<PAGE>
================================================================================
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] Confidential, for use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
THE FIRST AMERICAN FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
[Logo of The First American Financial Corporation]
(R)
THE FIRST AMERICAN FINANCIAL CORPORATION
Home Office: 114 East Fifth Street, Santa Ana, CA 92701-4642 (714) 558-3211
Mailing Address: Post Office Box 267, Santa Ana, CA 92702-0267
TO THE SHAREHOLDERS OF
THE FIRST AMERICAN FINANCIAL CORPORATION
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of The First
American Financial Corporation, a California corporation (the "Corporation"),
will be held on April 22, 1999, at 2:00 p.m., at the main office of First
American Title Insurance Company, 114 East Fifth Street, Santa Ana, California,
for the following purposes:
1) Electing a board of directors to serve for the ensuing year;
2) Approving an amendment to the Restated Articles of Incorporation of
the Corporation to increase the number of authorized Common shares
from 108,000,000 to 180,000,000 such shares;
3) Approving an amendment to The First American Financial Corporation
1996 Stock Option Plan that would increase by 3,000,000 the number of
Common shares that may be issued pursuant to stock options to be
awarded under that plan in the future; and
4) Transacting such other business as may come before the meeting or any
adjournments thereof.
Only shareholders of record at the close of business on March 4, 1999, are
entitled to notice of and to vote at the meeting.
It is hoped that you will be present at the meeting; however, please sign,
date, indicate your vote on, and return promptly, the enclosed proxy card in the
accompanying envelope, addressed to the Corporation's Transfer Agent, First
American Trust Company, Attention: Trust Operations, Post Office Box 267, Santa
Ana, California 92702-9975, which will accept and tabulate the proxies. If you
attend the meeting, you may, of course, personally vote your shares. You also
have the right to revoke a proxy at any time before it is exercised.
Mark R Arnesen, Secretary
Santa Ana, California
March , 1999
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
Home Office: 114 East Fifth Street, Santa Ana, CA 92701-4642 (714) 558-3211
Mailing Address: P.O. Box 267, Santa Ana, CA 92702-0267
PROXY STATEMENT
Solicitation of Proxies by the Board of Directors
Proxies of the holders of Common shares of The First American Financial
Corporation, a California corporation (the "Corporation"), are solicited by its
Board of Directors for use at the Annual Meeting of Shareholders to be held on
April 22, 1999, and at any adjournments thereof. The enclosed proxy card
represents the shares that you are eligible to vote at the meeting. Shares
represented by a properly executed and returned proxy will be voted at the
meeting in accordance with the directions noted thereon or, if no directions are
indicated, they will be voted in favor of the proposals in the notice set forth
herein. A shareholder giving a proxy has the power to revoke it by attending
the meeting and electing to vote in person, or by filing with the Secretary of
the Corporation, prior to the meeting, a written revocation or a duly executed
proxy bearing a later date. The approximate date on which this proxy statement
and the enclosed proxy card were first sent to shareholders of the Corporation
is March , 1999.
Shareholders of record at the close of business on March 4, 1999 (the
"Record Date"), are eligible to vote at the meeting. The only outstanding class
of stock of the Corporation is its $1 par value Common. Each shareholder is
entitled to one vote per share of Common stock held as of the Record Date. With
respect to the election of directors, voting may be cumulative as described
below. As of the Record Date, there were 60,250,455 shares of Common stock
outstanding and entitled to vote.
VOTING PROCEDURES
In the event any shareholder entitled to vote for the election of directors
gives notice at the meeting prior to voting of a decision to cumulate votes for
a candidate or candidates and the name(s) of such candidate(s) has (have) been
placed in nomination prior to voting, every shareholder may cumulate votes and
(i) give one candidate the number of votes equal to the number of directors to
be elected (which is 14) multiplied by the number of Common shares held by such
shareholder, or (ii) distribute such number of votes among as many candidates as
such shareholder shall choose. Regardless of whether the voting for directors
is cumulative, those candidates receiving the highest number of votes, up to the
number of directors to be elected, shall be elected directors of the
Corporation. As indicated on the enclosed proxy card, a proxy confers upon the
appointees discretionary authority to cumulate and distribute, as the appointees
shall choose, the aggregate cumulative votes in respect of the Common shares
represented among
1
<PAGE>
those nominees as to which the shareholder has not withheld authority.
Abstentions and broker nonvotes (discussed below) neither have the effect of
votes in opposition to, nor in favor of, the election of a director.
