REGISTRATION NO. 333-47755
FILED PURSUANT TO RULE 424(B)(1)
PROSPECTUS
THE FIRST AMERICAN [Logo of The First American
FINANCIAL CORPORATION Financial Corporation]
$100,000,000
7.55% SENIOR DEBENTURES DUE 2028
The First American Financial Corporation (the "Company") is offering
$100,000,000 aggregate principal amount of its 7.55% senior debentures due 2028
(the "Senior Debentures"). Interest on the Senior Debentures is payable on April
1 and October 1 of each year, commencing October 1, 1998. The Senior Debentures
will mature on April 1, 2028 and may be redeemed at the option of the Company at
any time and from time to time in whole or in part at the Make Whole Amount (as
defined herein). See "Description of the Senior Debentures -- Maturity; Optional
Redemption."
The Senior Debentures are general unsecured obligations of the Company and rank
senior to all existing or future indebtedness of the Company that is by its
terms expressly subordinated to the Senior Debentures and will rank pari passu
with all other existing or future indebtedness of the Company. The Senior
Debentures will be effectively subordinated to all existing and future
liabilities and obligations of the Company's subsidiaries and holders of the
Senior Debentures should look only to the assets of the Company for payments on
the Senior Debentures. As of December 31, 1997, the Company's subsidiaries had
liabilities and obligations of approximately $642.1 million net of intercompany
indebtedness. See "The First American Financial Corporation."
The Senior Debentures will initially be represented by a global security (a
"Global Security") registered in the name of The Depository Trust Company ("DTC"
or the "Depositary") or its nominee. Beneficial interests in the Global Security
will be shown on, and transfers thereof will be effected only through, records
maintained by DTC (with respect to participants' interests) and its
participants. Except as described herein, Senior Debentures in definitive form
will not be issued. Beneficial interests in the Senior Debentures may be
purchased in denominations of $1,000 or any integral multiple thereof. Payments
of the principal, premium if any, and interest on the Senior Debentures will be
made directly to DTC for subsequent disbursement to DTC participants, who are to
remit such payments to the beneficial owners of the Senior Debentures. See
"Description of the Senior Debentures--Book Entry System." Initial settlement
for the Senior Debentures will be made in immediately available funds. The
Senior Debentures will trade in DTC's Same-Day Funds Settlement System, and
secondary market trading activity in the Senior Debentures will therefore settle
in immediately available funds.
The Company does not intend to apply for listing of the Senior Debentures on any
securities exchange or authorization for quotation on the National Association
of Securities Dealers Inc. Automated Quotation System. No assurance can be given
as to whether an active trading market will develop for the Senior Debentures.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNTS(2) COMPANY(1)(3)
- --------------------------------------------------------------------------------
Per Senior Debenture 99.456% .875% 98.581%
Total $99,456,000 $875,000,000 $98,581,000
- --------------------------------------------------------------------------------
(1) Plus accrued interest, if any from April 7, 1998.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(3) Before deducting expenses payable by the Company, estimated at $186,500.
The Senior Debentures are being offered by the Underwriters (as such term is
defined herein, see "Underwriting"), subject to prior sale, when, as and if
issued by the Company and delivered and accepted by the Underwriters and subject
to certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offers and to reject orders in whole or in part. It is
expected that delivery of the Senior Debentures will be made in book-entry form
through the facilities of the Depositary on or about April 7, 1998.
CHASE SECURITIES INC. FIRST CHICAGO CAPITAL MARKETS, INC.
THE DATE OF THIS PROSPECTUS IS APRIL 2, 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SENIOR DEBENTURES,
INCLUDING OVERALLOTMENT, STABILIZING TRANSACTIONS AND SYNDICATE SHORT COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549; and at the following Regional Offices of the Commission: New York
Regional Office, Seven World Trade Center, 13th Floor, Suite 1300, New York, New
York 10048; and Chicago Regional Office, Citicorp Center, 500 West Madison
Street, 14th Floor, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549. The Commission also maintains a site on the World Wide Web
(http://www.sec.gov) that contains reports, proxy statements and other
information regarding the Company. In addition, such reports, proxy statements
and other information can also be inspected at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005, on which the Common
shares, $1.00 par value, of the Company are listed.
This Prospectus constitutes part of a Registration Statement on Form S-3
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act. In accordance with the rules and regulations of the
Commission, this Prospectus does not contain all of the information contained in
the Registration Statement and the exhibits and schedules thereto. For further
information concerning the Company and the Senior Debentures offered hereby,
reference is hereby made to the Registration Statement and the exhibits and
schedules filed therewith which may be obtained at the Commission's offices
whose addresses are listed above. The Registration Statement has been filed
electronically and may be obtained at the Commission's Web site listed above.
Any statements contained herein concerning the provisions of any document are
not necessarily complete, and, in each instance, reference is made to the copy
of such document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission. Each such statement is qualified in its entirety by
such reference.
INCORPORATION OF DOCUMENTS BY REFERENCE
The documents listed in (1), (2), (3), (4) and (5) below are incorporated
by reference in this Prospectus, and all documents filed by the Company with the
Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to the termination of any
offering of securities made by this Prospectus shall be deemed to be
incorporated by reference in this Prospectus and to be part hereof from the date
of filing of such documents. Any statement contained herein, or in a document
all or a portion of which is incorporated or deemed to be incorporated by
reference herein, shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
(2) The Company's Report on Form 8-K dated January 23, 1998;
(3) The Company's Report on Form 8-K dated January 27, 1998;
(4) The Company's Report on Form 8-K dated March 18, 1998; and
(5) The Company's Report on Form 8-K dated March 31, 1998.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
MARK R ARNESEN, VICE PRESIDENT AND SECRETARY, THE FIRST AMERICAN FINANCIAL
CORPORATION, 114 EAST FIFTH STREET, SANTA ANA, CALIFORNIA 92701-4642, TELEPHONE
NUMBER: (714) 558-3211. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY
REQUEST SHOULD BE MADE BY MARCH 30, 1998.
FORWARD-LOOKING STATEMENTS
Except for historical information contained in this Prospectus and in the
documents incorporated in this Prospectus by reference, the matters discussed
herein and therein contain forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
suggested in the forward-looking statements, including, without limitation, the
effect of economic conditions, interest rates, market demand, competition and
other risks detailed herein and in the Company's other filings with the
Commission.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in or incorporated by
reference in this Prospectus, which should be read in its entirety. See "Risk
Factors" for a description of certain factors that should be considered in
connection with an investment in the Senior Debentures.
THE COMPANY
The First American Financial Corporation (the "Company") was organized in
1894 as Orange County Title Company, succeeding to the business of two title
abstract companies founded in 1889 and operating in Southern 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 with executive offices located
in Santa Ana, California.
The Company, through its subsidiaries, is engaged in the business of
providing real estate-related financial and information services to real
property buyers and mortgage lenders. The Company's products and services
include title insurance; real estate tax monitoring; mortgage credit reporting;
mortgage loan servicing systems; property information; flood zone determination;
home warranty services; appraisal services and mortgage document preparation.
