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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-3658
THE FIRST AMERICAN FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INCORPORATED IN CALIFORNIA 95-1068610
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
114 EAST FIFTH STREET, SANTA ANA, 92701-4699
CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (714) 558-3211
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON NEW YORK STOCK EXCHANGE
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(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH
REGISTERED)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (17 C.F.R. (S) 229.405) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [_]
On MARCH 20, 1996, the aggregate market value of voting stock held by non-
affiliates was $312,697,923.
On MARCH 20, 1996, there were 11,658,501 shares of Common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement are incorporated by
reference in Part III of this report. The definitive proxy statement will be
filed no later than 120 days after the close of Registrant's fiscal year.
This report includes 58 pages.
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PART I
ITEM 1. BUSINESS.
THE COMPANY
The First American Financial Corporation was organized in 1894 as Orange
County Title Company, succeeding to the business of two title abstract
companies founded in 1889 and operating in Orange County, California. In 1924,
the Company commenced issuing title insurance policies. In 1986, the Company
began a diversification program by acquiring and developing financial service
businesses closely related to the real estate transfer and closing process.
The Company is a California corporation and has its executive offices at 114
East Fifth Street, Santa Ana, California 92701-4699. The Company's telephone
number is (714) 558-3211. Unless the context otherwise indicates, the
"Company," as used herein, refers to The First American Financial Corporation
and its subsidiaries.
GENERAL
The Company, through its subsidiaries, is engaged in the business of
providing real estate related financial and information services, including
title insurance, real estate tax monitoring, mortgage credit reporting, flood
zone determination, property information and home warranty services, to real
property buyers and mortgage lenders. The Company also provides trust and
limited banking services. Financial information regarding each of the
Company's primary business segments is included in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Item 8. Financial Statements and Supplementary Data" of Part II of this
report. Although industry-wide data for 1995 are not currently available, the
Company believes that its wholly owned subsidiary, First American Title
Insurance Company ("First American"), was the second largest title insurer in
the United States, based on gross title fees, and its wholly owned subsidiary,
First American Real Estate Information Services, Inc., was the nation's
largest provider of flood determinations, based on the number of flood
determination reports issued, and the nation's second largest provider of tax
monitoring services, based on the number of loans under service. The Company
also believes that its majority owned subsidiary, First American Home Buyers
Protection Corporation, was the third largest provider of home warranties in
the United States, based on the number of home protection contracts under
service. Substantially all of the Company's title insurance, tax monitoring,
credit reporting, flood zone determination and property information business
results from resales and refinancings of real estate, including residential
and commercial properties, and from the construction and sale of new
properties. The Company's home warranty business results from residential
resales and does not benefit from refinancings or commercial transactions.
Resales and refinancings of residential properties constitute the major
sources of the Company's revenues. Real estate activity is cyclical in nature
and is affected greatly by the cost and availability of long term mortgage
funds. Real estate activity and, in turn, the Company's revenue base, can be
adversely affected during periods of high interest rates and/or limited money
supply. However, this adverse effect is mitigated in part by the continuing
diversification of the Company's operations into areas outside of its
traditional title insurance business.
OVERVIEW OF TITLE INSURANCE INDUSTRY
Title insurance has become increasingly accepted as the most efficient means
of determining title to, and the priority of interests in, real estate in
nearly all parts of the United States. Today, virtually all real property
mortgage lenders require their borrowers to obtain a title insurance policy at
the time a mortgage loan is made.
Title Policies. Title insurance policies are insured statements of the
condition of title to real property, showing priority of ownership as
indicated by public records, as well as outstanding liens, encumbrances and
other matters of record, and certain other matters not of public record. Title
insurance policies are issued on the basis of a title report, which is
prepared after a search of the public records, maps, documents and prior title
policies to ascertain the existence of easements, restrictions, rights of way,
conditions, encumbrances or other matters affecting the title to, or use of,
real property. In certain instances, a visual inspection of the property is
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also made. To facilitate the preparation of title reports, copies of public
records, maps, documents and prior title policies may be compiled and indexed
to specific properties in an area. This compilation is known as a "title
plant."
The beneficiaries of title insurance policies are generally real estate
buyers and mortgage lenders. A title insurance policy indemnifies the named
insured and certain successors in interest against title defects, liens and
encumbrances existing as of the date of the policy and not specifically
excepted from its provisions. The policy typically provides coverage for the
real property mortgage lender in the amount of its outstanding mortgage loan
balance and for the buyer in the amount of the purchase price. Coverage under
a title insurance policy issued to a real property mortgage lender generally
terminates when the mortgage loan is repaid. Coverage under a title insurance
policy issued to an owner generally terminates upon the sale of the insured
property unless the owner carries back a mortgage or makes certain warranties
as to the title.
Unlike other types of insurance policies, title insurance policies do not
insure against future risk. Before issuing title policies, title insurers seek
to limit their risk of loss by accurately performing title searches and
examinations. The major expenses of a title company relate to such searches
and examinations, the preparation of preliminary reports or commitments and
the maintenance of title plants, and not from claim losses as in the case of
property and casualty insurers.
The Closing Process. Title insurance is essential to the real estate closing
process in most transactions involving real property mortgage lenders. In a
typical residential real estate sale transaction, title insurance is generally
ordered on behalf of an insured by a real estate broker, lawyer, developer,
lender or closer involved in the transaction. Once the order has been placed,
a title insurance company or an agent conducts a title search to determine the
current status of the title to the property. When the search is complete, the
title company or agent prepares, issues and circulates a commitment or
preliminary title report ("commitment") to the parties to the transaction. The
commitment summarizes the current status of the title to the property,
identifies the conditions, exceptions and/or limitations that the title
insurer intends to attach to the policy and identifies items appearing on the
title that must be eliminated prior to closing.
The closing function, sometimes called an escrow in western states, is often
performed by a lawyer, an escrow company or by a title insurance company or
agent (such person or entity, the "closer"). Once documentation has been
prepared and signed, and mortgage lender payoff demands are in hand, the
transaction is "closed." The closer records the appropriate title documents
and arranges the transfer of funds to pay off prior loans and extinguish the
liens securing such loans. Title policies are then issued insuring the
priority of the mortgage of the real property mortgage lender in the amount of
its mortgage loan and the buyer in the amount of the purchase price. The time
lag between the opening of the title order and the issuance of the title
policy is usually between 30 and 90 days.
Issuing the Policy: Direct vs. Agency. A title policy can be issued directly
by a title insurer or indirectly on behalf of a title insurer through agents
which are not themselves licensed as insurers. Where the policy is issued by a
title insurer, the search is performed by or at the direction of the title
insurer, and the premium is collected and retained by the title insurer. Where
the policy is issued by an agent, the agent performs the search, examines the
title, collects the premium and retains a portion of the premium. The
remainder of the premium is remitted to the title insurer as compensation for
bearing the risk of loss in the event a claim is made under the policy. The
percentage of the premium retained by an agent varies from region to region. A
title insurer is obligated to pay title claims in accordance with the terms of
its policies, regardless of whether it issues its policy directly or
indirectly through an agent.
Premiums. The premium for title insurance is due and earned in full when the
real estate transaction is closed. Premiums are generally calculated with
reference to the policy amount. The premium charged by a title insurer or an
agent is subject to regulation in most areas. Such regulations vary from state
to state.
Because the policy insures against matters that have occurred prior to its
issuance (rather than future occurrences, as with most other types of
insurance), the major portion of the premium is related to the service
performed in ascertaining the current status of title to the property.
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THE COMPANY'S TITLE INSURANCE OPERATIONS
Overview. The Company, through First American and its subsidiaries,
transacts the business of title insurance through a network of more than 300
branch offices and over 4,000 independent agents. Through its branch office
and agent network, the Company issues policies in all states (except Iowa),
the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, the
Bahama Islands, Canada, Mexico, Bermuda and the United Kingdom. In Iowa, the
Company provides abstracts of title only, because title insurance is not
permitted. Through acquisitions and start-ups during the mid-1980s, the
Company has grown from a large regional company to a nationwide company,
becoming less dependent on operating revenues from any one state or region.
The following table illustrates the Company's and the industry's growth
based on gross title fees in the ten largest title insurance markets (and all
states combined) during the ten year period from 1985 to 1994, and the
increase in the Company's share of the national title insurance market from
12.2% to 19.5% over the same period.
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GROSS TITLE FEES AND MARKET SHARE(1)
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INDUSTRY ($000) FIRST AMERICAN ($000)
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COMPOUND COMPOUND MARKET
ANNUAL ANNUAL SHARE
GROWTH GROWTH -----------
STATE 1985(2) 1994(2) RATE 1985(2) 1994(2) RATE 1985 1994
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California.............. $ 496,259 $1,100,140 9.3% $ 77,744 $ 267,027 14.7% 15.7% 24.3%
Texas................... 485,216 669,550 3.6% 29,598 68,990 9.9% 6.1% 10.3%
Florida................. 176,042 605,504 14.7% 13,169 73,048 21.0% 7.5% 12.1%
New York................ 236,328 368,462 5.1% 36,467 69,959 7.5% 15.4% 19.0%
Pennsylvania............ 99,615 247,623 10.7% 6,528 30,892 18.9% 6.6% 12.5%
Illinois................ 88,015 216,592 10.5% 5,655 25,398 18.2% 6.4% 11.7%
Michigan................ 52,724 196,980 15.8% 12,691 40,747 13.8% 24.1% 20.7%
Arizona................. 85,775 186,150 9.0% 22,610 62,290 11.9% 26.4% 33.5%
Ohio.................... 61,385 184,738 13.0% 4,635 52,793 31.0% 7.6% 28.6%
Washington.............. 70,067 176,964 10.8% 7,167 33,015 18.5% 10.2% 18.7%
Total, all States(3).... 2,588,799 5,951,203 9.7% 316,905 1,157,685 15.5% 12.2% 19.5%
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(1)Source: American Land Title Association
(2)Based on gross title fees as statutorily defined.
(3)Includes all 50 states (except Iowa) and the District of Columbia.
Based on industry statistics showing gross title fees in the major areas in
which the Company operates, in 1994 the Company had the largest or second
largest share of the title insurance market in 33 states, including
California, New York and Pennsylvania, which are three of the five largest
markets in the United States, and in the District of Columbia. Industry
statistics for 1995 are not currently available.
The Company plans to continue increasing its share of the title insurance
market through strategic acquisitions and further development of its existing
branch office and agency operations. The Company also will continue to focus
on expanding its share of the higher margin title insurance business conducted
on behalf of commercial clients. While commercial title business has been slow
for several years, the Company believes its national commercial market share
has grown through programs directed at major developers, lenders and law
firms.
Sales and Marketing. The Company markets its title insurance services to a
broad range of customers. The Company believes that its primary source of
business is from referrals from persons in the real estate community, such as
independent escrow companies, real estate brokers, developers, mortgage
brokers, mortgage bankers, financial institutions and attorneys. In addition
to the referral market, the Company markets its title insurance services
directly to large corporate customers and certain mortgage lenders. As title
agents contribute a large portion of the Company's revenues, the Company also
markets its title insurance services to independent agents. The Company's
marketing efforts emphasize the quality and timeliness of its services and its
national presence.
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While virtually all personnel in the Company's title insurance business
assist in marketing efforts, the Company maintains a sales force of
approximately 1,000 persons dedicated solely to marketing. This sales force is
located throughout the Company's branch office network. The Company provides
its sales personnel with training in selling techniques, and each branch
manager is responsible for hiring the sales staff and ensuring that sales
personnel under his or her supervision are properly trained. In addition to
this sales force, the Company has 22 sales personnel in its national accounts
department. One of the responsibilities of the national accounts department
sales personnel is the coordination of marketing efforts directed at large
real estate lenders and companies developing, selling, buying or brokering
properties on a multistate basis. The Company also supplements the efforts of
its sales force through general advertising in various trade and professional
journals.
The Company's increased commercial sales effort during the past decade has
enabled the Company to expand its commercial business base. Because commercial
transactions involve higher coverage amounts and yield higher premiums,
commercial title insurance business generates greater profit margins than does
residential title insurance business. Although the commercial real estate
economy has been slow during the past several years, in particular with
respect to new construction, and may continue to be slow in the near future,
the Company has recently experienced an increase in commercial real estate
activity from workouts, refinancings and purchases driven by depressed
commercial real estate values. Because of this increase in activity and the
Company's belief that new commercial construction will eventually increase,
the Company plans to continue to emphasize its commercial sales program.
Although sales outside of the United States account for a small percentage
of the Company's revenues, the Company believes that the acceptance of title
insurance in foreign markets has increased in recent years. Accordingly, the
Company plans to continue its international sales efforts, particularly in
Canada.
Underwriting. Before a title insurance policy is issued, a number of
underwriting decisions are made. For example, matters of record revealed
during the title search may require a determination as to whether an exception
should be taken in the policy. The Company believes that it is important for
the underwriting function to operate efficiently and effectively at all
decision making levels so that transactions may proceed in a timely manner. To
perform this function, the Company has underwriters at the branch level, the
regional level and the national level. Based on the low turnover and longevity
of First American's employees and its continuing training programs, the
Company believes that its underwriting personnel are among the most
experienced and well trained in the title insurance industry.
Agency Operations. The relationship between the Company and each agent is
governed by an agency agreement which states the conditions under which the
agent is authorized to issue title insurance policies on behalf of the
Company. The agency agreement also prescribes the circumstances under which
the agent may be liable to the Company if a policy loss is attributable to
error of the agent. Such agency agreements typically have a term of one to
five years and are terminable immediately for cause.
Due to the high incidence of agency fraud in the title insurance industry
during the late 1980s, the Company instituted measures to strengthen its agent
selection and audit programs. In determining whether to engage an independent
agent, the Company investigates the agent's experience, background, financial
condition and past performance. The Company maintains loss experience records
for each agent and conducts periodic audits of its agents. The Company has
also increased the number of agent representatives and agent auditors that it
employs. Agent representatives periodically visit agents and examine their
books and records. In addition to periodic audits, a full agent audit will be
triggered if certain "warning signs" are evident. Warning signs that can
trigger an audit include the failure to implement Company required accounting
controls, shortages of escrow funds and failure to remit underwriting fees on
a timely basis.
Title Plants. The Company's network of title plants constitutes one of its
principal assets. A title search is conducted by searching the public records
or utilizing a title plant. While public records are indexed by reference to
the names of the parties to a given recorded document, most title plants
arrange their records on a geographic basis. Because of this difference,
records of a title plant are generally easier to search. Most title plants
also index
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prior policies, adding to searching efficiency. Many title plants are
computerized. Certain offices of the Company utilize jointly owned plants or
utilize a plant under a joint user agreement with other title companies. The
Company believes its title plants, whether wholly or partially owned or
utilized under a joint user agreement, are among the best in the industry.
The Company's title plants are carried on its balance sheet at original
cost, which includes the cost of producing or acquiring interests in title
plants or the appraised value of subsidiaries' title plants at dates of
acquisition for companies accounted for as purchases. Thereafter, the cost of
daily maintenance of these plants is charged to expense as incurred. A
properly maintained title plant has an indefinite life and does not diminish
in value with the passage of time. Therefore, in accordance with generally
accepted accounting principles, no provision is made for depreciation of these
plants. Since each document must be reviewed and indexed into the title plant,
such maintenance activities constitute a significant item of expense. The
Company is able to offset title plant maintenance costs at its plants through
joint ownership and access agreements with other title insurers and title
agents.
Reserves for Claims and Losses. The Company provides for title insurance
losses based upon its historical experience by a charge to expense when the
related premium revenue is recognized. Historically, major claims (i.e.,
claims greater than $0.5 million) were charged to expense as they became known
because the unique circumstances surrounding most major claims made it
inherently impractical to predict the incidence and amount of such claims. In
the fourth quarter 1995, the Company determined, with the assistance of an
actuarial study, that sufficient major claims data now exists to reasonably
estimate a reserve for incurred but not reported claims. Accordingly, the
reserve for incurred but not reported claims at December 31, 1995, includes
major claims. The reserve for known claims and incurred but not reported
claims reflects management's best estimate of the total costs required to
settle all claims reported to the Company and claims incurred but not
reported, and is considered by the Company to be adequate for such purpose.
In settling claims, the Company occasionally purchases and ultimately sells
the interest of the insured in the real property or the interest of the
claimant adverse to the insured. The assets so acquired are carried at the
lower of cost or estimated realizable value, net of any indebtedness thereon.
Notes, real estate and other assets purchased or otherwise acquired in
settlement of claims, net of valuation reserves, totaled $12.3 million, $5.8
million and $7.5 million, respectively, as of December 31, 1995.
Reinsurance and Coinsurance. The Company assumes and distributes large title
insurance risks through mechanisms of reinsurance and coinsurance. In
reinsurance agreements, in consideration for a portion of the premium, the
reinsurer accepts that part of the risk which the primary insurer cedes to the
reinsurer over and above the portion retained by the primary insurer. The
primary insurer, however, remains liable for the total risk in the event that
the reinsurer does not meet its obligation. As a general rule, the Company
does not retain more than $25 million of coverage on any single policy. Under
coinsurance agreements, each coinsurer is jointly and severally liable for the
risk insured, or for so much thereof as is agreed to by the parties. The
Company's reinsurance activities account for less than 1% of its total title
insurance operating revenues.
Competition. The title insurance business is highly competitive. The number
of competing companies and the size of such companies varies in the different
areas in which the Company conducts business. Generally, in areas of major
real estate activity, such as metropolitan and suburban localities, the
Company competes with many other title insurers. Approximately 90 title
insurance underwriters are members of the American Land Title Association, the
title insurance industry's national trade association. The Company's major
nationwide competitors in its principal markets include Chicago Title and
Trust Company (which also includes Ticor Title Insurance Company and Security
Union Title Insurance Company), Commonwealth Land Title Insurance Company,
Lawyers Title Insurance Company, Stewart Title Guaranty Company, Old Republic
Title Insurance Group and Fidelity National Title Insurance Company. In
addition to these nationwide competitors, numerous agency operations
throughout the country provide aggressive competition on the local level.
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The Company believes that competition for title insurance business is based
primarily on the quality and timeliness of service, because parties to real
estate transactions are usually concerned with time schedules and costs
associated with delays in closing transactions. In those states where prices
are not established by regulatory authorities, the price of title insurance
policies is also an important competitive factor. The Company believes that it
provides quality service in a timely manner at competitive prices.
THE COMPANY'S RELATED BUSINESSES
As an adjunct to its title insurance business, in 1986 the Company embarked
on a diversification program by acquiring and developing financial service
businesses closely related to the real estate transfer and closing process.
These businesses included tax monitoring, home warranty, flood zone
determination, and reporting of credit and property information. The
development of these businesses has allowed the Company to become one of the
nation's leading companies offering a full range of services to real property
buyers and mortgage lenders. The Company also operates a trust and banking
business in southern California.
The Real Estate Information Service Business. The real estate information
service business encompasses tax monitoring, mortgage credit reporting, flood
zone determination and other property information services.
The tax monitoring service, established by the Company in 1987, advises real
property mortgage lenders of the status of property tax payments due on real
estate securing their loans. With the acquisition of TRTS Data Services, Inc.,
(now named First American Real Estate Information Services, Inc.) in November
1991, the Company believes that it is the second largest provider of tax
monitoring services in the United States.
Under a typical contract, a tax service provider monitors, on behalf of a
mortgage lender, the real estate taxes owing on properties securing such
lender's mortgage loans for the life of such loans. In general, providers of
tax monitoring services, such as the Company's tax service, indemnify mortgage
lenders against losses resulting from a failure to monitor delinquent taxes.
Where a mortgage lender requires that tax payments be impounded on behalf of
borrowers, providers of tax monitoring services, such as the Company's tax
service, may be required to monitor and oversee the transfer of these monies
to the taxing authorities and provide confirmation to lenders that such taxes
have been paid.
The Company's tax service business markets its product through a nationwide
sales staff which calls on servicers and originators of mortgage loans. The
Company's primary source of tax service business is from large multistate
mortgage lenders. The Company's only major nationwide competitor in the tax
service business is Transamerica Real Estate Tax Service. Because of its broad
geographic coverage and the large number of mortgage loans not being serviced
by a third party tax service provider, the Company believes that it is well
positioned to increase its market share in the tax service market.
The fee charged to service each mortgage loan varies from region to region,
but generally falls within the $55 to $80 price range and is paid in full at
the time the contract is executed. The Company recognizes approximately 70% of
this fee in the year the contract is executed. The remaining 30% of the fee is
deferred over the remaining life of the contract. However, income taxes are
paid on the entire fee in the year the fee is received. The Company maintains
extremely small reserves for losses relating to its tax monitoring services
because historically the Company's losses relating to such services have been
negligible, and the Company is not presently aware of any reason why its
historical loss experience will not continue at current levels.
The Company's mortgage credit reporting service provides credit information
reports for mortgage lenders throughout the United States. These reports are
derived from two or more credit bureau sources and are summarized and prepared
in a standard form acceptable to mortgage loan originators and secondary
mortgage purchasers. The Company's mortgage credit reporting service has grown
primarily through acquisitions. In 1994, the Company acquired all of the
minority interests in its lower tier subsidiaries Metopolitan Credit Reporting
Services, Inc., and Metropolitan Property Reporting Services, Inc. In 1994,
the Company also acquired California Credit Data, Inc., and Prime Credit
Reports, Inc., and in 1995, the Company acquired Credco, Inc. (now named
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First American Credco, Inc.). With the acquisition of First American Credco,
Inc., the Company believes that it is now the largest mortgage credit reporting
service in the United States.
In January 1995, the Company acquired Flood Data Services, Inc. (now named
First American Flood Data Services, Inc.). This business furnishes to mortgage
lenders flood zone determination reports, which provide information on whether
or not property securing a loan is in a governmentally delineated special flood
hazard area. Federal legislation passed in 1994 requires that most mortgage
lenders obtain a determination of the current flood zone status at the time
each loan is originated and obtain updates during the life of the loan. First
American Flood Data Services, Inc., is the largest provider of flood zone
determinations in the United States.
The Home Warranty Business. The Company's home warranty business commenced
operations in 1984, in part with the proceeds of a $1.5 million loan from the
Company which was, in 1986, converted to a majority equity interest. The
Company currently owns 79% of its home warranty business, which is operated as
a second tier subsidiary, with the balance owned by management of that
subsidiary. The Company's home warranty business issues one-year warranties
which protect homeowners against defects in household systems and appliances,
such as plumbing, water heaters and furnaces. The Company's home warranty
subsidiary currently charges approximately $245 to $295 for its basic home
warranty contract. Optional coverage is available for air conditioners, pools,
spas, washers, dryers and refrigerators for charges ranging from approximately
$25 to $125. For an additional charge, coverage is renewable annually at the
option of the homeowner upon approval by the home warranty subsidiary. Home
warranties are marketed through real estate brokers and agents. This business
is conducted in certain counties of Arizona, California, Nevada, Texas and
Washington. The principal competitor of the Company's home warranty business is
American Home Shield, a subsidiary of Service Master L.P. Fees for these
warranties are paid at the closing of the home purchase and are recognized
monthly over a twelve month period.
The Trust Business. Since 1960, the Company has conducted a general trust
business in California, acting as trustee when so appointed pursuant to court
order or private agreement. In 1985, the Company formed a banking subsidiary
into which its subsidiary trust operation was merged. As of December 31, 1995,
the trust operation was administering fiduciary and custodial assets having a
market value of approximately $915 million.
The Thrift Business. During 1988, the Company, through a majority owned
subsidiary, acquired an industrial loan corporation (the "Thrift") that accepts
thrift deposits and uses deposited funds to originate and purchase loans
secured by commercial properties in southern California. As of December 31,
1995, the Thrift had approximately $43.4 million of demand deposits and $46.1
million of loans outstanding.
The loans made by the Thrift currently range in amount from $4,000 to
$825,000, with an average loan balance of $230,000. Loans are made only on a
secured basis, at loan-to-value percentages no greater than 65%. The Thrift
specializes in making commercial real estate loans, installment loans to
individuals and financing commercial equipment leases. In excess of 90% of the
Thrift's loans are made on a variable rate basis. The average yield on the
Thrift's loan portfolio as of December 31, 1995, was 12%. A number of factors
are included in the determination of average yield, principal among which are
loan fees and closing points amortized to income, prepayment penalties recorded
as income, and amortization of discounts on purchased loans. The Thrift's
primary competitors in the southern California commercial real estate lending
market are other thrift and loan companies and, to a lesser extent, commercial
banks. In recent years, many of the commercial banks operating in southern
California have significantly reduced their involvement in the commercial real
estate lending market as a result of the regulatory requirements to which they
are subject. As a result, the Company has been able to enhance its competitive
position in this market and obtain relatively high yields on its loan
portfolio. In addition, the Company believes that many borrowers who might be
eligible for loans from commercial banks use thrift and loan companies, such as
the Thrift, because, in general, thrift and loan companies offer longer
maturity loans than do commercial banks, which typically offer one-year
renewable loans. There is, however, a higher degree of risk associated with
longer term loans than shorter term loans. The Thrift's average loan is 60
months in duration.
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The performance of the Thrift's loan portfolio is evaluated on an ongoing
basis by management of the Thrift. The Thrift places a loan on nonaccrual
status when two payments become past due. When a loan is placed on nonaccrual
status, the Thrift's general policy is to reverse from income previously
accrued but unpaid interest. Income on such loans is subsequently recognized
only to the extent that cash is received and future collection of principal is
probable. Interest income on nonaccrual loans which would have been recognized
during the year ended December 31, 1995, if all of such loans had been current
in accordance with their original terms, totalled $232,000. Interest income
actually recognized on these nonaccrual loans for the year ended December 31,
1995, was $76,000. The following table sets forth the amount of the Thrift's
nonperforming loans as of the dates indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1991 1992 1993 1994 1995
---- ------ ------ ------ ------
($000)
<S> <C> <C> <C> <C> <C>
NONPERFORMING ASSETS:
Loans accounted for on a nonaccrual basis...... $652 $1,039 $1,833 $1,741 $1,956
Accruing loans past due 90 or more days........
Troubled debt restructurings...................
---- ------ ------ ------ ------
Total......................................... $652 $1,039 $1,833 $1,741 $1,956
==== ====== ====== ====== ======
</TABLE>
Based on a variety of factors concerning the creditworthiness of its
borrowers, the Thrift determined that it had $1,565,000 of potential problem
loans in existence as of December 31, 1995.
The Thrift's allowance for loan losses is established through charges to
earnings in the form of provision for loan losses. Loan losses are charged to,
and recoveries are credited to, the allowance for loan losses. The provision
for loan losses is determined after considering various factors, such as loan
loss experience, maturity of the portfolio, size of the portfolio, borrower
credit history, the existing allowance for loan losses, current charges and
recoveries to the allowance for loan losses, the overall quality of the loan
portfolio, and current economic conditions, as determined by management of the
Thrift, regulatory agencies and independent credit review specialists. While
many of these factors are essentially a matter of judgment and may not be
reduced to a mathematical formula, the Company believes that, in light of the
collateral securing its loan portfolio, the Thrift's current allowance for
loan losses is an adequate allowance against foreseeable losses.
8
<PAGE>
The following table provides certain information with respect to the
Thrift's allowance for loan losses as well as charge-off and recovery
activity.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1991 1992 1993 1994 1995
------ ----- ----- ----- -------
($000)
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year............. $ 398 $ 376 $ 500 $ 750 $ 950
------ ----- ----- ----- -------
Charge-Offs:
Real estate--mortgage................... (117) (176) (66) (311) (194)
Assigned lease payments................. (111) (57) (21) (9) (9)
Other................................... (113) (44)
------ ----- ----- ----- -------
(228) (346) (131) (320) (203)
------ ----- ----- ----- -------
Recoveries:
Real estate--mortgage................... 22 14 3 55
Assigned lease payments................. 70 64 32 28 35
Other................................... 9 23
------ ----- ----- ----- -------
92 87 58 83 35
------ ----- ----- ----- -------
Net (charge-offs) recoveries............ (136) (259) (73) (237) (168)
Provision for losses.................... 114 383 323 437 562
------ ----- ----- ----- -------
Balance at end of year................... $ 376 $500 $750 $950 $1,344
====== ===== ===== ===== =======
Ratio of net charge-offs during the year
to average loans outstanding during the
year.................................... .6% .8% .2% .6% .4%
====== ===== ===== ===== =======
</TABLE>
The adequacy of the Thrift's allowance for loan losses is based on formula
allocations and specific allocations. Formula allocations are made on a
percentage basis which is dependent on the underlying collateral, the type of
loan and general economic conditions. Specific allocations are made as problem
or potential problem loans are identified and are based upon an evaluation by
the Thrift's management of the status of such loans. Specific allocations may
be revised from time to time as the status of problem or potential problem
loans changes.
The following table shows the allocation of the Thrift's allowance for loan
losses and the percent of loans in each category to total loans at the dates
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------
1991 1992 1993 1994 1995
--------------- --------------- --------------- --------------- ---------------
% OF % OF % OF % OF % OF
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
($000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LOAN CATEGORIES:
Real estate-mortgage... $282 75 $465 90 $635 98 $879 99 $1,300 99
Real estate-
construction.......... 45 12 18 4 3 1
Assigned lease
payments.............. 45 12 15 5 95 1 71 1 41
Other.................. 4 1 2 1 20 1
---- --- ---- --- ---- --- ---- --- ------ ---
$376 100 $500 100 $750 100 $950 100 $1,344 100
==== === ==== === ==== === ==== === ====== ===
</TABLE>
9
<PAGE>
ACQUISITIONS
Commencing in the 1960s, the Company initiated a growth program with a view
to becoming a nationwide provider of title insurance. This program included
expansion into new geographic markets through internal growth and selective
acquisitions of over 100 local and regional title companies. During the mid-
1980's, the Company began expanding into other real estate related financial
services.
Since 1980, the Company has made strategic acquisitions designed to expand
not only its direct title operations, but also the range of services it can
provide to real property buyers and mortgage lenders. The following lists some
of the key acquisitions made in furtherance of this strategy:
<TABLE>
<CAPTION>
YEAR OF
ACQUIRED ENTITY(1) ACQUISITION PRINCIPLE MARKET(S)
- ------------------ ----------- -------------------
<S> <C> <C>
TITLE INSURANCE:
Land Title Insurance Company of St.
Louis(2)................................... 1980 Missouri
St. Paul Title Insurance Corporation(3)..... 1982 Midwest
First American Title Guaranty Holding
Company(4)................................. 1983 California
Midland Title Security, Inc................. 1986 Ohio
Columbia Real Estate Title Insurance
Company(3)................................. 1987 District of Columbia
The Port Lawrence Title Insurance and Trust
Company.................................... 1988 Ohio
Universal Title Insurance Company(3)........ 1988 Minnesota
Mortgage Guarantee and Title Company........ 1988 Rhode Island
Security Title & Trust Agency of Alaska,
Inc........................................ 1989 Alaska
Southwest Title and Trust Company(5)........ 1990 Oklahoma
Preferred Land Title Services, Inc.......... 1992 New York City
Fidelity Title and Guaranty Company......... 1994 Florida
Republic Title of Texas, Inc................ 1994 Texas
REAL ESTATE INFORMATION SERVICES:
Metropolitan Realty Tax Service(6).......... 1990 East Coast
TRTS Data Services, Inc. ................... 1991 Nationwide
Metropolitan Credit Reporting Services,
Inc. ...................................... 1993 Northeast
Metropolitan Property Reporting Services,
Inc. ...................................... 1993 Northeast
Credco, Inc................................. 1995 Nationwide
Flood Data Services, Inc. .................. 1995 Nationwide
HOME WARRANTY:
First American Home Buyers Protection 1986 Arizona, California, Nevada,
Corporation(7)............................. Texas and Washington
</TABLE>
- --------
(1)Unless otherwise indicated, all entities listed are wholly owned by the
Company.
(2)99% owned.
(3)Subsequently merged into First American.
(4)80% owned.
(5)99% owned.
(6)Asset acquisition.
(7)79% owned.
10
<PAGE>
REGULATION
The title insurance business is heavily regulated by state insurance
regulatory authorities. These authorities generally possess broad powers with
respect to the licensing of title insurers, the types and amounts of
investments that title insurers may make, insurance rates, forms of policies
and the form and content of required annual statements, as well as the power
to audit and examine title insurers. Under state laws, certain levels of
capital and surplus must be maintained and certain amounts of securities must
be segregated or deposited with appropriate state officials. Various state
statutes require title insurers to defer a portion of all premiums in a
reserve for the protection of policyholders and to segregate investments in a
corresponding amount. Further, most states restrict the amount of dividends
and distributions a title insurer may make to its shareholders.
The National Association of Insurance Commissioners has recently announced
that it intends to increase efforts to have its model insurance code adopted
by state legislatures. The model insurance code contains restrictions limiting
the ability of insurance companies to pay dividends to their shareholders. The
dividend limitations in the model code are more restrictive than those set
forth in most state insurance codes currently in effect, including the
California Insurance Code which governs First American. The Company cannot
predict whether the model insurance code or any provision thereof will be
adopted in California.