Votes at the Annual Meeting of Shareholders will be tabulated by the
inspector(s) of election, who shall be appointed by the Chairman of the meeting
and who shall not be candidates for election to the Board of Directors.
Questions as to the qualifications of the voters, validity of proxies or other
matters pertaining to the vote shall be decided by the inspector(s), subject to
any ruling by the Chairman. The inspector(s) of election will treat Common
shares represented by a properly signed and returned proxy as present at the
Annual Meeting of Shareholders for the purpose of determining a quorum, without
regard to whether the proxy is marked as casting a vote or withholding a vote.
The inspector(s) of election will treat Common shares represented by "broker
nonvotes" (i.e., Common shares held in record name by brokers or nominees as to
which (i) instructions have not been received from the beneficial owners or
other persons entitled to vote, (ii) the broker or nominee does not have
discretionary voting power under applicable Securities and Exchange Commission
(the "SEC") rules or the instrument under which it serves in such capacity, and
(iii) the record holder has indicated on the proxy card or otherwise notified
the Corporation that such record holder does not have authority to vote on that
matter) as present for the purpose of determining a quorum.
The affirmative vote of the holders of a majority of the outstanding Common
shares entitled to vote is required for the adoption of the proposed amendment
of the Restated Articles of Incorporation of the Corporation. The affirmative
vote of a majority of the outstanding Common shares present in person or
represented by proxy at the meeting is required for the adoption of the proposed
amendment of The First American Financial Corporation 1996 Stock Option Plan.
The proposed amendments are set forth below in Items 2 and 3 of this proxy
statement. Abstentions and broker nonvotes with regard to these proposals will
have the same effect as votes cast against the adoption of the proposed
amendments.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information with respect to the only persons
known to the Corporation to be beneficial owners of 5% or more of its voting
securities, based upon information received from such persons as of the Record
Date. For purposes of this Proxy Statement, beneficial ownership of securities
is defined in accordance with the rules of the SEC and in general means the
power to vote or dispose of securities, regardless of any economic interest
therein. Shares subject to options exercisable within 60 days are treated as
outstanding when determining the amount and percentage beneficially owned by a
person or entity.
2
<PAGE>
<TABLE>
<CAPTION>
Common Stock
Beneficially Owned
-------------------
Names and Addresses Number of
of Shareholders Shares Percent
- ---------------------- --------- -------
<S> <C> <C>
EQSF Advisers, Inc. 3,108,000 (1) 5.16%
M. J. Whitman Advisers, Inc. 368,090 (1) .61%
767 Third Avenue
New York, New York
Kennedy Enterprises, L.P. 3,223,155 (2) 5.35%
Parker S. Kennedy 84,081 (3) .14%
114 East Fifth Street
Santa Ana, California
First American Trust Company 8,068,911 (4) 13.39%
Trustee of the Corporation's
Qualified Retirement Plans Trusts
421 North Main Street
Santa Ana, California
</TABLE>
(1) As of December 31, 1998, sole voting and dispositive power with respect to
the number of shares set forth in the table, based on statements contained
in amended Schedule 13G filed jointly by EQSF Advisers, Inc. ("EQSF"), M.
J. Whitman Advisers, Inc. ("MJWA"), and Martin J. Whitman with the SEC.
The amended Schedule 13G indicates that the shares were acquired in the
ordinary course of business and are held (i) by EQSF on behalf of Third
Avenue Value Fund, Inc., as to 3,000,000 shares, and on behalf of Third
Avenue Small-Cap Value Fund as to 108,000 shares, and (ii) by MJWA on
behalf of various clients for whom MJWA acts as investment adviser as to an
aggregate of 368,090 shares, and that the shares are not held with the
purpose or effect of changing or influencing control of the Corporation.
(2) The subject shares are held by Kennedy Enterprises, L.P., a California
limited partnership, of which Parker S. Kennedy, President of the
Corporation, is the sole general partner (the "Partnership"). The limited
partnership agreement pursuant to which the Partnership was formed
provides that the General Partner has all powers of a general partner as
provided in the California Uniform Limited Partnership Act, provided that
the General Partner is not permitted to cause the partnership to sell,
exchange or hypothecate any of its shares of stock of the Corporation
without the prior written consent of all of the limited partners. Mr.
Kennedy's father, D. P. Kennedy, is one of the limited partners as well as
an executive officer of the Corporation.