Although industry-wide data for 1997 is not currently available, the Company
believes that its wholly owned subsidiary, First American Title Insurance
Company, was the largest title insurer in the United States, based on premiums
written, and its wholly owned subsidiary, First American Real Estate Information
Services, Inc., was the nation's largest provider of flood zone determinations,
based on the number of flood zone determinations issued, the nation's largest
mortgage credit reporting service, based on the number of credit 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 one of
the largest providers of home warranties in the United States, based on the
number of home protection contracts under service. The Company also provides
trust and limited banking services. The title insurance and real estate
information segments operate through networks of offices nationwide. The
Company, through its subsidiaries, transacts its title insurance business
through a network of more than 300 branch offices and over 4,000 independent
agents. The Company also offers its title services in Australia, the Bahama
Islands, Bermuda, Canada, Guam, Mexico, Puerto Rico, the U.S. Virgin Islands and
the United Kingdom. Home warranty services are available in certain counties of
Arizona, California, Nevada, North Carolina, South Carolina, Texas, Utah and
Washington. The trust, banking and thrift businesses operate in Southern
California only. See "The First American Financial Corporation."
<PAGE>
THE OFFERING
Securities Offered.................. $100,000,000 aggregate principal amount of
7.55% Senior Debentures due 2028.
Maturity Date....................... April 1, 2028.
Interest Payment Dates.............. April 1 and October 1, commencing October
1, 1998.
Optional Redemption................. The Senior Debentures are redeemable at
the option of the Company at any time and
from time to time, in whole or in part, at
the Make Whole Amount (as defined herein).
See "Description of the Senior Debentures
-- Maturity; Optional Redemption."
Ranking............................. The Senior Debentures are general
unsecured obligations of the Company and
rank senior to all existing or future
indebtedness of the Company that is by its
terms expressly subordinated to the Senior
Debentures and will rank pari passu in
right of payment with all other existing
and future indebtedness of the Company.
Same-Day Settlement................. Initial settlement for the Senior
Debentures will be made in immediately
available funds. While held in global
form, the Senior Debentures will settle in
DTC's Same-Day Funds Settlement System and
settlement for any secondary market trades
and all payments of principal and interest
will be made in immediately available
funds.
Book-Entry System and Form and
Denomination of Senior Debentures... The Senior Debentures will be issued in
denominations of $1,000 and integral
multiples thereof. Payments of principal
and interest on Senior Debentures
represented by a permanent global Senior
Debenture registered in the name of, or
held by, the Depositary or its nominee
will be made in immediately available
funds to the Depositary or its nominee as
the registered holder of the permanent
global Senior Debenture. Senior Debentures
will not be issued in definitive form
except under the circumstances described
herein. See "Description of the Senior
Debentures -- Book-Entry System."
Principal Covenants................. The indenture under which the Senior
Debentures will be issued (the
"Indenture") imposes certain obligations
and limitations on the Company and its
subsidiaries, including, but not limited
to, a limitation on the incurrence of
certain liens on the capital stock of the
Company's Restricted Subsidiaries (as such
term is defined herein). See "Description
of the Securities -- Certain Covenants of
the Company."
Use of Proceeds..................... The net proceeds from the sale of the
Senior Debentures will be used for general
corporate purposes, including, without
limitation, repayment of certain debt and
the financing and construction of new
corporate facilities. See "Use of
Proceeds."
FOR ADDITIONAL INFORMATION REGARDING THE SENIOR DEBENTURES, INCLUDING
CERTAIN DEFINITIONS, SEE "DESCRIPTION OF THE SENIOR DEBENTURES."
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth summary historical consolidated financial
and other data for the Company for the five years ended December 31, 1997. The
summary is qualified in its entirety by reference to the financial statements
and other information contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, incorporated by reference herein.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Operating revenues $1,379,781 $1,356,946 $1,227,185 $1,571,168 $1,860,205
Investment and other
income 18,645 19,447 23,031 26,398 27,256
---------- ---------- ---------- ---------- ----------
1,398,426 1,376,393 1,250,216 1,597,566 1,887,461
---------- ---------- ---------- ---------- ----------
Expenses:
Salaries and other
personnel costs 397,902 423,328 431,984 531,250 647,750
Premiums retained by
agents 504,375 533,598 413,444 516,593 563,137
Other operating
expenses 222,934 232,532 257,823 322,709 411,319
Provision for title
losses and other
claims 125,588 110,230 90,387 86,487 90,323
Depreciation and
amortization 16,333 19,796 20,790 27,242 38,149
Interest 4,419 6,267 6,242 4,796 9,994
Minority interest 5,267 2,944 2,132 2,624 3,676
---------- ---------- ---------- ---------- ----------
1,276,818 1,328,695 1,222,802 1,491,701 1,764,348
---------- ---------- ---------- ---------- ----------
Income before premium
and income taxes 121,608 47,698 27,414 105,865 123,113
Premium taxes 17,617 15,453 13,627 16,676 16,904
---------- ---------- ---------- ---------- ----------
Income before income
taxes 103,991 32,245 13,787 89,189 106,209
Income taxes 41,900 13,300 6,200 35,600 41,500
---------- ---------- ---------- ---------- ----------
Income before cumulative
effect of a change in
accounting for income
taxes 62,091 18,945 7,587 53,589 64,709
Cumulative effect of a
change in accounting
for income taxes 4,200 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income $66,291 $18,945 $7,587 $53,589 $64,709
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
EARNINGS PER SHARE:*
Basic $3.89 $1.10 $.44 $3.12 $3.73
Diluted** $3.89 $1.11 $.45 $3.09 $3.64
BALANCE SHEET DATA:
Cash and invested assets $359,127 $368,999 $340,089 $364,620 $411,014
Total assets $786,448 $828,649 $873,778 $979,794 $1,168,144
Notes and contracts $85,022 $89,600 $77,206 $71,257 $41,973
payable
Guaranteed preferred -- -- -- -- $100,000
beneficial interests in the
Company's junior
subordinated deferrable
interest debentures
Total stockholders' equity $283,718 $292,110 $302,767 $352,465 $411,412
OTHER DATA:
Loss ratio 9.1% 8.1% 7.4% 5.5% 4.9%
Ratio of debt to total
capitalization*** 21.5% 22.1% 19.1% 16.0% 7.3%
Cash flow from operations $105,720 $53,915 $38,482 $112,843 $111,155
EBITDA**** $142,360 $73,761 $54,446 $137,903 $171,256
Capital Expenditures $36,161 $34,562 $29,643 $48,785 $74,486
Ratio of EBITDA to 32.2 11.8 8.7 28.8 17.1
interest
Depreciation and $16,333 $19,796 $20,790 $27,242 $38,149
amortization
</TABLE>
- ---------------------------------
* Based upon the weighted average number of common shares outstanding. On
December 11, 1997, the Company declared a three-for-two stock split to
shareholders of record on January 1, 1998. The shares commenced trading on
a post-split basis on January 16, 1998. All per share data above reflects
such stock-split. See the Company's Report on Form 8-K dated January 23,
1998, which is incorporated by reference herein.