The Company's home warranty business also is subject to regulation by
insurance authorities in the states in which it conducts such business. The
Company's trust company and industrial loan company are both subject to
regulation by the Federal Deposit Insurance Corporation. In addition, the
Company's trust company is regulated by the California Superintendent of Banks
and the Company's industrial loan company is regulated by the California
Commissioner of Corporations.
INVESTMENT POLICIES
The Company invests primarily in cash equivalents, federal and municipal
governmental securities, mortgage loans and investment grade debt and equity
securities. The largely fixed income portfolio is classified in the Company's
financial statements as "available for sale." In addition to the Company's
investment strategy, state laws impose certain restrictions upon the types and
amounts of investments that may be made by the Company's regulated
subsidiaries.
Additionally, on April 21, 1992, the Company entered into a $65 million
Credit Agreement with a syndicate of banks that includes The Chase Manhattan
Bank (National Association) as both lender and agent for the syndicate (the
"Credit Agreement"). Under the terms of the Credit Agreement, a term loan of
$65 million was made to the Company on April 27, 1992, and the proceeds
thereof were used to retire approximately $63 million of demand and term
indebtedness. The Credit Agreement, as amended, contains investment
restrictions limiting the types and amounts of investments that the Company
and its subsidiaries may make. Such restrictions limit the investments in and
advances to subsidiaries and affiliated companies that the Company may make
and generally limit the Company's other investments to investment grade
securities, such as U.S. Treasury securities, insured bank time deposits or
certificates of deposit, repurchase obligations secured by U.S. Treasury
securities, bank commercial paper and secured money market funds. The Company
is, however, permitted to make certain additional investments not in excess of
25% of stockholders' equity, of which no more than 60% may be in equity
securities and no more than $5 million may be with any one issuer.
11
<PAGE>
EMPLOYEES
The following table provides a summary of the total number of employees of
the Company as of December 31, 1995:
<TABLE>
<CAPTION>
NUMBER OF
BUSINESS EMPLOYEES
-------- ---------
<S> <C>
Title insurance................................................ 8,269
Real estate information services............................... 1,607
Home warranty.................................................. 187
Trust and banking.............................................. 86
-------
Total......................................................... 10,149
=======
</TABLE>
ITEM 2. PROPERTIES.
The Company owns two adjacent office buildings in Santa Ana, California,
which house its executive offices, its trust and banking subsidiary and the
Orange County title insurance branch operations. This complex, which contains
approximately 105,000 square feet of floor space and an enclosed parking area,
comprises one city block. The Company also owns an 18,000 square foot office
building, located across the street from its main offices, that will provide
space for expansion of its home office operations.
The Company's title insurance subsidiary, First American, and its
subsidiaries, own or lease buildings or office space in more than 400
locations throughout the United States and Canada, principally for their
respective title operations.
The Company's real estate information subsidiary, First American Real Estate
Information Services, Inc. ("FAREISI"), owns a building in Irving, Texas,
which houses its national operations center. This building contains 70,000
square feet of office space and was purchased in September 1992. FAREISI's
corporate headquarters are housed in a leased office building located in St.
Petersburg, Florida. In addition, FAREISI and its subsidiaries lease office
space in more than 75 locations throughout the United States, principally for
their respective operations.
The Company's home warranty subsidiary owns 1.7 acres of land in Van Nuys,
California, which contains a 20,000 square foot office building, a 7,000
square foot warehouse and a parking lot.
Each of the office facilities occupied by the Company or its subsidiaries is
in good condition and adequate for its intended use.
ITEM 3. LEGAL PROCEEDINGS.
Set forth below is a brief description of material pending legal
proceedings, other than ordinary routine litigation incidental to the
Company's businesses, to which the Company or any of its subsidiaries is a
party or of which any of their properties is the subject. Due to the nature of
its businesses described in Item 1 above, the Company is involved in numerous
routine legal proceedings incidental to such businesses. Some of these
proceedings involve claims for damages in material amounts. At this time,
however, the Company does not anticipate that the resolution of any of these
proceedings will materially and adversely affect its financial condition.
On April 13, 1990, a civil action entitled Brown, et al. v. Ticor Title
Insurance Co., et al., Case No.Civ 90-0577 (PHX-SMM) (U.S. Dist. Ct. Ariz.),
was filed in the U.S. District Court in Phoenix, Arizona, by Walter Thomas
Brown and Jeffrey L. Dziewit, as purported representatives of title insurance
purchasers in Arizona and Wisconsin, alleging violation by First American
Title Insurance Company ("First American") and other title insurers of federal
antitrust laws in the alleged fixing of rates for title insurance and for
search and examination services by reason of defendants' participation in
state-regulated rating bureaus in the two states.
12
<PAGE>
On October 11, 1994, the Judicial Panel on Multi-district Litigation ordered
that an action entitled Segall, et al. v. Stewart Title Guaranty Co., et al.,
be transferred from the U.S. District Court for the Eastern District of
Wisconsin to the District of Arizona for coordinated or consolidated pretrial
proceedings with Brown. These two actions are now consolidated and part of
MDL-94-1027, under the title "In Re:Title Search and Examination Services
Antitrust Litigation." Segall is a civil suit filed on behalf of a purported
class of purchasers of title insurance in Wisconsin against certain title
insurance companies and individuals. The Segall suit alleges that the
defendants violated federal antitrust laws by reason of the defendants'
participation in the state-regulated rating bureau in Wisconsin. The purported
plaintiff class includes the Wisconsin plaintiff class members alleged in
Brown as well as some additional purported class members. The Company does not
believe that the ultimate resolution of this litigation will materially and
adversely affect its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
COMMON STOCK MARKET PRICES AND DIVIDENDS
The Company's common stock began trading on the New York Stock Exchange
(ticker symbol FAF) on December 3, 1993. Prior to December 3, 1993, The
Company's common stock was traded over-the-counter on the NASDAQ National
Market System. The approximate number of record holders of common stock on
February 29, 1996 was 3,274.
High and low stock prices and dividends for the last two years were:
<TABLE>
<CAPTION>
1995 1994
------------------------ ------------------------
CASH CASH
QUARTER ENDED HIGH-LOW RANGE DIVIDENDS HIGH-LOW RANGE DIVIDENDS
------------- -------------- --------- -------------- ---------
<S> <C> <C> <C> <C>
March 31...................... $20.63--$16.75 $.15 $37.50--$31.00 $.15
June 30....................... $25.50--$19.13 $.15 $30.63--$23.13 $.15
September 30.................. $25.38--$22.75 $.15 $24.50--$20.25 $.15
December 31................... $27.38--$21.75 $.15 $20.50--$16.00 $.15
</TABLE>
While the Company expects to continue its policy of paying regular quarterly
cash dividends, future dividends will be dependent on future earnings,
financial condition and capital requirements. The payment of dividends is
subject to the restrictions described in Notes 2 and 8 to the consolidated
financial statements included in "Item 8. Financial Statements and
Supplementary Data" of Part II of this report.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues.................. $1,250,216 $1,376,393 $1,398,426 $1,115,467 $756,821
Income before cumulative
effect of a change in ac-
counting for income taxes
(Note A)................. $ 7,587 $ 18,945 $ 62,091 $ 43,258 $ 3,005
Net income................ $ 7,587 $ 18,945 $ 66,291 $ 43,258 $ 3,005
Total assets.............. $ 873,778 $ 828,649 $ 786,448 $ 691,279 $533,357
Notes and contracts pay-
able..................... $ 77,206 $ 89,600 $ 85,022 $ 81,981 $ 92,889
Stockholders' equity...... $ 302,767 $ 292,110 $ 283,718 $ 216,842 $137,950
Return on average stock-
holders' equity.......... 2.6% 6.6% 26.5% 24.4% 2.1%
Cash dividends on common
shares................... $ 6,850 $ 6,869 $ 5,840 $ 3,989 $ 3,748
Per share of common stock
(Note B)--
Income before cumulative
effect of a change in
accounting for income
taxes (Note A).......... $ .67 $ 1.66 $ 5.47 $ 4.55 $ .32
Net Income............... $ .67 $ 1.66 $ 5.84 $ 4.55 $ .32
Stockholder's equity..... $ 26.53 $ 25.63 $ 24.93 $ 19.26 $ 15.64
Cash dividends........... $ .60 $ .60 $ .51 $ .41 $ .40
Number of common shares
outstanding--
Weighted average during
the year................ 11,403 11,447 11,353 9,502 9,478
End of year.............. 11,411 11,395 11,381 11,260 8,821
Title orders opened (Note
C)....................... 894 873 1,218 1,048 819
Title orders closed (Note
C)....................... 667 723 933 809 593
Number of employees....... 10,149 9,033 10,679 8,694 7,585
</TABLE>
- --------
Note A--See Note 10 to the consolidated financial statements for description
of a change in accounting for income taxes.
Note B--Per share information relating to net income is based on the
weighted average number of shares outstanding for the years presented. Per
share information relating to stockholders' equity is based on shares
outstanding at the end of each year.
Note C--Title order volumes are those processed by the direct title
operations of the Company and do not include orders processed by agents.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS.
RESULTS OF OPERATIONS
OVERVIEW--As with all providers of real estate-related financial and
informational services, the Company's revenues depend, in large part, upon the
level of real estate activity and the cost and availability of mortgage funds.
The majority of the Company's revenues for the title insurance and real estate
information segments result from resales and refinancings of residential real
estate, and to a lesser extent, from commercial transactions and the
construction and sale of new properties. Revenues for the Company's home
warranty segment result solely from residential resale activity and do not
benefit from refinancings. Traditionally, the greatest volume of real estate
activity, particularly residential resale, has occurred in the spring and
summer months. However, numerous actions taken by the Federal Reserve Board
during 1992 and 1993 to stimulate economic recovery caused unusual
fluctuations in the traditional pattern of real estate activity. During 1993
mortgage interest rates fell to their lowest level in 25 years. This decline
in rates caused an unprecedented volume of refinance transactions and the
Company's title insurance and real estate information segments processed
record order volumes. Due to inflationary concerns, the Federal Reserve Board
began a succession of interest rate increases in February 1994. The resulting
increase in mortgage interest rates adversely affected the Company's revenue
base in the second half of 1994 (primarily the fourth quarter) as refinance
activity came to a virtual halt. This, coupled with the persistently poor real
estate economy in California and a return of the traditional seasonal real
estate cycle, resulted in a low inventory of open transactions going into
1995. As a result, 1995 first quarter operating revenues experienced a 30%
decline when compared with the same period of the prior year. In response to
the severe decline in new orders, the Company instituted personnel reductions
totaling 26% of the work force from March 1994 through February 1995. However,
the cost cutting measures lagged the revenue declines resulting in a fourth
quarter 1994 loss of $.25 per share and a first quarter 1995 loss per share of
$1.11. Mortgage interest rates peaked in January 1995 and decreased throughout
the remainder of the year and into 1996 helped by an easing of monetary policy
by the Federal Reserve Board. During the last half of 1995, the national real
estate markets improved and refinancing activity began to increase. These
factors contributed to a 26% improvement in operating revenues in the last
half of 1995 when compared to the first half of 1995 and resulted in earnings
per share of $1.68 compared with a loss per share of $1.01.
OPERATING REVENUES--A summary by segment of the Company's operating revenues
is as follows:
<TABLE>
<CAPTION>
1995 % 1994 % 1993 %
----------- --- ---------- --- ---------- ---
(IN THOUSANDS, EXCEPT PERCENT)
<S> <C> <C> <C> <C> <C> <C>
TITLE INSURANCE:
Direct Operations................ $ 517,616 42 $ 562,566 41 $ 632,226 46
Agency Operations................ 517,173 42 659,015 49 618,353 45
----------- --- ---------- --- ---------- ---
1,034,789 84 1,221,581 90 1,250,579 91
Real Estate Information........... 145,755 12 94,816 7 95,069 7
Home Warranty..................... 32,531 3 28,116 2 22,402 1
Trust and Banking................. 14,110 1 12,433 1 11,731 1
----------- --- ---------- --- ---------- ---
$ 1,227,185 100 $1,356,946 100 $1,379,781 100
=========== === ========== === ========== ===
</TABLE>
Operating revenues from direct title operations decreased 8.0% in 1995 as
compared with 1994. This decrease was primarily attributable to a 7.7%
decrease in the number of title orders closed by the Company's direct
operations. The Company's direct title operations closed 667,200 title orders
during 1995, as compared with 722,900 title orders closed during 1994. This
decrease was attributable to higher interest rates and inclement weather which
resulted in reduced national real estate activity in the first half of 1995.
Operating revenues from direct title operations decreased 11.0% in 1994 as
compared with 1993. The decrease was primarily attributable to a 22.5% decline
in the number of title orders closed, offset in part by an increase in the
average revenues per order closed. The decrease in orders closed was due to a
decline in refinance activity, the subsiding real estate economy in California
(a state highly concentrated with direct title operations) and the return of
the traditional,
15
<PAGE>
seasonal real estate cycle in the fourth quarter 1994. The average revenues
per order closed were $778 for 1994 as compared with $678 for 1993. The
increase reflected a change in the Company's business mix from predominantly
lower margin refinance transactions in 1993 to a more balanced mix in 1994,
including higher margin resale transactions. Operating revenues from agency
title operations, which are more concentrated in the midwestern and eastern
sectors of the country, decreased 21.5% in 1995 from 1994. The decrease
reflects a slow first half of 1995 as discussed above, compounded by the
inherent delay in reporting by agents of the resurgence in business for the
latter part of 1995. Operating revenues from agency title operations increased
6.6% in 1994 over 1993. This increase was primarily attributable to the high
level of orders closed with our agents during the fourth quarter 1993 and not
reported to the Company until the beginning of 1994, as well as the increase
in resale activity, offset in part by the decline in refinance transactions.
Real estate information operating revenues increased 53.7% in 1995 when
compared with 1994. This increase was primarily attributable to $59.8 million
of operating revenues contributed by new acquisitions, partially offset by the
same economic factors affecting title insurance mentioned above. Operating
revenues remained relatively constant for 1994 when compared with 1993; this
constant level of revenues, in spite of a significant fourth quarter 1994
revenue reduction, was primarily attributable to the heavy volume of refinance
transactions that continued through the end of 1993 and into the beginning of
1994, as well as approximately $6.0 million of revenues contributed by
companies acquired during 1994.
Home warranty operating revenues increased 15.7% in 1995 over 1994 and 25.5%
in 1994 over 1993. These increases were primarily attributable to improvements
in certain of the residential resale markets in which this segment operates,
successful geographic expansion, increased consumer awareness and an increase
in the number of annual renewals.
INVESTMENT AND OTHER INCOME--Investment and other income increased 18.4% in
1995 over 1994 and 4.3% in 1994 over 1993. The increase in the current year
was primarily attributable to gains on the sale of certain investments, a $.7
million fire insurance recovery and increased equity in earnings of affiliates
of $.5 million, offset in part by a 9.3% decrease in the average investment
portfolio balance. The increase in 1994 over 1993 was due to a 22.2% increase
in the average investment portfolio balance, offset in part by a reduction of
$1.4 million in equity in earnings of affiliates. See Note 9 to the
consolidated financial statements for additional details on investment and
other income.
SALARIES AND OTHER PERSONNEL COSTS--A summary by segment of the Company's
salaries and other personnel costs is as follows:
<TABLE>
<CAPTION>
1995 % 1994 % 1993 %
-------- --- -------- --- -------- ---
(IN THOUSANDS, EXCEPT PERCENT)
<S> <C> <C> <C> <C> <C> <C>
Title Insurance.......................... $352,745 82 $369,100 87 $354,343 89
Real Estate Information.................. 57,738 13 36,073 8 26,732 7
Home Warranty............................ 7,714 2 7,078 2 6,076 1
Trust and Banking........................ 4,799 1 4,087 1 3,962 1
Corporate................................ 8,988 2 6,990 2 6,789 2
-------- --- -------- --- -------- ---
$431,984 100 $423,328 100 $397,902 100
======== === ======== === ======== ===
</TABLE>
The Company's title insurance segment is labor intensive; accordingly, a
major variable expense component is salaries and other personnel costs. The
expense component is affected by two competing factors: The need to monitor
personnel changes to match corresponding or anticipated new orders, and the
need to provide quality service. Commencing in the second quarter 1994 through
the first quarter 1995, the Company's ability to match cost reductions with
order declines was hampered by the continual upward adjustment of interest
rates by the Federal Reserve Board. In addition, the Company's growth in
operations servicing builder and lender business has created ongoing fixed
costs required to service accounts, even when market conditions are producing
fewer new orders.
16
<PAGE>
Title insurance personnel expenses decreased 4.4% in 1995 from 1994. The
decrease relates directly to the Company's intensified efforts during the
latter part of 1994 and the beginning of 1995 to adjust personnel and related
expense levels commensurate with new order counts. This cost-containment
process stabilized the cost of the labor base at a more acceptable level as
business improved during the second quarter 1995. This decrease was offset, in
part, by acquisition activity and modest personnel increases in the second
half of 1995. Personnel expenses increased 4.2% in 1994 over 1993. This
increase was primarily attributable to the additional personnel needed to
service the heavy volume of title orders (predominately refinance
transactions) that continued through the end of 1993 into the first quarter of
1994 and, to a lesser extent, acquisition activity. This increase was
partially offset by the effects of personnel reductions that commenced during
the beginning of the second quarter 1994, and continued throughout the rest of
1994 in response to significantly reduced order counts; although, due to the
costs associated with terminations, expense declines lagged behind personnel
reductions.
Real estate information personnel expenses increased 60.1% in 1995 over
1994. This increase was primarily due to $20.0 million of personnel costs
associated with acquisitions, and to a lesser extent, in-house development of
a new electronic communications delivery system for information based
products. This was offset in part by personnel reductions associated with the
decline in new tax service contracts which began in the last half of 1994 and
continued into the first half of 1995. Personnel expenses increased 34.9% in
1994 over 1993. This increase was primarily due to personnel costs incurred
servicing the heavy volume of business during the first half of 1994, costs
associated with developing new and enhancing existing computer software to
better service customer needs and $2.9 million of costs attributable to
company acquisitions. This increase was partially offset by a 13.8% reduction
in personnel in the last half of 1994, although, due to personnel separation
costs, expense declines lagged behind personnel reductions.
Home warranty personnel expenses increased 9.0% in 1995 over 1994 and 16.5%
in 1994 over 1993. The increases were primarily due to the additional
personnel required to service the increased business volume in the states the
segment currently services, as well as new geographic expansion and modest
salary increases. These increases were offset in part by ongoing efforts of
management to maximize personnel efficiencies.
In December 1990, the Financial Accounting Standards Board (FASB) issued
Statement No. 106, "Employers' Accounting for Postretirement Benefits Other
than Pensions." This standard became effective in 1993 and requires the
Company to accrue the cost of providing postretirement health care and life
insurance benefits over the service lives of employees. Compliance with this
standard did not materially affect the Company's results of operations or
financial condition. In November 1992, the FASB issued Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits." This standard became effective in 1994 and requires employers to
accrue an obligation if the benefits are attributable to service already
rendered, the benefits accumulate or vest, payment is probable, and the
amounts can be reasonably estimated. Compliance with the standard did not
materially affect the Company's results of operations or financial condition.
PREMIUMS RETAINED BY AGENTS--A summary of agent retention and agent revenues
is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(IN THOUSANDS, EXCEPT
PERCENT)
<S> <C> <C> <C>
Agent Retention................................ $413,444 $533,598 $504,375
======== ======== ========
Agent Revenues................................. $517,173 $659,015 $618,353
======== ======== ========
% Retained by Agents........................... 80% 81% 82%
======== ======== ========
</TABLE>
The premium split between underwriter and agents is in accordance with their
respective agency contracts and can vary from region to region due to
divergencies in real estate closing practices as well as rating structures.
The decrease in the percentage amount of title premiums retained by agents was
the direct result of changes in the geographic mix of agency revenues.
17
<PAGE>
OTHER OPERATING EXPENSES--A summary by segment of the Company's other
operating expenses is as follows:
<TABLE>
<CAPTION>
1995 % 1994 % 1993 %
-------- --- -------- --- -------- ---
(IN THOUSANDS, EXCEPT PERCENT)
<S> <C> <C> <C> <C> <C> <C>
Title Insurance.......................... $188,024 72 $184,723 79 $183,213 82
Real Estate Information.................. 61,167 23 37,479 16 29,556 13
Home Warranty............................ 1,843 1 1,901 1 1,299 1
Trust and Banking........................ 5,650 2 4,829 2 4,140 2
Corporate................................ 3,927 2 3,600 2 4,726 2
-------- --- -------- --- -------- ---
$260,611 100 $232,532 100 $222,934 100
======== === ======== === ======== ===
</TABLE>
Title insurance other operating expenses remained relatively constant for
the last three years. The modest percentage changes noted are due in part to
marginal price level increases by vendors and acquisition activity, partially
offset by successful cost-containment programs. Other operating expenses were
also impacted by changes in incremental costs (i.e., office supplies, document
reproduction, messenger services, plant maintenance and title search costs)
associated with the relative changes in open order counts.
Real estate information other operating expenses increased 63.2% in 1995
over 1994 and 26.8% in 1994 over 1993. The increase in 1995 was primarily
attributable to $28.8 million relating to acquisitions, offset in part by
cost-containment programs in light of a reduction in new tax service contracts
in 1995. The increase in 1994 was attributable to the incremental costs
incurred servicing the heavy volume of business during the first half of 1994,
costs associated with developing and enhancing computer software, costs
incurred in assimilating and expanding the mortgage credit reporting
operations, and $2.0 million of other operating expenses attributable to
acquisitions.
PROVISION FOR TITLE LOSSES AND OTHER CLAIMS--A summary by segment of the
Company's provision for title losses and other claims is as follows:
<TABLE>
<CAPTION>
1995 % 1994 % 1993 %
------- --- -------- --- -------- ---
(IN THOUSANDS, EXCEPT PERCENT)
<S> <C> <C> <C> <C> <C> <C>
Title Insurance........................... $68,338 76 $ 93,012 84 $111,038 89
Real Estate Information................... 3,166 3 2,129 2 2,683 2
Home Warranty............................. 18,857 21 15,022 14 11,762 9
Trust and Banking......................... 26 67 105
------- --- -------- --- -------- ---
$90,387 100 $110,230 100 $125,588 100
======= === ======== === ======== ===
</TABLE>
The provision for title insurance losses expressed as a percentage of title
insurance operating revenues was 6.6% in 1995, 7.6% in 1994, and 8.9% in 1993.
The decreases were primarily attributable to an ongoing improvement in the
Company's claims experience, as well as a reduction in major claims activity.
The Company anticipates that the improvement over the past several years will
continue in 1996. The provision for home warranty losses as a percentage of
home warranty operating revenues was 58.0% in 1995, 53.4% in 1994, and 52.5%
in 1993. These increases were primarily attributable to increases in the
average number of claims per contract experienced during these periods,
resulting from the home warranty operations offering extended coverages on its
warranties.
DEPRECIATION AND AMORTIZATION--Capital expenditures as well as depreciation
and amortization are summarized in Note 14 to the consolidated financial
statements.
INTEREST--Interest expense remained relatively unchanged in 1995 when
compared with 1994 primarily as the result of an average outstanding debt
balance and comparable average interest rates. Interest expense increased
41.8% in 1994 over 1993 primarily due to $1.5 million of interest expense
attributable to a
18
<PAGE>
December 1993 trust deed note, which was paid off in November of 1994, and a
higher average interest rate, offset in part by a 3.7% decrease in the average
outstanding debt balance. The Company, at its option, has a reduced interest
rate option on the variable rate indebtedness portion of the Company's credit
facility. This agreement is described in Note 8 to the consolidated financial
statements.
MINORITY INTERESTS--Minority interests in net income of consolidated
subsidiaries decreased 27.6% in 1995 from 1994 and 44.1% in 1994 from 1993.
The decrease in 1995 over 1994 was primarily attributable to the Company's
purchases of shares from minority shareholders. The decrease in 1994 over 1993
was due to a decline in the profitability of the Company's less than 100%
owned subsidiaries, the August 1994 sale of the Company's remaining interest
in North American Title Insurance Company and the purchases of shares from
minority shareholders.
PRETAX PROFITS--A summary by segment of the Company's pretax profits is as
follows:
<TABLE>
<CAPTION>
1995 % 1994 % 1993 %
-------- --- ------- --- -------- ---
(IN THOUSANDS, EXCEPT PERCENT)
<S> <C> <C> <C> <C> <C> <C>
Title Insurance........................ $ 17,540 37 $37,819 58 $ 97,314 69
Real Estate Information................ 19,690 42 17,371 27 35,046 25
Home Warranty.......................... 6,828 14 6,709 10 5,477 4
Trust and Banking...................... 3,304 7 3,214 5 3,313 2
-------- --- ------- --- -------- ---
47,362 100 65,113 100 141,150 100
-------- === ------- === -------- ===
Corporate.............................. (19,948) (17,415) (19,542)
-------- ------- --------
$ 27,414 $47,698 $121,608
======== ======= ========
</TABLE>
The Company's profit margins and pretax profits vary according to a number
of factors, including the volume, composition (residential or commercial) and
type (resale, refinancing or new construction) of real estate activity. For
example, in title insurance operations, commercial transactions tend to
generate higher revenues and greater profit margins than residential
transactions. Further, profit margins from refinancing activities are lower
than those from resale activities because in many states there are premium
discounts on, and cancellation rates are higher for, refinancing transactions.
Cancellations of title orders adversely affect pretax profits because costs
are incurred and expensed in opening and processing such orders but revenues
are not generated. Also, the Company's direct title insurance business has
significant fixed costs in addition to its variable costs. Accordingly, profit
margins from the Company's direct title insurance business improve as the
volume of title orders closed increases. Title insurance profit margins are
also affected by the percentage of operating revenues generated by agency
operations. Profit margins from direct operations are generally higher than
from agency operations due primarily to the large portion of the premium that
is retained by the agent. Real estate information pretax profits are generally
unaffected by the type of real estate activity but increase as the volume of
residential real estate loan transactions increases. Home warranty pretax
profits improve as the volume of residential resales increases. In general,
the title insurance business is a lower margin business when compared to the
Company's other segments. The lower margins reflect the high fixed cost of
producing title evidence whereas the corresponding revenues are subject to
regulatory and competitive pricing constraints.
PREMIUM TAXES--A summary by pertinent segment of the Company's premium taxes
is as follows:
<TABLE>
<CAPTION>
1995 % 1994 % 1993 %
------- --- ------- --- ------- ---
(IN THOUSANDS, EXCEPT PERCENT)
<S> <C> <C> <C> <C> <C> <C>
Title Insurance............................. $13,016 96 $14,873 96 $17,119 97
Home Warranty............................... 611 4 580 4 498 3
------- --- ------- --- ------- ---
$13,627 100 $15,453 100 $17,617 100
======= === ======= === ======= ===
</TABLE>
19
<PAGE>
Insurers are generally not subject to state income or franchise taxes.
However, in lieu thereof, a "premium" tax is imposed on certain operating
revenues, as defined by statute. Tax rates and bases vary from state to state;
accordingly, the total premium tax burden is dependent upon the geographical
mix of title insurance and home warranty operating revenues. Premium taxes for
title insurance decreased 12.5% in 1995 from 1994 and 13.1% in 1994 from 1993.
These changes correspond to the relative decreases in title insurance
operating revenues. Premium taxes as a percent of title insurance operating
revenues remained relatively constant at approximately 1.2%. Premium taxes for
home warranty increased 5.3% in 1995 over 1994 and 16.5% in 1994 over 1993.
These changes reflect the level of home warranty premiums written during the
respective periods.
INCOME TAXES--The Company's effective income tax rate, which includes a
provision for state income and franchise taxes for non-insurance subsidiaries,
was 45.0% for 1995, 41.2% for 1994 and 40.3% for 1993. The increases in
effective rate were primarily attributable to the reduction in the
deductibility of certain business expenses, as mandated by the Revenue
Reconciliation Act of 1993, and increases in state income and franchise taxes
which resulted from the Company's non-insurance subsidiaries' contribution to
pretax profits. The increase in effective rate for 1994 was partially offset
by the utilization of $1.8 million of capital loss carryforwards, for which
the Company had previously established a valuation allowance, pursuant to
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Information regarding items included in the reconciliation of the
effective rate with the federal statutory rate is contained in Note 10 to the
consolidated financial statements.
In February 1992, the Financial Accounting Standards Board issued Statement
No. 109, "Accounting for Income Taxes," which became effective for 1993. This
statement prescribes the use of the liability method of accounting for income
taxes, whereby deferred tax assets and liabilities are calculated at the
balance sheet date using current tax laws and rates in effect. The cumulative
effect of this change in accounting principal was recognized in the first
quarter of 1993 in the form of a one-time benefit totaling $4.2 million.
NET INCOME--Net income and per share information are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(IN THOUSANDS, EXCEPT
PERCENT)
<S> <C> <C> <C>
Income before cumulative effect of a change in account-
ing for income taxes.................................. $ 7,587 $18,945 $62,091
======= ======= =======
Net income............................................. $ 7,587 $18,945 $66,291
======= ======= =======
Weighted average shares................................ 11,403 11,447 11,353
======= ======= =======
Income per share before cumulative effect of a change
in accounting for income taxes........................ $ 0.67 $ 1.66 $ 5.47
======= ======= =======
Net income per share................................... $ 0.67 $ 1.66 $ 5.84
======= ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities amounted to $30.4 million, $53.9
million and $105.7 million for 1995, 1994 and 1993, respectively, after claim
payments of $66.6 million, $87.6 million and $77.3 million, respectively. The
principal non-operating uses of cash and cash equivalents for the three-year
period ended December 31, 1995, were for additions to the investment
portfolio, capital expenditures, company acquisitions and the repayment of
debt. The most significant nonoperating sources of cash and cash equivalents
were from proceeds from the sales and maturities of certain investments, and
in 1994, proceeds from the sale of property and equipment and proceeds from
the issuance of debt. The net effect of all activities on total cash and cash
equivalents was a decrease of $8.3 million in 1995 and increases of $23.9
million and $10.5 million in 1994 and 1993, respectively.
Notes and contracts payable as a percentage of total capitalization as of
December 31, 1995, was 19.1% as compared with 22.1% as of the prior year end.
The decrease was primarily attributable to a $12.4 million net
20
<PAGE>
decrease in debt. As part of the Company's strategy to extend the maturity of,
and provide a long-term amortization schedule for, its outstanding demand and
term indebtedness, the Company entered into a credit agreement with the Chase
Manhattan Bank as agent on April 21, 1992. Under the terms of the credit
agreement, the company borrowed $65.0 million on April 27, 1992, and used the
proceeds thereof to retire approximately $63 million of demand and near-term
indebtedness. During 1994, the Company amended the credit agreement to borrow
an additional $20.0 million of variable rate indebtedness to pay off an
existing higher rate trust deed note. In addition, the amendment provided for
a $30.0 million revolving line of credit which remained unused as of December
31, 1995. This credit agreement is more fully described in Note 8 to the
consolidated financial statements.
Pursuant to various insurance and other regulations, the maximum amount of
dividends, loans and advances available to the Company in 1996 from its
principle subsidiary, First American Title Insurance Company, is $44.6
million. Such restrictions have not had, nor are they expected to have, an
impact on the Company's ability to meet its cash obligations.
Due to the Company's significant liquid asset position and its consistent
ability to generate cash flows from operations, management believes that its
resources are sufficient to satisfy its anticipated cash requirements. The
Company's strong financial position will enable management to react to future
opportunities for acquisitions or other investments in support of the
Company's continued growth and expansion.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Separate financial statements for subsidiaries not consolidated and 50% or
less owned persons accounted for by the equity method have been omitted
because, if considered in the aggregate, they would not constitute a
significant subsidiary.
<TABLE>
<CAPTION>
PAGE
INDEX NO.
----- ----
<S> <C>
Report of Independent Accountants.......................................... 23
Financial Statements:
Consolidated Balance Sheets............................................... 24
Consolidated Statements of Income......................................... 26
Consolidated Statements of Stockholders' Equity........................... 27
Consolidated Statements of Cash Flows..................................... 28
Notes to Consolidated Financial Statements................................ 29
Unaudited Quarterly Financial Data......................................... 44
Financial Statement Schedules:
I.Summary of Investments--Other than Investments in Related Parties....... 45
II.Condensed Financial Information of Registrant.......................... 46
III.Supplementary Insurance Information................................... 50
IV.Reinsurance............................................................ 52
V.Valuation and Qualifying Accounts....................................... 53
</TABLE>
Financial statement schedules not listed above are either omitted because
they are not applicable or the required information is shown in the
consolidated financial statements or in the notes thereto.
22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON THE CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
In our opinion, the consolidated financial statements and financial
statement schedules listed in the index on page 22 present fairly, in all
material respects, the financial position of The First American Financial
Corporation and its subsidiaries at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 10 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in fiscal year 1993.