3
<PAGE>
(3) Parker S. Kennedy has sole voting and dispositive power with respect to the
number of shares set forth in the table, except as to 7,981 of such shares,
which are allocated to his account and held by the Corporation's wholly
owned subsidiary, First American Trust Company (the "Trust Company"), as
trustee of the Corporation's Employee Profit Sharing and Stock Ownership
Plan. See note (4) below. Of the other shares set forth in the table,
2,600 are owned by Mr. Kennedy directly and 73,500 are shares he has the
right to acquire within 60 days pursuant to stock options awarded under
employee incentive compensation plans.
(4) Of the shares set forth in the table, 6,027,742 are held by the Trust
Company pursuant to the Corporation's Employee Profit Sharing and Stock
Ownership Plan, and 1,634,954 are held by the Trust Company as trustee of
the Corporation's 401(k) Savings Plan. Both of these plans require the
trustee to vote the shares as directed by the employees to whose accounts
the shares have been allocated. Shares as to which no directions are
received are not voted. In addition to the shares set forth in the table,
406,215 shares are held by the Trust Company as trustee of the
Corporation's Pension Trust, as part of the diversified investment fund of
that trust. Parker S. Kennedy, Mark R Arnesen and Thomas A. Klemens, who
also are executive officers of the Corporation, serve on a committee
composed of eight members, a majority of which may, under the terms of the
trust agreement governing the trust, and subject to the fiduciary
requirements of the Employee Retirement Income Security Act of 1974, direct
the disposition of the securities held by the trustee.
4
<PAGE>
ITEM 1. ELECTION OF DIRECTORS
The directors of the Corporation are elected annually. The Board of Directors
nominates persons to stand for election as directors. Unless otherwise
specified, each proxy that is duly executed and returned will be voted in favor
of the election of the following persons, if they are then available and willing
to serve. If any of the nominees should be unable or decline to serve at the
time of the meeting, the discretionary authority provided in each duly executed
proxy will be exercised to vote for a substitute or substitutes. The Board of
Directors has no reason to believe that any substitute will be required. All
nominees are at present directors of the Corporation.
The following schedule sets forth the nominees and certain information
concerning each of them:
<TABLE>
<CAPTION>
Director
Name Age Principal Occupation Since
<S> <C> <C> <C>
George L. Argyros 62 Chairman and Chief Executive Officer 1988
Arnel and Affiliates
Diversified Investment Company
Gary J. Beban 52 Senior Executive Managing Director 1996
CB Richard Ellis, Inc.
Commercial Real Estate Brokerage
J. David Chatham 48 President and Chief Executive Officer 1989
Chatham Holdings Corporation
Real Estate Development and Associated Industries
William G. Davis 69 Counsel 1992
Tory Tory DesLauriers & Binnington
Director
Canadian Imperial Bank of Commerce
Premier of Province of Ontario (Canada) (1971- 1985)
James L. Doti 52 President and Professor of Economics 1993
Chapman University
Lewis W. Douglas, Jr. 74 Oil Exploration 1971(1)
Paul B. Fay, Jr. 80 President 1967
The Fay Improvement Company
Financial Consulting and Business Ventures
D. P. Kennedy 80 Chairman of the Board 1956
The First American Financial Corporation
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Director
Name Age Principal Occupation Since
<S> <C> <C> <C>
Parker S. Kennedy 51 President 1987(2)
The First American Financial Corporation
Chairman of the Board
First American Title Insurance Company,
a subsidiary of the Corporation
Anthony R. Moiso 59 President and Chief Executive Officer 1990
Rancho Mission Viejo, LLC
Ranching and Real Estate Development
Frank O'Bryan 65 Chairman of the Board 1994
WMC Mortgage Corporation
Mortgage Lender (1997 to date)
Chairman of the Board
Spring Mountain Group
Escrow and Savings and Loan Holding Company
(1985-1997)
Roslyn B. Payne 52 President 1988
Jackson Street Partners, Ltd.
Real Estate Venture Capital and Investments
D. Van Skilling 65 Chairman and Chief Executive Officer 1998
Experian Information Solutions, Inc.
Information Services and Solutions for Direct Marketing
and Credit Industries (1996 to date)
Executive Vice President
TRW Inc. (1989-1996)
Diversified Automotive, Aerospace and Information Services
Virginia Ueberroth 59 President 1988
Ueberroth Family Foundation
</TABLE>
(1) Mr. Douglas also was a director of the Corporation during the period 1961-
1967.