** After restatement for the adoption of statement of financial accounting
standards No. 128, "Earnings per Share."
*** Capitalization includes minority interests and junior subordinated
deferrable interest debentures.
**** "EBITDA" consists of operating income plus depreciation and amortization.
The Company believes that EBITDA provides additional information for
determining its ability to meet debt service requirements. EBITDA does not
represent and should not be considered as an alternative to net income or
cash flow from operations as determined by generally accepted accounting
principles, and EBITDA does not necessarily indicate whether cash flow will
be sufficient for cash requirements.
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
investors should consider carefully the following risk factors before making an
investment in the Senior Debentures. To the extent any of the information
contained or incorporated by reference in this Prospectus constitutes a
"forward-looking statement" as defined in Section 27A of the Securities Act, the
risk factors set forth below are cautionary statements identifying important
factors that could cause actual results to differ materially from those in the
forward-looking statement. See "Forward-Looking Statements."
STATUS OF COMPANY AS HOLDING COMPANY
As a holding company, the ability of the Company to make payments of
interest and principal on the Senior Debentures will be dependent primarily upon
the receipt of dividends and other distributions from its subsidiaries. First
American Title Insurance Company ("FATICO"), which is the Company's principal
subsidiary, is subject to regulatory restrictions on its ability to pay
dividends or make other payments to the Company. In 1998, the maximum amount of
dividends, loans and advances available to the Company from FATICO is $52.1
million. In addition, the right of the Company to participate in any
distribution of assets of any subsidiary, including FATICO, upon such
subsidiary's liquidation or reorganization or otherwise, will be subject to the
prior claims of creditors of that subsidiary, except to the extent that any
claims of the Company as a creditor of such subsidiary may be recognized as
such. Accordingly, the Senior Debentures will effectively be subordinated to all
existing and future liabilities and obligations of the Company's subsidiaries
and holders of the Senior Debentures should look only to the assets of the
Company for payments on the Senior Debentures. As of December 31, 1997, the
Company's subsidiaries had liabilities and obligations of approximately $642.1
million net of intercompany indebtedness. See "The First American Financial
Corporation."
ABSENCE OF PUBLIC MARKET
Prior to this offering there has been no public market for the Senior
Debentures, and there can be no assurance that such a market will develop. The
Company does not intend to apply for listing of the Senior Debentures on any
securities exchange or authorization for quotation on the National Association
of Securities Dealers Inc. Automated Quotation System. The Company has been
advised by the Underwriters that they intend to make a market in the Senior
Debentures, as permitted by applicable laws and regulations. However, the
Underwriters are not obligated to make a market in the Senior Debentures, and
any market-making activity with respect to the Senior Debentures may be
discontinued at any time without notice. Accordingly, no assurance can be given
that an active public or other market will develop for the Senior Debentures or
as to the liquidity of or the trading market for the Senior Debentures. If an
active public market does not develop, the market price and liquidity of the
Senior Debentures may be adversely affected.
CYCLICAL NATURE OF REAL ESTATE MARKET
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 source 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.
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
As a key component of its growth strategy, the Company has pursued and is
pursuing acquisitions in the real estate-related financial services industry .
Certain risks are inherent in an acquisition strategy, such as increasing
leverage and debt service requirements and combining disparate company cultures
and facilities, which could adversely affect the Company's financial position
and operating results. The success of any completed acquisition will depend in
part on the Company's ability to integrate effectively the acquired businesses
into the Company. This process may involve unforeseen difficulties and may
require a disproportionate amount of management's attention and the Company's
financial and other resources. No assurance can be given that additional
suitable acquisition candidates will be identified, financed and purchased on
acceptable terms, or that recent acquisitions or future acquisitions, if
completed, will be successful.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent upon the continued services of the
Company's senior management, particularly its President, Parker S. Kennedy, its
Chairman and Director, D.P. Kennedy, and its Executive Vice President and Chief
Financial Officer, Thomas A. Klemens. The loss of the services of any of these
individuals could have a material adverse effect on the Company's financial
position and results of operations. The Company's success also depends on its
ability to attract and retain other highly qualified managerial personnel.
YEAR 2000 COSTS
Currently, many computer systems and software products are coded to accept
only two digit entries in the date code field. These date code fields will need
to accept four digit entries to distinguish 21st century dates from 20th century
dates. As a result, many companies' software and computer systems may need to be
upgraded or replaced in order to comply with such "Year 2000" requirements. The
Company and third parties with which the Company does business rely on numerous
computer programs in their day to day operations. The Company is evaluating the
Year 2000 issue as it relates to the Company's internal computer systems and
third party computer systems with which the Company interacts. The Company
expects to incur internal staff costs as well as consulting and other expenses
related to these issues; these costs will be expensed as incurred. In addition,
the appropriate course of action may include replacement or an upgrade of
certain systems or equipment at a substantial cost to the Company. There can be
no assurance that the Year 2000 issues will be resolved in 1998 or 1999. The
Company may incur significant costs in resolving its Year 2000 issues. If not
resolved, this issue could have a significant adverse impact on the Company's
operations.
GOVERNMENT REGULATION
The title insurance industry is subject to extensive governmental
regulation. Applicable laws and their interpretation vary from state to state
and are enforced with broad discretion. There can be no assurance that any
review of the Company's operations and business relationships by courts or other
regulatory authorities will not result in determinations that could adversely
affect the Company or that the regulatory environment will not change to
restrict the Company's existing or future operations.
USE OF PROCEEDS
The net proceeds from the sale of the Senior Debentures will be used for
general corporate purposes, including, without limitation, repayment of certain
debt and the financing and construction of new corporate facilities. The Company
will use approximately $12.1 million of net proceeds to satisfy the Company's
obligations under a certain sale-leaseback agreement which imposes an implicit
interest rate of 10.3% per annum and approximately $4.8 million of net proceeds
to retire certain of the Company's senior notes bearing an interest rate of
9.38% per annum and maturing in April 1999. Pending such uses, some portion of
such funds may be invested in short-term marketable securities. The remainder of
such proceeds will be added to the general funds of the Company.
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
The Company's consolidated ratio of earnings to fixed charges is set forth
below for each of the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings to Fixed Charges 24.5 6.1 3.2 19.6 11.6
</TABLE>
For purposes of computing the ratio of earnings to fixed charges, earnings
represent net income plus applicable income taxes and fixed charges. Fixed
charges represent interest expense.