PRICE WATERHOUSE LLP
Costa Mesa, California
February 28, 1996
23
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash and Cash Equivalents.......................... $145,902,000 $154,234,000
------------ ------------
Accounts and Accrued Income Receivable,
less allowances ($5,970,000 and $4,022,000)....... 75,069,000 47,103,000
------------ ------------
Income Tax Receivable.............................. 7,324,000
------------
Investments:
Deposits with savings and loan associations and
banks........................................... 18,637,000 18,538,000
Debt securities.................................. 128,875,000 149,190,000
Equity securities................................ 21,445,000 21,813,000
Other long-term investments...................... 25,230,000 25,224,000
------------ ------------
194,187,000 214,765,000
------------ ------------
Loans Receivable................................... 46,134,000 40,546,000
------------ ------------
Property and Equipment, at cost:
Land............................................. 15,031,000 14,599,000
Buildings........................................ 73,580,000 70,073,000
Furniture and equipment.......................... 103,885,000 90,542,000
Less--accumulated depreciation................... (73,672,000) (64,659,000)
------------ ------------
118,824,000 110,555,000
------------ ------------
Title Plants and Other Indexes..................... 82,454,000 54,781,000
------------ ------------
Assets Acquired in Connection with Claim
Settlements....................................... 25,592,000 27,223,000
------------ ------------
Deferred Income Taxes.............................. 39,994,000 43,726,000
------------ ------------
Goodwill and Other Intangibles, less accumulated
amortization ($9,227,000 and $7,464,000).......... 71,825,000 61,322,000
------------ ------------
Deferred Policy Acquisition Costs.................. 24,342,000 26,060,000
------------ ------------
Other Assets....................................... 49,455,000 41,010,000
------------ ------------
$873,778,000 $828,649,000
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
24
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1995 1994
------------ ------------
<S> <C> <C>
Demand Deposits..................................... $ 43,418,000 $ 38,695,000
------------ ------------
Accounts Payable and Accrued Liabilities:
Accounts payable.................................. 6,289,000 5,329,000
Salaries and wages................................ 20,872,000 18,935,000
Other............................................. 53,777,000 36,542,000
------------ ------------
80,938,000 60,806,000
------------ ------------
Deferred Revenue.................................... 104,315,000 117,828,000
------------ ------------
Reserve for Known and Incurred But Not Reported
Claims............................................. 238,161,000 206,743,000
------------ ------------
Income Tax Payable.................................. 2,812,000
------------
Notes and Contracts Payable......................... 77,206,000 89,600,000
------------ ------------
Minority Interests in Consolidated Subsidiaries..... 24,161,000 22,867,000
------------ ------------
Commitments and Contingencies (Notes 12 and 13)
Stockholders' Equity:
Preferred stock, $1 par value
Authorized--500,000 shares
Outstanding--None
Common stock, $1 par value
Authorized--24,000,000 shares
Outstanding--11,411,000 and 11,395,000 shares.... 11,411,000 11,395,000
Additional paid-in capital........................ 44,270,000 44,013,000
Retained earnings................................. 243,093,000 242,356,000
Net unrealized gain (loss) on securities.......... 3,993,000 (5,654,000)
------------ ------------
Total Stockholders' Equity.......................... 302,767,000 292,110,000
------------ ------------
$873,778,000 $828,649,000
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
25
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUES
Operating revenues.............. $1,227,185,000 $1,356,946,000 $1,379,781,000
Investment and other income..... 23,031,000 19,447,000 18,645,000
-------------- -------------- --------------
1,250,216,000 1,376,393,000 1,398,426,000
-------------- -------------- --------------
EXPENSES
Salaries and other personnel
costs.......................... 431,984,000 423,328,000 397,902,000
Premiums retained by agents..... 413,444,000 533,598,000 504,375,000
Other operating expenses........ 260,611,000 232,532,000 222,934,000
Provision for title losses and
other claims................... 90,387,000 110,230,000 125,588,000
Depreciation and amortization... 18,002,000 19,796,000 16,333,000
Interest........................ 6,242,000 6,267,000 4,419,000
Minority interests.............. 2,132,000 2,944,000 5,267,000
-------------- -------------- --------------
1,222,802,000 1,328,695,000 1,276,818,000
-------------- -------------- --------------
Income before premium and income
taxes............................ 27,414,000 47,698,000 121,608,000
Premium taxes..................... 13,627,000 15,453,000 17,617,000
-------------- -------------- --------------
Income before income taxes........ 13,787,000 32,245,000 103,991,000
Income taxes...................... 6,200,000 13,300,000 41,900,000
-------------- -------------- --------------
Income before cumulative effect of
a change in accounting for income
taxes............................ 7,587,000 18,945,000 62,091,000
Cumulative effect of a change in
accounting for income taxes...... 4,200,000
-------------- -------------- --------------
Net income........................ $ 7,587,000 $ 18,945,000 $ 66,291,000
============== ============== ==============
Per share data--based upon the
weighted average number
of common shares outstanding
Income before cumulative effect of
a change in accounting for income
taxes............................ $ 0.67 $ 1.66 $ 5.47
Cumulative effect of a change in
accounting for income taxes...... 0.37
-------------- -------------- --------------
Net income........................ $ 0.67 $ 1.66 $ 5.84
============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
26
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
ADDITIONAL LONG-TERM UNREALIZED
COMMON PAID-IN RETAINED DEBT OF GAIN (LOSS)
SHARES STOCK CAPITAL EARNINGS ESOT ON SECURITIES
---------- ----------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1992................... 11,260,000 $11,260,000 $39,662,000 $169,829,000 $(5,196,000) $ 1,287,000
Net income for 1993..... 66,291,000
Cash dividends on common
shares................. (5,840,000)
Shares issued in
connection with company
acquisitions........... 141,000 141,000 3,897,000
Shares issued in
connection with stock
bonus plan............. 46,000 46,000 1,154,000
Purchase of Company
shares................. (66,000) (66,000) (1,572,000)
Decrease in ESOT debt... 2,599,000
Net unrealized gain on
securities............. 226,000
---------- ----------- ----------- ------------ ----------- -----------
BALANCE AT DECEMBER 31,
1993................... 11,381,000 11,381,000 43,141,000 230,280,000 (2,597,000) 1,513,000
Net income for 1994..... 18,945,000
Cash dividends on common
shares................. (6,869,000)
Shares issued in
conneciton with company
acquisitions........... 85,000 85,000 2,596,000
Shares issued in
connection with stock
bonus plan............. 55,000 55,000 1,855,000
Purchase of Company
shares................. (126,000) (126,000) (3,579,000)
Decrease in ESOT debt... 2,597,000
Net unrealized loss on
securities............. (7,167,000)
---------- ----------- ----------- ------------ ----------- -----------
BALANCE AT DECEMBER 31,
1994................... 11,395,000 11,395,000 44,013,000 242,356,000 (5,654,000)
Net income for 1995..... 7,587,000
Cash dividends on common
shares................. (6,850,000)
Shares issued in
conneciton with company
acquisitions........... 105,000 105,000 2,607,000
Shares issued in
connection with stock
bonus plan............. 65,000 65,000 1,088,000
Purchase of Company
shares................. (154,000) (154,000) (3,438,000)
Net unrealized loss on
securities............. 9,647,000
---------- ----------- ----------- ------------ ----------- -----------
BALANCE AT DECEMBER 31,
1995................... 11,411,000 $11,411,000 $44,270,000 $243,093,000 $ 3,993,000
========== =========== =========== ============ =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
27
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1995 1994 1993
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income......................... $ 7,587,000 $ 18,945,000 $ 66,291,000
Adjustments to reconcile net income
to cash provided by operating
activities--
Cumulative effect of a change in
accounting for income taxes..... (4,200,000)
Provision for title losses and
other claims.................... 90,387,000 110,230,000 125,588,000
Depreciation and amortization.... 18,002,000 19,796,000 16,333,000
Minority interests in net income. 2,132,000 2,944,000 5,267,000
Other, net....................... 207,000 1,673,000 (1,639,000)
Changes in assets and liabilities
excluding effects of company
acquisitions and noncash
transactions--
Claims paid, including assets
acquired, net of recoveries..... (66,639,000) (87,579,000) (77,305,000)
Net change in income tax
accounts........................ 10,777,000 (19,159,000) (32,956,000)
(Increase) decrease in accounts
and accrued income receivable... (22,943,000) 17,809,000 (15,954,000)
Increase (decrease) in accounts
payable and accrued liabilities. 11,057,000 (5,140,000) 5,450,000
(Decrease) increase in deferred
revenue......................... (13,588,000) 8,544,000 23,341,000
Other, net....................... (6,542,000) (14,148,000) (4,488,000)
------------ ------------ -------------
CASH PROVIDED BY OPERATING
ACTIVITIES........................ 30,437,000 53,915,000 105,728,000
------------ ------------ -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Net cash effect of company
acquisitions...................... (30,921,000) (9,075,000) (3,803,000)
Net decrease in deposits with
banks............................. 901,000 2,864,000 1,822,000
Purchases of debt and equity
securities........................ (19,513,000) (94,826,000) (105,147,000)
Proceeds from sales of debt and
equity securities................. 41,066,000 40,755,000 33,799,000
Proceeds from maturities of debt
securities........................ 19,278,000 57,122,000 30,411,000
Net decrease (increase) in other
long-term investments............. 2,761,000 (1,643,000) (503,000)
Net increase in loans receivable... (5,588,000) (7,226,000) (2,501,000)
Capital expenditures............... (21,731,000) (34,562,000) (36,161,000)
Net proceeds from sale of property
and equipment..................... 757,000 32,367,000 3,885,000
------------ ------------ -------------
CASH USED FOR INVESTING ACTIVITIES. (12,990,000) (14,224,000) (78,198,000)
------------ ------------ -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net change in demand deposits...... 4,723,000 6,185,000 3,217,000
Proceeds from insurance of debt.... 20,000,000
Repayment of debt.................. (20,060,000) (31,366,000) (12,769,000)
Purchase of Company shares......... (3,592,000) (3,705,000) (1,638,000)
Cash dividends..................... (6,850,000) (6,869,000) (5,840,000)
------------ ------------ -------------
CASH USED FOR FINANCING ACTIVITIES. (25,779,000) (15,755,000) (17,030,000)
------------ ------------ -------------
Net (decrease) increase in cash and
cash equivalents................... (8,332,000) 23,936,000 10,500,000
Cash and cash equivalents--Beginning
of year............................ 154,234,000 130,298,000 119,798,000
------------ ------------ -------------
CASH AND CASH EQUIVALENTS--END OF
YEAR.............................. $145,902,000 $154,234,000 $ 130,298,000
============ ============ =============
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Interest.......................... $ 6,108,000 $ 6,153,000 $ 5,098,000
Premium taxes..................... $ 14,048,000 $ 18,478,000 $ 16,237,000
Income taxes...................... $ 6,580,000 $ 36,374,000 $ 73,549,000
Noncash investing and financing
activities:
Shares issued for stock bonus
plan............................. $ 1,153,000 $ 1,910,000 $ 1,200,000
Company acquisitions in exchange
for common stock................. $ 2,712,000 $ 2,681,000 $ 4,038,000
Net unrealized gain (loss) on
securities....................... $ 9,647,000 $ (7,167,000) $ 226,000
Liabilities in connection with
company acquisitions............. $ 20,345,000 $ 12,956,000 $ 20,011,000
Increase in equity due to
reduction of long-term debt of
ESOT............................. $ 2,597,000 $ 2,599,000
Debt incurred in connection with
purchase of real property........ $ 3,750,000
Debt incurred in connection with
the purchase of other
investments...................... $ 4,870,000
</TABLE>
See Notes to Consolidated Financial Statements
28
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements include the accounts of The First
American Financial Corporation and all majority-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Certain 1993 and 1994 amounts have been reclassified to conform with the 1995
presentation.
Cash equivalents
The Company considers cash equivalents to be all short-term investments
which have an initial maturity of 90 days or less and are not restricted for
statutory deposit or premium reserve requirements. The carrying amount for
cash equivalents is a reasonable estimate of fair value due to the short-term
maturity of these investments.
Investments
Deposits with savings and loan associations and banks are short-term
investments with initial maturities of more than 90 days. The carrying amount
of these investments is a reasonable estimate of fair value due to their
short-term nature.
Debt securities are carried at fair value and consist primarily of
investments in obligations of the United States Treasury, various corporations
and certain state and political subdivisions.
Equity securities are carried at fair value and consist primarily of
investments in marketable common and preferred stocks of corporate entities in
which the Company's ownership does not exceed 20%.
Other long-term investments consist primarily of investments in affiliates,
which are accounted for under the equity method of accounting, and notes
receivable, which are carried at the lower of cost or estimated realizable
value.
Realized gains and losses on investments are determined using the specific
identification method. Unrealized gains or losses on debt and equity
securities are included, net of related tax effects, as a separate component
of stockholders' equity.
Property and equipment
Depreciation on buildings and furniture and equipment is computed using the
declining balance and straight-line methods over estimated useful lives of 25
to 45 and 3 to 10 years, respectively.
Title plants and other indexes
Title plants and other indexes are carried at original cost. Appraised
values are used in conjunction with the acquisition of purchased subsidiaries.
The cost of daily maintenance (updating) of these plants and other indexes are
charged to expense as incurred. Because properly maintained title plants and
other indexes have indefinite lives and do not diminish in value with the
passage of time, no provision has been made for depreciation.
Assets acquired in connection with claim settlements
In connection with settlement of title insurance and other claims, the
Company sometimes purchases mortgages, deeds of trust, real property, or
judgment liens. These assets, sometimes referred to as "salvage assets," are
carried at the lower of cost or estimated realizable value, net of any
indebtedness thereon. Judgment liens primarily represent funds expended by the
Company to purchase judgments to satisfy title claims.
29
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Goodwill and other intangibles
Goodwill recognized in business combinations is amortized over its estimated
useful life ranging from 30 to 40 years. Other intangibles, which include
customer lists, covenants not to compete and organization costs, are amortized
over their estimated useful lives, ranging from 3 to 20 years.
Deferred policy acquisition costs
Deferred policy acquisition costs are directly related to the procurement of
home warranty and tax service contracts. These costs are deferred and
amortized to expense in the same pattern as contract fees are recognized as
revenues.
Reserve for known and incurred but not reported claims
The Company provides for title insurance losses based upon its historical
experience by a charge to expense when the related premium revenue is
recognized. Historically, major claims (i.e., claims greater than $0.5
million) were charged to expense as they became known because the unique
circumstances surrounding most major claims made it inherently impractical to
predict the incidence and amount of such claims. In the fourth quarter 1995,
the Company determined, with the assistance of an actuarial study, that
sufficient major claims data now exists to reasonably estimate a reserve for
incurred but not reported claims. Accordingly, the reserve for incurred but
not reported claims at December 31, 1995, includes major claims. The inclusion
of major claims did not have a material effect on the Company's financial
condition or results of operations. Title insurance losses and other claims
associated with ceded reinsurance are provided for as the company remains
contingently liable in the event that the reinsurer does not satisfy its
obligations. The reserve for known and incurred but not reported claims
reflects management's best estimate of the total costs required to settle all
claims reported to the Company and claims incurred but not reported. The
process applied to estimate claims costs is subject to many variables,
including changes and trends in the type of title insurance policies issued,
the real estate market and the interest rate environment. It is reasonably
possible that a change in the estimate will occur in the future.
The Company provides for claim losses relating to its home warranty business
based on the average cost per claim as applied to the total of new claims
incurred. The average cost per claim is calculated using the average of the
most recent twelve months of claims experience.
Operating revenues
Title premiums on policies issued directly by the Company are recognized on
the effective date of the title policy and escrow fees are recorded upon close
of the escrow. Revenues from title policies issued by independent agents are
recorded when notice of issuance is received from the agent.
Revenues from tax service contracts are recognized proportionately over the
estimated duration of the contracts as the related servicing costs are
estimated to occur. The majority of the servicing costs, approximately 70%, is
incurred in the year the contract is executed, with the remaining 30% incurred
over the remaining service life of the contract.
Revenues from home warranty contracts are recognized ratably over the 12-
month duration of the contracts.
Interest on loans with the Company's thrift subsidiary is recognized on the
outstanding principal balance on the accrual basis. Loan origination fees and
related direct loan origination costs are deferred and recognized over the
life of the loan.
30
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Premium taxes
Title insurance and home warranty companies, like other types of insurers,
are generally not subject to state income or franchise taxes. However, in lieu
thereof, most states impose a tax based primarily on insurance premiums
written. This premium tax is reported as a separate line item in the
consolidated statements of income in order to provide a more meaningful
disclosure of the taxation of the Company.
Income taxes
Taxes are based on income for financial reporting purposes and include
deferred taxes applicable to temporary differences between the financial
statement carrying amount and the tax basis of certain of the Company's assets
and liabilities.
Use of Estimates
Certain amounts and disclosures included in the consolidated financial
statements require management to make estimates which could differ from actual
results.
Fiduciary assets and liabilities
Assets and liabilities of the trusts and escrows administered by the Company
are not included in the consolidated balance sheets.
NOTE 2. STATUTORY RESTRICTIONS ON STOCKHOLDERS' EQUITY AND INVESTMENTS:
Pursuant to insurance and other regulations of the various states in which
the Company's title insurance subsidiary, First American Title Insurance
Company (FATICO), operates, the amount of dividends, loans and advances
available to the parent company from FATICO is limited, principally for the
protection of policyholders. Under such statutory regulations, the maximum
amount of dividends, loans and advances available to the parent company from
FATICO in 1996 is $44.6 million.
Investments carried at $12.8 million were on deposit with state treasurers
in accordance with statutory requirements for the protection of policyholders
at December 31, 1995.
FATICO maintained statutory capital and surplus of $205.6 million and $212.5
million at December 31, 1995 and 1994, respectively. Statutory net income for
the years ended December 31, 1995, 1994 and 1993 was $11.4 million, $15.5
million and $83.0 million respectively.
FATICO, domiciled in the state of California, prepares its statutory
financial statements in accordance with prescribed accounting practices which
include a variety of publications of the National Association of Insurance
Commissioners, state laws, regulations and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices
not so prescribed.
NOTE 3. DEBT AND EQUITY SECURITIES:
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." This standard requires that all debt and equity
securities, other than those that the Company has the ability and intent to
hold to maturity, be carried at fair value. The Company has classified its
securities portfolio as available-for-sale and, in accordance with SFAS No.
115, has included fair value adjustments as a separate component of
stockholders' equity, net of tax. Prior to January 1, 1994, the Company
reported only its equity securities at fair value with adjustments included,
net of tax, as a separate component of stockholders' equity.
31
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The amortized cost and estimated fair value of investments in debt
securities are as follows:
<TABLE>
<CAPTION>
GROSS
UNREALIZED ESTIMATED
AMORTIZED -------------- FAIR
COSTS GAINS LOSSES VALUE
--------- ------ ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
U.S. Treasury securities................... $ 42,325 $1,189 $ (68) $ 43,446
Corporate securities....................... 36,927 1,041 (72) 37,896
Obligations of states and political
subdivisions.............................. 39,644 291 (228) 39,707
Mortgage-backed securities................. 7,861 66 (101) 7,826
-------- ------ ------- --------
$126,757 $2,587 $ (469) $128,875
======== ====== ======= ========
DECEMBER 31, 1994
U.S. Treasury securities................... $ 51,586 $ 179 $(1,949) $ 49,816
Corporate securities....................... 36,773 20 (2,752) 34,041
Obligations of states and political
subdivisions.............................. 57,203 426 (2,932) 54,697
Mortgage-backed securities................. 11,722 32 (1,118) 10,636
-------- ------ ------- --------
$157,284 $ 657 $(8,751) $149,190
======== ====== ======= ========
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1995, by contractual maturities, are as follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less.................................. $ 22,315 $ 22,379
Due after one year through five years.................... 53,670 54,543
Due after five years through ten years................... 36,107 37,610
Due after ten years...................................... 6,804 6,517
-------- --------
118,896 121,049
Mortgage-backed securities............................... 7,861 7,826
-------- --------
$126,757 $128,876
======== ========
</TABLE>
32
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The cost and estimated fair value of investments in equity securities are as
follows:
<TABLE>
<CAPTION>
GROSS
UNREALIZED
-------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
------- ------ ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Common stocks:
Public utilities........................... $12,971 $2,510 $ (441) $15,040
Other...................................... 3,393 1,941 (27) 5,307
------- ------ ------- -------
16,364 4,451 (468) 20,347
Preferred stocks............................. 1,057 41 1,098
------- ------ ------- -------
$17,421 $4,492 $ (468) $21,445
======= ====== ======= =======
DECEMBER 31, 1994
Common stocks:
Public utilities........................... $16,280 $ 842 $(2,006) $15,116
Other...................................... 5,976 938 (384) 6,530
------- ------ ------- -------
22,256 1,780 (2,390) 21,646
Preferred stocks............................. 162 5 167
------- ------ ------- -------
$22,418 $1,785 $(2,390) $21,813
======= ====== ======= =======
</TABLE>
Sales of debt and equity securities resulted in realized gains of $1,316,000,
$108,000 and $332,000 and realized losses of $358,000, $457,000 and $38,000 for
the years ended December 31, 1995, 1994 and 1993, respectively. The fair value
of debt and equity securities was estimated using quoted market prices.
NOTE 4. LOANS RECEIVABLE:
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1995 1994
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Real estate-mortgage...................................... $ 48,899 $43,035
Assigned lease payments................................... 135 223
Other..................................................... 62 126
-------- -------
49,096 43,384
Unearned income on lease contracts........................ (41) (63)
Allowance for loan losses................................. (1,344) (950)
Participations sold....................................... (872) (1,017)
Deferred loan fees, net................................... (705) (808)
-------- -------
(2,962) (2,838)
-------- -------
$ 46,134 $40,546
======== =======
</TABLE>
33
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Real estate loans are secured by properties located in Southern California.
The average yields on the Company's loan portfolio for the years ended
December 31, 1995 and 1994, were 12% and 11%, respectively. Average yields are
affected by amortization of discounts on loans purchased from other
institutions, prepayment penalties recorded as income, loan fees amortized to
income, and the market interest rates charged by thrift and loan institutions.
The fair value of loans receivable was $47.2 million and $41.7 million at
December 31, 1995 and 1994, respectively, and was estimated based on the
discounted value of the future cash flows using the current rates being
offered for loans with similar terms to borrowers of similar credit quality.
The allowance for loan losses is maintained at a level that is considered
appropriate by management to provide for known and inherent risks in the
portfolio.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114 became effective in the current year. This
standard requires that an impaired loan be measured at the present value of
expected future cash flows discounted at the loan's effective interest rate.
As a practical expedient, the loan may be valued based on its observable
market price or the fair value of the collateral, if the loan is collateral
dependent. Adoption of this standard did not have a materially adverse effect
on the Company's financial condition or results of operations.
NOTE 5. ASSETS ACQUIRED IN CONNECTION WITH CLAIM SETTLEMENTS:
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Notes receivable............................................. $12,335 $10,313
Real estate.................................................. 5,796 7,240
Judgements and other......................................... 7,461 9,670
------- -------
$25,592 $27,223
======= =======
</TABLE>
The above amounts are net of valuation reserves of $11.2 million and $12.4
million at December 31, 1995 and 1994, respectively.
The fair value of notes receivable was $12.0 million and $9.7 million at
December 31, 1995 and 1994, respectively, and was estimated based on the
discounted value of the future cash flows using the current rates at which
similar loans would be made to borrowers of similar credit quality.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." This statement
will become effective for the Company's 1996 fiscal year and requires
companies to assess for potential impairments of long-lived assets and certain
identifiable intangibles when there is evidence that events or changes in
circumstances have made recovery of an asset's carrying value unlikely. The
Company believes that adoption of this standard will not have a materially
adverse effect on its financial condition or results of operations.
34
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The activity in the valuation reserve is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of year............................... $12,354 $11,581
Provision for losses....................................... 3,019 3,674
Dispositions............................................... (4,127) (2,901)
------- -------
Balance at end of year..................................... $11,246 $12,354
======= =======
</TABLE>
NOTE 6. DEMAND DEPOSITS:
Passbook and investment certificate accounts are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Passbook.................................................... $12,053 $11,107
Certificate accounts:
Less than one year......................................... 17,690 18,762
One to five years.......................................... 13,675 8,826
------- -------
$43,418 $38,695
======= =======
Annualized interest rates:
Passbook................................................... 5%-6% 4%-5%
Certificate accounts....................................... 5%-8% 4%-9%
</TABLE>
The fair value of investment certificate accounts was $31.6 million and
$25.6 million at December 31, 1995 and 1994, respectively, and was estimated
based on the discounted value of the future cash flows using a discount rate
approximating current market for similar liabilities. The carrying value of
the passbook account approximates fair value due to the short-term nature of
this liability.
NOTE 7. RESERVE FOR KNOWN AND INCURRED BUT NOT REPORTED CLAIMS:
Activity in the reserve for known and incurred but not reported claims is
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year....................... $206,743 $180,333 $135,212
-------- -------- --------
Provision related to:
Current year..................................... 82,632 98,900 112,652
Prior years...................................... 7,755 11,330 12,936
-------- -------- --------
Total provision.................................... 90,387 110,230 125,588
-------- -------- --------
Payments related to:
Current year..................................... 25,039 23,314 18,552
Prior year....................................... 40,934 56,832 56,664
-------- -------- --------
Total payments..................................... 65,973 80,146 75,216
-------- -------- --------
Other.............................................. 7,004 (3,674) (5,251)
-------- -------- --------
Balance at end of year............................. $238,161 $206,743 $180,333
======== ======== ========
</TABLE>
35
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
"Other" primarily represents reclassifications to the reserve for assets
acquired in connection with claim settlements. Included in "Other" for 1995 is
$10.0 million in purchase accounting adjustments. Claims activity associated
with reinsurance is not material and, therefore, not presented separately.
NOTE 8. NOTES AND CONTRACTS PAYABLE:
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Secured notes payable pursuant to amended credit agreement..... $49,250 $61,000
Trust deed notes with maturities through 2017, secured by land
and buildings with a net book value of $13,266, average rate
of 8 1/2%..................................................... 9,386 10,783
Other notes and contracts payable with maturities through 2004,
average rate of 7 1/2%........................................ 18,570 17,817
------- -------
$77,206 $89,600
======= =======
</TABLE>
At December 31, 1995, the Company's borrowings under its bank credit
agreement consisted of $7.6 million of fixed rate indebtedness ($8.4 million
at December 31, 1994), maturing in April 1999 and bearing interest at 9.38%
per annum; and $41.6 million of variable rate indebtedness ($52.6 million at
December 31, 1994), maturing in October 2000 and bearing interest at the
higher of Chase Manhattan Bank's prime lending rate or the federal funds rate
plus 1/2%. The Company may, at its election, use a reduced interest rate
option of LIBOR plus 1 1/4% for the majority of the variable rate
indebtedness.
During November 1994, the Company amended the credit agreement to borrow an
additional $20.0 million of variable rate indebtedness to pay off an existing
higher rate trust deed note. In addition, the amendment provided for a $30.0
million revolving line of credit which was unused as of December 31, 1995.
In February 1996, the Company further amended the credit agreement to
provide for more favorable pricing for its LIBOR option. The applicable
margins range from .50% to 1.00% depending on claims paying or financial
strength ratings or the Company's adjusted leverage ratio. The amendment also
provides for the elimination and/or relaxation of certain restrictive
covenants.
The terms of the amended credit agreement provide for quarterly amortization
of all credit agreement indebtedness. The minimum quarterly payment is $1.7
million and the maximum quarterly payment is $3.0 million. The Company has the
right to prepay the variable rate indebtedness but may prepay the fixed rate
indebtedness only with the consent of the holder thereof. In addition,
pursuant to the terms of the credit agreement, the Company must satisfy a
number of financial convenants and has agreed to be bound by certain
restrictive covenants. These covenants include, among others, limitations on
the incurrence of additional indebtedness and/or liens, as well as
restrictions on defined investments, acquisitions, dispositions, payments of
dividends and capital expenditures. Further, the Company is required to
maintain minimum levels of capital and earnings and meet predetermined debt to
equity ratios and fixed charge coverage ratios.
As security for its obligations to the lenders under the credit agreement,
the Company has pledged the capital stock of its direct wholly owned operating
subsidiaries, First American Title Insurance Company, First American Trust
Company and First American Real Estate Information Services, Inc., which, in
the aggregate, represent substantially all of its assets.
36
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate annual maturities for notes and contracts payable in each of
the five years after December 31, 1995, are as follows (in thousands):
<TABLE>
<S> <C>
1996.............................................................. $19,504
1997.............................................................. $16,852
1998.............................................................. $14,342
1999.............................................................. $12,375
2000.............................................................. $ 8,358
</TABLE>
The fair value of notes and contracts payable was $77.7 million and $86.0
million at December 31, 1995 and 1994, respectively, and was estimated based
on the current rates offered to the Company for debt of the same remaining
maturities. The weighted average interest rate for the Company's notes and
contracts payable was 7 1/2% and 8% at December 31, 1995 and 1994,
respectively.
NOTE 9. INVESTMENT AND OTHER INCOME:
The components of investment and other income are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest:
Cash equivalents and deposits with savings and loan
associations and banks............................. $ 3,308 $ 2,695 $ 2,627
Debt securities..................................... 9,270 9,424 8,157
Other long-term investments......................... 2,401 1,785 1,390
------- ------- -------
14,979 13,904 12,174
Dividends on equity securities........................ 1,088 925 521
Equity in earnings of unconsolidated affiliates....... 748 199 1,557
Net gain (loss) on sales of debt and equity
securities........................................... 958 (349) 294
Other................................................. 5,258 4,768 4,099
------- ------- -------
$23,031 $19,447 $18,645
======= ======= =======
</TABLE>
NOTE 10. INCOME TAXES:
Income taxes are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1995 1994 1993
------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal....................................... $3,442 $13,033 $ 51,522
State......................................... 1,810 2,271 8,250
------ ------- --------
5,252 15,304 59,772
------ ------- --------
Deferred:
Federal....................................... 70 (684) (17,288)
State......................................... 878 (1,320) (584)
------ ------- --------
948 (2,004) (17,872)
------ ------- --------
$6,200 $13,300 $ 41,900
====== ======= ========
</TABLE>
37
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income taxes differ from the amounts computed by applying the Federal income
tax rate of 35%. A reconciliation of this difference is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Taxes calculated at federal rate.............. $ 4,825 $11,286 $36,397
Tax exempt interest income.................... (719) (720) (330)
Tax effect of minority interests.............. 746 985 1,844
State taxes, net of federal benefit........... 2,456 618 4,778
Use of federal capital loss carryforward...... (648)
Exclusion of certain meals and entertainment
expenses..................................... 2,391 2,630 916
Change in tax reserves........................ (2,301)
Other items, net.............................. (1,198) (851) (1,705)
------- ------- -------
$ 6,200 $13,300 $41,900
======= ======= =======
</TABLE>
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No.
109 provides that deferred tax assets and liabilities be recognized for
temporary differences between the financial statement carrying amount and the
tax basis of certain of the Company's assets and liabilities. In addition,
SFAS No. 109 requires that deferred tax assets and liabilities be measured
using enacted tax rates expected to apply to taxable income in the years in
which the temporary differences are expected to be recovered or settled. The
impact on deferred taxes of changes in tax rates and laws, if any, is
reflected in the financial statements in the period of enactment. In some
situations, SFAS No. 109 permits the recognition of expected benefits of
utilizing net operating loss and tax credit carryforwards.
Pursuant to the method prescribed under Accounting Principles Board Opinion
(APB) No. 11, "Accounting for Income Taxes," which was effective for years
ending prior to January 1, 1993, deferred income taxes were recognized for
income and expense items reported in different periods for financial reporting
and income tax purposes using the applicable tax rate for the year in which
the differences originated. Deferred taxes under APB No. 11 were not permitted
to be adjusted for subsequent changes in tax rates.
The Company did not restate its financial statements for prior years since
such restatement is not required under SFAS No. 109. Instead, the Company
recognized a benefit of $4.2 million, or $.37 per share, representing the
cumulative effect of a change in accounting for income taxes. The cumulative
effect represented the adjustment of previously recorded deferred tax assets
and liabilities to reflect lower prevailing tax rates, and the related
adjustment of certain other balance sheet accounts. The effect of the
adjustments to other balance sheet accounts was to increase deferred revenue
by $11.5 million, accrued expenses by $3.0 million and reserves for claims by
$0.8 million, and to decrease goodwill by $1.9 million.
38
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The primary components of temporary differences which give rise to the
Company's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Deferred revenue...................................... $25,474 $29,504
Employee benefits..................................... 8,433 8,431
Title claims and related salvage...................... 14,612 8,251
Unrealized loss on securities......................... 3,045
Federal capital loss carryforward..................... 1,898
Bad debt reserves..................................... 2,467 1,730
Federal net operating loss carryforward............... 1,251 1,251
Other................................................. 4,459 3,532
Valuation allowance................................... (856) (2,880)
------- -------
Total deferred tax assets............................ 55,840 54,762
------- -------
Deferred tax liabilities:
Depreciable and amortizable assets.................... 10,540 8,939
Unrealized gain on securities......................... 2,150
Sale leaseback........................................ 1,066 52
Other................................................. 2,090 2,045
------- -------
Total deferred tax liabilities....................... 15,846 11,036
------- -------
Net deferred tax asset.................................. $39,994 $43,726
======= =======
</TABLE>
The Company has federal net operating loss carryforwards of approximately
$3.6 million at December 31, 1995, that expire in 1999. The utilization of
these net operating losses is limited to future federal taxable income of
First American Real Estate Information Services, Inc., a wholly owned
subsidiary of the Company. The utilization of the loss carryforward is also
subject to limitations prescribed by Section 382 of the Internal Revenue Code.
