
discouraging unsolicited attempts to obtain control of the Corporation.
Anti-takeover Measures
The Corporation is required by SEC rules to disclose to the shareholders
those provisions of its Restated Articles of Incorporation and Bylaws that
would have an effect of delaying, deferring or preventing a change in control
of the Corporation and that would operate only with respect to an
extraordinary corporate transaction. The Corporation has adopted a "rights
plan" and, in connection therewith, has established the rights, preferences
and privileges of a series of Preferred shares.
On October 23, 1997, the Board of Directors authorized the creation of 1,000
Series A Junior Participating Preferred Shares, $1.00 par value (the "Series A
Preferred Shares"). No Series A Preferred Shares are presently outstanding.
However, by a dividend distribution made to shareholders of record at the
close of business on November 15, 1997, the Corporation distributed a right to
acquire one one-hundred thousandth (the "Preferred Share Fraction") of a
Series A Preferred Share (a "Right") at a price of $265 in respect of each
Common share outstanding on the record date. The purchase price is subject to
adjustment under certain circumstances. Each Preferred Share Fraction carries
voting and dividend rights that are intended to produce the equivalent of one
Common share. The voting and dividend rights of the Series A Preferred Shares
are subject to adjustment in the event of dividends, subdivisions and
combinations with respect to the Common shares of the Corporation.
The Rights were issued pursuant to the Rights Agreement, dated as of October
23, 1997 (as it may be amended, modified or supplemented from time to time,
the "Rights Agreement"), between the Corporation and
18
Wilmington Trust Company, as Rights Agent, a copy of which will be furnished
to shareholders without charge upon request in writing to the Secretary of the
Corporation at the address indicated on the first page of this proxy
statement.
The Rights are not exercisable until certain "change in control" events that
are described in the Rights Agreement occur. The Rights will expire at the
close of business on October 23, 2007, unless the Corporation redeems the
Rights before that date.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the
Corporation without conditioning the offer on the Rights being redeemed or a
substantial number of Rights being acquired. However, the Rights should not
interfere with any merger or other business combination approved by the Board
of Directors of the Corporation.
FOR THE REASONS SET FORTH IN ITEM 2 ABOVE, THE BOARD OF DIRECTORS
RECOMMENDS A VOTE "FOR" THE PROPOSED AMENDMENT.
ITEM 3. 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 3,000,000 the
number of Common shares available for grant thereunder (the "Proposed Plan
Increase").
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 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 of the Corporation at the address
indicated on the first page of this proxy statement.
Under the Plan, the Compensation Committee may grant stock options to
Employees. There are currently approximately 1,000 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 Compensation
Committee has previously granted options to purchase Stock to Employees under
the Plan, the Compensation 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 Compensation Committee to
1,875,000, to account for the "three-for-two" stock split that occurred in
January 1998. On April 23, 1998, the shareholders of the Corporation approved
an increase of 1,000,000 shares which had been recommended by the Board of
Directors, bringing the total number of shares that could be subject to
options
19
under the Plan to 2,875,000. That number was later adjusted by the
Compensation Committee to 8,625,000, to account for the "three-for-one" stock
split that occurred in July 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
Compensation 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% of the Common shares authorized under the Plan may be issued
to an individual Employee.
The Proposed Amendment
If the Proposed Plan Increase 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 11,625,000 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."
Reason for the Amendment
As discussed above, the aggregate number of Common shares that may presently
be issued under the Plan is 8,625,000. Of that aggregate number, 6,893,200
shares have been issued pursuant to exercise of, or remain subject to, options
previously awarded under the Plan. The Proposed Plan Increase 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
Compensation Committee, is insufficient to continue to meet the goals of the
Plan outlined above.
Grants Under the Plan
The Compensation Committee may grant to Employees nonqualified stock options
and stock options qualifying as incentive stock options under 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 18, 1999, was $21.625 per share. To exercise an option, an Employee may
pay the exercise price in cash or, if permitted by the Compensation 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 Compensation Committee but may
not exceed ten years from the date of grant. The Compensation 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 Compensation 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,
20
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 SEC under the Exchange Act, or the federal tax laws
applicable to incentive stock options. The Compensation 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.
Certain Federal Income Tax Consequences
The following is a brief summary of the principal federal income tax
consequences to the Corporation and 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
stock option. The individual will generally recognize ordinary income upon the
exercise of a nonqualified stock 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.
21
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 3 ABOVE, THE BOARD OF DIRECTORS
RECOMMENDS A VOTE "FOR" THE PROPOSED AMENDMENT.
APPRAISAL RIGHTS
Under the Corporation's Restated Articles of Incorporation and relevant
sections of the California Corporations Code, holders of the Corporation's
Common shares are not entitled to appraisal rights in connection with the
proposals to be voted upon at the meeting.
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
The firm of PricewaterhouseCoopers 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, 1999. This firm has served as independent accountants for the
Corporation since 1954.
A representative of PricewaterhouseCoopers LLP 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 25, 1999, 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.
Pursuant to rules promulgated by the SEC, any shareholder who intends to
present a proposal at the next Annual Meeting of Shareholders of the
Corporation without requesting the Corporation to include such proposal in the
Corporation's proxy statement should be aware that he must notify the
Corporation not later than February 8, 2000, of his intention to present the
proposal. Otherwise, the Corporation may exercise discretionary voting with
respect to such shareholder proposal pursuant to authority conferred on the
Corporation by proxies to be solicited by the Board of Directors of the
Corporation and delivered to the Corporation in connection with the meeting.
22
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 SEC on Form
10-K for the year 1998 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 of the Corporation at the 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., 445 Park 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 22, 1999
23
[LOGO OF THE FIRST AMERICAN FINANCIAL CORPORATION]
(R)
THE FIRST AMERICAN FINANCIAL CORPORATION
FIRST AMERICAN SQUARE . 114 EAST FIFTH STREET, SANTA ANA, CA 92701-4642
[Logo]
(R)
The First American Financial Corporation
Annual Meeting of Shareholders of
The First American Financial Corporation
Thursday, April 22, 1999
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.
- FOLD AND DETACH HERE -
- --------------------------------------------------------------------------------
The First American Financial Corporation
FIRST AMERICAN SQUARE 114 EAST FIFTH STREET, SANTA ANA, CALIFORNIA 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 22, 1999, 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 (1) the election of
directors, (2) the approval of the proposed amendment to the Restated Articles
of Incorporation of The First American Financial Corporation increasing the
number of authorized Common shares and (3) 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]
(R)
The First American Financial Corporation
- --------------------------------------------------------------------------------
(Continued from other side)
The Board of Directors recommends a vote FOR items 1, 2 and 3 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., D. P. Kennedy, Parker S.
Kennedy, Anthony R. Moiso, 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 Restated Articles of Incorporation to increase to 180,000,000
the number of Common shares authorized to be issued.
___ FOR ___ AGAINST ___ ABSTAIN
3. Amendment of 1996 Stock Option Plan to increase by 3,000,000 the number of
Common shares that may be issued pursuant to stock options granted
thereunder.
___ FOR ___ AGAINST ___ ABSTAIN
_______________________ _______________________ Dated..................., 1999
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.