CAPITALIZATION
The following table sets forth the capitalization of the Company and its
subsidiaries, on a consolidated basis, as of December 31, 1997, and as adjusted
to give effect the offering of the Senior Debentures and the use of proceeds
therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
NOTES AND CONTRACTS PAYABLE...................................... $41,973 $36,653
------- -------
SENIOR DEBENTURES................................................ -- 100,000
-------
MINORITY INTERESTS............................................... 25,214 25,214
------ ------
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN
THE COMPANY'S JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURES................................ 100,000 100,000
------- -------
SHAREHOLDERS' EQUITY
Common Stock................................................ 61,327 61,327
Retained Earnings........................................... 344,645 344,645
Net Unrealized Gain on Securities........................... 5,440 5,440
------- -------
Total Shareholders' Equity............................. 411,412 411,412
------- -------
TOTAL CAPITALIZATION............................................. $578,599 $673,279
======== ========
</TABLE>
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
OVERVIEW
The Company was organized in 1894 as Orange County Title Company,
succeeding to the business of two title abstract companies founded in 1889 and
operating in Southern 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 whose executive offices are located at 114 East Fifth Street, Santa
Ana, California 92701-4642, and its telephone number is (714) 558-3211.
The Company, through its subsidiaries, is engaged in the business of
providing real estate-related financial and informational services, including
title insurance, real estate tax monitoring, mortgage credit reporting, flood
zone determination, mortgage loan servicing systems, property information, home
warranty services, appraisal services and mortgage document preparation to real
property buyers and mortgage lenders. The Company also provides trust and
limited banking services.
Through growth and acquisitions, the Company believes it has become the
United States' largest provider of real estate-related financial and
informational services. The Company has assembled an array of companies which,
together, provide comprehensive services to the mortgage industry, commercial
and residential real estate developers, home buyers and other customers. As a
part of its growth strategy, the Company has pursued and is pursuing
acquisitions in the real estate-related financial services industry.
BUSINESS SEGMENTS
TITLE INSURANCE
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. Policies are issued based on a title
report prepared after a search of public records, maps, and documents and are
typically issued when a title is transferred.
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 Company, through First American Title Insurance Company and its other
subsidiaries, transacts its title insurance business through a network of more
than 300 branch offices and more than 4,000 independent agents. In 1997, the
Company's title insurance operations generated $1.46 billion in operating
revenues.
REAL ESTATE INFORMATION SERVICES
In recent years management has developed a strategy to be a "one-stop" real
estate information service company. To this end, in 1991 the Company acquired
what was believed to be the second largest tax service company, and in 1995
acquired what were believed to be, in each case, the largest mortgage credit
reporting company and the largest flood zone determination company, in the
United States.
In general, the Company's real estate information service products generate
higher margins than its title insurance products. The majority of pre-tax
profits generated by the Company from non-title business is derived from the
real estate services business, which generated $45.3 million in pre-tax profits
in 1997 and $331.4 million in operating revenues. Approximately 29% of the
Company's pre-tax profits in 1997 were derived from its real estate information
services businesses. These businesses are not regulated and hence not
constrained by dividend statutes enforceable by the states in which the Company
operates its title business or by constraints imposed by California on the
Company's trust and banking business.
First American Real Estate Information Services, Inc. ("FAREIS") has grown
from its tax service origins into a diversified mortgage services company.
FAREIS and its subsidiaries now serve mortgage originators, mortgage servicers,
title companies, real estate attorneys, consumers as well as non-lending
entities. The business was initially established in 1987 to advise mortgage
lenders as to the status of tax payments on real property securing their loans.
The Company's real estate information services also include mortgage and other
credit reporting services, flood zone determinations, mortgage loan servicing
systems, property inspections, appraisal services and mortgage document
preparation.
The tax service business includes both real estate tax reporting as well as
tax outsourcing and tax certification. The Company's tax service business
reports on 12 million properties annually and is believed to be the second
largest provider of tax services to the real estate market. The Company works
with over 22,000 taxing authorities nationwide.
First American CREDCO, Inc. ("CREDCO"), the Company's mortgage credit
reporting entity, is believed by the Company to be the largest provider of these
services in the United States and processes over 600,000 credit reports per
month. CREDCO provides residential mortgage credit reports, prequalifying
reports, merged credit data, resident screening services, business reports,
credit scoring tools and personal credit reports. CREDCO has recently branched
into the consumer lending and risk scoring areas, providing credit reporting and
information management services to automobile dealers, consumers and home equity
lenders nationwide. Approximately 25% of CREDCO's 1997 revenues were from
non-real estate related sources.
The Company is the leading provider of flood zone determinations. Flood
reporting services consist of a broad range of information required by
regulatory agencies regarding properties in relation to flood zones. This
business currently processes over 400,000 flood determinations per month.
The property/field services business consists of processing single family
home inspections, conducting field interviews with delinquent mortgagors,
monitoring the condition of properties and assuring timely property
preservation. The Company's acquisition in December 1996 of Ward Associates
places the Company among the leaders in this business.
The appraisal services business utilizes leading technology to provide
national mortgage lenders with property-relative value assessments. The
appraisal services business operates throughout the United States. Electronic
appraisals are supplemented with qualified local appraisers.
In April 1996, the Company acquired the Excelis Mortgage Loan Servicing
System ("Excelis MLS"), now known as Excelis, Inc. Excelis MLS is the only
commercially available real-time on-line servicing system that has been
developed since 1990 to meet increasingly sophisticated market demands. The
software employs rules-based technology, which enables the user to customize the
system to fit its individual servicing criteria and policies.
In May 1997, the Company purchased all of the operations of Strategic
Mortgage Services, Inc., a Delaware Corporation ("SMS"), other than SMS' flood
zone determination business. SMS is a leading provider of real estate
information services to the U.S. mortgage and title insurance industries. The
acquired businesses include SMS' credit division, which the Company believes is
the third largest provider of U.S. mortgage credit information; SMS' property
appraisal division, which the Company believes is the second largest provider of
U.S. appraisal services; SMS' title division, which provides title and closing
services throughout the United States, servicing primarily second mortgage
originators; SMS' settlement services business, which provides title plant
systems and accounting services, as well as escrow closing software, to the
title industry; and a controlling interest in what the Company believes is
largest mortgage document preparation firm.
On January 1, 1998, the Company and its real estate information service
subsidiaries (other than Excelis Inc.) (the "Real Estate Information
Subsidiaries") consummated a joint venture with Experian Information Solutions,
Inc. ("Experian"), pursuant to which First American Real Estate Solutions LLC
("FARES") was established. Under the joint venture, the Real Estate Information
Subsidiaries contributed substantially all of their assets and liabilities to
FARES in exchange for an 80% ownership interest and Experian transferred
substantially all of the assets and liabilities of its Real Estate Solutions
division ("RES") to FARES in exchange for a 20% ownership interest. The Company
believes that RES is the nation's foremost supplier of core real estate data,
providing, among other things, property valuation information, title
information, tax information and imaged title documents. As a result of this
joint venture, the Company believes that FARES is the nation's largest and most
diverse provider of information technology and decision support solutions for
the mortgage and real estate industries. See the Company's Report on Form 8-K
dated January 27, 1998, which is incorporated by reference herein.