The Company maintains a valuation allowance for certain temporary
differences for which it is more likely than not the Company will not receive
benefits.
NOTE 11. EMPLOYEE BENEFIT PLANS:
The Company has pension and other retirement benefit plans covering
substantially all employees. The Company's principal pension plan, amended to
be noncontributory effective January 1, 1995, is a qualified defined benefit
plan with benefits based on the employee's years of service and the highest
five consecutive years' compensation during the last ten years of employment.
The Company's policy is to fund all accrued pension costs. Contributions are
intended to provide not only for benefits attributable to past service, but
also for those benefits expected to be earned in the future. The Company also
has non-qualified unfunded supplemental benefit plans covering certain key
management personnel. Benefits under these plans are intended to be funded
with proceeds from life insurance policies purchased by the Company on the
lives of the executives.
39
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net pension cost for the Company's pension and other retirement benefit
plans includes the following components:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the
year........................................ $ 7,798 $ 5,400 $ 3,758
Interest cost on projected benefit
obligation.................................. 8,741 7,631 6,727
Actual (gain) loss on plan assets............ (9,636) 1,065 (4,495)
Net amortization and deferral................ 4,674 (5,740) (62)
------- ------- -------
Net periodic pension cost.................... $11,577 $ 8,356 $ 5,928
======= ======= =======
</TABLE>
The following table sets forth the plans' status at:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------
1995 1994
---------------------- ----------------------
UNFUNDED UNFUNDED
FUNDED SUPPLEMENTAL FUNDED SUPPLEMENTAL
PENSION BENEFIT PENSION BENEFIT
PLANS PLANS PLANS PLANS
-------- ------------ -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Present value of benefit
obligation:
Vested benefits.......... $(68,977) $(15,100) $(51,414) $(12,972)
Non-vested benefits...... (5,250) (3,828) (5,918) (2,782)
-------- -------- -------- --------
Accumulated benefit obliga-
tion...................... (74,227) (18,928) (57,332) (15,754)
Value of future pay in-
creases................... (25,165) (5,374) (23,730) (4,546)
-------- -------- -------- --------
Total projected benefit ob-
ligation.................. (99,392) (24,302) (81,062) (20,300)
Plan assets at fair value.. 71,929 65,537
-------- -------- -------- --------
Plan assets less than pro-
jected benefit obligation. (27,463) (24,302) (15,525) (20,300)
Unrecognized net (asset)
obligation
at transition............. (359) 2,162 (409) 2,522
Prior service cost not yet
recognized................ (543) 495 (236) 559
Unrecognized net loss...... 21,065 4,091 16,459 1,691
Adjustment to recognize
minimum liability......... (1,374) (226)
-------- -------- -------- --------
Prepaid (accrued) pension
costs..................... $ (7,300) $(18,928) $ 289 $(15,754)
======== ======== ======== ========
</TABLE>
The rates of increase in future compensation levels for the plans of 4 1/2%
and 5% and the weighted average discount rates of 7 3/4% and 8 1/4% were used
in determining the actuarial present value of the projected benefit obligation
at December 31, 1995 and 1994, respectively. The majority of pension plan
assets are invested in U.S. government securities, time deposits and common
stocks with projected long-term rates of return of 9%.
The Company's principal profit sharing plan was amended effective January 1,
1995, to discontinue future contributions. The plan holds 1,675,000 and
1,844,000 shares of the Company's common stock, representing 15% and 16% of
the total shares outstanding at December 31, 1995, and 1994, respectively.
Contributions to the Company's profit sharing plans totaled $2.0 million and
$3.0 million for 1994 and 1993, respectively.
The Company also has a Stock Bonus Plan for key employees pursuant to which
65,000, 55,000 and 46,000 common shares were awarded for 1995, 1994 and 1993,
respectively, resulting in a charge to operations of $1.2 million, $1.9
million and $1.2 million respectively. The Plan, as amended December 9, 1992,
provides that a total of up to 200,000 common shares may be awarded in any one
year.
40
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective January 1, 1995, the Company adopted The First American Financial
Corporation 401(k) Savings Plan ("The Savings Plan"), which is available to
substantially all employees. The Savings Plan allows for employee elective
contributions up to the maximum deductible amount as determined by the
Internal Revenue Code.
In December 1990, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." This standard was effective for
1993 and focuses principally on postretirement health care and life insurance
benefits and requires accrual of the expected cost of providing those benefits
over the service lives of the employees. Compliance with this standard did not
have a materially adverse effect on the Company's financial condition or
results of operations.
In November 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits." This standard was effective for 1994 and focuses
principally on benefits provided to former or inactive employees after
employment but before retirement. Compliance with this standard did not have a
materially adverse effect on the Company's financial condition or results of
operations.
NOTE 12. COMMITMENTS:
The Company leases certain office facilities, automobiles and equipment
under operating leases, which for the most part are renewable. The majority of
these leases also provide that the Company will pay insurance and taxes. In
December 1994, the Company entered into a sale-leaseback agreement with regard
to certain furniture and equipment with a net book value of $22.4 million.
Proceeds from the sale amounted to $31.4 million and a gain of $9.0 million
has been included in deferred revenue and will be amortized over the life of
the lease. Under the agreement, the Company has agreed to lease the equipment
for four years with minimum annual lease payments of $8.3 million.
Future minimum rental payments under operating leases that have initial or
remaining noncancelable lease terms in excess of one year as of December 31,
1995, are as follow (in thousands):
<TABLE>
<S> <C>
1996............................................................. $ 47,623
1997............................................................. 40,193
1998............................................................. 33,163
1999............................................................. 23,012
2000............................................................. 11,321
Later years...................................................... 20,707
--------
$176,019
========
</TABLE>
Total rental expense for all operating leases and month-to-month rentals was
$58.6 million, $50.1 million and $46.0 million for 1995, 1994 and 1993,
respectively.
NOTE 13. LITIGATION:
On April 13, 1990, a class action was filed in the United States District
Court in Phoenix, Arizona, against First American Title Insurance Company and
a number of other title insurers. This action seeks damages and injunctive
relief based on the defendants' participation in rating bureaus in Arizona and
Wisconsin.
41
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The case is now before the District Court for coordinated or consolidated
pretrial proceedings with an action that was filed in the United States
District Court for the Eastern District of Wisconsin. The Wisconsin federal
action presents claims on behalf of a purported class of purchasers of title
insurance in Wisconsin, and seeks damages and other forms of relief, similar
to those involved in the federal action filed in Arizona, with respect to
participation in the rating bureau in Wisconsin.
The Company does not believe that the ultimate resolution of these actions
will have a materially adverse effect on its financial condition or results of
operations.
The Company is involved in various routine legal proceedings related to its
operations. While the ultimate disposition of each proceeding is not
determinable, the Company does not believe that any of such proceedings will
have a materially adverse effect on its financial condition or results of
operations.
NOTE 14. SEGMENT FINANCIAL INFORMATION:
The Company's operations include four reportable segments: title insurance,
real estate information, home warranty and trust and banking. The title
insurance segment issues policies which are insured statements of the
condition of title to real property. The real estate information segment
provides to lender customers the status of tax payments on real property
securing their loans, credit information derived from at lease two credit
bureau sources and flood zone determination reports which provide information
on whether or not a property is in a special flood hazard area. The home
warranty segment issues one-year warranties which protect homeowners against
defects in home fixtures. The trust and banking segment provides full-service
trust and depository services, accepts deposits and makes real estate secured
loans.
The title insurance and real estate information segments operate through
networks of offices nationwide. The Company offers its title services through
both direct operations and agents throughout the Unites States. It also
provides title services abroad in the Bahama Islands, Bermuda, Canada, Guam,
Mexico, Puerto Rico, the U.S. Virgin Islands, and the United Kingdom. Home
warranty services are available in Arizona, California, Nevada, Texas and
Washington. The trust, banking and thrift businesses operate in Southern
California.
42
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Selected financial information about the Company's operations by segment for
each of the past three years is as follows:
<TABLE>
<CAPTION>
DEPRECIATION
PRETAX AND CAPITAL
REVENUES PROFIT (LOSS) ASSETS AMORTIZATION EXPENDITURES
---------- ------------- -------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1995
Title Insurance......... $1,052,823 $ 17,540 $532,697 $12,208 $18,130
Real Estate Information. 147,004 19,690 182,499 4,565 2,294
Home Warranty........... 35,531 6,828 56,637 289 118
Trust and Banking....... 14,110 3,304 63,416 331 1,189
Corporate............... 748 (19,948) 38,529 609
---------- -------- -------- ------- -------
$1,250,216 $ 27,414 $873,778 $18,002 $21,731
========== ======== ======== ======= =======
1994
Title Insurance......... $1,236,663 $ 37,819 $546,103 $16,070 $27,694
Real Estate Information. 96,113 17,371 139,680 2,916 5,979
Home Warranty........... 30,985 6,709 53,834 275 170
Trust and Banking....... 12,433 3,214 55,423 236 719
Corporate............... 199 (17,415) 33,609 299
---------- -------- -------- ------- -------
$1,376,393 $ 47,698 $828,649 $19,796 $34,562
========== ======== ======== ======= =======
1993
Title Insurance......... $1,264,565 $ 97,314 $530,438 $13,839 $30,141
Real Estate Information. 95,685 35,046 139,487 1,668 5,412
Home Warranty........... 24,888 5,477 49,508 274 558
Trust and Banking....... 11,731 3,313 48,155 211 50
Corporate............... 1,557 (19,542) 18,860 341
---------- -------- -------- ------- -------
$1,398,426 $121,608 $786,448 $16,333 $36,161
========== ======== ======== ======= =======
</TABLE>
Corporate consists primarily of unallocated interest expense, minority
interests, equity in earnings of affiliated companies, employee benefit
contributions and personnel and other operating expenses associated with the
Company's home office facilities.
43
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
QUARTERLY FINANCIAL DATA
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Revenues............................ $261,154 $293,240 $331,328 $364,494
======== ======== ======== ========
Income (loss) before income taxes... $(21,509) $ 1,837 $ 15,520 $ 17,939
======== ======== ======== ========
Net income (loss)................... $(12,709) $ 1,137 $ 9,320 $ 9,839
======== ======== ======== ========
Net income (loss) per share......... $ (1.11) $ 0.10 $ 0.81 $ 0.87
======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1994
Revenues............................ $372,436 $369,011 $334,870 $300,076
======== ======== ======== ========
Income (loss) before taxes.......... $ 16,498 $ 13,434 $ 7,090 $ (4,777)
======== ======== ======== ========
Net income (loss)................... $ 9,398 $ 7,634 $ 4,790 $ (2,877)
======== ======== ======== ========
Net income (loss) per share......... $ 0.82 $ 0.67 $ 0.42 $ (0.25)
======== ======== ======== ========
</TABLE>
The Company's primary business segments are cyclical in nature, with the
spring and summer months historically being the strongest. However, interest
rate adjustment by the Federal Reserve Board during the last few years have
caused unusual fluctuations in the Company's quarterly operating results. See
Management's Discussion and Analysis on page 15 of this report for further
discussion of the Company's results of operations.
44
<PAGE>
SCHEDULE I
1 OF 1
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
-------- ------------ ------------ ---------------
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST MARKET VALUE BALANCE SHEET
------------------ ------------ ------------ ---------------
<S> <C> <C> <C>
Deposits with savings and loan asso-
ciations and banks:
Registrant........................ $ 50,000 $ 50,000 $ 50,000
------------ ------------ ------------
Consolidated...................... $ 18,637,000 $ 18,637,000 $ 18,637,000
------------ ------------ ------------
Debt securities:
Registrant--None
Consolidated--
U.S. Treasury securities.......... $ 42,325,000 $ 43,446,000 $ 43,446,000
Corporate securities............ 36,927,000 37,896,000 37,896,000
Obligations of states and
political subdivisions......... 39,644,000 39,707,000 39,707,000
Mortgage-backed securities...... 7,861,000 7,826,000 7,826,000
------------ ------------ ------------
$126,757,000 $128,875,000 $128,875,000
------------ ------------ ------------
Equity securities:
Registrant--None
Consolidated...................... $ 17,421,000 $ 21,445,000 $ 21,445,000
------------ ------------ ------------
Other long-term investments:
Registrant--None
Consolidated...................... $ 25,230,000 $ 25,230,000 $ 25,230,000
------------ ------------ ------------
Total Investments:
Registrant........................ $ 50,000 $ 50,000 $ 50,000
============ ============ ============
Consolidated...................... $188,045,000 $194,187,000 $194,187,000
============ ============ ============
</TABLE>
45
<PAGE>
SCHEDULE II
1 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash and cash equivalents.......................... $ 19,415,000 $ 15,178,000
------------ ------------
Stock of subsidiaries, at equity................... 469,511,000 446,672,000
------------ ------------
Deposits with savings and loan associations and
banks............................................. 50,000
------------
Equity securities.................................. 1,708,000
------------
Property and equipment, at cost:
Land............................................. 425,000 425,000
Buildings and building improvements.............. 5,006,000 5,006,000
Less--accumulated depreciation................... (4,256,000) (4,071,000)
------------ ------------
1,175,000 1,360,000
------------ ------------
Other assets....................................... 4,924,000 5,427,000
------------ ------------
$495,075,000 $470,345,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable.................................. $ 1,742,000 $ 1,740,000
------------ ------------
Accrued expenses................................... 524,000 519,000
------------ ------------
Payable to subsidiaries............................ 130,281,000 105,094,000
------------ ------------
Notes and contracts payable........................ 59,761,000 70,882,000
------------ ------------
Stockholders' equity:
Preferred stock, $1 par value
Authorized--500,000 shares;
Outstanding--None
Common stock, $1 par value
Authorized--24,000,000 shares;
Outstanding--11,411,000 and 11,395,000 shares... 11,411,000 11,395,000
Additional paid-in capital....................... 44,270,000 44,013,000
Retained earnings................................ 243,093,000 242,356,000
Net unrealized gain (loss) on securities......... 3,993,000 (5,654,000)
------------ ------------
Total stockholders' equity......................... 302,767,000 292,110,000
------------ ------------
$495,075,000 $470,345,000
============ ============
</TABLE>
See Notes to Parent Company Financial Statements
46
<PAGE>
SCHEDULE II
2 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Interest and other income................ $ 837,000 $ 846,000 $ 477,000
Equity in earnings of subsidiaries....... 25,803,000 33,249,000 82,126,000
----------- ----------- -----------
26,640,000 34,095,000 82,603,000
----------- ----------- -----------
Expenses:
Interest................................. 5,040,000 3,781,000 3,976,000
Depreciation............................. 185,000 186,000 186,000
Other administrative expenses............ 13,828,000 11,183,000 12,150,000
----------- ----------- -----------
19,053,000 15,150,000 16,312,000
----------- ----------- -----------
Net income................................. $ 7,587,000 $18,945,000 $66,291,000
=========== =========== ===========
Net income per share, based upon the
weighted average number of shares
outstanding............................... $ 0.67 $ 1.66 $ 5.84
=========== =========== ===========
</TABLE>
See Notes to Parent Company Financial Statements
47
<PAGE>
SCHEDULE II
3 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................... $ 7,587,000 $ 18,945,000 $ 66,291,000
Adjustments to reconcile net income
to cash provided by operating
activities--
Depreciation..................... 185,000 186,000 186,000
Expense relating to stock bonus
plan............................ 1,153,000 1,910,000 1,200,000
Equity in earnings of
subsidiaries, net of dividends.. (25,802,000) (24,249,000) (82,126,000)
Other............................ (225,000)
Changes in assets and
liabilities, excluding effects
of company acquisitions and
noncash transactions--
Decrease (increase) in other
assets........................ 503,000 310,000 (300,000)
Increase (decrease) in
dividends payable and accrued
expenses...................... 7,000 123,000 (851,000)
Increase in intercompany ac-
counts........................ 40,509,000 21,086,000 32,152,000
------------ ------------ ------------
Cash provided by operating activi-
ties................................ 23,917,000 18,311,000 16,552,000
------------ ------------ ------------
Cash flows from investing activities:
Net decrease (increase) in deposits
with banks........................ (50,000) 100,000
Purchases of equity securities..... (1,957,000)
Sales of equity securities......... 1,933,000
------------ ------------ ------------
Cash provided by (used for) investing
activities.......................... 1,883,000 (1,957,000) 100,000
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of debt..... 20,000,000
Repayment of debt.................. (11,121,000) (11,245,000) (10,910,000)
Purchase of Company shares......... (3,592,000) (3,705,000) (1,638,000)
Cash dividends..................... (6,850,000) (6,869,000) (5,840,000)
------------ ------------ ------------
Cash used for financing activities... (21,563,000) (1,819,000) (18,388,000)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................... 4,237,000 14,535,000 (1,736,000)
Cash and cash equivalents--
Beginning of year.................. 15,178,000 643,000 2,379,000
------------ ------------ ------------
End of year........................ $ 19,415,000 $ 15,178,000 $ 643,000
============ ============ ============
Supplementary information:
Cash paid during the year for
interest.......................... $ 4,986,000 $ 3,654,000 $ 4,556,000
Noncash investing and financing
activities:
Shares issued for stock bonus plan. $ 1,153,000 $ 1,910,000 $ 1,200,000
Company acquisitions in exchange
for common stock.................. $ 2,712,000 $ 2,681,000 $ 4,038,000
Increase in equity due to reduction
of long-term debt of ESOT......... $ 2,597,000 $ 2,599,000
Liabilities in connection with com-
pany acquisitions................... $ 7,027,000
</TABLE>
See Notes to Parent Company Financial Statements
48
<PAGE>
SCHEDULE II
4 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
NOTE A
The composition of the Notes and Contracts Payable consists of:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1995 1994
----------- -----------
<S> <C> <C>
Secured notes payable to financial institutions........ $49,250,000 $61,000,000
Trust deed notes with maturities through 2002, average
rate of 10%. Secured by land and buildings with an ag-
gregate net book value of $899,000.................... 895,000 1,866,000
Other notes and contracts payable with maturities
through 2000, average
rate of 7 1/4%........................................ 9,616,000 8,016,000
----------- -----------
$59,761,000 $70,882,000
=========== ===========
</TABLE>
The aggregate annual maturities for notes and contracts payable in each of
the five years after December 31, 1995, are $14,803,000, $14,450,000,
$12,324,000, $10,667,000, and $7,302,000 respectively.
NOTE B
The parent company files a consolidated tax return with its subsidiary
companies in which it owns 80% or more of the outstanding stock. The current
and cumulative tax effects relating to the operations of the parent company
are reflected in the accounts of First American Title Insurance Company.
49
<PAGE>
SCHEDULE
III
1 OF 2
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INSURANCE INFORMATION
BALANCE SHEET CAPTIONS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
-------- ----------- ------------ ------------
DEFERRED
POLICY
ACQUISITION CLAIMS DEFERRED
SEGMENT COSTS RESERVES REVENUES
------- ----------- ------------ ------------
<S> <C> <C> <C>
1995
Title Insurance........................... $232,081,000 $ 6,641,000
Real Estate Information................... $22,078,000 3,686,000 82,581,000
Home Warranty............................. 2,264,000 2,394,000 15,093,000
Trust and Banking.........................
Corporate.................................
----------- ------------ ------------
Total................................... $24,342,000 $238,161,000 $104,315,000
=========== ============ ============
1994
Title Insurance........................... $202,069,000 $ 8,896,000
Real Estate Information................... $24,312,000 2,841,000 95,985,000
Home Warranty............................. 1,748,000 1,833,000 12,947,000
Trust and Banking.........................
Corporate.................................
----------- ------------ ------------
Total................................... $26,060,000 $206,743,000 $117,828,000
=========== ============ ============
</TABLE>
50
<PAGE>
SCHEDULE III
2 OF 2
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INSURANCE INFORMATION
INCOME STATEMENT CAPTIONS
<TABLE>
<CAPTION>
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J
-------- -------------- ----------- ------------ ------------ ------------
AMORTIZATION
OF DEFERRED
NET POLICY OTHER
OPERATING INVESTMENT LOSS ACQUISITION OPERATING
SEGMENT REVENUES INCOME PROVISION COSTS EXPENSES
------- -------------- ----------- ------------ ------------ ------------
1995
<S> <C> <C> <C> <C> <C>
Title Insurance......... $1,034,789,000 $18,034,000 $ 68,338,000 $188,024,000
Real Estate Information. 145,755,000 1,249,000 3,166,000 $5,891,000 55,276,000
Home Warranty........... 32,531,000 3,000,000 18,857,000 1,748,000 95,000
Trust and Banking....... 14,110,000 26,000 5,650,000
Corporate............... 748,000 3,927,000
-------------- ----------- ------------ ---------- ------------
Total................. $1,227,185,000 $23,031,000 $ 90,387,000 $7,639,000 $252,972,000
============== =========== ============ ========== ============
<CAPTION>
1994
<S> <C> <C> <C> <C> <C>
Title Insurance......... $1,221,581,000 $15,082,000 $ 93,012,000 $184,723,000
Real Estate Information. 94,816,000 1,297,000 2,129,000 $4,536,000 32,943,000
Home Warranty........... 28,116,000 2,869,000 15,022,000 1,447,000 454,000
Trust and Banking....... 12,433,000 67,000 4,829,000
Corporate............... 199,000 3,600,000
-------------- ----------- ------------ ---------- ------------
Total................. $1,356,946,000 $19,447,000 $110,230,000 $5,983,000 $226,549,000
============== =========== ============ ========== ============
<CAPTION>
1993
<S> <C> <C> <C> <C> <C>
Title Insurance......... $1,249,322,000 $15,243,000 $111,038,000 $183,213,000
Real Estate Information. 95,069,000 616,000 2,683,000 $3,448,000 26,108,000
Home Warranty........... 22,402,000 2,486,000 11,762,000 1,178,000 121,000
Trust and Banking....... 11,731,000 105,000 4,140,000
Corporate............... 1,557,000 4,726,000
-------------- ----------- ------------ ---------- ------------
Total................. $1,378,524,000 $19,902,000 $125,588,000 $4,626,000 $218,308,000
============== =========== ============ ========== ============
</TABLE>
51
<PAGE>
SCHEDULE IV
1 OF 1
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
REINSURANCE
<TABLE>
<CAPTION>
TITLE
INSURANCE
OPERATING TITLE
REVENUES CEDED TO ASSUMED INSURANCE PERCENTAGE OF
BEFORE OTHER FROM OTHER OPERATING AMOUNT ASSUMED TO
SEGMENT REINSURANCE COMPANIES COMPANIES REVENUES OPERATING REVENUES
- ------- -------------- ---------- ---------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
1995 $1,034,435,000 $2,840,000 $3,194,000 $1,034,789,000 .3%
============== ========== ========== ============== ===
1994 $1,220,581,000 $4,362,000 $5,362,000 $1,221,581,000 .4%
============== ========== ========== ============== ===
1993 $1,247,657,000 $2,542,000 $4,207,000 $1,249,322,000 .3%
============== ========== ========== ============== ===
</TABLE>
52
<PAGE>
SCHEDULE V
1 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ ---------------------- ----------- ------------
ADDITIONS
----------------------
BALANCE CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING OF COSTS AND OTHER FROM END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS RESERVE PERIOD
----------- ------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Reserve deducted from
accounts receivable:
Registrant--None
Consolidated.......... $ 4,022,000 $ 2,965,000 $ 1,017,000(A) $ 5,970,000
============ =========== =========== ============
Reserve for title losses
and other claims:
Registrant--None
Consolidated.......... $206,743,000 $90,387,000 $7,004,000(B) $65,973,000(C) $238,161,000
============ =========== ========== =========== ============
Reserve deducted from
loans receivable:
Registrant--None
Consolidated.......... $ 950,000 $ 562,000 $ 168,000(A) $ 1,344,000
============ =========== =========== ============
Reserve deducted from
other investments:
Registrant--None
Consolidated.......... $ 353,000 $ 353,000
============ ============
Reserve deducted from
assets acquired in
connection with claim
settlements:
Registrant--None
Consolidated.......... $ 12,354,000 $3,019,000 $ 4,127,000(D) $ 11,246,000
============ ========== =========== ============
Reserve deducted from
deferred income taxes:
Registrant--None
Consolidated.......... $ 2,880,000 $ 2,024,000(E) $ 856,000
============ =========== ============
Reserve deducted from
other assets:
Registrant--None
Consolidated.......... $ 1,342,000 $ 84,000 $ 6,000 $ 1,420,000
============ =========== =========== ============
</TABLE>
Note A--Amount represents accounts written off, net of recoveries.
Note B--Amount represents $10,023,000 in purchase accounting adjustments, net
of a reclassification of $3,019,000 to the reserve for assets acquired
in connection with claim settlements.
Note C--Amount represents claim payments, net of recoveries.
Note D--Amount represents elimination of reserve in connection with
disposition and/or revaluation of the related asset.
Note E--Amount represents elimination of reserve in connection with the
expiration of the related temporary differences.
53
<PAGE>
SCHEDULE V
2 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ ------------------------ ----------- ------------
ADDITIONS
------------------------
BALANCE CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND OTHER FROM END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVE PERIOD
----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Reserve deducted from
accounts receivable:
Registrant--None
Consolidated.......... $ 4,098,000 $ 2,604,000 $ 2,680,000(A) $ 4,022,000
============ ============ =========== ============
Reserve for title losses
and other claims:
Registrant--None
Consolidated.......... $180,333,000 $110,230,000 $(3,674,000)(B) $80,146,000(C) $206,743,000
============ ============ =========== =========== ============
Reserve deducted from
loans receivable:
Registrant--None
Consolidated.......... $ 750,000 $ 437,000 $ 237,000(A) $ 950,000
============ ============ =========== ============
Reserve deducted from
other investments:
Registrant--None
Consolidated.......... $ 353,000 $ 353,000
============ ============
Reserve deducted from
assets acquired in
connection with claim
settlements:
Registrant--None
Consolidated.......... $ 11,581,000 $ 3,674,000(B) $ 2,901,000(D) $ 12,354,000
============ =========== =========== ============
Reserve deducted from
deferred income taxes:
Registrant--None
Consolidated.......... $ 3,304,000 $ 424,000(E) $ 2,880,000
============ =========== ============
Reserve deducted from
other assets:
Registrant--None
Consolidated.......... $ 1,177,000 $ 258,000 $ 93,000 $ 1,342,000
============ ============ =========== ============
</TABLE>
Note A--Amount represents accounts written off, net of recoveries.
Note B--Amount represents a reclassification to the reserve for assets
acquired in connection with claim settlements.
Note C--Amount represents claim payments, net of recoveries.
Note D--Amount represents elimination of reserve in connection with
disposition and/or revaluation of the related asset.
Note E--Amount represents elimination of reserve in connection with
utilization of the related temporary differences.
54
<PAGE>
SCHEDULE V
3 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ --------------------------- ----------- ------------
ADDITIONS
---------------------------
BALANCE CHARGED TO CHARGED TO DEDUCTIONS BALANCE
BEGINNING OF COSTS AND OTHER FROM AT END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS RESERVE PERIOD
----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Reserve deducted from
accounts receivable:
Registrant--None
Consolidated.......... $ 3,623,000 $ 1,661,000 $ 1,186,000(A) $ 4,098,000
============ ============ =========== ============
Reserve for title losses
and other claims:
Registrant--None
Consolidated.......... $135,212,000 $125,588,000 $(5,251,000)(B) $75,216,000(C) $180,333,000
============ ============ =========== =========== ============
Reserve deducted from
loans receivable:
Registrant--None
Consolidated.......... $ 500,000 $ 323,000 $ 73,000(A) $ 750,000
============ ============ =========== ============
Reserve deducted from
other investments:
Registrant--None
Consolidated.......... $ 460,000 $ 107,000(D) $ 353,000
============ =========== ============
Reserve deducted from
assets acquired in
connection with claim
settlements:
Registrant--None
Consolidated.......... $ 6,899,000 $ 5,251,000 (B) $ 569,000(D) $ 11,581,000
============ =========== =========== ============
Reserve deducted from
deferred income taxes:
Registrant--None
Consolidated.......... $ 3,304,000(E) $ 3,304,000
============ ============
Reserve deducted from
other assets:
Registrant--None
Consolidated.......... $ 1,047,000 $ 130,000 $ 1,177,000
============ ============ ============
</TABLE>
Note A--Amount represents accounts written off, net of recoveries.
Note B--Amount represents a reclassification to the reserve for assets
acquired in connection with claim settlements.
Note C--Amount represents claim payments, net of recoveries.
Note D--Amount represents elimination of reserve in connection with
disposition and/or revaluation of the related asset.
Note E--Amount represents the valuation allowance established for certain
temporary differences for which it is more likely than not the Company
will not receive future benefits. The valuation allowance is in
accordance with the provisions set forth in SFAS 109, which was adopted
by the Company in the current year.
55
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
The information required by Items 10 through 13 of this report is set forth
in the sections entitled "Security Ownership of Certain Beneficial Owners,"
"Election of Directors," "Security Ownership of Management," "Executive
Compensation," "Report of the Compensation Committee on Executive
Compensation," "Comparative Cumulative Total Return to Shareholders,"
"Executive Officers" and "Compliance With Section 16(a) of the Securities
Exchange Act of 1934" in the Company's definitive proxy statement, which
sections are incorporated in this report and made a part hereof by reference.
The definitive proxy statement will be filed no later than 120 days after
close of Registrant's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. & 2. Financial Statements and Financial Statement Schedules
The Financial Statements and Financial Statement Schedules
filed as part of this report are listed in the accompanying
index at page 20 in "Item 8" of Part II of this report.
3. Exhibits (Each management contract or compensatory plan or
arrangement in which any director or named executive officer of
The First American Financial Corporation, as defined by Item
402(a)(3) of Regulation S-K (17 C.F.R. (S)229.402(a)(3)),
participates that is included among the exhibits listed below is
identified by an asterisk (*).)
(3) (a) Restated Articles of Incorporation of The First American
Financial Corporation dated November 8, 1989, incorporated
by reference herein from Exhibit 3.1 of Amendment No. 3,
dated October 16, 1992, to Registration Statement on Form
S-2.
(3) (b) Certificate of Amendment of Restated Articles of
Incorporation of The First American Financial Corporation
dated September 21, 1992, incorporated by reference herein
from Exhibit 3.2 of Amendment No. 3, dated October 16,
1992, to Registration Statement on Form S-2.
(3) (c) Bylaws, as amended.
(4) (a) Amendment and Restatement dated as of April 28, 1993, of
Credit Agreement dated as of April 21, 1992, incorporated
by reference herein from Exhibit (4) of Amendment No. 1,
dated July 26, 1993, to Quarterly Report on Form 10-Q for
the quarter ended March 31, 1993.
(4) (b) Amendment No. 1 dated as of March 31, 1994, to Amendment
and Restatement dated as of April 28, 1993, of Credit
Agreement dated as of April 21, 1992, incorporated by
reference herein from Exhibit (4) of Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994.
(4) (c) Amendment No. 2 dated as of November 22, 1994, to
Amendment and Restatement dated as of April 28, 1993, of
Credit Agreement dated as of April 21, 1992, incorporated
by reference herein from Exhibit (4) of Current Report on
Form 8-K dated December 14, 1994.
56
<PAGE>
(4) (d) Amendment No. 3 dated as of March 31, 1995, to Amendment
and Restatement dated as of April 28, 1993, of Credit
Agreement dated as of April 21, 1992, incorporated by
reference herein from Exhibit (4) of Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995.
(4) (e) Amendment No. 4 dated as of June 1, 1995, to Amendment and
Restatement dated as of April 28, 1993, of Credit
Agreement dated as of April 21, 1992, incorporated by
reference herein from Exhibit (4) of Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995.
(4) (f) Amendment No. 5 dated as of February 16, 1996, to
Amendment and Restatement dated as of April 28, 1993, of
Credit Agreement dated as of April 21, 1992.
*(10) (a) Description of Stock Bonus Plan, as amended, incorporated
by reference herein from Exhibit 10(a) of Annual Report on
Form 10-K for the fiscal year ended December 31, 1992.
*(10) (b) Executive Supplemental Benefit Plan dated April 10, 1986,
and Amendment No. 1 thereto dated October 1, 1986,
incorporated by reference herein from Exhibit (10)(b) of
Annual Report on Form 10-K for the fiscal year ended
December 31, 1988.
*(10) (c) Amendment No. 2, dated March 22, 1990, to Executive
Supplemental Benefit Plan, incorporated by reference
herein from Exhibit (10)(c) of Annual Report on Form 10-K
for the fiscal year ended December 31, 1989.
*(10) (d) Management Supplemental Benefit Plan dated July 20, 1988,
incorporated by reference herein from Exhibit (10) of
Quarterly Report on Form 10-Q for the quarter ended June
30, 1992.
*(10) (e) Pension Restoration Plan (effective as of January 1,
1994).