HOME WARRANTY
The Company currently owns 79% of its home warranty business, with the
remaining balance owned by current and former management of this subsidiary. The
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 warranties issued are for household systems and
appliances only, not for the homes themselves. The Company's home warranty
business currently operates in certain counties of Arizona, California, Nevada,
North Carolina, South Carolina, Texas, Utah and Washington. The Company's home
warranty business is one of the largest in the United States based on contracts
under service, with $46.9 million in operating revenues in 1997.
TRUST AND THRIFT
Since 1960, the Company has conducted a general trust business in Southern
California. In 1985, the Company formed a banking subsidiary into which its
subsidiary trust operation was merged. As of December 31, 1997, the trust
operations were administering fiduciary and custodial assets having a market
value in excess of $1.3 billion.
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. The loans made by the Thrift currently range in amount
from $20,000 to $1,105,000, with an average loan balance of $270,500. Loans are
made only on a secured basis, at loan-to-value percentages no greater than 75%.
The Thrift specializes in making commercial real estate loans and financing
commercial equipment leases. In excess of 93% 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, 1997, was 11%. The Thrift's average loan is 60 months in duration.
Current deposits total $62.5 million and the loan portfolio totals $65.5
million.
DESCRIPTION OF THE SENIOR DEBENTURES
The Senior Debentures will be issued under a Senior Indenture (the
"Indenture") between the Company and Wilmington Trust Company, as trustee (the
"Trustee"). This summary of the material terms and provisions of the Senior
Debentures and the Indenture does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the Indenture.
GENERAL
The Senior Debentures will be issued in a principal amount of one hundred
million dollars ($100,000,000). The Senior Debentures will bear interest at the
annual rate of 7.55% of the principal amount thereof, payable semi-annually in
arrears on April 1 and October 1 of each year (each, an "Interest Payment
Date"), commencing October 1, 1998, to the person in whose name each Senior
Debenture is registered, subject to certain exceptions, at the close of business
on the first day of the month of the relevant Interest Payment Date. In
addition, to the extent permitted by law, interest shall accrue on any interest
due but not paid on such Interest Payment Date at the annual rate of 7.55%. The
amount of interest payable for any period will be computed on the basis of a
360-day year of twelve 30-day months. In the event that any date on which
interest is payable on the Senior Debentures is not a Business Day (as such term
is defined below), then payment of the interest payable on such date will be
made on the next succeeding day that is a Business Day (and without any interest
or other payment in respect of any such delay), except that if such Business Day
is in the next succeeding calendar year, such payment shall be made on the
immediately preceding Business Day, in each case, with the same force and effect
as if made on the date such payment was originally payable. A "Business Day"
shall mean any day other than a Saturday or a Sunday, or a day on which banking
institutions in The City of New York are authorized or required by law or
executive order to remain closed or a day on which the corporate trust office of
the Trustee is closed for business.
MATURITY; OPTIONAL REDEMPTION
The Senior Debentures will mature on April 1, 2028 (such date, the "Stated
Maturity"). No sinking fund is provided for the Senior Debentures. The Company
may at its option and subject to the terms and conditions of the Indenture,
redeem the Senior Debentures at any time or from time to time in whole or in
part at a redemption price equal to the Make Whole Amount.
The "Make Whole Amount" will be equal to the amount, as determined by a
Quotation Agent (as defined below), equal to the sum of the principal amount of
the Senior Debentures to be redeemed and the present value of scheduled
semi-annual interest payments thereon accrued on a daily basis (assuming a
360-day year consisting of twelve 30-day months) from the Redemption Date to
Stated Maturity (the "Make Whole Payment Period"), discounted to the Redemption
Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day
months) at the Adjusted Treasury Rate.
"Adjusted Treasury Rate" means the Treasury Rate plus 0.20%.
"Comparable Treasury Issue" means the United States Treasury security
selected by the Quotation Agent as having a maturity comparable to the Make
Whole Payment Period that would be utilized, at the time of selection and in
accordance with customary financial practice, in pricing new issues of corporate
debt securities of comparable maturity to the Make Whole Payment Period. If no
United States Treasury security has a maturity which is within a period from
three months before to three months after the Stated Maturity, the two most
closely corresponding United States Treasury securities shall be used as the
Comparable Treasury Issue, and the Treasury Rate shall be interpolated or
extrapolated on a straight-line basis, rounding to the nearest month using such
securities.
"Comparable Treasury Price" means, with respect to any Redemption Date, (A)
the average of five Reference Treasury Dealer Quotations for such Redemption
Date, after excluding the highest and lowest such Reference Treasury Dealer
Quotations, or (B) if the Quotation Agent obtains fewer than five such Reference
Treasury Dealer Quotations for such Redemption Date, the average of all such
quotations.
"Quotation Agent" means Chase Securities Inc. and its successors; provided,
however, that if the foregoing shall cease to be a primary U.S. government
securities dealer in New York City (a "Primary Treasury Dealer"), the Company
shall substitute therefor another Primary Treasury Dealer.
"Reference Treasury Dealer" means (i) the Quotation Agent and (ii) any
other Primary Treasury Dealer selected by the Quotation Agent after consultation
with the Company.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any Redemption Date, the average, as determined by
the Quotation Agent, of the bid and asked prices for the Comparable Treasury
Issue (expressed in each case as a percentage of its principal amount) quoted in
writing to the Quotation Agent by such Reference Treasury Dealer at 5:00 p.m.,
New York City time, on the third Business Day preceding such Redemption Date.
"Treasury Rate" means (i) the yield, under the heading which represents the
average for the immediately prior week, appearing in the most recently published
statistical release designated "H.15(519)" or any successor publication which is
published weekly by the Federal Reserve and which establishes yields on actively
traded United States Treasury securities adjusted to constant maturity under the
caption "Treasury Constant Maturities", for the maturity corresponding to the
Make Whole Payment Period (if no maturity is within three months before or after
the Make Whole Payment Period, yields for the two published maturities most
closely corresponding to the Make Whole Payment Period shall be determined and
the Treasury Rate shall be interpolated or extrapolated from such yields on a
straight line basis, rounding to the nearest month) or (ii) if such release (or
any successor release) is not published during the week preceding the
calculation date or does not contain such yields, the rate per annum equal to
the semi-annual equivalent yield to maturity of the Comparable Treasury Issue,
calculated using a price for the Comparable Treasury Issue (expressed as a
percentage of its principal amount) equal to the Comparable Treasury Price for
such Redemption Date. The Treasury Rate shall be calculated on the third
Business Day preceding the Redemption Date.
RANKING
The Senior Debentures will be unsecured and will rank senior to all
existing or future indebtedness of the Company that is by its terms expressly
subordinated to the Senior Debentures and will rank pari passu with all other
indebtedness of the Company. The Senior Debentures will be effectively
subordinated to all existing and future liabilities and obligations of the
Company's subsidiaries and holders of the Senior Debentures should look only to
the assets of the Company for payments on the Senior Debentures. As of December
31, 1997, the Company's subsidiaries had liabilities and obligations of
approximately $642.1 million net of intercompany indebtedness. See "The First
American Financial Corporation."