(10) (f) Pledge Agreement dated as of April 27, 1992, incorporated
by reference herein from Exhibit (2) of Current Report on
Form 8-K dated May 8, 1992.
(21) Subsidiaries of the registrant.
(27) Financial Data Schedule
(b)Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period covered
by this report.
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE FIRST AMERICAN FINANCIAL CORPORATION (Registrant)
By:/S/ PARKER S. KENNEDY
----------------------------------------------------------------------------
Parker S. Kennedy, President
(Principal Executive Officer)
Date: March 28, 1996
----------------------------------------------------------------------------
By:/S/ THOMAS A. KLEMENS
----------------------------------------------------------------------------
Thomas A. Klemens, Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 28, 1996
----------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
By/S/ D.P. KENNEDY
----------------------------------------------------------------------------
D.P. Kennedy,
Chairman and Director
Date March 28, 1996
----------------------------------------------------------------------------
By/S/ PARKER S. KENNEDY
----------------------------------------------------------------------------
Parker S. Kennedy,
President and Director
Date March 28, 1996
----------------------------------------------------------------------------
By/S/ THOMAS A. KLEMENS
----------------------------------------------------------------------------
Thomas A. Klemens,
Vice President, Chief Financial Officer
Date March 28, 1996
----------------------------------------------------------------------------
By/S/ GEORGE L. ARGYROS
----------------------------------------------------------------------------
George L. Argyros, Director
Date March 28, 1996
----------------------------------------------------------------------------
By/S/ J. DAVID CHATHAM
----------------------------------------------------------------------------
J. David Chatham, Director
Date March 28, 1996
----------------------------------------------------------------------------
By
----------------------------------------------------------------------------
William G. Davis, Director
Date
----------------------------------------------------------------------------
By/S/ JAMES L. DOTI
----------------------------------------------------------------------------
James L. Doti, Director
Date March 28, 1996
----------------------------------------------------------------------------
By/S/ LEWIS W. DOUGLAS, JR.
----------------------------------------------------------------------------
Lewis W. Douglas, Jr., Director
Date March 28, 1996
----------------------------------------------------------------------------
By/S/ PAUL B. FAY, JR.
----------------------------------------------------------------------------
Paul B. Fay, Jr., Director
Date March 28, 1996
----------------------------------------------------------------------------
By/S/ ROBERT B. MCLAIN
----------------------------------------------------------------------------
Robert B. McLain, Director
Date March 28, 1996
----------------------------------------------------------------------------
By/S/ ANTHONY R. MOISO
----------------------------------------------------------------------------
Anthony R. Moiso, Director
Date March 28, 1996
----------------------------------------------------------------------------
By
----------------------------------------------------------------------------
Rudolph J. Munzer, Director
Date
----------------------------------------------------------------------------
By/S/ FRANK O'BRYAN
----------------------------------------------------------------------------
Frank O'Bryan, Director
Date March 28, 1996
----------------------------------------------------------------------------
By/S/ ROSLYN B. PAYNE
----------------------------------------------------------------------------
Roslyn B. Payne, Director
Date March 28, 1996
----------------------------------------------------------------------------
By/S/ VIRGINIA UEBERROTH
----------------------------------------------------------------------------
Virginia Ueberroth, Director
Date March 28, 1996
----------------------------------------------------------------------------
58
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
(3) (a) Restated Articles of Incorporation of The First S
American Financial Corporation dated November 8,
1989, incorporated by reference herein from Exhibit
3.1 of Amendment No. 3, dated October 16, 1992, to
Registration Statement on Form S-2
(3) (b) Certificate of Amendment of Restated Articles of S
Incorporation of The First American Financial
Corporation dated September 21, 1992, incorporated by
reference herein from Exhibit 3.2 of Amendment No. 3,
dated October 16, 1992, to Registration Statement on
Form S-2
(3) (c) Bylaws, as amended S
(4) (a) Amendment and Restatement dated as of April 28, 1993, S
of Credit Agreement dated as of April 21, 1992,
incorporated by reference herein from Amendment No.
1, dated July 26, 1993, to Quarterly Report on Form
10-Q for the quarter ended March 31, 1993
(4) (b) Amendment No. 1 dated as of March 31, 1994, to S
Amendment and Restatement dated as of April 28, 1993,
of Credit Agreement dated as of April 21, 1992,
incorporated by reference herein from Exhibit (4) of
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1994
(4) (c) Amendment No. 2 dated as of November 22, 1994, to S
Amendment and Restatement dated as of April 28, 1993,
of Credit Agreement dated as of April 21, 1992,
incorporated by reference herein from Exhibit (4) of
Current Report on Form 8-K dated
December 14, 1994
(4) (d) Amendment No. 3 dated as of March 31, 1995, to S
Amendment and Restatement dated as of April 28, 1993,
of Credit Agreement dated as of April 21, 1992,
incorporated by reference herein from Exhibit (4) of
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.
(4) (e) Amendment No. 4 dated as of June 1, 1995, to S
Amendment and Restatement dated as of April 28, 1993,
of Credit Agreement dated as of April 21, 1992
incorporated by reference herein from Exhibit (4) of
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995.
(4) (f) Amendment No. 5 dated as of February 16, 1996, to S
Amendment and Restatement dated as of April 28, 1993,
of Credit Agreement dated as of April 21, 1992.
*(10) (a) Description of Stock Bonus Plan, as amended, S
incorporated by reference herein from Exhibit 10(a)
of Annual Report on Form 10-K for the fiscal year
ended December 31, 1992
*(10) (b) Executive Supplemental Benefit Plan dated April 10, S
1986, and Amendment No. 1 thereto dated October 1,
1986, incorporated by reference herein from Exhibit
(10) (b) of Annual Report on Form 10-K for the fiscal
year ended December 31, 1988
*(10) (c) Amendment No. 2, dated March 22, 1990, to Executive S
Supplemental Benefit Plan, incorporated by reference
herein from Exhibit (10)(c) of Annual Report on Form
10-K for the fiscal year ended December 31, 1989
*(10) (d) Management Supplemental Benefit Plan dated July 20, S
1988, incorporated by reference herein from Exhibit
(10) of Quarterly Report on Form 10-Q for the quarter
ended June 30, 1992
*(10) (e) Pension Restoration Plan (effective as of January 1, S
1994)
(10) (f) Pledge Agreement dated as of April 27, 1992, S
incorporated by reference herein from Exhibit (2) of
Current Report on Form 8-K dated May 8, 1992
(21) Subsidiaries of the registrant S
(27) Financial Data Schedule S
</TABLE>
<PAGE>
Exhibit (3)(c)
BYLAWS
OF
THE FIRST AMERICAN FINANCIAL CORPORATION
ARTICLE I
OFFICES
Section l. PRINCIPAL OFFICES. The location of the principal executive
office of the corporation is 114 East Fifth Street, Santa Ana, California. The
board of directors may change the location of the principal executive office to
any place within or outside the State of California. If the principal executive
office is located outside this state, and the corporation has one or more
business offices in this state, the board of directors shall fix and designate a
principal business office in the State of California.
Section 2. OTHER OFFICES. The board of directors may at any time
establish branch or subordinate offices at any place or places where the
corporation is qualified to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section l. PLACE OF MEETINGS. Meetings of shareholders shall be held at
any place within or outside the State of California designated by the board of
directors. In the absence of any such designation, shareholders' meetings shall
be held at the principal executive office of the corporation.
Section 2. ANNUAL MEETING. The annual meeting of share holders shall be
held each year on a date and at a time desig nated by the board of directors. At
each annual meeting, directors shall be elected, and any other proper business
may be transacted.
Section 3. SPECIAL MEETING. A special meeting of the shareholders may
be called at any time by the board of directors, or by the chairman of the
board, or by the
1
<PAGE>
president, or by one or more shareholders holding shares in the aggregate
entitled to cast not less than 10% of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the chairman of the board, the president, any
vice president, or the secretary of the corporation. The officer receiving the
request shall cause notice to be promptly given to the shareholders entitled to
vote, in accordance with the provisions of Sections 4 and 5 of this Article II,
that a meeting will be held at the time requested by the person or persons
calling the meeting, not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, the person or persons requesting the
meeting may give notice. Nothing contained in this paragraph of this Section 3
shall be construed as limiting, fixing or affecting the time when a meeting of
shareholders called by action of the board of directors may be held.
Section 4. NOTICE OF SHAREHOLDERS' MEETING. All notices of meetings of
shareholders shall be sent or otherwise given in accordance with Section 5 of
this Article II not less than ten (10) nor more than sixty (60) days before the
date of the meeting. The notice shall specify the place, date and hour of the
meeting and (i) in the case of a special meeting, the general nature of the
business to be transacted, or (ii) in the case of the annual meeting, those
matters which the board of directors, at the time of giving the notice, intends
to present for action by the shareholders. The notice of any meeting at which
directors are to be elected shall include the name of any nominee or nominees
whom, at the time of the notice, management intends to present for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Corporations Code of California, (ii)
an
2
<PAGE>
amendment of the articles of incorporation, pursuant to Section 902 of that
Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of
that Code, (iv) a voluntary dissolution of the corporation, pursuant to Section
1900 of that code, or (v) a distribution in dissolution other than in accordance
with the rights of outstanding preferred shares, pursuant to Section 2007 of
that Code, the notice shall also state the general nature of that proposal.
Section 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any
meeting of shareholders shall be given either personally or by first-class mail
or telegraphic or other written communication, charges prepaid, addressed to the
shareholder at the address of that shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice. If no such address appears on the corporation's books or is given,
notice shall be deemed to have been given if sent to that shareholder by first-
class mail or telegraphic or other written communication to the corporation's
principal executive office, or if published at least once in a newspaper of
general circulation in the county where that office is located. Notice shall be
deemed to have been given at the time when delivered personally or deposited in
the mail or sent by telegram or other means of written communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the shareholder
at that address, all future notices or reports shall be deemed to have been
given without further mailing if these shall be available to the shareholder on
written demand of the shareholder at the principal executive office of the
corporation for a period of one year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting shall be executed by the secretary, assistant secretary,
or any transfer agent of the corporation giving the notice, and shall be filed
and maintained in the minute book of the corporation.
3
<PAGE>
Section 6. QUORUM. The presence in person or by proxy of the holders of
a majority of the shares entitled to vote at any meeting of shareholders shall
constitute a quorum for the transaction of business. The shareholders present at
a duly called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
Section 7. ADJOURNED MEETING NOTICE. Any shareholders' meeting, annual
or special, whether or not a quorum is present, may be adjourned from time to
time by the vote of the majority of the shares represented at that meeting,
either in person or by proxy, but in the absence of a quorum, no other business
may be transacted at that meeting, except as provided in Section 6 of this
Article II.
When any meeting of shareholders, either annual or special, is
adjourned to another time or place; notice need not be given of the adjourned
meeting if the time and place are announced at a meeting at which the
adjournment is taken, unless a new record date for the adjourned meeting is
fixed, or unless the adjournment is for more than forty-five (45) days from the
date set forth for the original meeting, in which case the board of directors
shall set a new record date. Notice of any such adjourned meeting shall be given
to each shareholder of record entitled to vote at the adjourned meeting in
accordance with the provisions of Sections 4 and 5 of this Article II. At any
adjourned meeting the corporation may transact any business which might have
been transacted at the original meeting.
Section 8. VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of Section ll
of this Article II, subject to the provisions of Sections 702 to 704 inclusive,
of the Corporations Code of California (relating to voting shares held by a
fiduciary in the name of a corporation, or in joint ownership). The
shareholders' vote may be by voice vote or by ballot; provided however, that any
election for directors must be by ballot if demanded by any shareholder before
the voting has begun. On any matter other than elections of directors,
4
<PAGE>
any shareholder may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or vote them against the proposal, but, if the
shareholder fails to specify the number of shares which the shareholder is
voting affirmatively, it will be conclusively presumed that the shareholder's
approving vote is with respect to all shares that the shareholder is entitled to
vote. If a quorum is present, the affirmative vote of the majority of the shares
represented at the meeting and entitled to vote on any matter (other than the
election of directors) shall be the act of the shareholders, unless the vote of
a greater number or voting by classes is required by California General
Corporation Law or by the articles of incorporation.
At a shareholders' meeting at which directors are to be elected, no
shareholder shall be entitled to cumulate votes (i.e., cast for any one or more
candidates a number of votes greater than the number of the shareholder's
shares) unless the candidates' names have been placed in nomination prior to
commencement of the voting and a shareholder has given notice prior to
commencement of the voting of the shareholder's intention to cumulate votes. If
any shareholder has given such a notice, then every shareholder entitled to vote
may cumulate votes for candidates in nomination and give one candidate a number
of votes equal to the number of directors to be elected multiplied by the number
of votes to which that shareholder's shares are entitled, or distribute the
shareholder's votes on the same principle among any or all of the candidates, as
the shareholder thinks fit. The candidates receiving the highest number of
votes, up to the number of directors to be elected, shall be elected.
Section 9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHARE HOLDERS. The
transactions of any meeting of shareholders, either annual or special, however
called and noticed, and wherever held, shall be as valid as though had at a
meeting duly held after regular call and notice, if a quorum be present either
in person or by proxy, and if, either before or after the meeting, each person
entitled to vote, who was not present in person or by proxy, signs a written
waiver of notice or a consent to a holding of the meeting, or an approval of the
minutes. The waiver of notice or consent need not specify either the business to
be transacted or the purpose of any
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annual or special meeting of shareholders, except that if action is taken or
proposed to be taken for approval of any of those matters specified in the
second paragraph of Section 4 of this Article II, the waiver of notice or
consent shall state the general nature of the proposal. All such waivers,
consents or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened, and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if that objection is expressly made at the meeting.
Section 10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Any action which may be taken at any annual or special meeting of shareholders
may be taken without a meeting and without prior notice, if a consent in
writing, setting forth the action so taken, is signed by the holders of
outstanding shares having not less than the minimum number of votes that would
be necessary to authorize or take that action at a meeting at which all shares
entitled to vote on that action were present and voted. In the case of election
of directors, such a consent shall be effective only if signed by the holders of
all outstanding shares entitled to vote for the election of directors; provided,
however, that a director may be elected at any time to fill a vacancy on the
board of directors that has not been filled by the directors, by the written
consent of the holders of a majority of the outstanding shares entitled to vote
for the election of directors. All such consents shall be filed with the
secretary of the cor poration and shall be maintained in the corporate records.
Any shareholder giving a written consent, or the shareholder's proxy holders, or
a transferee of the shares or a personal representative of the shareholder or
their respective proxy holders, may revoke the consent by a writing received by
the secretary of the corporation before written consents of the number of shares
required to authorize the proposed action have been filed with the secretary.
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If the consents of all shareholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all such
shareholders shall not have been received, the secretary shall give prompt
notice of the corporate action approved by the shareholders without a meeting.
This notice shall be given in the manner specified in Section 5 of this Article
II. In the case of approval of (i) contracts or trans actions in which a
director has a direct or indirect financial interest, pursuant to Section 310 of
the Corporations Code of California, (ii) indemnification of agents of the
corporation, pursuant to Section 317 of that Code, (iii) a reorganization of the
corporation, pursuant to Section 1201 of that Code, and (iv) a distribution in
dissolution other than in accordance with the rights of outstanding preferred
shares, pursuant to Section 2007 of that Code, the notice shall be given at
least ten (10) days before the consummation of any action authorized by that
approval.
Section ll. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING
CONSENTS. For purposes of determining the share holders entitled to notice of
any meeting or to vote or entitled to give consent to corporate action without a
meeting, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) days nor less than ten (10) days before the date of
any such meeting nor more than sixty (60) days before any such action without a
meeting, and in this event only shareholders of record on the date so fixed are
entitled to notice and to vote or to give consents, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date, except as otherwise provided in the California General
Corporation Law.
If the board of directors does not so fix a record date:
(a) The record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the close of
business on the business day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held.
(b) The record date for determining shareholders entitled to give
consent to corporate action in writing without
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a meeting, (i) when no prior action by the board has been taken, shall be the
day on which the first written consent is given, or (ii) when prior action of
the board has been taken, shall be at the close of business on the day on which
the board adopts the resolution relating to that action, or the sixtieth (60th)
day before the date of such other action, whichever is later.
Section 12. PROXIES. Every person entitled to vote for directors or on
any other matter shall have the right to do so either in person or by one or
more agents authorized by a written proxy signed by the person and filed with
the secretary of the corporation. A proxy shall be deemed signed if the
shareholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission, or otherwise) by the shareholder or the
shareholder's attorney in fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i)
revoked by the person executing it, before the vote pursuant to that proxy, by a
writing delivered to the corporation stating that the proxy is revoked, or by a
subsequent proxy executed by, or attendance at the meeting and voting in person
by, the person executing the proxy; or (ii) written notice of the death or
incapacity of the maker of that proxy is received by the corporation before the
vote pursuant to that proxy is counted; provided, however, that no proxy shall
be valid after the expiration of eleven (ll) months from the date of the proxy,
unless otherwise provided in the proxy. The revocability of a proxy that states
on its face that it is irrevocable shall be governed by the provisions of
Sections 705(e) and 705(f) of the Corporations Code of California.
Section 13. INSPECTORS OF ELECTION. Before any meeting of shareholders,
the board of directors may appoint any persons other than nominees for office to
act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the chairman of the meeting may, and on
the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (l) or three (3). If inspectors are appointed at a meeting on the request of
one or more shareholders or proxies, the holders of a majority of shares or
their proxies present at the meeting shall determine
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whether one (l) or three (3) inspectors are to be appointed. If any person
appointed as inspector fails to appear or fails or refuses to act, the chairman
of the meeting may, and upon the request of any shareholder or a shareholder's
proxy shall, appoint a person to fill that vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting
power of each, the shares represented at the meeting, the existence of a quorum,
and the authenticity, validity, and effect of proxies;
(b) Receive votes, ballots, or consents;
(c) Hear and determine all challenges and questions
in any way arising in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the
election or vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
Section l. POWERS. Subject to the provisions of the California General
Corporation Law and any limitations in the articles of incorporation and these
bylaws relating to action required to be approved by the shareholders or by the
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
board of directors.
Without prejudice to these general powers, and subject to the same
limitations, the directors shall have the power to:
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(a) Select and remove all officers, agents, and employees of
the corporation; prescribe any powers and duties for them that are consistent
with law, with the articles of incorporation, and with these bylaws; fix their
compensation; and require from them security for faithful service.
(b) Change the principal executive office or the principal
business office in the State of California from one location to another; cause
the corporation to be qualified to do business in any other state, territory,
dependency, or country and to conduct business within or without the State of
California; and designate any place within or without the State of California
for the holding of any shareholders' meeting, or meetings, including annual
meetings.
(c) Adopt, make, and use a corporate seal; prescribe the forms
of certificates of stock; and alter the form of the seal and certificates.
(d) Authorize the issuance of shares of stock of the
corporation on any lawful terms, in consideration of money paid, labor done,
services actually rendered, debts or securities cancelled, or tangible or
intangible property actually received.
(e) Borrow money and incur indebtedness on behalf of the
corporation, and cause to be executed and delivered for the corporation's
purposes, in the corporate name, promissory notes, bonds, debentures, deeds of
trust, mortgages, pledges, hypothecations, and other evidences of debt and
securities.
Section 2. NUMBER AND QUALIFICATION OF DIRECTORS. The number of
directors of the corporation shall be no less than 9 nor more than 17. The exact
number of directors shall be 14 until changed, within the limits specified
above, by a bylaw amending this Section 2, duly adopted by the board of
directors or by the shareholders. The indefinite number of directors may be
changed, or a definite number fixed without provision for an indefinite number,
by a duly adopted amendment to the articles of incorporation; provided, however,
that an amendment reducing the number or the minimum number of directors to a
number less than five cannot be adopted if the votes cast against its adoption
at a meeting of the shareholders, or the shares not
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consenting in the case of action by written consent, are equal to more than 16
2/3% of the outstanding shares entitled to vote. No amendment may change the
stated maximum number of authorized directors to a number greater than two times
the stated minimum number of directors minus one.
Section 3. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be
elected at each annual meeting of the shareholders to hold office until the next
annual meeting. Each director, including a director elected to fill a vacancy,
shall hold office until the expiration of the term for which elected and until a
successor has been elected and qualified.
Section 4. VACANCIES. Vacancies in the board of directors may be filled
by a majority of the remaining directors, though less than a quorum, or by a
sole remaining director, except that a vacancy created by the removal of a
director by the vote or written consent of the shareholders or by court order
may be filled only by the vote of a majority of the shares entitled to vote
represented at a duly held meeting at which a quorum is present, or by the
written consent of holders of a majority of the outstanding shares entitled to
vote. Each director so elected shall hold office until the next annual meeting
of the shareholders and until a successor has been elected and qualified.
A vacancy or vacancies in the board of directors shall be deemed to
exist in the event of the death, resignation, or removal of any director, or if
the board of directors by resolution declares vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony, or if the authorized number of directors is increased, or if the
shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the number of directors to be voted for at that
meeting.
The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the direc tors, but any such election by
written consent shall require the consent of a majority of the outstanding
shares entitled to vote.
Any director may resign effective on giving written notice
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to the chairman of the board, the president, the secretary, or the board of
directors, unless the notice specifies a later time for that resignation to
become effective. If the resignation of a director is effective at a future
time, the board of directors may elect a successor to take office when the
resignation becomes effective.
No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office expires.
Section 5. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. Regular
meetings of the board of directors may be held at any place within or outside
the State of California that has been designated from time to time by resolution
of the board. In the absence of such a designation, regular meetings shall be
held at the principal executive office of the corporation. Special meetings of
the board shall be held at any place within or outside the State of California
that has been designated in the notice of the meeting or, if not stated in the
notice or there is no notice, at the principal executive office of the
corporation. Any meeting, regular or special, may be held by conference
telephone or similar communication equipment, so long as all directors
participating in the meeting can hear one another, and all such directors shall
be deemed to be present in person at the meeting.
Section 6. ANNUAL MEETING. Immediately following each annual meeting of
shareholders, the board of directors shall hold a regular meeting for the
purpose of organization, any desired election of officers, and the transaction
of other business. Notice of this meeting shall not be required.
Section 7. OTHER REGULAR MEETINGS. Other regular meetings of the board
of directors shall be held without call at such time as shall from time to time
be fixed by the board of directors. Such regular meetings may be held without
notice.
Section 8. SPECIAL MEETINGS. Special meetings of the board of directors
for any purpose or purposes may be called at any time by the chairman of the
board or the president or the secretary or any two directors.
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Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. In case the notice is mailed,
it shall be deposited in the United States mail at least four (4) days before
the time of the holding of the meeting. In case the notice is delivered
personally, or by telephone or telegram, it shall be delivered personally or by
telephone or to the telegraph company at least forty-eight (48) hours before the
time of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated either to the director or to a person at the
office of the director who the person giving the notice has reason to believe
will promptly communicate it to the director. The notice need not specify the
purpose of the meeting nor the place if the meeting is to be held at the
principal executive office of the corporation.
Section 9. QUORUM. A majority of the authorized number of directors
shall constitute a quorum for the transaction of business, except to adjourn as
provided in Section ll of this Article III. Every act done or decision made by a
majority of the directors present at a meeting duly held at which a quorum is
present shall be regarded as the act of the board of directors, subject to the
provisions of Section 310 of the Corporations Code of California (as to approval
of contracts or transactions in which a director has a direct or indirect
material financial interest), Section 311 of that Code (as to appointment of
committees), and Section 317(e) of that Code (as to indemnification of
directors). A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
Section 10. WAIVER OF NOTICE. The transactions of any meeting of the
board of directors, however called and noticed or wherever held, shall be as
valid as though had at a meeting duly held after regular call and notice if a
quorum is present and if, either before or after the meeting, each of the
directors not present signs a written waiver of notice, a consent to holding the
meeting or an approval of the minutes. The waiver of notice or consent need not
specify the purpose of
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the meeting. All such waivers, consents, and approvals shall be filed with the
corporate records or made a part of the minutes of the meeting. Notice of a
meeting shall also be deemed given to any director who attends the meeting
without protesting before or at its commencement, the lack of notice to that
director.
Section ll. ADJOURNMENT. A majority of the directors present, whether
or not constituting a quorum, may adjourn any meeting to another time and place.
Section 12. NOTICE OF ADJOURNMENT. Notice of the time and place of
holding an adjourned meeting need not be given, unless the meeting is adjourned
for more than twenty-four hours, in which case notice of the time and place
shall be given before the time of the adjourned meeting, in the manner specified
in Section 8 of this Article III, to the directors who were not present at the
time of the adjournment.
Section 13. ACTION WITHOUT MEETING. Any action required or permitted to
be taken by the board of directors may be taken without a meeting, if all
members of the board shall individually or collectively consent in writing to
that action. Such action by written consent shall have the same force and effect
as a unanimous vote of the board of directors. Such written consent or consents
shall be filed with the minutes of the proceedings of the board.
Section 14. FEES AND COMPENSATION OF DIRECTORS. Directors and members
of committees may receive such compensation, if any, for their services, and
such reimbursement of expenses, as may be fixed or determined by resolution of
the board of directors. This Section 14 shall not be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation for those services.
ARTICLE IV
COMMITTEES
Section l. COMMITTEES OF DIRECTORS. The board of
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directors may, by resolution adopted by a majority of the authorized number of
directors, designate one or more committees, each consisting of two or more
directors, to serve at the pleasure of the board. The board may designate one or
more directors as alternate members of any committee who may replace any absent
member at any meeting of the committee. Any committee, to the extent provided in
the resolution of the board, shall have all the authority of the board, except
with respect to:
(a) the approval of any action which, under the General Corporation Law
of California, also requires shareholders' approval or approval of the
outstanding shares;
(b) the filling of vacancies on the board of directors or in any
committee;
(c) the fixing of compensation of the directors for serving on the
board or on any committee;
(d) the amendment or repeal of bylaws or the adoption of new bylaws;
(e) the amendment or repeal of any resolution of the board of directors
which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except at a
rate or in a periodic amount or within a price range determined by the board of
directors; or
(g) the appointment of any other committees of the board of directors
or the members of these committees.
Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of
committees shall be governed by, and held and taken in accordance with, the
provisions of Article III of these bylaws, Sections 5 (place of meetings), 7
(regular meetings), 8 (special meetings and notice), 9 (quorum), 10 (waiver of
notice), 11 (adjournment), 12 (notice of adjournment), and 13 (action without
meeting), with such changes in the context of those bylaws as are necessary to
substitute the committee and its members for the board of
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directors and its members, except that the time of regular meetings of
committees may be determined either by resolution of the board of directors or
by resolution of the committee; special meetings of committees may also be
called by resolution of the board of directors; and notice of special meetings
of committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The board of directors may adopt
rules for the government of any committee not inconsistent with the provisions
of these bylaws.
ARTICLE V
OFFICERS
Section l. OFFICERS. The officers of the corporation shall be a
president, a secretary, and a chief financial officer. The corporation may also
have, at the discretion of the board of directors, a chairman of the board, one
or more vice presidents, one or more assistant secretaries, one or more
assistant treasurers, and such other officers as may be appointed in accordance
with the provisions of Section 3 of this Article V. Any number of offices may be
held by the same person.
Section 2. ELECTION OF OFFICERS. The officers of the corporation,
except such officers as may be appointed in accordance with the provisions of
Section 3 or Section 5 of this Article V, shall be chosen by the board of
directors, and each shall serve at the pleasure of the board, subject to the
rights, if any, of any officer under any contract of employment.
Section 3. SUBORDINATE OFFICERS. The board of directors may appoint,
and may empower the president to appoint, such other officers as the business of
the corporation may require, each of whom shall hold office for such period,
have such authority and perform such duties as are provided in the bylaws or as
the board of directors may from time to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject
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to the rights, if any, of any officer under any contract of employment, any
officer may be removed, either with or without cause, by the board of directors,
at any regular or special meeting of the board, or, except in the case of an
officer chosen by the board of directors, by an officer upon whom such power of
removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
Section 5. VACANCIES IN OFFICES. A vacancy in any office because of
death, resignation, removal, disqualification or any other cause shall be filled
in the manner prescribed in these bylaws for regular appointments to that
office.
Section 6. CHAIRMAN OF THE BOARD. The chairman of the board, if such an
officer be elected, shall, if present, preside at meetings of the board of
directors and exercise and perform such powers and duties as may be from time to
time assigned to him by the board of directors or prescribed by the bylaws. If
there is no president, the chairman of the board shall, in addition be the chief
executive officer of the corporation and shall have the powers and duties
prescribed in Section 7 of this Article V.
Section 7. PRESIDENT. Subject to such supervisory powers, if any, as
may be given by the board of directors to the chairman of the board, if there be
such an officer, the president shall be the chief executive officer of the
corporation and shall, subject to the control of the board of directors, have
general supervision, direction, and control of the business and the officers of
the corporation. He shall preside at all meetings of the shareholders and, in
the absence of the chairman of the board, or if there be none, at all meetings
of the board of directors. He shall have the general powers and duties of
management usually vested in the office of president of a corporation, and shall
have such other powers
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and duties as may be prescribed by the board of directors or by the bylaws.
Section 8. VICE PRESIDENT. In the absence or disability of the
president, the vice presidents, if any, in order of their rank as fixed by the
board of directors or, if not ranked, a vice president designated by the board
of directors, shall perform all the duties of the president, and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform other
duties as from time to time may be prescribed for them respectively by the board
of directors or the bylaws, and the president, or the chairman of the board.
Section 9. SECRETARY. The secretary shall keep or cause to be kept, at
the principal executive office or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and shareholders, with the time and place of holding, whether
regular or special, and, if special, how authorized, the notice given, the names
of those present at directors' meetings or committee meetings, the number of
shares present or represented at shareholders' meetings, and the proceedings.
The secretary shall keep, or cause to be kept, at the principal
executive office or at the office of the corporation's transfer agent or
registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number of classes of shares held by each, the number
and date of certificates issued for the same, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the shareholders and of the board of directors required by the bylaws or by
law to be given, and he shall keep the seal of the corporation if one be
adopted, in safe custody, and shall have such other powers and perform such
other duties as may be prescribed by the board of directors or by the bylaws.
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Section 10. CHIEF FINANCIAL OFFICER. The chief financial
officer shall keep and maintain, or cause to be kept and maintained, adequate
and correct books and records of accounts of the properties and business
transactions of the corporation, including accounts of its assets, liabilities,
receipts, disbursements, gains, losses, capital, retained earnings and shares.
The books of the account shall at all reasonable times be open to inspection by
any director.
The chief financial officer shall deposit moneys and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of direc tors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have other powers and perform such other duties as may be
prescribed by the board of directors or the bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND OTHER AGENTS; INSURANCE OF DIRECTORS AND OFFICERS
Section 1. INDEMNIFICATION. (i) The corporation shall indemnify its
Officers and Directors to the fullest extent permitted by law, including those
circumstances in which indemnification would otherwise be discretionary; (ii)
the corporation is required to advance expenses to its Officers and Directors as
incurred, including expenses relating to obtaining a determination that such
Officers and Directors are entitled to indemnification, provided that they
undertake to repay the amount advanced if it is ultimately determined that they
are not entitled to indemnification; (iii) an Officer or Director may bring suit
against the corporation if a claim for indemnification is not timely paid; (iv)
the corporation may not retroactively amend this Section 1 in a way which is
adverse to its Officers and Directors; (v) the provisions of subsections (i)
through (iv) above shall apply to all past and present Officers and Directors of
the corporation.
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Indemnification of Agents of the corporation who are not its Officers
and Directors shall be in accordance with the provisions of Section 317 of the
Corporations Code of California.
The corporation may enter into indemnification agreements with its
Directors, Officers and other Agents upon such terms and conditions as are
deemed to be in the best interests of the corporation by its board of directors.
The other provisions of this Section 1 to the contrary notwithstanding,
the corporation shall not be obligated:
(a) to indemnify or advance expenses to an Officer, Director or Agent
with respect to proceedings or claims initiated or brought voluntarily by such
Officer, Director or Agent and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under an
indemnification agreement or any statute or law or otherwise as required under
Section 317 of the Corporations Code of California, but such indemnification or
advancement of expenses may be provided by the corporation in specific cases if
the board of directors has approved the bringing of such suit;
(b) to indemnify an Officer, Director or Agent for any expenses
incurred with respect to any proceeding instituted by such Officer, Director or
Agent to enforce or interpret provis ions of an indemnity agreement or this
Section 1, if a court of competent jurisdiction determines that each of the
material assertions made by the Officer, Director or Agent in such proceeding
was not made in good faith or was frivolous;
(c) to indemnify an Officer, Director or Agent for expenses or
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid or satisfied by an insurance carrier under a policy of officers'
and directors' liability insurance maintained by the corporation; provided that
the corporation shall be obligated to remit to the Officer, Director or Agent
any insurance proceeds received in respect of expenses or liabilities previously
paid or satisfied by such Officer, Director or
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Agent;
(d) to indemnify an Officer, Director or Agent for expenses, judgments,
fines or penalties sustained, or for an accounting of profits made from, the
purchase and sale by such Officer, Director or Agent of securities of the
corporation in violation of the provisions of Section 16(b) of the Securities
Exchange Act of 1934, as amended, the rules and regulations promulgated
thereunder, any amendments thereto or any similar provisions of any federal,
state or local statutory law; or
(e) in the event a court of competent jurisdiction finally determines
that such indemnification is unlawful.