BOOK-ENTRY SYSTEM
The Senior Debentures will initially be issued in the form of a Global
Security held in book-entry form. DTC or its nominee will be the sole registered
holder of the Senior Debentures for all purposes under the Indenture.
Upon the issuance of a Global Security evidencing the Senior Debentures,
DTC or its nominee will credit the accounts of persons holding through it with
the respective principal amounts of the Senior Debentures represented by such
Global Security purchased by such persons. Such accounts shall be designated by
the Underwriters, with respect to Senior Debentures placed by the Underwriters
for the Company. Ownership of beneficial interests in a Global Security will be
limited to persons that have accounts with DTC ("participants") or persons that
may hold interests through participants. Ownership by participants of beneficial
interests in a Global Security will be shown on, and the transfer of such
ownership interests will be effected only through, records maintained by DTC for
such Global Security. Ownership of beneficial interests in such Global Security
by persons that hold through participants will be shown on, and the transfer of
such ownership interests within such participant will be effected only through,
records maintained by such participant. The laws of some jurisdictions require
that certain purchasers of securities take physical delivery of such securities
in definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Security.
Payment of principal and interest on Senior Debentures represented by any
such Global Security will be made to DTC or its nominee, as the case may be, as
the sole registered owner and the sole holder of the Senior Debentures
represented thereby for all purposes under the Indenture. None of the Company,
any agent of the Company, or the Trustee or the Underwriters will have any
responsibility or liability for any aspect of DTC's records relating to, or
payments made on account of, beneficial ownership interests in a Global Security
representing any Senior Debentures or for maintaining, supervising, or reviewing
any of DTC's records relating to such beneficial ownership interests.
The Company has been advised by DTC that upon receipt of any payment of
principal of or interest on any Global Security, DTC will immediately credit, on
its book-entry registration and transfer system, the accounts of participants
with payments in amounts proportionate to their respective beneficial interests
in the principal or face amount of such Global Security as shown on the records
of DTC. Payments by participants to owners of beneficial interests in a Global
Security held through such participants will be governed by standing
instructions and customary practices as is now the case with securities held for
customer accounts registered in "street name" and will be the sole
responsibility of such participants.
A Global Security may not be transferred except as a whole by DTC to a
nominee of DTC. A Global Security is exchangeable for Senior Debentures only if
(i) DTC notifies the Company that it is unwilling or unable to continue as a
Depositary for such Global Security or if at any time DTC ceases to be a
clearing agency registered under the Exchange Act, (ii) the Company executes and
delivers to the Trustee a notice that such Global Security shall be so
transferable, registrable, and exchangeable, and such transfers shall be
registrable, or (iii) there shall have occurred and be continuing an Event of
Default (defined below) or an event which, with the giving of notice or lapse of
time or both, would constitute an Event of Default (defined below) with respect
to the Senior Debentures represented by such Global Security. Any Global
Security that is exchangeable for Senior Debentures pursuant to the preceding
sentence will be transferred to, and registered and exchanged for, Senior
Debentures in authorized denominations and registered in such names as the
Depositary holding such Global Security may direct. Subject to the foregoing,
the Global Security is not exchangeable, except for a Global Security of like
denomination to be registered in the name of the Depositary or its nominee. In
the event that a Global Security becomes exchangeable for Senior Debentures, (i)
Senior Debentures will be issued only in fully registered form in denominations
of $1,000 or integral multiples thereof, (ii) payment of principal, any
repurchase price, and interest on the Senior Debentures will be payable, and the
transfer of the Senior Debentures will be registrable, at the office or agency
of the Company maintained for such purposes, and (iii) no service charge will be
made for any registration of transfer or exchange of the Senior Debentures,
although the Company may require payment of a sum sufficient to cover any tax or
governmental charge imposed in connection therewith.
So long as DTC or its nominee is the registered owner of such Global
Security, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Senior Debentures represented by such Global Security for
the purposes of receiving payment on the Senior Debentures, receiving notices,
and for all other purposes under the Indenture and the Senior Debentures.
Beneficial interests in Senior Debentures will be evidenced only by, and
transfers thereof will be effected only through, records maintained by DTC and
its participants. Cede & Co. has been appointed as the nominee of DTC. Except as
provided above, owners of beneficial interests in a Global Security will not be
considered the holders thereof for any purposes under the Indenture.
Accordingly, each person owning a beneficial interest in such a Global Security
must rely on the procedures of DTC and, if such person is not a participant, on
the procedures of the participant through which such person owns its interest,
to exercise any rights of a holder under the Indenture. The Company understands
that under existing industry practices, in the event that the Company requests
any action of holders, or that an owner of a beneficial interest in such a
Global Security desires to give or take any action which a holder is entitled to
give or take under the Indenture, DTC would authorize the participants holding
the relevant beneficial interest to give or take such action and such
participants would authorize beneficial owners owning through such participants
to give or take such action or would otherwise act upon the instructions of
beneficial owners owning through them.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the Banking Law of the State of New York, a member of the
Federal Reserve system, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered under the
Exchange Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers (including the Underwriters), banks, trust companies, clearing
corporations, and certain other organizations some of whom (and/or their
representatives) own DTC. Access to DTC's book-entry system is also available to
others, such as banks, brokers, dealers, and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly.
SAME-DAY SETTLEMENT AND PAYMENT
Initial settlement for the Senior Debentures will be made in immediately
available funds. All payments of principal and interest will be made by the
Company in immediately available funds or the equivalent, so long as DTC
continues to make the Same-Day Funds Settlement System available to the Company.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearinghouse or next-day funds. In contrast, the Senior
Debentures will trade in DTC's Same-Day Funds Settlement System. Secondary
market trading activity in the Senior Debentures will therefore be required by
DTC to settle in immediately available funds. No assurance can be given as to
the effect, if any, of settlement in immediately available funds on trading
activity in the Senior Debentures.
CERTAIN COVENANTS OF THE COMPANY
LIMITATION ON LIENS ON CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Indenture provides that the Company may not, and may not permit any
Subsidiary to, create, assume, incur or suffer to exist any Lien, other than a
Purchase Money Lien, upon any capital stock of any Restricted Security, whether
owned on the date of the Indenture or thereafter acquired, to secure any
Indebtedness (other than the Senior Debentures) of the Company, any Subsidiary
or any other Person without in any such case making effective provision whereby
all of the outstanding Senior Debentures shall be directly secured equally and
ratably with such Indebtedness or, if such Indebtedness is secured by such a
Lien and is expressly subordinated or junior in right of payment to the Senior
Debentures, secured by such a Lien that is senior in priority to the Lien
securing such Indebtedness; provided, however, that this restriction will not
apply to (i) Liens on the capital stock of any Restricted Subsidiary securing
Indebtedness outstanding from time to time, provided that the principal amount
of all such Indebtedness secured by Liens on the capital stock of any Restricted
Subsidiary, at the time of each incurrence of any portion of any such
Indebtedness, does not exceed 20% of Total Capitalization and (ii) Liens
securing Indebtedness from the Company to any wholly owned Restricted Subsidiary
or from any wholly owned Restricted Subsidiary to the Company or its
subsidiaries. This provision will not restrict any other property of the Company
or its Subsidiaries. Pursuant to clause (i) above, as of December 31, 1997, the
Company could have secured by Liens on the capital stock of Restricted
Subsidiaries up to approximately $134.7 million of Indebtedness, without
providing security to the holders of the Senior Debentures. In fact, however, as
of December 31, 1997, the Company has no Indebtedness secured by Liens on the
capital stock of the Restricted Subsidiaries and the Company's Credit Facility
is unsecured.