The term "Officer" as used in this Section 1 shall mean each person who
is, or was, appointed to the office of Chairman of the Board, President, Vice
President, Secretary, Assistant Secretary, Chief Financial Officer Treasurer,
Assistant Treasurer, and such other office of the corporation as the board shall
designate from time to time. The term "Director" as used in this Section 1 shall
mean any person who is, or was, appointed to serve on the board of directors
either by the shareholders or the remaining board members. The term "Agent" as
used in this Section 1 shall have the same meaning as that set forth in Section
317(a) of the Corporations Code of California, except that it shall not include
Officers and Directors.
Section 2. INSURANCE. The corporation may purchase and maintain
insurance on behalf of its Directors, Officers and Agents, against any liability
asserted against, or incurred by, any of them by reason of the fact that such
person is, or was, a Director, Officer or Agent of the corporation, whether or
not the corporation would have the power to indemnify such persons against such
liability under the General Corporation Law of California.
ARTICLE VII
RECORDS AND REPORTS
Section l. MAINTENANCE AND INSPECTION OF SHARE REGISTER.
21
<PAGE>
The corporation shall keep at its principal executive office, or at the
office of its transfer agent or registrar, if either be appointed and as
determined by resolution of the board of directors, a record of its
shareholders, giving the names and addresses of all shareholders and the number
and class of shares held by each shareholder.
A shareholder or shareholders of the corporation holding at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation may (i) inspect and copy the records of shareholders' names and
addresses and shareholdings during usual business hours on five days prior
written demand on the corporation, and (ii) obtain from the transfer agent of
the corporation, on written demand and on the tender of such transfer agent's
usual charges for such list, a list of the shareholders' names and addresses,
who are entitled to vote for the election of directors, and their shareholdings,
as of the most recent record date for which that list has been compiled or as of
a date specified by the shareholder after the date of demand. This list shall be
made available to any such shareholder by the transfer agent on or before the
latter of five (5) days after the demand is received or the date specified in
the demand as the date as of which the list is to be compiled. The record of
shareholders shall be open to inspection on the written demand of any
shareholder or holder of a voting trust certificate, at any time during the
usual business hours, for a purpose reasonably related to the holder's interests
as a shareholder or as the holder of a voting trust certificate. Any inspection
and copying under this Section l may be made in person or by an agent or
attorney of the shareholder or holder of a voting trust certificate making the
demand.
Section 2. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall
keep at its principal executive office or, if its principal executive office is
not in the State of California, at its principal business office in this state,
the original or a copy of the bylaws as amended to date, which shall be open to
inspection by the shareholders at all reasonable times during office hours. If
the principal executive office of the corporation is outside the State of
California and the corporation has no principal business office in this state,
the Secretary shall, upon the written request of
22
<PAGE>
any shareholder, furnish to that shareholder a copy of the bylaws as amended to
date.
Section 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The
accounting books and records and minutes of proceedings of the shareholders and
the board of directors and any committee or committees of the board of directors
shall be kept at such place or places designated by the board of directors or,
in the absence of such designation, at the principal executive office of the
corporation. The minutes shall be kept in written form and the accounting books
and records shall be kept either in written form or in any other form capable of
being converted into written form. The minutes and accounting books and records
shall be open to inspection upon the written demand of any shareholder or holder
of a voting trust certificate, at any reasonable time during the usual business
hours, for a purpose reasonably related to the holder's interests as a
shareholder or as the holder of a voting trust certificate. The inspection may
be made in person or by an agent or attorney, and shall include the right to
copy and make extracts. These rights of inspection shall extend to the records
of each subsidiary corporation of the corporation.
Section 4. INSPECTION BY DIRECTORS. Every director shall have the
absolute right at any reasonable time to inspect all books, records, and
documents of every kind and the physical properties of the corporation and each
of its subsidiary corporations. This inspection by a director may be made in
person, or by an agent or attorney and the right of inspection includes the
right to copy and make extracts of documents.
Section 5. ANNUAL REPORT TO SHAREHOLDERS. The board of directors shall
cause an annual report to be sent to the shareholders not later than one hundred
twenty days (120) after the close of the fiscal year adopted by the corporation.
This report shall be sent at least fifteen (15) days before the annual meeting
of shareholders to be held during the next fiscal year and in the manner
specified in Section 5 of Article II of these bylaws for giving notice to
shareholders of the corporation. The annual report shall contain a balance sheet
as of the end of the fiscal year and an income statement and statement of
changes in financial position for the fiscal year, accompanied by any report of
independent accountants or, if
23
<PAGE>
there is no such report, the certificate of an authorized officer of the
corporation that the statements were prepared without audit from the books and
records of the corporation.
Section 6. FINANCIAL STATEMENTS. A copy of any annual financial
statement and any income statement of the corporation for each fiscal year, and
any accompanying balance sheet of the corporation as of the end of each such
period that has been prepared by the corporation, shall be kept on file in the
principal executive office of the corporation for twelve (12) months and each
such statement shall be exhibited at any reasonable time to any shareholder
demanding an examination of any such statement or a copy shall be mailed to any
such shareholder.
If a shareholder or shareholders holding at least five percent (5%) of
the outstanding shares of any class of stock of the corporation makes a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the then current fiscal year
ended more than thirty (30) days before the date of the request, and a balance
sheet of the corporation as of the end of that period, the chief financial
officer shall cause that statement to be prepared, if not already prepared, and
shall deliver personally or mail that statement or statements to the person
making the request within thirty (30) days after the receipt of the request. If
the corporation has not sent to the shareholders its annual report for the last
fiscal year, this report shall likewise be delivered or mailed to the
shareholder or shareholders within thirty (30) days after the request.
The corporation shall also, on the written request of any shareholder,
mail to the shareholder a copy of the last annual, semi-annual or quarterly
income statement which it has prepared, and a balance sheet as of the end of
that period.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
24
<PAGE>
Section 7. ANNUAL STATEMENT OF GENERAL INFORMATION. The corporation
shall, during the period commencing on April l and ending on September 30 in
each year, file with the Secretary of State of the State of California, on the
prescribed form, a statement setting forth the authorized number of directors,
the names and complete business or residence addresses of the chief executive
officer, secretary and chief financial officer, the street address of its
principal executive office or principal business office in this state and the
general type of business activity of the corporation, together with a
designation of the agent of the corporation for the purpose of service of
process, all in compliance with Section 1502 of the Corporations Code of
California.
ARTICLE VIII
GENERAL CORPORATE MATTERS
Section l. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For
purposes of determining the shareholders entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action (other than action by
shareholders by written consent without a meeting), the board of directors may
fix, in advance, a record date, which shall not be more than sixty (60) days
before any such action, and in that case only shareholders of record on the date
so fixed are entitled to receive the dividend, distribution, or allotment of
rights or to exercise the rights, as the case may be, not withstanding any
transfer of any shares on the books of the corporation after the record date so
fixed, except as otherwise provided in the California General Corporation Law.
If the board of directors does not so fix a record date, the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.
Section 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks,
drafts, or other orders for payment of money, notes, or other evidences of
indebtedness, issued in the name
25
<PAGE>
of or payable to the corporation, shall be signed or endorsed by such person or
persons and in such manner as, from time to time, shall be determined by
resolution of the board of directors.
Section 3. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The board
of directors, except as otherwise provided in these bylaws, may authorize any
officer or officers, agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the corporation, and this authority
may be general or confined to specific instances; and, unless so authorized or
ratified by the board of directors or within the agency power of an officer, no
officer, agent or employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or for any amount.
Section 4. CERTIFICATES FOR SHARES. A certificate or certificates for
shares of the capital stock of the corporation shall be issued to each
shareholder when any of these shares are fully paid, and the board of directors
may authorize the issuance of certificates or shares as partly paid provided
that these certificates shall state the amount of the consideration to be paid
for them and the amount paid. All certificates shall be signed in the name of
the corporation by the chairman of the board or vice chairman of the board or
president or vice president and by the chief financial officer or an assistant
treasurer or the secretary or an assistant secretary, certifying the number of
shares and the class or series of shares owned by the shareholder. Any or all of
the signatures on the certificates may be facsimile. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has
been placed on a certificate shall have ceased to be that officer, transfer
agent, or registrar before that certificate is issued, it may be issued by the
corporation with the same effect as if that person were an officer, transfer
agent, or registrar at the date of issue.
Section 5. LOST CERTIFICATES. Except as provided in this Section 5, no
new certificates for shares shall be issued to replace an old certificate unless
the latter is surrendered to the corporation and cancelled at the same time. The
board of
26
<PAGE>
directors may, in case any share certificate or certificate for any other
security is lost, stolen, or destroyed, authorize the issuance of a replacement
certificate on such terms and condi tions as the board may require, including
provision for in demnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft, or destruction of the certificate or the issuance of the
replacement certificate.
Section 6. REPRESENTATION OF SHARES OF OTHER CORPOR ATIONS. The
chairman of the board, the president, or any vice president, or any other person
authorized by resolution of the board of directors or by any of the foregoing
designated officers, is authorized to vote on behalf of the corporation any and
all shares of any other corporation or corporations, foreign or domestic,
standing in the name of the corporation. The authority granted to these officers
to vote or represent on behalf of the corporation any and all shares held by the
corporation in any other corporation or corporations may be exercised by any of
these officers in person or by any person authorized to do so by a proxy duly
executed by these officers.
Section 7. CONSTRUCTION AND DEFINITIONS. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions in the
California General Corpor ation Law shall govern the construction of these
bylaws. Without limiting the generality of this provision, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
Section l. AMENDMENT BY SHAREHOLDERS. New bylaws may be adopted or
these bylaws may be amended or repealed by the vote or written consent of
holders of a majority of the outstanding shares entitled to vote; provided,
however, that if the articles of incorporation of the corporation set forth the
27
<PAGE>
number of authorized directors of the corporation, the authorized number of
directors may be changed only by an amendment of the articles of incorporation.
Section 2. AMENDMENT BY DIRECTORS. Subject to the rights of the
shareholders as provided in Section l of this Article IX to adopt, amend or
repeal bylaws, bylaws may be adopted, amended or repealed by the board of
directors; provided, however, that the board of directors may adopt a bylaw or
amendment of a bylaw changing the authorized number of directors only for the
purpose of fixing the exact number of directors within the limits specified in
the articles of incorporation or in Section 2 of Article III of these bylaws.
28
<PAGE>
Exhibit (4)(f)
AMENDMENT NO. 5
AMENDMENT NO. 5 dated as of February 16, 1996 to the AMENDMENT
AND RESTATEMENT dated as of April 28, 1993 of CREDIT AGREEMENT dated as of April
21, 1992 between THE FIRST AMERICAN FINANCIAL CORPORATION (the "Company"), the
-------
lenders party thereto (the "Lenders") and THE CHASE MANHATTAN BANK (NATIONAL
-------
ASSOCIATION), as agent (the "Agent") for the Lenders (such Amendment and
-----
Restatement, as amended by Amendment No. 1 thereto dated as of June 1, 1994,
Amendment No. 2 thereto dated as of November 22, 1994, Amendment No. 3 thereto
dated as of March 31, 1995 and Amendment No. 4 thereto dated as of June 1, 1995,
being herein called the "Credit Agreement").
----------------
The Company has requested that the Lenders agree to certain
amendments of the Credit Agreement. The Lenders are willing to do so on the
terms and conditions contained herein.
Accordingly, the parties hereto hereby agree as follows:
Section 1. Definitions. Terms defined in the Credit
-----------
Agreement shall have the same meanings when used herein.
Section 2. Amendments of Credit Agreement. Effective as of the
------------------------------
date, and subject to the conditions, set forth in Section 3 hereof, the Credit
Agreement is hereby amended as follows:
A. Section 1.01 of the Credit Agreement is amended by
inserting the following new defined terms in the appropriate alphabetical order:
"Amendment No. 5" shall mean Amendment No. 5 dated as
---------------
of February 16, 1996 to this Agreement.
"Arbitrage Loans" shall mean loans made by any financial
---------------
institution (a "lender") which is, at the time of the making of such
loan, a depository of the Company or any Subsidiary of the Company, to
the Company or any such Subsidiary in an amount not exceeding the
amount of the deposits of the Company or any such Subsidiary held by
such depository, the proceeds of which are invested in U.S. Government
securities and/or certificates of deposit rated
<PAGE>
-2-
A-1 or P-1 and having a term not exceeding the maturity date of such
loan (but in no event longer than 92 days), provided that (i) the
relevant borrower shall have a right of offset against such investment
(in the case of certificates of deposit) and (ii) all such loans must
be off the balance sheet of the Company and its Subsidiaries at the
last day of any quarterly fiscal period.
"Insured Depository Subsidiary" shall mean any subsidiary of
-----------------------------
the Company that is an "insured depository institution" within the
meaning of 12 U.S.C. ss.1813(c)(2).
B. Section 1.01 of the Credit Agreement is amended by
changing the defined terms "Applicable Margin" and "Capital
Expenditures" to read as follows:
"Applicable Margin" shall mean, with respect to Bank
-----------------
Loans:
(a) with respect to such Loans that are Base Rate
Loans, zero; and
(b) with respect to such Loans that are Eurodollar
Loans,
(i) for any period commencing on the first date of a
fiscal quarter of the Company (the "Current Fiscal Quarter")
----------------------
immediately following the date on which the Company shall have
delivered a certificate of a senior financial officer of the
Company demonstrating in reasonable detail (based upon
financial statements of the Company for the fiscal quarter
most recently ended that have been delivered to the Lenders
pursuant to Section 8.01(a) or (b) hereof) (each a "Rate
----
Certificate") that the Pro Forma Fixed Charge Coverage Ratio
-----------
for the most recently completed Computation Period is less
than 1.40:1.0 to and including the last day of the Current
Fiscal Quarter, 1% per annum;
(ii) if the Company shall have delivered a Rate
Certificate demonstrating in reasonable detail that the Pro
Forma Fixed Charge Coverage Ratio for the most recently
completed Computation Period is equal to or
<PAGE>
-3-
greater than 1.40:1.0, then for the Current Fiscal
Quarter,
(x) for each day of the Current Fiscal Quarter on
which the Company shall have either or both of an S&P
Claims Paying Rating and a Moody's Financial Strength
Rating, the per annum margin set forth below opposite
the relevant ratings category for such day:
Ratings Category Applicable Margin
---------------- -----------------
S&P Claims Paying Rating 0.50%
is A or above and Moody's
Financial Strength Rating
is A2 or above ("Category A
----------
Period")
------
S&P Claims Paying Rating 0.625%
is A- or above and Moody's
Financial Strength Rating
is A3 or above ("Category B
----------
Period"), but a Category A
------
Period is not in effect
S&P Claims Paying Rating 0.75%
is BBB or above and Moody's
Financial Strength Rating is Baa2
or above ("Category C Period"),
-----------------
but neither a Category A Period
nor a Category B Period is in
effect
S&P Claims Paying Rating 1.00%,
is BBB- or below or the
Moody's Financial Strength
Rating is Baa3 or below
("Category D Period")
-----------------
provided that (A) if the Company shall have only one such
rating on any such day, the Applicable Margin set forth above
opposite such rating shall apply for such day and (B) if the
Company shall have an S&P Claims
<PAGE>
-4-
Paying Rating and a Moody's Financial Strength Rating in
different ratings category for any such day, the Applicable
Margin set forth above for the lower ratings category shall
apply for such day; and
(iii) if the Company shall have neither an S&P Claims
Paying Rating nor a Moody's Financial Strength Rating on any
day during the Current Fiscal Quarter, the per annum margin
set forth below opposite the Adjusted Leverage Ratio, measured
as at the end of the immediately preceding fiscal quarter of
the Company (based upon financial statements of the Company
for the fiscal quarter most recently ended that have been
delivered to the Lenders pursuant to Section 8.01(a) or (b)
hereof and set forth in reasonable detail in the certificate
of a senior financial officer of the Company delivered
pursuant to the last paragraph of Section 8.01 hereof):
Adjusted Leverage Ratio Applicable Margin
----------------------- -----------------
< 30% 0.80%
-
> 30% 1.00%.
"Capital Expenditures" shall mean, for any period,
--------------------
expenditures (including, without limitation, the aggregate amount of
Capital Lease Obligations incurred during such period) made by the
Company or any of its Consolidated Subsidiaries to acquire or construct
fixed assets, plant and equipment (including renewals, improvements and
replacements, but excluding (a) repairs, (b) asset purchases of title
plants, (c) expenditures made pursuant to the Riverside Acquisition,
(d) expenditures made in connection with the replacement, substitution
or restoration of assets to the extent financed from insurance proceeds
or with awards of compensation arising from a taking by eminent domain
or condemnation, (e) the FARETSI Building Purchase and (f) expenditures
made in respect of the purchase of real property by the Company or any
of its Subsidiaries for occupancy or use in their respective
businesses) during such period computed in accordance with GAAP.
<PAGE>
-5-
"Moody's Financial Strength Rating" shall mean the
---------------------------------
rating assigned to an insurance company by Moody's Investors
Services, Inc. with regard to its "financial strength".
"S&P Claims Paying Rating" shall mean the rating assigned to
------------------------
an insurance company by Standard & Poor's Corporation with regard to
its "claims paying ability".
C. Section 3.02(d) of the Credit Agreement (which was
added to the Credit Agreement by Section 3.J of Amendment No. 2
thereto dated as of November 22, 1994) is deleted in its
entirety.
D. Section 8 of the Credit Agreement is amended and
restated in its entirety to read as follows:
"Section 8. Covenants of the Company. The Company covenants
------------------------
and agrees with the Lenders and the Agent that, so long as any Loan is
outstanding and until payment in full of all amounts payable by the Company
hereunder:
8.01 Financial Statements, Etc. The Company will
-------------------------
deliver to each of the Lenders:
(a) as soon as available and in any event within 45 days after
the end of each of the first three quarterly fiscal periods of each
fiscal year of the Company, consolidated and consolidating statements
of income and consolidated statements of stockholders' equity and cash
flow of the Company and its Consolidated Subsidiaries for such period
and for the period from the beginning of the respective fiscal year to
the end of such period, and the related consolidated and consolidating
balance sheets of the Company and its Consolidated Subsidiaries as at
the end of such period, setting forth in each case in comparative form
the corresponding consolidated and consolidating figures for the
corresponding period in the preceding fiscal year, accompanied by a
certificate of a senior financial officer of the Company, which
certificate shall state that said consolidated financial statements
fairly present the consolidated financial condition and results of
operations of the Company and its Consolidated Subsidiaries, and said
consolidating statements of income and balance sheets, to the extent
that they relate to the Company on a parent
<PAGE>
-6-
company stand alone basis, fairly present the individual unconsolidated
financial condition and results of operations of the Company, in each
case in accordance with generally accepted accounting principles,
consistently applied, as at the end of, and for, such period (subject
to normal year-end audit adjustments);
(b) as soon as available and in any event within 90 days after
the end of each fiscal year of the Company, consolidated and
consolidating statements of income and consolidated statements of
stockholders' equity and cash flow of the Company and its Consolidated
Subsidiaries for such fiscal year and the related consolidated and
consolidating balance sheets of the Company and its Consolidated
Subsidiaries as at the end of such fiscal year, setting forth in each
case in comparative form the corresponding consolidated and
consolidating figures for the preceding fiscal year, and accompanied
(i) in the case of said consolidated statements and balance sheet of
the Company, by an opinion thereon of independent certified public
accountants of recognized national standing, which opinion shall state
that said consolidated financial statements fairly present the
consolidated financial condition and results of operations of the
Company and its Consolidated Subsidiaries as at the end of, and for,
such fiscal year in accordance with generally accepted accounting
principles, and a certificate of such accountants stating that, in
making the examination necessary for their opinion, they obtained no
knowledge, except as specifically stated, of any Default, and (ii) in
the case of said consolidating statements and balance sheets, to the
extent that they relate to the Company on a parent company stand alone
basis, by a certificate of a senior financial officer of the Company,
which certificate shall state that said consolidating statements of
income and balance sheets fairly present the individual unconsolidated
financial condition and results of operations of the Company, in each
case in accordance with generally accepted accounting principles,
consistently applied, as at the end of, and for, such fiscal year;
(c) as soon as available and in any event within 45 days after
the end of each of the first three quarterly fiscal periods of each
fiscal year of each Material
<PAGE>
-7-
Subsidiary which is not an Insurance Company, but only to the extent
that consolidated statements are prepared by such Material Subsidiary
for such period, consolidated statements of income and consolidated
statements of stockholders' equity of such Material Subsidiary and its
Consolidated Subsidiaries for such period and for the period from the
beginning of the respective fiscal year to the end of such period, and
the related consolidated balance sheets of such Material Subsidiary and
its Consolidated Subsidiaries as at the end of such period, setting
forth in each case in comparative form the corresponding consolidated
figures for the corresponding period in the preceding fiscal year,
accompanied by a certificate of a senior financial officer of such
Material Subsidiary, which certificate shall state that said
consolidated financial statements fairly present the consolidated
financial condition and results of operations of such Material
Subsidiary and its Consolidated Subsidiaries in accordance with
generally accepted accounting principles, consistently applied, as at
the end of, and for, such period (subject to normal year-end audit
adjustments);
(d) as soon as available and in any event within 90 days after
the end of each fiscal year of each Material Subsidiary which is not an
Insurance Company, consolidated statements of income and consolidated
statements of stockholders' equity and cash flow of such Material
Subsidiary and its Consolidated Subsidiaries for such fiscal year and
the related consolidated balance sheets of such Material Subsidiary and
its Consolidated Subsidiaries as at the end of such fiscal year,
setting forth in each case in comparative form the corresponding
consolidated figures for the preceding fiscal year, and accompanied by
a certificate of a senior financial officer of such Material
Subsidiary, which certificate shall state that said consolidated
financial statements fairly present the consolidated financial
condition and results of operations of such Material Subsidiary and its
Consolidated Subsidiaries in accordance with generally accepted
accounting principles, consistently applied, as at the end of, and for,
such fiscal year;
(e) as soon as available and in any event within 45 days
after the end of each of the first three quarterly
<PAGE>
-8-
fiscal periods of each fiscal year of each Insurance Company which is a
Material Subsidiary (other than an indirect Material Subsidiary of the
Company which is not required to file a Statutory Statement with any
Applicable Insurance Regulatory Authority), Statutory Statements of
such Insurance Company (prepared in accordance with statutory
accounting practices required or permitted by the Applicable Insurance
Regulatory Authority) for such fiscal period, accompanied by (i) a
certificate of a senior financial officer of such Insurance Company
which certificate shall state that such financial statements present
the financial condition of such Insurance Company in accordance with
statutory accounting practices required or permitted by the Applicable
Insurance Regulatory Authority and (ii) a certificate of a senior
financial officer of such Insurance Company, affirming the adequacy of
Reserves of such Insurance Company as at the end of such fiscal
quarter;
(f) as soon as available and in any event within 60 days after
the end of each fiscal year of each Insurance Company which is a
Material Subsidiary (other than an indirect Material Subsidiary of the
Company which is not required to file a Statutory Statement with any
Applicable Insurance Regulatory Authority), the annual Statutory
Statement of such Insurance Company (prepared in accordance with
statutory accounting practices required or permitted by the Applicable
Insurance Regulatory Authority) for such year and as filed with the
Insurance Department of the applicable state, accompanied by (i) a
certificate of a senior financial officer of such Insurance Company
stating that said Statutory Statement presents the financial condition
of such Insurance Company in accordance with the statutory accounting
practices required or permitted by the applicable Insurance Regulatory
Authority, and (ii) a certificate of a senior financial officer of such
Insurance Company, affirming the adequacy of Reserves of such Insurance
Company as at the end of such fiscal year;
(g) to the extent prepared by the Company and as soon as
available and in any event within 90 days after the end of each fiscal
year of each Material Subsidiary which is an Insurance Company which is
not required to file a Statutory Statement with any Applicable
Insurance Regulatory Authority (i) except with respect to Midland Title
Security, Inc. and
<PAGE>
-9-
First American Title Company of Nevada, consolidated statements of
income and consolidated statements of stockholders' equity of such
Material Subsidiary and its Consolidated Subsidiaries for such fiscal
year and the related consolidated balance sheets of such Material
Subsidiary and its Consolidated Subsidiaries as at the end of such
fiscal year, setting forth in each case in comparative form the
corresponding consolidated figures for the preceding fiscal year, and
accompanied by a certificate of a senior financial officer of such
Material Subsidiary, which certificate shall state that said
consolidated financial statements fairly present the consolidated
financial condition and results of operations of such Material
Subsidiary and its Consolidated Subsidiaries in accordance with
generally accepted accounting principles, consistently applied, as at
the end of, and for, such fiscal year; and (ii) with respect to each of
Midland Title Security, Inc. and First American Title Company of
Nevada, consolidated balance sheets of such Material Subsidiary and its
Consolidated Subsidiaries as at the end of such fiscal year, setting
forth in comparative form the corresponding consolidated figures for
the preceding fiscal year, and accompanied by a certificate of a senior
financial officer of such Material Subsidiary, which certificate shall
state that said consolidated balance sheets fairly present the
consolidated financial condition of such Material Subsidiary and its
Consolidated Subsidiaries in accordance with generally accepted
accounting principles, consistently applied, as at the end of such
fiscal year;
(h) promptly upon their becoming available, copies of all
registration statements and regular periodic reports, if any, which the
Company shall have filed with the Securities and Exchange Commission
(or any governmental agency substituted therefor) or any national
securities exchange;
(i) promptly upon the mailing thereof to the shareholders of
the Company generally, copies of all financial statements, reports and
proxy statements so mailed;
(j) as soon as possible, and in any event within 20 days after
the Company knows or has reason to believe that any of the events or
conditions specified below with
<PAGE>
-10-
respect to any Plan or Multiemployer Plan has occurred or exists, a
statement signed by a senior financial officer of the Company setting
forth details respecting such event or condition and the action, if
any, that the Company or its ERISA Affiliate proposes to take with
respect thereto (and a copy of any report or notice required to be
filed with or given to PBGC by the Company or an ERISA Affiliate with
respect to such event or condition):
(i) any reportable event, as defined in Section
4043(b) of ERISA and the regulations issued thereunder, with
respect to a Plan, as to which PBGC has not by regulation
waived the requirement of Section 4043(a) of ERISA that it be
notified within 30 days of the occurrence of such event
(provided that a failure to meet the minimum funding standard
--------
of Section 412 of the Code or Section 302 of ERISA, including,
without limitation, the failure to make on or before its due
date a required installment under Section 412(m) of the Code
or Section 302(e) of ERISA, shall be a reportable event
regardless of the issuance of any waivers in accordance with
Section 412(d) of the Code); and any request for a waiver
under Section 412(d) of the Code for any Plan;
(ii) the distribution of a notice of intent to terminate
any Plan pursuant to Section 4041(c) of ERISA or any action
taken by the Company or an ERISA Affiliate to terminate any
Plan pursuant to Section 4041(c) of ERISA;
(iii) the institution by PBGC of proceedings under Section
4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Plan, or the receipt by the Company
or any ERISA Affiliate of a notice from a Multiemployer Plan
that such action has been taken by PBGC with respect to such
Multiemployer Plan;
(iv) the complete or partial withdrawal from a
Multiemployer Plan by the Company or any ERISA Affiliate that
results in liability of the Company or any ERISA Affiliate in
excess of $250,000 under Section 4201 or 4204 of ERISA
(including the obligation
<PAGE>
-11-
to satisfy secondary liability as a result of a purchaser
default) or the receipt by the Company or any ERISA Affiliate
of notice from a Multiemployer Plan that it is in
reorganization or insolvency pursuant to Section 4241 or 4245
of ERISA or that it intends to terminate or has terminated
under Section 4041A of ERISA;
(v) the institution of a proceeding by a fiduciary of
any Multiemployer Plan against the Company or any ERISA
Affiliate to enforce Section 515 of ERISA, which proceeding
will or could reasonably be expected to result in any material
liability of the Company or any ERISA Affiliate, which
material liability will be, or could reasonably be expected to
be, payable while this Agreement is in effect and which
proceeding is not dismissed within 30 days; and
(vi) the adoption of an amendment to any Plan that,
pursuant to Section 401(a)(29) of the Code or Section 307 of
ERISA, would result in the loss of tax-exempt status of the
trust of which such Plan is a part if the Company or an ERISA
Affiliate fails to timely provide security to the Plan in
accordance with the provisions of said Sections;
(k) as soon as received by the Company, a copy of any final
financial examination report (including, without limitation, any report
in respect of any tri-annual examination conducted by any Applicable
Insurance Regulatory Authority) or market conduct examination report
issued by or prepared for any governmental authority (including any
Applicable Insurance Regulatory Authority and NAIC) with respect to any
Insurance Company; and (ii) to the extent disclosure to the Lenders is
permitted by law, a copy of any financial examination report issued by
or prepared for any governmental authority (including any Applicable
Bank Regulatory Authority) with respect to the Company, First American
Trust or First Security Thrift;
(l) immediately, notice of actual (or threatened
action that could lead to the) suspension, termination or
revocation of any License of any Insurance Company which is
<PAGE>
-12-
a Material Subsidiary by any governmental authority (including any
Applicable Insurance Regulatory Authority), including any notice by any
governmental authority of the commencement of any proceeding, hearing
or administrative action to suspend, terminate or revoke any such
License as a result of the failure by any such Insurance Company to
take or refrain from taking, any action which adversely affects the
authority of such Insurance Company to conduct its business after
notice thereof by such governmental authority (including any such
Applicable Insurance Regulatory Authority);
(m) promptly after the Company knows or has reason to believe
that any insurance, banking or other regulator having jurisdiction over
the Company or any of its Material Subsidiaries has commenced any
proceeding, issued any order, given notice of a formal hearing, sought
relief from any court or taken any similar action with respect to the
Company or any of its Material Subsidiaries that seeks to, or would,
result in the revocation of any license or authorization of the Company
or any of its Material Subsidiaries or materially restrict the ability
of the Company or any of its Material Subsidiaries to do business in
any jurisdiction, a notice describing in reasonable detail such
proceeding, order, hearing or similar action;
(n) at the time it furnishes statements pursuant to paragraph
(a) or (b) above, a certificate of a senior financial officer of the
Company which certificate shall (i) list all Subject Property (as such
term is defined in Section 8.23 hereof) acquired by the Company and its
Subsidiaries during the most recently ended fiscal quarter and (ii)
list all Investments made by the Company and its Subsidiaries pursuant
to Section 8.08(d) hereof during the most recently ended fiscal
quarter;
(o) promptly upon their becoming available, each Call Report
of each Bank Subsidiary prepared for or filed with any Applicable Bank
Regulatory Authority;
(p) immediately, but in any event no later than five
days after the Company knows that any Applicable Bank
<PAGE>
-13-
Regulatory Authority's specification by regulation of capital levels
results in First Security Thrift being designated an
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized" institution pursuant to 12 U.S.C. ss.1831o, a notice
identifying such designation and describing in reasonable detail the
computations necessary to determine such designation;
(q) promptly after the Company knows or has reason to believe
that any Default has occurred, a notice of such Default describing the
same in reasonable detail and, together with such notice or as soon
thereafter as possible, a description of the action that the Company
has taken or proposes to take with respect thereto; and
(r) from time to time such other information regarding the
financial condition, operations, business or prospects of the Company
or any of its Subsidiaries (including, without limitation, any Plan or
Multiemployer Plan and any reports or other information required to be
filed under ERISA) as any Lender or the Agent may reasonably request.
The Company will furnish to each Lender, at the time it furnishes each set of
financial statements pursuant to paragraph (a) or (b) above, a certificate of a
senior financial officer of the Company (i) to the effect that no Default has
occurred and is continuing (or, if any Default has occurred and is continuing,
describing the same in reasonable detail and describing the action that the
Company has taken or proposes to take with respect thereto) and (ii) setting
forth in reasonable detail the computations necessary to determine (x) Deferred
Revenues (but only to the extent not already reflected as a discrete item in the
set of financial statements furnished with such certificate) and (y) whether the
Company is in compliance with Sections 8.07, 8.08, 8.09, 8.10, 8.11, 8.12, 8.13
and 8.14 hereof, as of the end of the respective quarterly fiscal period or
fiscal year (such certificate to include, with respect to said Section 8.11, (I)
a description in reasonable detail of the assumptions underlying the estimates
used in determining Pro Forma Fixed Charges for the Computation Period
commencing on the day next following the last day of such fiscal period or
fiscal year and a certification that
<PAGE>
-14-
such assumptions and estimates are reasonable and were made in good faith and
(II) if such Computation Period commences on or after July 1, 1995, a
description in reasonable detail of any material differences between such
assumptions and the corres ponding assumptions underlying the estimates used in
determining Pro Forma Fixed Charges for the then next preceding Computation
Period and the reasons therefor).