The Indenture defines: "Total Capitalization," as of the date of
determination, as the sum of (i) all Indebtedness of the Company outstanding as
of such date, including, without limitation, the Company's junior deferrable
interest debentures, the Securities and all Indebtedness under bank credit
facilities, (ii) the Company's consolidated shareholders' equity at the end of
the most recently completed fiscal quarter of the Company immediately preceding
such date of determination for which financial statements are or are required to
be available and (iii) the minority interests in Subsidiaries of the Company at
the end of the most recently completed fiscal quarter of the Company immediately
preceding such date of determination for which financial statements are or are
required to be available; "Credit Facility" as the Amended and Restated Credit
Agreement among the Company, The Chase Manhattan Bank, and the lenders party
thereto from time to time, dated as of July 29, 1997, as amended from time to
time; "Lien" as any mortgage, pledge, hypothecation, encumbrance, charge or
security interest of any kind; "Indebtedness" as indebtedness for money borrowed
or indebtedness evidenced by a bond, note, debenture or other evidence of
indebtedness; "Person" as any individual, corporation, partnership, joint
venture, limited liability company, trust, unincorporated organization or
government or any agency or political subdivision thereof; "Purchase Money Lien"
as (i) a Lien upon any capital stock of any Restricted Subsidiary acquired
before or after the date of the Indenture if such Lien is for the purpose of
financing the acquisition of the capital stock of such Restricted Subsidiary,
and does not exceed the cost to the Company or any Subsidiary of acquiring the
capital stock of such Restricted Subsidiary and such financing is effected
concurrently with, or within six months after, the date of such acquisition and
(ii) any extension, renewal or refinancing of any such Lien described in clause
(i) immediately above so long as the principal amount of obligations secured
thereby shall not exceed the original principal amount of obligations so secured
at the time of any such extension, renewal or refinancing; "Restricted
Subsidiary" as any Subsidiary that is a licensed insurance company having
capital and surplus in excess of $2.5 million; "Securities" as the Company's
senior unsecured debt securities; and "Subsidiary" as a corporation or business
trust, a majority of the outstanding voting securities of which is owned,
directly or indirectly, by the Company and/or one or more Subsidiaries. On the
date hereof, the Restricted Subsidiaries of the Company are First American Title
and Trust Company, First American Title Insurance Company, First American Home
Buyers Protection Corporation, First American Title Insurance Company of New
York, First American Title Insurance Company of Oregon, First American Title
Insurance Company of Texas and Port Lawrence Title and Trust Company.
LIMITATION ON CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Company shall not consolidate with or merge
into any other Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, unless (i) the successor Person is
organized under the laws of the United States or any state or the District of
Columbia, and such successor Person expressly assumes the Company's obligations
on the Senior Debentures issued under the Indenture; (ii) immediately after
giving effect thereto, no Event of Default, and no event which, after notice or
lapse of time or both, would become an Event of Default, shall have happened and
be continuing; (iii) any such lease shall provide that it will remain in effect
so long as any Senior Debentures are outstanding; and (iv) certain other
conditions prescribed in the Indenture are met.
INDENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Senior Debentures that has occurred and is continuing
constitutes an "Event of Default" with respect to the Senior Debentures:
(i) failure for 30 days to pay any interest on the Senior Debentures when
due; or
(ii) failure to pay any principal on the Senior Debentures when due whether
at maturity, upon redemption by declaration or otherwise; or
(iii)failure to observe or perform in any material respect any other
covenant contained in the Indenture for 90 days after written notice
to the Company from the Trustee or the holders of at least 25% in
aggregate outstanding principal amount of outstanding Senior
Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Company; or
(v) any default or event of default under any Indebtedness of the Company
or any of its Subsidiaries other than Indebtedness secured by assets
of the Company or any of its Subsidiaries the terms of which limit the
remedies of the holder or holders thereof primarily to the assets so
secured ("Nonrecourse Indebtedness"), which default or event of
default results in at least $10 million of aggregate principal amount
of such Indebtedness being declared due and payable prior to maturity
and such acceleration is not rescinded within 10 days thereafter; or
(vi) failure by the Company or any of its Subsidiaries to pay at maturity
any Indebtedness other than Nonrecourse Indebtedness in excess of $10
million aggregate principal amount, and such failure shall not have
been cured within 10 days thereafter.
The holders of a majority in aggregate outstanding principal amount of
Senior Debentures have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee. The Trustee
or the holders of not less than 25% in aggregate outstanding principal amount of
Senior Debentures may declare the principal due and payable immediately upon an
Event of Default. The holders of a majority in aggregate outstanding principal
amount of Senior Debentures may annul such declaration and waive the default if
the default (other than the non-payment of the principal of Senior Debentures
which has become due solely by such acceleration) has been cured and a sum
sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Trustee.
The holders of a majority in aggregate outstanding principal amount of the
Senior Debentures may, on behalf of the holders of all the Senior Debentures,
waive any past default, except a default in the payment of principal or interest
(unless such default has been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Trustee) or a default in respect of a covenant or
provision which under the Indenture cannot be modified or amended without the
consent of the holder of each outstanding Senior Debenture. The Company is
required to file annually with the Trustee a certificate as to whether or not
the Company is in compliance with all the conditions and covenants applicable to
it under the Indenture.
In case an Event of Default shall occur and be continuing, the Trustee will
have the right to declare the principal of and the interest on such Senior
Debentures and any other amounts payable under the Indenture to be forthwith due
and payable and to enforce its other rights as a creditor with respect to such
Senior Debentures.
MODIFICATION OF INDENTURE
From time to time the Company and the Trustee may, without the consent of
the holders of the Senior Debentures, amend, waive or supplement the Indenture
for specified purposes, including, among other things, curing ambiguities,
defects or inconsistencies (provided that any such action does not materially
and adversely affect the interests of the holders of Senior Debentures) and
qualifying, or maintaining the qualification of, the Indenture under the Trust
Indenture Act of 1939, as amended. The Indenture contains provisions permitting
the Company and the Trustee, with the consent of the holders of not less than a
majority in principal amount of outstanding Senior Debentures affected, to
modify the Indenture in a manner affecting the rights of the holders of such
Senior Debentures; provided that no such modification may, without the consent
of the holder of each outstanding Senior Debenture so affected, (i) change the
stated maturity of Senior Debentures or reduce the principal amount thereof, or
reduce the rate or extend the time of payment of interest thereon (except such
extension as is contemplated hereby) or (ii) reduce the percentage of principal
amount of Senior Debentures the holders of which are required to consent to any
such modification of the Indenture.