8.02 Litigation. The Company will promptly give to each Lender
----------
notice of all legal or arbitral proceedings, and of all proceedings by or before
any governmental or regulatory authority or agency, and any material development
in respect of such legal or other proceedings, affecting the Company or any of
its Subsidiaries, except proceedings which, if adversely determined, would not
have a Material Adverse Effect. Without limiting the generality of the
foregoing, the Company will give to each Lender notice of the assertion of any
Environmental Claim by any Person against, or with respect to the activities of,
the Company or any of its Subsidiaries and notice of any alleged violation of or
non-compliance with any Environmental Laws or any permits, licenses or
authorizations, other than any Environmental Claim or alleged violation which,
if adversely determined, would not have a Material Adverse Effect.
8.03 Existence, Etc. (a) The Company will, and will
--------------
cause each of its Material Subsidiaries to:
(i) preserve and maintain its legal existence and all of its
material rights, privileges, licenses and franchises (provided that
--------
nothing in this Section 8.03 shall prohibit any transaction expressly
permitted under Section 8.05 hereof); and
(ii) maintain all of its Properties used or useful (in the good
faith opinion of the Company) in its business in good working order and
condition, ordinary wear and tear excepted.
(b) The Company will, and will cause each of its
Subsidiaries to:
<PAGE>
-15-
(i) comply with the requirements of all applicable laws,
rules, regulations and orders of governmental or regulatory authorities
if failure to comply with such requirements could have a Material
Adverse Effect;
(ii) pay and discharge all taxes, assessments and governmental
charges or levies imposed on it or on its income or profits or on any
of its Property prior to the date on which penalties attach thereto,
except for any such tax, assessment, charge or levy the payment of
which is being contested in good faith and by proper proceedings and
against which adequate reserves (as required by generally accepted
accounting principles or statutory accounting practices, as the case
may be) are being maintained;
(iii) keep adequate records and books of account, in which complete
entries will be made in accordance with generally accepted accounting
principles or statutory accounting practices, as the case may be,
consistently applied; and
(iv) permit representatives of any Lender or the Agent, during
normal business hours under guidance from officers of the Company or
its Subsidiaries, to examine, copy and make extracts from its books and
records, to inspect any of its Properties, and to discuss its business
and affairs with its officers, all to the extent reasonably requested
by such Lender or the Agent (as the case may be).
8.04 Insurance. The Company will, and will cause each of its
---------
Subsidiaries to, keep insured by financially sound and reputable insurers all
Property of a character usually insured by corporations engaged in the same or
similar business similarly situated against loss or damage of the kinds and in
the amounts customarily insured against by such corporations and carry such
other insurance as is usually carried by such corporations.
8.05 Prohibition of Fundamental Changes.
----------------------------------
(a) The Company will not, nor will it permit any of its
Material Subsidiaries to, enter into any transaction of merger or consolidation
or amalgamation, or liquidate, wind up or
<PAGE>
-16-
dissolve itself (or suffer any liquidation or dissolution). The Company will
not, nor will it permit any of its Subsidiaries to, acquire any business or
Property (including, without limitation, title plant assets) from, or capital
stock (including, without limitation, the capital stock of any Subsidiary of the
Company held by minority shareholders) of, or be a party to any acquisition of,
any Person except for:
(i) any such acquisition (which acquisition may be an
Investment in a Corporate Affiliate), the consideration for which is
paid solely in shares of common stock of the Company with a Book Value
which, on the date of such acquisition (when added to the Book Value of
all such other common stock issued as consideration pursuant to this
clause (i)) does not exceed 15% of the total assets of the Company and
its Subsidiaries (on a consolidated basis) on such date;
(ii) any such acquisition which is required to be made by
FATICO, First American Home Buyers Protection Corporation or First
American Title Guaranty Holding Company under the Minority Stockholders
Put Documents, and then only on or after the date so required
to be made;
(iii) any such acquisition (which acquisition may be an
Investment in a Corporate Affiliate, but shall not include an
acquisition referred to in clause (ii) above) made after the date of
Amendment No. 5, the consideration for which is either paid in cash or
through the assumption of Indebtedness; provided that (x) in the case
--------
of each such acquisition (the "Subject Acquisition"), the sum of all
-------------------
such consideration paid or assumed pursuant to this clause (iii) for
the Subject Acquisition and all other such acquisitions effected on or
after the date of Amendment No. 5 does not exceed a total aggregate
amount of $100,000,000, (y) for any Subject Acquisition for which the
consideration paid or assumed equals or exceeds $35,000,000, the
Majority Lenders shall have consented thereto and (z) the aggregate
amount of Investments permitted under this clause (iii) in First
Security Thrift shall not exceed $5,000,000 in the aggregate;
<PAGE>
-17-
(iv) purchases of inventory and office supplies to be
sold or used in the ordinary course of business;
(v) the Riverside Acquisition;
(vi) Investments permitted under Section 8.08 hereof;
and
(vii) Capital Expenditures permitted under Section 8.14
hereof.
(b) The Company will not, nor will it permit any of its
Material Subsidiaries to, convey, sell, lease, transfer or otherwise dispose of,
in one transaction or a series of transactions, all or a substantial part of its
business or Property, whether now owned or hereafter acquired (including,
without limitation, receivables and leasehold interests), provided that the
--------
Company and its Material Subsidiaries may sell or dispose of any Property in the
ordinary course of business and obsolete or worn-out Property no longer used or
useful in its business.
(c) Notwithstanding the foregoing provisions of this
Section 8.05:
(i) any Subsidiary of the Company (other than FATICO, First
American Trust and FARETSI) may be merged or consolidated with or into:
(x) the Company if the Company shall be the continuing or surviving
corporation or (y) any other such Subsidiary; provided that if any such
--------
transaction shall be between a Subsidiary and a Wholly Owned
Subsidiary, the Wholly Owned Subsidiary shall be the continuing or
surviving corporation;
(ii) any Subsidiary of the Company may sell, lease, transfer or
otherwise dispose of any or all of its Property (upon voluntary
liquidation or otherwise) to the Company or a Wholly Owned Subsidiary
of the Company; and
(iii) the Company or any Subsidiary of the Company may merge or
consolidate with any other Person (which is not a Subsidiary of the
Company) if (x) in the case of a merger or
<PAGE>
-18-
consolidation of the Company, the Company is the surviving corporation
and, in any other case, the surviving corporation is a Wholly Owned
Subsidiary of the Company and (y) after giving effect thereto no
Default would exist hereunder.
8.06 Limitation on Liens. The Company will not, nor will it
-------------------
permit any of its Subsidiaries to, create, incur, assume or suffer to exist any
Lien upon any of its Property, whether now owned or hereafter acquired, except:
(a) Liens created pursuant to the Pledge Agreement;
(b) Liens in existence on September 30, 1994 and, to the
extent that any such Lien secures Indebtedness the aggregate principal
or face amount of which equals or exceeds (or may equal or exceed)
$1,000,000, listed in Schedule I to Amendment No. 2;
(c) Liens imposed by any governmental authority for taxes,
assessments or charges not yet due or which are being contested in good
faith and by appropriate proceedings if adequate reserves with respect
thereto are maintained on the books of the Company or the affected
Subsidiaries, as the case may be, in accordance with generally accepted
accounting principles (or, in the case of an Insurance Company,
statutory accounting practices);
(d) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of
business which are not overdue for a period of more than 30 days or
which are being contested in good faith and by appropriate proceedings
and Liens securing judgments but only to the extent for an amount and
for a period not resulting in an Event of Default under Section 9(h)
hereof;
(e) pledges or deposits under worker's compensation,
unemployment insurance and other social security
legislation;
<PAGE>
-19-
(f) deposits to secure the performance of bids, trade
contracts (other than for borrowed money), leases, statutory
obligations, surety and appeal bonds, performance bonds, casualty
insurance policies of the type usually carried by corporations engaged
in businesses or activities that are the same as or similar to those of
the Company and its Subsidiaries and other obligations of a like nature
incurred in the ordinary course of business;
(g) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business and
encumbrances consisting of zoning restrictions, easements, licenses,
restrictions on the use of Property or minor imperfections in title
thereto which, in the aggregate, are not material in amount, and which
do not in any case materially detract from the value of the Property
subject thereto or interfere with the ordinary conduct of the business
of the Company or any of its Subsidiaries;
(h) Liens upon Property of any corporation which becomes a
Subsidiary of the Company after April 21, 1992, provided that such
Liens are in existence at the time such corporation becomes a
Subsidiary of the Company and were not created in anticipation thereof;
(i) Liens upon real and/or tangible personal Property used
primarily in the ordinary course of the business of the Company and its
Subsidiaries and acquired after April 21, 1992;
(j) Liens upon the real and/or tangible personal Property
acquired by FATICO pursuant to the Riverside Acquisition created no
later than 90 days from the date of such acquisition solely for the
purpose of securing the Indebtedness permitted by Section 8.07(e)
hereof representing, or incurred to finance, the cost of such Property;
provided that no such Lien shall extend to or cover any Property of
--------
FATICO other than the Property so acquired and improvements thereon;
(k) Liens upon the Property of First American Trust
and Southwest Title and Trust Company which are created in
<PAGE>
-20-
the ordinary course of their respective financial services
businesses as such businesses are conducted as of April 21,
1992;
(l) Liens upon Property of any Subsidiary of the Company
securing Indebtedness of such Subsidiary to the Company or another
Subsidiary of the Company that is the direct or indirect parent entity
of such Subsidiary permitted by Section 8.07 hereof;
(m) Liens upon Property of the Company or any of its
Subsidiaries securing Arbitrage Loans; provided that no such Lien shall
extend to or cover any such Property other than the securities and/or
other investments in which the proceeds of such Arbitrage Loans have
been invested; and
(n) any extension, renewal or replacement of the foregoing,
provided however, that the Liens permitted hereunder shall not be
spread to cover any additional Indebtedness or Property (other than a
substitution of like Property).
8.07 Indebtedness. The Company will not, nor will it permit
------------
any of its Subsidiaries to, create, incur, assume or suffer to exist any
Indebtedness except:
(a) Indebtedness to the Lenders hereunder;
(b) Indebtedness outstanding on September 30, 1994 and, to the
extent that any such Indebtedness has an aggregate principal or face
amount which equals or exceeds (or may equal or exceed) $1,000,000,
listed in Schedule I to Amendment No. 2;
(c) Indebtedness of the Company and its Subsidiaries
secured by Liens permitted under Section 8.06(i) hereof up
to but not exceeding $45,000,000 at any one time
outstanding;
(d) Indebtedness of the Company incurred or assumed
pursuant to any acquisition expressly permitted by
clause (iii) of Section 8.05(a) hereof;
<PAGE>
-21-
(e) Indebtedness of FATICO incurred pursuant to the Riverside
Acquisition in an aggregate amount up to but not exceeding $6,000,000
at any one time outstanding; provided that the aggregate principal
amount of Indebtedness permitted by this clause (e) shall not exceed
75% of the fair market value (as determined in good faith by a senior
financial officer of the Company) of the real and/or tangible personal
Property acquired by FATICO pursuant to the Riverside Acquisition;
(f) Indebtedness of the Company to any Subsidiary of the
Company, Indebtedness of any Subsidiary of the Company (the "Debtor
------
Subsidiary") to the Company or another Subsidiary of the Company that
----------
is the direct or indirect parent entity of the Debtor Subsidiary, and
Indebtedness of direct Wholly Owned Subsidiaries of the Company to
their respective Wholly Owned Subsidiaries;
(g) Indebtedness of FATICO to FARETSI;
(h) Arbitrage Loans;
(i) Indebtedness representing Capital Lease
Obligations to the extent permitted by Section 8.14 hereof;
(j) Indebtedness of FATICO, First American Title
Guaranty Holding Company and First American Home Buyers
Protection Corporation with respect to Minority Stockholders
Put Obligations;
(k) Indebtedness of FARETSI and FATICO to the Company
representing intercompany loans made by the Company from net proceeds
received by the Company from its Equity Issuances;
(l) additional Indebtedness of the Insurance Companies in
respect of letters of credit (or similar instruments) and Guarantees
issued in the ordinary course of the title insurance business in
connection with settlement of title insurance claims, so long as the
aggregate amount of all such Indebtedness does not exceed $10,000,000
at any one time outstanding;
<PAGE>
-22-
(m) Indebtedness of the Company or any of its Subsidiaries in
respect of letters of credit (or similar instruments) and guarantees
issued in connection with settlement or administration of claims made
against the Company or any of its Subsidiaries under insurance policies
of the type usually carried by corporations engaged in businesses or
activities that are the same as or similar to those of the Company and
its Subsidiaries;
(n) additional Indebtedness of the Company and its
Subsidiaries (other than to each other) up to but not
exceeding $25,000,000 at any one time outstanding; and
(o) any extension, renewal or refinancing of the
foregoing.
8.08 Investments. The Company will not, nor will it permit any
-----------
of its Subsidiaries to, make or permit to remain outstanding any Investments
except:
(a) The Company may make or have outstanding the
following:
(i) Permitted Investments;
(ii) operating deposit accounts with banks;
(iii) Investments by the Company in capital
stock of Subsidiaries of the Company to the extent
outstanding on the Amendment No. 2 Effective Date
(as defined in Amendment No. 2), and disclosed on
Schedule II thereto;
(iv) Investments by the Company in FATICO as
contemplated by Section 8.18 hereof;
(v) Interest Rate Protection Agreements
(including those required by Section 8.15 hereof) so
long as the aggregate outstanding notional principal
amount of all transactions under such Agreements does
not exceed an amount equal to the sum of the
aggregate outstanding principal amount
<PAGE>
-23-
of the Bank Loans plus the aggregate outstanding
unused amount of the New Revolving Credit
Commitments at any time;
(vi) [intentionally omitted]
(vii) Investments by the Company in its
capacity as a "qualified intermediary" (as such
term is defined on April 21, 1992 in Internal Revenue
Service Reg. section 1.103(k)-1(g)(4)) in tax
deferred exchanges arranged by First American Trust
in the ordinary course of First American Trust's
financial services business;
(viii) Investments by the Company required to be
made in any Subsidiary of the Company by any
Applicable Bank Regulatory Authority or any
Applicable Insurance Regulatory Authority; and
(ix) Investments of the Company outstanding on
December 31, 1991, so long as any such Investments
(other than any such Investments in its Subsidiaries)
are not "rolled over", renewed or extended subsequent
to such date.
(b) Any Insurance Company may make or have
outstanding the following:
(i) Permitted Investments (without regard to
maturity limitations);
(ii) operating deposit accounts with banks;
(iii) Investments by such Insurance Company in
capital stock of Subsidiaries of such Insurance
Company to the extent outstanding on the Amendment
No. 2 Effective Date (as defined in Amendment No.
2) and disclosed on Schedule II thereto and
additional Investments by FATICO, First American
Title Guaranty Holding Company and First American
Home Buyers Protection Corporation in the capital
stock of First American Title Guaranty Holding
<PAGE>
-24-
Company and First American Home Buyers Protection
Corporation required to be made pursuant to
Minority Stockholders Put Obligations;
(iv) Investments in Investment Grade Debt
Securities, provided that the aggregate amount of all
such Investments made by the Insurance Companies in
the securities of any one issuer does not exceed 5%
of the Combined Investment
Portfolio;
(v) Investments made in the ordinary course of
the title insurance business in connection with
settlement of title insurance claims (subject to the
requirements of Section 8.23 hereof);
(vi) [intentionally omitted]
(vii) Investments required to be made in any
Subsidiary of any Insurance Company by any Applicable
Bank Regulatory Authority or any Applicable Insurance
Regulatory Authority;
(viii) Investments of such Insurance Company
outstanding on December 31, 1991, so long as any such
Investments (other than Investments in its
Subsidiaries) are not "rolled over", renewed or
extended subsequent to such date; and
(ix) FATICO may (notwithstanding Section 8.05
hereof) exchange the capital stock of North American
Title Insurance Company held by it for approximately
17% of the capital stock of North American Asset
Development Corporation.
(c) Any Subsidiary of the Company which is not an
Insurance Company (other than First Security Thrift) may make
or have outstanding the following:
(i) Permitted Investments (without regard to
maturity limitations);
<PAGE>
-25-
(ii) operating deposit accounts with banks;
(iii) Investments by such Subsidiary in
capital stock of Subsidiaries of such Subsidiary
to the extent outstanding on the Amendment No. 2
Effective Date (as defined in Amendment No. 2) and
disclosed on Schedule II thereto;
(iv) [intentionally omitted]
(v) Investments by FARETSI with respect to
the intercompany Indebtedness permitted by
clause (g) of Section 8.07 hereof;
(vi) Investments made by First American Trust
and Southwest Title and Trust Company in the ordinary
course of their respective financial services
businesses as such businesses are conducted on April
21, 1992;
(vii) Investments in Investment Grade Debt
Securities, provided that any such Investment does
not result in any such Subsidiary holding Investments
of more than $1,000,000 in any one issuer;
(viii) Investments required to be made in any
Subsidiary of such Subsidiary by any Applicable Bank
Regulatory Authority or any Applicable Insurance
Regulatory Authority; and
(ix) Investments of such Subsidiary out standing
on December 31, 1991, so long as any such Investments
(other than Investments in its Subsidiaries) are not
"rolled over", renewed or extended subsequent to such
date.
(d) Additional Investments (including, without
limitation, Investments in Corporate Affiliates) may be made
by the Company and its Subsidiaries (other than First Security
Thrift) in an aggregate amount not exceeding an amount equal
to 25% of Stockholders'
<PAGE>
-26-
Equity, provided that (w) with respect to Investments made by
--------
the Insurance Companies, such Investments are admitted assets,
assets acquired in settlement of claims, or non-admitted
assets in an aggregate amount not exceeding $5,000,000, (x)
the aggregate amount of all such Investments made by the
Company and its Subsidiaries in any one issuer shall not
exceed $5,000,000, (y) no more than 60% of the aggregate
amount permitted for such Investments in this subsection (d)
shall be in equity securities and (z) any such Investment in
equity securities otherwise permitted by clause (y) above
shall not result in either the Company or any of its
Subsidiaries holding more than a 20% ownership interest in any
one issuer of equity securities.
(e) First Security Thrift may make or have
outstanding the following:
(i) Permitted Investments (without regard to
maturity limitations);
(ii) operating deposit accounts with banks;
(iii) Investments in Investment Grade Debt
Securities, provided that the aggregate amount of all
--------
such Investments made by First Security Thrift in the
securities of any one issuer does not exceed
$1,000,000;
(iv) Investments in commercial and
residential real estate loans or mortgages, provided
--------
that any such Investments shall be within the legal
lending guidelines prescribed by the Federal Deposit
Insurance Corporation (or any successor thereto);
(v) Investments made in the ordinary course
of the secured lending business in connection with
foreclosures on secured loans (subject to the
requirements of Section 8.23 hereof); and
<PAGE>
-27-
(vi) Investments of First Security Thrift
outstanding on December 31, 1991.
(f) In addition to the other Investments permitted by
this Section 8.08, the Company and its Subsidiaries may make
Investments in their respective direct or indirect
Subsidiaries, provided that any Investments in First Security
--------
Thrift after the date of Amendment No. 5 shall be subject to
the limitation set forth in Section 8.05(a)(iii)(z) hereof.
(g) In addition to the other Investments permitted by
this Section 8.08, the Company and its Subsidiaries may (1)
make any Investment which is expressly permitted to be made
pursuant to clauses (i) and (iii) of Section 8.05(a) hereof
and (2) contribute shares of capital stock of a Subsidiary
acquired by the Company in an acquisition referred to in
clause (i) or (iii) of Section 8.05(a) hereof to any other
Subsidiary of the Company (either directly or indirectly
through other Subsidiaries of the Company) and such Subsidiary
may hold the resulting Investment in such acquired Subsidiary
(but may not increase the same except to the extent permitted
by paragraph (f) above).
(h) In addition to the other Investments permitted by
this Section 8.08, each of the Company and its Subsidiaries
may make Investments in intercompany Indebtedness that is
permitted to be owed to it under Section 8.07 hereof.
(i) In addition to the other Investments permitted by
this Section 8.08, the Company and its Subsidiaries may make
new loans and advances subsequent to April 21, 1992 (in
addition to those loans and advances already outstanding
pursuant to clauses (a)(ix), (b)(viii) and (c)(ix) of this
Section 8.08), maturing not more than 90 days from the
respective dates such new loans and advances are made, to
their respective officers, employees and agents in the
ordinary course of business, provided that (x) the aggregate
--------
amount (as to the Company and all of its
<PAGE>
-28-
Subsidiaries) of all such new loans and advances shall not
exceed $2,500,000 at any one time outstanding and (y) any such
new loan or advance to any such officer or employee shall not
exceed $250,000 at any one time outstanding.
(j) In addition to the other Investments permitted by
this Section 8.08, the interests of (i) First American Title
Company of Los Angeles in The 520 North Central Joint Venture,
(ii) National Survey Services, Inc. in the Bock & Clark
Partnership, (iii) First American Title Guaranty Holding
Company in the Harrison-Webster Investment Group and (iv)
Southwest Title Land Company in the joint ventures and limited
partnerships specified in Schedule II to Amendment No. 2.
(k) In addition to the other Investments permitted by
this Section 8.08, the Company or any of its Subsidiaries may
be a general partner in a partnership or joint venture after
the date of Amendment No. 5, provided that (i) the aggregate
--------
amount of Indebtedness of each such partnership or joint
venture shall be included in the Adjusted Leverage Ratio and
(ii) the amount of Investments by each such partnership or
joint venture shall be subject to the other limitations set
forth in this Section 8.08.
(l) In addition to the other Investments permitted by
this Section 8.08, the Company and its Subsidiaries may incur
Arbitrage Loans.
8.09 Stockholders' Equity. The Company will not permit
--------------------
Stockholders' Equity to be less than $265,000,000 at any time.
8.10 Adjusted Leverage Ratio. The Company will not permit the
-----------------------
Adjusted Leverage Ratio to exceed 0.40 to 1 at any time.
8.11 Pro Forma Fixed Charge Coverage Ratio. The Company will
-------------------------------------
not permit the Pro Forma Fixed Charge Coverage Ratio
<PAGE>
-29-
for the Computation Period commencing on the first day of any fiscal quarter of
the Company to be less than 1.25 to 1.
8.12 Minimum Combined Earnings. The Company will not permit,
-------------------------
as at the last day of each fiscal year of the Company (commencing with the
fiscal year ending on December 31, 1996), the Combined Earnings to be less than
$20,000,000 plus (for each fiscal year ending after December 31, 1996) an
----
additional $20,000,000.
8.13 Minimum FATICO Surplus, Etc.. The Company will not permit
---------------------------
(a) FATICO Surplus to be less than $150,000,000 at any time and (b) FATICO
Unassigned Surplus to be less than $80,000,000 at any time.
8.14 Capital Expenditures. The Company will not permit the
--------------------
aggregate amount of Capital Expenditures by the Company and its Consolidated
Subsidiaries at any time during any fiscal year to exceed 20% of the Base Amount
for such fiscal year less Dividend Payments paid in such fiscal year (other than
any such Dividend Payments made with the proceeds of New Loans not later than
five Business Days after the Borrowing thereof under Amendment No. 2).
8.15 Interest Rate Protection Agreements. At all times during
-----------------------------------
the three-year period following the date that the Company entered into the
Interest Rate Protection Agreement required by Section 8.15 of the Existing
Credit Agreement, the Company will maintain in full force and effect such
Interest Rate Protection Agreement or one or more Interest Rate Protection
Agreements with one or more of the Lenders (and/or with a bank or other
financial institution having capital, surplus and undivided profits of at least
$500,000,000), which effectively enables the Company (in a manner satisfactory
to the Majority Lenders), as at any date, to protect itself against the Prime
Rate exceeding 9% per annum as to a notional principal amount at least equal to
$22,500,000.
8.16 Lines of Business. The Company will not permit, nor will
-----------------
it permit any of its Subsidiaries to, (a) engage to any substantial extent in
any line or lines of business activity other than the businesses it was engaged
in on the date of
<PAGE>
-30-
Amendment No. 5 or (b) expand into any new markets or product lines
substantially different from those in which it was engaged as of the date of
Amendment No. 5. Notwithstanding the foregoing, (i) no Insurance Subsidiary
shall engage in any business other than the ownership and management of
insurance operations and businesses reasonably related or incidental thereto,
(ii) First Security Thrift shall not engage in any business other than the
ownership and management of thrift operations and businesses reasonably related
or incidental thereto and (iii) First American Capital Management, Inc. ("First
-----
American Capital Management"), a Wholly Owned Subsidiary of the Company, may
- ---------------------------
provide investment advisory services to First American Trust and a proprietary
family of mutual funds and, in that connection, First American Capital
Management and First American Trust may engage in activities reasonably related
or incidental thereto.
8.17 Transactions with Affiliates. Except as expressly
----------------------------
permitted by this Agreement, the Company will not, nor will it permit any of its
Subsidiaries to, directly or indirectly: (a) make any Investment in an Affiliate
(other than Investments required to be made in (i) The 520 North Central Joint
Venture by First American Title Company of Los Angeles pursuant to the express
terms of The 520 North Central Joint Venture Agreement, (ii) the Bock & Clark
Partnership by National Survey Services, Inc. pursuant to the express terms of
the Bock & Clark Partnership Agreement and (iii) the Harrison-Webster Investment
Group by First American Title Guaranty Holding Company pursuant to the express
terms of the Harrison-Webster Partnership Agreement); (b) transfer, sell, lease,
assign or otherwise dispose of any Property to an Affiliate; (c) merge into or
consolidate with or purchase or acquire Property from an Affiliate; or (d) enter
into any other transaction directly or indirectly with or for the benefit of an
Affiliate (including, without limitation, guarantees and assumptions of
obligations of an Affiliate); provided that (x) any Affiliate who is an
--------
individual may serve as a director, officer or employee of the Company or any of
its Subsidiaries and receive reasonable compensation (whether paid in cash,
securities or other benefits) for his or her services in such capacity and (y)
the Company and its Subsidiaries may enter into transactions (other than
extensions of credit by the Company or any of its Subsidiaries to
<PAGE>
-31-
an Affiliate) providing for the leasing of Property, the rendering or receipt of
services or the purchase or sale of inventory and other Property in the ordinary
course of business if the monetary or business consideration arising therefrom
would be substantially as advantageous to the Company and its Subsidiaries as
the monetary or business consideration which would obtain in a comparable
transaction with a Person not an Affiliate.
8.18 Use of Proceeds, Etc. The Company confirms that it used
--------------------
the proceeds of the Loans hereunder solely to repay the Specified Debt (together
with all fees, commissions and expenses payable in connection with such
repayment) in compliance with all applicable legal and regulatory requirements
and to make capital contributions in FATICO; provided that neither the Agent nor
any Lender shall have any responsibility as to the use of any of such proceeds.
8.19 Certain Obligations Respecting Subsidiaries. The Company
-------------------------------------------
will, and will cause each of its Material Subsidiaries to, take such action from
time to time as shall be necessary to ensure that the Company and each of its
Material Subsidiaries at all times owns (subject only to the Lien of the Pledge
Agreement) (a) at least the same percentage of the issued and outstanding shares
of each class of stock of each of its Wholly Owned Subsidiaries and its Material
Subsidiaries as was owned on April 21, 1992 and (b) at least 90% of the issued
and outstanding shares of each class of stock of each of its other Material
Subsidiaries as was owned on April 21, 1992. Without limiting the generality of
the foregoing, except as expressly permitted by Section 8.05 hereof, the Company
will not and will not permit any of its Material Subsidiaries to sell, transfer
or otherwise dispose of any shares of stock or any other ownership interest in
any Material Subsidiary owned by them, any of FATICO, First American Trust and
FARETSI or permit any of its Material Subsidiaries to issue any shares of stock
of any class whatsoever to any Person (other than to the Company or any Material
Subsidiary of the Company which owns 100% of the issued and outstanding capital
stock of such Material Subsidiary). In the event that any such additional shares
of stock shall be issued by any of FATICO, First American Trust and FARETSI, the
Company agrees forthwith to deliver to the Agent pursuant to the Pledge
<PAGE>
-32-
Agreement the certificates evidencing such shares of stock, accompanied by
undated stock powers executed in blank and shall take such other action as the
Agent shall request to perfect the security interest created therein pursuant to
the Pledge Agreement. The Company will not permit any of its Material
Subsidiaries to enter into, after the date hereof, any indenture, agreement,
instrument or other arrangement (other than an arrangement mandated by
Applicable Bank Regulatory Authorities or Applicable Insurance Regulatory
Authorities) that, directly or indirectly, prohibits or restrains, or has the
effect of prohibiting or restraining, or imposes materially adverse conditions
upon, the incurrence or payment of Indebtedness, the granting of Liens, the
declaration or payment of dividends, the making of loans, advances or
Investments or the sale, assignment, transfer or other disposition of Property.
In addition (to the extent not required by applicable law), the Company will
not, and will not permit any of its Material Subsidiaries to, enter into any
capital maintenance or other agreement which requires the Company or such
Material Subsidiary to make a cash equity or other capital contribution to any
Material Subsidiary.
8.20 Modifications of Certain Documents.
----------------------------------
(a) The Company will not, nor will it permit any of its
Subsidiaries to, without the prior consent of the Agent (with the approval of
the Majority Lenders), consent to any modification, supplement or waiver of any
of the material provisions of the Minority Stockholders Put Documents, any
documents governing the ESOT Indebtedness, any of the Tax Sharing Agreements,
The 520 North Central Joint Venture Agreement, the Bock & Clark Partnership
Agreement or the Harrison-Webster Partnership Agreement or the joint venture or
partnership agreement for any Investment by Southwest Title Land Company
referred to in Section 8.08(j) hereof.
(b) The Company will not, nor will it permit any of its
Subsidiaries to, without the prior consent of the Agent (with the approval of
the Majority Lenders), enter into or consent to any amendment, supplement or
other modification of any of the Outstanding Debt Documents that:
<PAGE>
-33-
(i) increases or extends the term of the commitments
thereunder, or extends the time or waives any requirement
for the reduction or termination of such commitments;
(ii) extends the date fixed for the payment of principal of or
interest on any loan or fee thereunder (other than pursuant to any
extension, renewal or refinancing permitted under Section 8.07(o)
hereof);
(iii) increases the amount of any such payment of
principal;
(iv) increases the rate at which interest is payable
thereon or any fee is payable thereunder;
(v) alters the rights or obligations of the Company to
prepay any loans thereunder; or
(vi) modifies the number or percentage of lenders or holders of
subject debt required to make any determinations or waive any rights
thereunder or modify any provisions thereof.
8.21 [intentionally omitted]
8.22 Sale/Leaseback Transactions. The Company will not, nor
---------------------------
will it permit any of its Subsidiaries to, enter into any arrangement with any
Person whereby the Company or any of its Subsidiaries shall sell or otherwise
transfer any of its Property and thereafter rent or lease such Property or
similar Property for substantially the same use or uses as the Property sold or
transferred if, as a result thereof, the aggregate amount of rent and lease
payments payable in any fiscal year by the Company and its Subsidiaries under
all such arrangements would exceed $15,000,000.
8.23 Foreclosure; Etc. The Company will not, nor will it
----------------
permit any of its Subsidiaries to, acquire ownership or control of any
commercial real property which is used for commercial purposes by means of the
exercise of any right of foreclosure, power of sale or similar remedy it may
avail itself of by way of any indenture of mortgage or similar instrument
<PAGE>
-34-
relating to such commercial real property (the "Subject Property"), or accept a
----------------
deed to the Subject Property in lieu of foreclosure or in settlement of any
title insurance claim against it, unless the Company shall have theretofore
caused a Phase I Environmental Review (as defined below) with respect to the
Subject Property to be conducted. As used herein, the term "Phase I
-------
Environmental Review" shall mean an environmental survey and assessment prepared
- --------------------
by an independent engineer selected by the Company expert in the identification
and analysis of environmental risks (such engineer and his agents being referred
to as the "Environmental Consultant"), such survey and assessment to (a)
------------------------
estimate current liabilities and assess potential sources of future liabilities
of any owner or operator of, or any other Person having control of, the Subject
Property arising under the Comprehensive Response, Compensation and Liability
Act, the Superfund Amendments and Reauthorization Act of 1986, the Resource
Conservation and Recovery Act, in each case as amended, and any other act or
regulation of any Federal, state or local environmental authority having
authority in respect of the Subject Property and (b) be based upon (i) a
physical on-site inspection by the Environmental Consultant of the Subject
Property (without any excavation of the Subject Property), (ii) interviews by
the Environmental Consultant of individuals who have direct managerial
responsibility for operations on the Subject Property, (iii) a review by the
Environmental Consultant of records relating to current and historical
operations conducted at the Subject Property and (iv) as deemed appropriate by
the Environmental Consultant, interviews by the Environmental Consultant of
individuals in the area in which the Subject Property is located who may have
knowledge of current and historical operations conducted at the Subject
Property. The Company agrees to provide to any Lender a copy of such
Environmental Review within 60 days of any request by such Lender therefor.