DEFEASANCE AND DISCHARGE
The Indenture provides that the Company, at the Company's option: (a) will
be discharged from any and all obligations in respect of the Senior Debentures
(except for certain obligations to register the transfer or exchange of Senior
Debentures, replace stolen, lost or mutilated Senior Debentures, maintain paying
agencies and hold moneys for payment in trust) or (b) need not comply with
certain restrictive covenants of the Indenture (including those described under
"Certain Covenants of the Company"), in each case if the Company deposits, in
trust with the Trustee, money or U.S. government obligations which through the
payment of interest thereon and principal thereof in accordance with their terms
will provide money, in an amount sufficient to pay all the principal of, and
interest and premium, if any, on the Senior Debentures on the dates such
payments are due in accordance with the terms of such Senior Debentures. To
exercise any such option, the Company is required to deliver to the Trustee an
opinion of counsel to the effect that the deposit and related defeasance would
not cause the holders of Senior Debentures to recognize income, gain or loss for
United States federal income tax purposes and, in the case of a discharge
pursuant to clause (a), such opinion shall be accompanied by a private letter
ruling to that effect received by the Company from the United States Internal
Revenue Service or revenue ruling pertaining to a comparable form of transaction
to such effect by the United States Internal Revenue Service.
PAYMENT AND PAYING AGENTS
Initially, the Company will act as paying agent with respect to the Senior
Debentures. The Company at any time may designate additional paying agents or
rescind the designation of any paying agent or approve a change in the office
through which any paying agent acts, except that the Company will be required to
maintain a paying agent at the place of payment.
Any moneys deposited with the Trustee or any paying agent, or then held by
the Company in trust, for the payment of the principal of or interest on any
Senior Debentures and remaining unclaimed for two years after such principal or
interest has become due and payable shall, at the request of the Company, be
repaid to the Company, and the holder of such Senior Debentures shall thereafter
look, as a general unsecured creditor, only to the Company for payment thereof.
GOVERNING LAW
The Indenture and the Senior Debentures will be governed by and construed
in accordance with the laws of the State of New York.
INFORMATION CONCERNING THE TRUSTEE
The Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Trustee is under no obligation to
exercise any of the powers vested in it by the Indenture at the request of any
holder of Senior Debentures, unless offered reasonable indemnity by such holder
against the costs, expenses and liabilities which might be incurred thereby. The
Trustee is not required to expend or risk its own funds or otherwise incur
personal financial liability in the performance of its duties if the Trustee
reasonably believes that repayment or adequate indemnity is not reasonably
assured to it.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
between the Company and the several Underwriters named below (each an
"Underwriter"), dated April 2, 1998 (the "Underwriting Agreement"), the Company
has agreed to sell to the Underwriters, and the Underwriters have severally
agreed to purchase from the Company, the principal amount of the Senior
Debentures set forth below opposite their respective names:
Principal Amount of
Underwriter Senior Debentures
Chase Securities Inc..............................................$90,000,000
First Chicago Capital Markets, Inc................................$10,000,000
Total...................................................$100,000,000
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Senior Debentures
offered hereby if any of the Senior Debentures are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the Senior Debentures to the public initially at the respective
offering price set forth on the cover page of this Prospectus, and to certain
dealers initially at such price less a discount not in excess of 0.500% of the
principal amount of the Senior Debentures. The Underwriters may allow, and such
dealers may reallow, a concession to certain other dealers not in excess of
0.250% of the principal amount of the Senior Debentures on sales to certain
other dealers. After the initial public offering, the public offering price and
such concessions may be changed.
Chase Securities Inc. is an affiliate of The Chase Manhattan Bank which is
the agent for and a lender under the Credit Facility. Chase Securities Inc.
served as arranger for the Credit Facility. First Chicago Capital Markets, Inc.
is an affiliate of The First National Bank of Chicago. The Chase Manhattan Bank,
The First National Bank of Chicago and their respective affiliates participate
on a regular basis in various general financing and banking transactions for the
Company and its affiliates.
The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act, and to contribute
to payments which the Underwriters might be required to make in respect thereof.
In connection with the offering of the Senior Debentures, Chase Securities
Inc., on behalf of the Underwriters, may engage in overallotment, stabilizing
transactions and syndicate covering transactions. Overallotment involves sales
in excess of the offering size, which creates a short position for the
Underwriters. Stabilizing transactions involve bids to purchase the Senior
Debentures in the open market for the purpose of pegging, fixing or maintaining
the price of the Senior Debentures. Syndicate covering transactions involve
purchases of the Senior Debentures in the open market after the distribution has
been completed in order to cover short positions. Such stabilizing transactions
and syndicate covering transactions may cause the price of the Senior Debentures
to be higher than it would otherwise be in the absence of such transactions.
Such activities, if commenced, may be discontinued at any time.
The Senior Debentures are a new series of securities with no established
trading market and will not be listed on any securities exchange. The
Underwriters have advised the Company that they intend to make a market in the
Senior Debentures, but are under no obligation to do so and such market making
may be terminated at any time. Therefore, no assurance can be given as to the
liquidity of, or the trading market for, the Senior Debentures.
LEGAL MATTERS
The validity of the Senior Debentures will be passed upon by White & Case
LLP, 633 West Fifth Street, Los Angeles, California 90071, as counsel for the
Company. Certain legal matters will be passed upon for the Underwriters by
Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York 10017.
EXPERTS
The financial statements incorporated in this Prospectus by reference to
the Annual Report on Form 10-K for the year ended December 31, 1997, have been
so incorporated in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
* * *
<PAGE>
(outside back cover page)
NO PERSON HAS BEEN AUTHORIZED TO GIVE Prospectus
ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR THE FIRST AMERICAN
INCORPORATED BY REFERENCE IN THIS FINANCIAL CORPORATION
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT $100,000,000
BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT 7.55% Senior Debentures due 2028
CONSTITUTE AN OFFER TO SELL, OR THE
SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES, OR ANY OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES, IN ANY CIRCUMSTANCES IN
WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY OFFER OR SALE MADE
HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE [Logo of The First American
HEREOF OR THAT THE INFORMATION CONTAINED Financial Corporation]
HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
Available Information 2
Incorporation of Documents by
Reference 2
Forward-Looking Statements 3
Prospectus Summary 4 CHASE SECURITIES INC.
Risk Factors 9
Use of Proceeds 11 FIRST CHICAGO CAPITAL MARKETS,
Ratio of Earnings to Fixed Charges 12 INC.
Capitalization 12
The First American Financial
Corporation 13
Description of the Senior Debentures 17
Underwriting 26
Legal Matters 27
Experts 27