8.24 Communication with Accountants. The Company agrees to
------------------------------
permit the Agent (on behalf of the Lenders) to communicate through a financial
officer of the Company with its independent certified public accountants (if no
Event of Default has occurred and is continuing), after the Agent obtains the
prior consent of the Company (which consent may be oral or written) and further
agrees to authorize such accountants on a
<PAGE>
-35-
case by case basis to disclose to the Lenders through the Agent any and all
financial statements and other supporting financial documents and schedules,
including copies of any management letter with respect to the business,
financial condition, and other affairs of the Company and any of its
Subsidiaries which may be reasonably requested; provided however, that, after
-------- -------
the occurrence and during the continuance of any Event of Default, the Agent
shall not be required to obtain the consent of the Company in order to engage in
any direct discussions with such accountants, but the Agent shall be required to
provide the Company with the opportunity to participate in such meetings.
8.25 [intentionally omitted]
8.26 [intentionally omitted]
8.27 [intentionally omitted]
8.28 [intentionally omitted]"
E. Section 9 of the Credit Agreement is amended by (i)
inserting the word "or" at the end of clause (m) thereof and (ii) inserting the
following new clauses (n) and (o), immediately following said clause (m), to
read as follows:
"(n) Any Insured Depository Subsidiary shall be
or become "undercapitalized", "significantly
undercapitalized" or "critically undercapitalized"
within the meaning of 12 U.S.C. ss.1831o(b), as amended,
restated or redesignated from time to time; or
(o) The Borrower or any of its Subsidiaries
(including, without limitation, any Insured Depository
Subsidiary) shall submit a "capital restoration plan" under 12
U.S.C. ss.1831o(e)(2), as amended, restated or redesignated
from time to time, with respect to any Insured Depository
Subsidiary;".
F. Each reference in the Credit Agreement to the
Credit Agreement (including references such as "herein",
"hereunder" and the like) is amended to refer to the Credit
<PAGE>
-36-
Agreement as amended hereby and (unless the context otherwise requires) to this
Amendment.
G. Each reference in the Credit Agreement to any section
which, pursuant to this Amendment or any prior amendment to the Credit
Agreement, has been "intentionally omitted" shall be deleted.
H. Except as hereby expressly amended, the Credit
Agreement shall remain in full force and effect.
Section 3. Effectiveness of Amendments. The amend ments
---------------------------
provided for by Section 2 hereof shall become effective as of December 31, 1995
(except for the amendments to the definition of "Applicable Margin" which shall
take effect on the date of this Amendment) upon the satisfaction of the
following conditions precedent: (a) the execution and delivery by the Agent of a
counterpart of this Amendment and the receipt by the Agent of counterparts of
this Amendment executed and delivered by the Company and each of the Lenders
(other than the Fixed Rate Lender); and (b) the receipt by the Agent of a
certificate of a senior officer of the Company to the effect that no Default
under the Credit Agreement (as amended hereby) has occurred and is continuing.
The Agent will advise the Company and the Lenders when such conditions have been
so satisfied.
Section 4. Expenses. The Company hereby confirms its
--------
obligations under Section 11.03(a)(ii) of the Credit Agreement with respect to
the reasonable out-of-pocket costs and expenses of the Agent (including, without
limitation, the reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy)
in connection with the negotiation, preparation, execution and delivery of this
Amendment).
Section 5. Counterparts. This Amendment may be executed in any
------------
number of counterparts, all of which taken together shall constitute one and the
same instrument, and any of the parties hereto may execute this Amendment by
executing any such counterpart.
<PAGE>
-37-
Section 6. New York Law. This Amendment shall be governed by
------------
and construed in accordance with the laws of the State of New York.
<PAGE>
-38-
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Amendment as of the date first above written.
THE FIRST AMERICAN FINANCIAL
CORPORATION
By /s/ PARKER S. KENNEDY
------------------------------
Title: President
By /s/ THOMAS A. KLEMENS
------------------------------
Title: Vice President
Chief Financial Officer
<PAGE>
-39-
THE CHASE MANHATTAN BANK, N.A.
By /s/ ROBERT A. FOSTER
---------------------------
Title: Vice President
<PAGE>
-40-
FIRST INTERSTATE
BANK OF CALIFORNIA
By /s/ MARLA W. JOHNSON
---------------------------
Title: Vice President
<PAGE>
-41-
IMPERIAL BANK
By /s/ ARNOLD ONAGA
------------------------
Title: Vice President
<PAGE>
-42-
SANWA BANK CALIFORNIA
By /s/ ART DUNBAR
----------------------------
Title: Vice President
<PAGE>
-43-
UNION BANK
By /s/ SUSAN M. RUSSELL
---------------------------
Title:
<PAGE>
-44-
NBD BANK
By /s/ RICHARD J. JOHNSEN
----------------------------
Title: Vice President
<PAGE>
-45-
THE CANADA LIFE
ASSURANCE COMPANY
INCE & CO., as Nominee for
The Canada Life Assurance Company
By /s/ H. VON SORPE
-----------------------------------
Title: Partner
<PAGE>
-46-
THE CHASE MANHATTAN BANK, N.A.,
as Agent
By /s/ ROBERT A. FOSTER
------------------------------
Title: Vice President
<PAGE>
Exhibit (10)(e)
The First American Financial
Corporation Pension Restoration
Plan
(Effective as of January 1, 1994)
<PAGE>
The First American Financial
Corporation Pension Restoration Plan
(Effective as of January 1, 1994)
Contents
- --------------------------------------------------------------------------------
Section Page
Article 1. Establishment of Plan
1.1 Adoption and Name of Plan 1
1.2 Purpose of Plan 1
1.3 Application of Plan 1
Article 2. Definitions
2.1 Definitions 2
2.2 Gender and Number 2
Article 3. Restoration Plan Benefit
3.1 Restoration Benefit 3
3.2 Payment of Restoration Benefits 3
Article 4. Form and Timing of Benefit Payments
4.1 Retirement Benefits 4
4.2 Death Benefits 4
4.3 Tax Withholding 5
Article 5. Administration
5.1 Committee 6
5.2 Costs and Expenses 6
5.3 Claims Procedure 6
5.4 Effect of a Mistake 7
5.5 Indemnity 7
Article 6. Amendment and Termination
6.1 Amendment or Discontinuance of the Plan 8
6.2 Reorganization of the Company or an Employer 8
6.3 Protected Benefits 8
i
<PAGE>
The First American Financial
Corporation Pension Restoration Plan
(Effective as of January 1, 1994)
Contents
- --------------------------------------------------------------------------------
Section Page
Article 7. Miscellaneous
7.1 Nonalienation 9
7.2 No Implied Trust 9
7.3 Data 9
7.4 Notice of Address 9
7.5 Records 10
7.6 Incompetency 10
7.7 Employment Rights 10
7.8 No Individual Liability 10
7.9 Illegality of Particular Provision 11
7.10 Applicable Law 11
ii
<PAGE>
Article 1. Establishment of Plan
1.1 Adoption and Name of Plan
Effective as of January 1, 1994, The First American Financial Corporation (the
"Company") establishes this restoration retirement plan for eligible executives
of Employers to be known as The First American Financial Corporation Pension
Restoration Plan (the "Plan"). Capitalized terms used in this Article shall have
the meanings set forth in Article 2 of this Plan.
1.2 Purpose of Plan
This Plan is established to provide eligible executives with restoration
benefits solely from the general assets of the Company equal to the amount of
benefits which cannot be paid from the Pension Plan:
(a) Because of the limitations imposed by Code section 415 relating to
contributions and benefits provided under tax-qualified plans; and
(b) Because of the limitations imposed by Code section 401(a)(17) on the amount
of Compensation that may be taken into account under tax-qualified plans.
With respect to section 1.2(a), the Plan is intended to be an "excess benefit
plan", as defined by ERISA section 3(36). With respect to section 1.2(b), the
Plan is intended to be an unfunded plan maintained primarily for the purpose of
providing deferred compensation for a select group of management or highly
compensated employees, as determined under ERISA sections 201(2), 301(3) and
401(a)(1). Accordingly, the Plan is not tax-qualified for purposes of the Code
and is exempt from the participation, vesting, funding, and fiduciary
requirements of Title 1 of ERISA.
1.3 Application of Plan
The terms of this Plan apply only to eligible Employees who are in the employ of
the Company on or after January 1, 1994. Any Employee whose employment
relationship terminates before January 1, 1994 shall not be entitled to benefits
under this Plan.
1
<PAGE>
Article 2. Definitions
2.1 Definitions
These definitions are in addition to the definitions of any other terms that
appear elsewhere in this Plan or in the Pension Plan. Whenever used in the Plan,
the following capitalized terms shall have the respective meanings set forth
below unless otherwise required by the context in which they are used:
(a) "Effective Date" means January 1, 1994.
(b) "Member" shall mean any Employee or former Employee:
(1) Who was a Participant in the Pension Plan on January 1, 1994, and
(2) Whose Accrued Benefit under the Pension Plan is limited or reduced
under Code section 401(a)(17) or Code section 415.
(c) "Pension Plan" means The First American Financial Corporation Pension Plan,
as presently in effect and as it may be amended from time to time.
(d) "Plan" means The First American Financial Corporation Pension Restoration
Plan, as presently in effect and as it may be amended from time to time.
(e) "Plan Year" means the calendar year.
(f) "Restoration Benefit" means the benefit determined under Article 3 of this
Plan and paid from the general assets of the Company.
Except as otherwise explicitly provided in this Plan, all other capitalized
terms shall have the meaning set forth in the Pension Plan.
2.2 Gender and Number
Except when otherwise indicated by the context, any masculine or feminine
terminology shall also include the neuter and other gender, and the use of any
term in the singular or plural shall also include the opposite number.
2
<PAGE>
Article 3. Restoration Plan Benefit
3.1 Restoration Benefit
The Restoration Benefit provided under this Plan shall be the amount, if any, by
which
(a) exceeds (b), where:
(a) Is the amount of the vested Accrued Benefit which would have been payable
to the Member or, if the Member has died, the Beneficiary under the Pension
Plan if such benefit were determined:
(1) Without regard to any limitation on Compensation imposed by Code
section 401(a)(17), but disregarding any Compensation in excess of
$275,000, and
(2) Without regard to any limitation under Code section 415 on benefits
that may be paid from a tax-qualified plan; and
(b) Is the vested Accrued Benefit actually provided to the Member or, if the
Member has died, the Beneficiary under the Pension Plan (determined after
giving effect to any applicable limitations imposed by Code section
401(a)(17) and section 415).
3.2 Payment of Restoration Benefits
The obligation of the Company to pay Restoration Benefits and the Member's right
to receive such a benefit shall not arise until:
(a) Benefit payments commence under the Pension Plan; and
(b) It has been determined that a Restoration Benefit is payable under Plan
section 3.1.
Once it has been determined that the Member or, if the Member has died, the
Beneficiary is entitled to such a benefit, the Restoration Benefit shall be paid
only in accordance with the provisions of Article 4 of this Plan.
3
<PAGE>
Article 4. Form and Timing of Benefit Payments
4.1 Retirement Benefits
After the Member has properly applied for retirement benefits under section 4.4
of the Pension Plan, the Committee shall determine the time and form in which
any Restoration Benefit payable from this Plan shall be paid to the Member. In
making this determination, the Committee shall consider, but not be bound by,
the payment form elected by the Member with respect to his or her Accrued
Benefit under the Pension Plan. The Committee may authorize one or more of its
members to make individually the determination described in this section 4.1.
In computing the Restoration Benefit, the same reduction factors, if any, that
apply to the Accrued Benefit for early commencement of benefits shall also apply
to the Restoration Benefit. The Actuarial Equivalent assumptions and factors
which would be used under the Pension Plan to convert the Accrued Benefit to an
optional form shall also be used to convert the Restoration Benefit to that same
form, if and when the Committee determines to pay the Restoration Benefit in
such form.
4.2 Death Benefits
(a) Preretirement Spousal Benefit. Upon the death of a Member whose spouse is
entitled to survivor annuity benefits under the preretirement death benefit
provisions of section 5.1 of the Pension Plan, such spouse shall be
entitled to a survivor annuity under this Plan. The survivor annuity
payable from this Plan on account of the Member's death shall be paid at
the same time as the survivor's annuity is paid for such period from the
Pension Plan. The amount of the survivor annuity payable from this Plan
shall be the amount that would have been paid to the surviving spouse under
a qualified joint and survivor annuity, as defined in Code section 417(b),
which is the Actuarial Equivalent of the Restoration Benefit determined as
of the Member's death under Plan section 3.1. The same reduction factors
that apply to any early commencement of the survivor's annuity determined
under the Pension Plan shall also apply to the survivor's annuity
determined under this Plan.
(b) Postretirement Death Benefit. If a Member dies after payment of the
Restoration Benefit has commenced, the Member's Beneficiary shall receive
the death benefit payments hereunder, if any, called for by the payment
form in effect for the Restoration Benefit. Any death benefits payable
under this Plan section 4.2(b) shall be paid at the time and in the form
provided by the payment form determined under Plan section 4.1.
4.3 Tax Withholding
Any federal, state or local taxes, including FICA tax amounts, required by law
to be withheld with respect to benefits earned and vested under this Plan or any
other
4
<PAGE>
compensation arrangement may be withheld from the Member's Restoration Benefit,
salary, wages or other amounts paid by the Company and reasonably available for
withholding. Prior to making or authorizing any benefit payment under this Plan,
the Company may require such documents from any taxing authority, or may require
such indemnities or surety bond from any Member or Beneficiary, as the Company
shall reasonably consider necessary for its protection.
5
<PAGE>
Article 5. Administration
5.1 Committee
The Plan shall be administered by the Committee which administers the Pension
Plan. The Committee shall be authorized to construe and interpret all provisions
of the Plan, to prescribe, amend and rescind rules and practices concerning its
administration, to decide all claims pursuant to Plan section 5.3, and to make
all other determinations necessary to carry out the purposes of this Plan. The
interpretations, constructions, and determinations of the Committee shall be
conclusive and binding on all parties.
Without limiting the generality of the foregoing, the Committee shall have the
authority to calculate all benefit amounts under this Plan and shall have the
authority to delegate responsibility for the performance of ministerial
functions necessary for administration of the Plan to such persons as the
Committee shall in its discretion deem appropriate.
No Committee member may participate in an action of the Committee on a matter in
which such member has an individual interest as a Member. Such matters will be
determined by the remaining Committee members or by an independent individual or
group appointed by the Company for such purpose.
5.2 Costs and Expenses
The costs of benefit payments from this Plan and the expenses of administering
the Plan shall be paid by the Company from its general assets.
5.3 Claims Procedure
(a) If a Member or Beneficiary believes that a payment is due under Article 4
of this Plan and such payment has not been received, a claim for a benefit
may be submitted by writing to the Committee. The Committee shall make all
determinations as to the rights of any person to benefits hereunder.
(b) Any denial of a claim for benefits under the Plan shall be stated in
writing by the Committee and delivered or mailed to the Member or
Beneficiary.
(c) Each Member or Beneficiary whose claim is denied, or the duly authorized
representative of such person, may appeal the denial to the Committee, in
accordance with the procedures set forth in section 8.8 of the Pension
Plan.
5.4 Effect of a Mistake
In the event of a mistake or misstatement as to the eligibility, participation
or service of any Member, or the amount of payments made or to be made to a
Member, spouse or Beneficiary, the Committee shall, if possible, cause such
withholding, acceleration or other adjustment of payments to be made as will, in
the sole judgment of the Committee,
6
<PAGE>
result in the Member, spouse or Beneficiary receiving the proper amount of
payments under the Plan.
5.5 Indemnity
The Company shall, through the purchase of insurance or otherwise, indemnify
each member of the Board (or board of directors of an Affiliate), each member of
the Committee, and any other Employees to whom any responsibility with respect
to the Plan is allocated or delegated, from and against any and all claims,
losses, damages, and expenses, including attorneys' fees, and any liability,
including any amounts paid in settlement with the Company's approval, arising
from the individual's action or failure to act, except when the same is
judicially determined to be attributable to the gross negligence or willful
misconduct of such person. The right of indemnity described in the preceding
sentence shall be conditioned upon (i) the timely receipt of notice by the
Company of any claim asserted against the individual, which notice, in the event
of a lawsuit, shall be given within ten days after receipt by the individual of
the complaint, and (ii) the receipt by the Company from the individual of an
offer for the Company to participate in the settlement or defense of such claim.
7
<PAGE>
Article 6. Amendment and Termination
6.1 Amendment or Discontinuance of the Plan
This Plan may be amended, modified or terminated at any time by the Board. In
addition, the Committee may, in its discretion, amend this Plan, prospectively
or retroactively, if it finds that the amendment will not significantly increase
or decrease costs or benefits, or if it finds that the amendment is required by
law. Any amendment, modification or termination of this Plan shall be subject
only to the contractual rights of Members or Beneficiaries to Restoration
Benefits which have already accrued at the effective date of such amendment,
modification or termination, to the extent that such benefits remain payable
from this Plan when payment of the corresponding Accrued Benefit begins under
the Pension Plan.
6.2 Reorganization of the Company or an Employer
In the event of a merger or consolidation of the Company or an Employer, or the
transfer of substantially all of the assets or stock of an Employer to another
entity, such continuing, resulting or transferee entity shall have the right to
continue and carry on the Plan and to assume all liabilities of the Company
hereunder without obtaining the consent of any Member or Beneficiary. If such
successor shall assume the liabilities of the Company hereunder, then,
notwithstanding any Plan provision to the contrary, the Company shall be
relieved of all such liability, and no Member or Beneficiary shall have the
right to assert any claim against the Company for benefits under or in
connection with this Plan.
6.3 Protected Benefits
Upon a complete or partial termination of this Plan, or if liabilities accrued
hereunder up to the date of an event specified in Plan section 6.2 are not
assumed by the successor to the Company, the rights of all affected Members and
their Beneficiaries shall terminate, except that the Committee shall establish
reasonable procedures to determine the value of each Member's Restoration
Benefit, as of the last day of the Plan Year coinciding with or next following
the termination, and payment shall be made to the Member or Beneficiary in
accordance with Article 4 of this Plan.
8
<PAGE>
Article 7. Miscellaneous
7.1 Nonalienation
To the extent permitted by law, the Company shall not make any payment or
distribution under this Plan to any assignee or creditor of a Member or
Beneficiary. Prior to the time of a benefit payment under this Plan, a Member or
Beneficiary shall have no rights by way of anticipation or otherwise to assign
or dispose of any interest under this Plan, nor shall rights be assigned or
transferred by operation of law or otherwise, including, but without limitation,
by execution, levy, garnishment, attachment, pledge, lien, or bankruptcy.
7.2 No Implied Trust
Nothing contained in this Plan, and no action taken pursuant to any provision of
this Plan, shall create or be construed to create a trust of any kind, or a
fiduciary relationship among the Company, Members, Beneficiaries or any other
persons. Furthermore, no Member or Beneficiary shall have any interest in any
specific asset of the Company by operation of this Plan.
7.3 Data
All persons entitled to benefits from the Plan must furnish to the Committee
such documents, evidence or information as the Committee considers necessary or
appropriate for the purpose of administering the Plan, including information
concerning marital status; and it shall be a condition of the Plan that each
such person must furnish such information and sign such documents as the
Committee may require before any benefits become payable from the Plan. The
Committee shall be entitled to pay benefits to a nonspouse Beneficiary in
reliance upon the signed statement of a Member that he or she is not married,
without any further liability to a spouse if such statement is false.
7.4 Notice of Address
Any payment to a Member or Beneficiary, at the last known post office address on
file with the Company, shall constitute a complete discharge to the Company with
respect thereto unless the Company shall have received prior written notice of
any change in the address, condition, or status of the distributee. Neither the
Company nor any director or officer shall have any duty or obligation to search
for or ascertain the whereabouts of any Member or his Beneficiary.
7.5 Records
The records of the Committee with respect to this Plan shall be conclusive on
all Members, Beneficiaries, and other persons.
9
<PAGE>
7.6 Incompetency
Every person receiving or claiming benefits under this Plan shall be
conclusively presumed to be mentally competent and of age until the Committee
receives written notice, in a form and manner acceptable to it, that such person
is incompetent or a minor, and that a guardian, conservator, statutory
committee, or other person legally vested with the care of the person or estate
has been appointed; provided, however, that if the Committee shall find that any
person to whom a benefit is payable under this Plan is unable to properly care
for such person's own affairs because of incompetency, or is a minor, then any
payment due (unless a prior claim therefor shall have been made by a duly
appointed legal representative) may be paid to the spouse, a child, a parent, a
brother or sister, or other person legally entitled to payment.
In the event a guardian of the estate of any person receiving or claiming
benefits under this Plan shall be appointed by a court of competent
jurisdiction, payment shall be made to such guardian provided that proper proof
of appointment is furnished in a form and manner acceptable to the Committee. To
the extent permitted by law, any such payment so made shall be a complete
discharge of liability therefor under this Plan.
7.7 Employment Rights
The establishment of this Plan shall not be construed as conferring any legal
rights upon any Member or any other person for continuation of employment, nor
shall it interfere with the rights of the Company to discharge any person or to
deal with such person without regard to the effect such treatment might have
upon benefits arising under this Plan.
7.8 No Individual Liability
It is declared to be the express purpose and intention of this Plan that no
liability whatsoever shall attach to or be incurred by the shareholders,
officers, or directors of the Company, or any representatives appointed
hereunder, by reason of any term or condition of this Plan.
7.9 Illegality of Particular Provision
If any particular provision of this Plan shall be found to be illegal or
unenforceable, such provision shall not affect any other provision, but this
Plan shall be construed in all respects as if such invalid provision were
omitted.
7.10 Applicable Law
This Plan shall be construed in accordance with and governed by the laws of the
State of California to the extent not superseded by the laws of the United
States of America.
10
<PAGE>
In Witness Whereof, The First American Financial Corporation has caused its duly
authorized officers to execute this Plan on the 21 day of
February, 1996.
The First American Financial Corporation
By /s/ PARKER S. KENNEDY
------------------------------------
Its President
------------------------------------
By /s/ MARK R. ARNESEN
------------------------------------
Its Secretary
------------------------------------
11
<PAGE>
EXHIBIT (21)
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
PERCENT OF STOCK
OWNED BENEFICIALLY
STATE UNDER LAWS BY COMPANY OR
NAME OF SUBSIDIARY OF WHICH ORGANIZED SUBSIDIARY
------------------ ------------------ ------------------
<S> <C> <C>
Consolidated subsidiaries of:
Registrant--
First American Loan Servicing
Corporation Texas 100%
First American Management Company Washington 100%
First American Property Data
Services, Inc. California 100%
First American Real Estate
Information Services, Inc. California 100%
First American Title Insurance
Company California 100%
First American Trust Company California 100%
Consolidated subsidiaries of First
American Title Insurance Company--
Albany County Title, Inc. Wyoming 100%
Attorneys Abstract, Inc. New York 100%
Bienville Properties, Inc. Louisiana 100%
Burton Abstract & Title Company Michigan 100%
Consolidated Title and Abstract Co. Minnesota 100%
Eaton County Abstract & Title Company Michigan 100%
Eureka Title Company California 100%
Fidelity Title & Guaranty Company Florida 100%
First American Abstract Company Mississippi 100%
First American Abstract Company of
Louisiana Louisiana 100%
First American Exchange Corporation Louisiana 100%
First American Title Agency, Inc. Virginia 100%
First American Title Company of
Alaska Alaska 100%
First American Title Company of Clark
County Washington 100%
First American Title Company of
Colorado Colorado 100%
First American Title Company of
Dallas Texas 100%
First American Title Company of
Florida, Inc. Florida 100%
First American Title Company of
Hawaii, Inc. Hawaii 100%
First American Title Company of
Idaho, Inc. Idaho 100%
First American Title Company of Los
Angeles California 100%
First American Title Company of
Nevada Nevada 100%
First American Title Company of
Thurston County Washington 100%
First American Title Company of Utah Utah 100%
First American Title Guaranty Agency
of Carbon County Wyoming 100%
First American Title Insurance Agency
of Coconino, Inc. Arizona 100%
First American Title Insurance Agency
of Gila, Inc. Arizona 100%
First American Title Insurance
Company Ltd. (UK) England 100%
First American Title Insurance
Company of New York New York 100%
First American Title Insurance
Company of Texas Texas 100%
First Exchange of Arizona, Inc. Arizona 100%
Fremont County Title Company Wyoming 100%
Guardian Title Company of Maryland Maryland 100%
Jefferson-Pilot Title Insurance
Company North Carolina 100%
Land Title Associates, Inc. Oklahoma 100%
Land Title Company of St. Louis, Inc. Missouri 100%
</TABLE>
<PAGE>
SUBSIDIARIES OF THE REGISTRANT (CONTINUED)
<TABLE>
<CAPTION>
PERCENT OF STOCK
OWNED BENEFICIALLY
STATE UNDER LAWS BY COMPANY OR
NAME OF SUBSIDIARY OF WHICH ORGANIZED SUBSIDIARY
------------------ ------------------ ------------------
<S> <C> <C>
Massachusetts Abstract Company, Inc. Massachusetts 100%
Memphis Title Company Tennessee 100%
Midland Title Security, Inc. Ohio 100%
New York Abstract Company, Inc. New York 100%
Ohio Title Corporation Ohio 100%
Pioneer of Philadelphia, Ltd. Pennsylvania 100%
Port Lawrence National Agency, Inc. Ohio 100%
Republic Title of Texas, Inc. Texas 100%
Security Title Company of Southern
Utah Utah 100%
Standard Title Insurance Company Oklahoma 100%
The Inland Empire Service Corporation California 100%
The Port Lawrence Agency, Inc. Ohio 100%
The Port Lawrence Title and Trust
Company Ohio 100%
Ticore, Inc. Oregon 100%
Washakie Abstract Company Wyoming 100%
First American Auto Title Transfer,
L.L.C. Louisiana 99%
First American Title Company of
Bellingham Washington 99%
First American Title Insurance Agency
of Yuma, Inc. Arizona 99%
Land Title Insurance Company of St.
Louis Missouri 99%
Peoples Abstract Company Iowa 99%
Southwest Title & Trust Company Oklahoma 99%
First American Title Insurance Agency
of Pinal Arizona 96%
First American Title Guaranty Agency
of Cheyenne Wyoming 92%
First American Title Insurance Agency
of Mohave, Inc. Arizona 88%
First American Title Insurance Agency,
Inc. (Navajo) Arizona 85%
First Canadian Title Canada 85%
First American Title Insurance Agency
of Yavapai, Inc. Arizona 84%
First American Title Company of New
Mexico New Mexico 80%
First American Title Company of
Spokane Washington 80%
First American Title Company of St.
Lucie County, Inc. Florida 80%
First American Title Guaranty Agency
of Hot Springs County Wyoming 80%
First American Title Guaranty Holding
Company California 80%
First American Home Buyers Protection
Corporation California 79%
First American Title Guaranty Agency
of Sublette County Wyoming 79%
First American Title Guaranty Agency
of Crook County Wyoming 78%
Teton Land Title Company Wyoming 76%
Converse Land Title Company (a
partnership) Wyoming 74%
First American Title Company of Magic
Valley, Inc. Idaho 70%
Goshen County Abstract & Title Wyoming 69%
Mid Valley Title and Escrow Company California 59%
Campbell County Abstract Company Wyoming 57%
First American Title Company of
Mendocino County California 54%
Johnson County Title Company, Inc. Wyoming 54%
Big Horn Land Title Company Wyoming 53%
Wyoming Land Title Company Wyoming 53%
Shoshone Title Insurance and Abstract
Company Wyoming 52%
North American Title Insurance Company California 50%
</TABLE>
<PAGE>
SUBSIDIARIES OF THE REGISTRANT (CONTINUED)
<TABLE>
<CAPTION>
PERCENT OF STOCK
OWNED BENEFICIALLY
STATE UNDER LAWS BY COMPANY OR
NAME OF SUBSIDIARY OF WHICH ORGANIZED SUBSIDIARY
------------------ ------------------ ------------------
<S> <C> <C>
Consolidated subsidiaries of First
American Real Estate Information--
Services, Inc.--
First American CREDCO, Inc. Washington 100%
First American Credit Services, Inc. New York 100%
First American Equity Loan Services,
Inc. Ohio 100%
First American Flood Data Services,
Inc. Texas 100%
First American Property Services, Inc. New York 100%
Pasco Enterprises, Inc. Texas 100%
Prime Credit Reports, Inc. California 100%
Realty Tax & Service Company California 100%
Consolidated subsidiary of First American
Equity Loan Service, Inc.
Docu-Search, Inc. Kentucky 100%
Consolidated subsidiary of Mid Valley
Title & Escrow Company--
Mt. Shasta Title & Escrow Company California 65%
Consolidated subsidiaries of Ticore,
Inc.--
Eagle Exchange Corporation Oregon 100%
Escrow Automated Systems, Inc. Oregon 100%
Title Insurance Company of Oregon Oregon 100%
Consolidated subsidiaries of Title
Insurance Company of Oregon--
Deschutes County Title Company Oregon 100%
Willamette Valley Title Company Oregon 100%
Consolidated subsidiary of Massachusetts
Abstract Company, Inc.--
Massachusetts Title Insurance Company Massachusetts 65%
Consolidated Subsidiaries of First
American Title Company of Utah--
Utah First Exchange, Inc. Utah 100%
Consolidated subsidiaries of First
American Title Guaranty Holding
Company--
First Escrow Accounting Services
Company California 100%
First Guaranty Bancorp California 100%
First Guaranty Exchange Company California 100%
Superior Trustee's Services Company
Inc. California 100%
First American Title Guaranty Company California 99%
Harrison-Webster Investment Group (a
partnership) California 75%
Stanley Building Associates (a
partnership) California 75%
Consolidated subsidiaries of First
Guaranty Bancorp--
F. S. T. Financial Services California 100%
First Security Thrift Company California 100%
Consolidated subsidiary of Land Title
Associates, Inc.--
First American Title & Abstract Co. Oklahoma 100%
</TABLE>
<PAGE>
SUBSIDIARIES OF THE REGISTRANT (CONTINUED)
<TABLE>
<CAPTION>
PERCENT OF STOCK
OWNED BENEFICIALLY
STATE UNDER LAWS BY COMPANY OR
NAME OF SUBSIDIARY OF WHICH ORGANIZED SUBSIDIARY
------------------ ------------------ ------------------
<S> <C> <C>
Consolidated subsidiaries of Midland
Title Security, Inc.--
Commerce Title Agency, Inc. Ohio 100%
Lawyers Mortgage and Title Company,
Inc. Ohio 100%
Midland Exchange Services, Inc. Ohio 100%
National Survey Service, Inc. Delaware 100%
R. E. Services, Inc. Ohio 100%
MCM Title Services, Inc. Ohio 67%
Consolidated Subsidiaries of Mortgage
Guarantee and Title Company--
GR Title Services, Inc. Rhode Island 100%
Consolidated subsidiary of First
American Home Buyers Protection
Corporation--
First American Home Buyers Protection
Corporation (Delaware) Delaware 50%
Consolidated subsidiary of Land Title
Insurance Company of St. Louis--
Property Data, Inc. Missouri 100%
The Trust Company of St. Louis County Missouri 99%
Consolidated subsidiaries of First
American Title Insurance Company of
Texas--
Corpus Christi Title Company Texas 100%
Fort Bend Title Company Texas 100%
Heart of Texas Title Company Texas 51%
Consolidated subsidiaries of Fort Bend
Title Company--
Citizens Title Company Texas 100%
Peareson Fort Bend Abstract Company Texas 100%
Consolidated subsidiaries of First
American Title Insurance Company of New
York--
First American Exchange Corporation New York 100%
Mortgage Guarantee & Title Rhode Island 100%
Preferred Land Title Services, Inc. New York 100%
Consolidated subsidiaries of Republic
Title of Texas, Inc.--
American Escrow Company Texas 100%
Texas Escrow Company Texas 100%
Title Software Corporation Texas 100%
Consolidated subsidiary of Southwest
Title & Trust Company--
Southwest Title Land Company Oklahoma 100%
Consolidated subsidiary of the Port
Lawrence Title and Trust Company
Landimer Title Agency Ohio 100%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 128,875,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 21,445,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 194,187,000
<CASH> 145,902,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 24,342,000
<TOTAL-ASSETS> 873,778,000
<POLICY-LOSSES> 238,161,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 77,206,000
0
0
<COMMON> 11,411,000
<OTHER-SE> 291,356,000
<TOTAL-LIABILITY-AND-EQUITY> 0
1,227,185,000
<INVESTMENT-INCOME> 22,073,000
<INVESTMENT-GAINS> 958,000
<OTHER-INCOME> 0
<BENEFITS> 90,387,000
<UNDERWRITING-AMORTIZATION> 7,639,000
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 13,787,000
<INCOME-TAX> 6,200,000
<INCOME-CONTINUING> 7,587,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,587,000
<EPS-PRIMARY> 0.67
<EPS-DILUTED> 0
<RESERVE-OPEN> 206,743,000
<PROVISION-CURRENT> 82,632,000
<PROVISION-PRIOR> 7,755,000
<PAYMENTS-CURRENT> 25,039,000
<PAYMENTS-PRIOR> 33,930,000<F1>
<RESERVE-CLOSE> 238,161,000
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes purchase accounting adjustments and reclassifications to the reserve
for assets acquired in connection with claim settlements.
</FN>
</TABLE>