(2) Parker S. Kennedy is D. P. Kennedy's son.
Certain nominees serve as directors of other publicly held companies as
follows: Mr. Argyros--The Newhall Land and Farming Company, DST Systems, Inc.,
and Rockwell International Corporation; Mr. Beban--CB Richard Ellis, Inc.; Mr.
Davis--The Seagram Company Ltd., Magna International Inc. and International
Comfort Products Corporation; Dr. Doti--Fleetwood Enterprises, Inc., Remedy
Temp, Inc., and Standard Pacific Corp.; Mr. Fay--Vestaur Securities, Inc.; and
Mr. Skilling--Lamson and Sessions Inc.
6
<PAGE>
The Board of Directors held seven meetings during 1998. Directors who
attended less than 75% of the aggregate of such meetings and meetings of
committees of which they are members are Messrs. Argyros and Moiso, and Mrs.
Payne.
The Board of Directors has an Audit Committee, the members of which are
Messrs. Chatham, Doti, Fay, Moiso and O'Bryan, and Mrs. Ueberroth. The
functions performed by the Audit Committee include selecting the Corporation's
independent auditor, directing and supervising investigations into matters
within the scope of its duties, reviewing with the independent auditor the plan
and results of its audit, reviewing internal auditing procedures and results,
overseeing the Corporation's "Year 2000" readiness program, and determining the
nature of other services to be performed by, and fees to be paid to, the
independent auditor. During 1998, the Audit Committee met seven times.
The Board of Directors also has a Compensation Committee, the members of
which are Messrs. Beban, Chatham, Davis, Doti, Douglas and Fay. The Compensation
Committee establishes compensation rates and procedures with respect to senior
management of the Corporation and its subsidiaries, including bonus awards.
During 1998, the Compensation Committee met three times.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Prior to May 27, 1998, the Corporation indirectly owned 17,053 common
shares of its second-tier subsidiary, First American Title Guaranty Holding
Company. These shares represented 80% of the issued and outstanding common
shares of the Title Guaranty. Prior to that date, Director Roslyn B. Payne
owned 475 common shares of Title Guaranty. These shares represented 2.2% of the
issued and outstanding common shares of Title Guaranty. On May 27, 1998, the
Corporation acquired all the issued and outstanding Title Guaranty common shares
that it did not own prior to such date, at an agreed price of $2,231.10 per
share, in exchange for Common shares of the Corporation valued at their closing
price of $63.875 on April 8, 1998. Mrs. Payne tendered all of her Title
Guaranty common shares in this exchange and received 16,591 Common shares of the
Corporation (49,773 Common shares as adjusted for the "three-for-one" stock
split that occurred during July 1998).
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information received by the Corporation as
of the Record Date with respect to beneficial ownership of the Corporation's
Common shares by current directors, nominees for director, executive officers
and by all directors and executive officers as a group. The number of shares
stated as being beneficially owned is determined according to the rules of the
SEC, and is not necessarily indicative of beneficial ownership for any other
purpose. Under such rules, beneficial ownership includes any shares as to which
the individual has sole or shared voting or investment power, and also any
shares the individual has, or will have, the right
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<PAGE>
to acquire within 60 days after the date of this proxy statement through the
exercise of any stock option or other right.
<TABLE>
<CAPTION>
Common Shares Beneficially Owned (1)
Name Number of Shares Percent of Shares
Outstanding, if
Greater than 1%
<S> <C> <C>
DIRECTORS
George L. Argyros 127,925 (2) --
Gary J. Beban 14,196 --
J. David Chatham 19,024 --
William G. Davis 13,950 --
James L. Doti 18,450 --
Lewis W. Douglas, Jr. 27,021 --
Paul B. Fay, Jr. 82,467 --
D. P. Kennedy 53,965 (3) --
Parker S. Kennedy 3,307,236 (3)(4) 5.5%
Anthony R. Moiso 24,483 --
Frank O'Bryan 20,055 --
Roslyn B. Payne 63,956 --
D. Van Skilling 8,007 --
Virginia Ueberroth 73,500 --
EXECUTIVE OFFICERS WHO ARE NOT
DIRECTORS
Mark R Arnesen 36,597 (4) --
Craig I. DeRoy 51,146 --
Thomas A. Klemens 115,620 (4) --
All Directors and Executive 4,057,598 6.7%
Officers as a Group (17 persons)
</TABLE>
8
<PAGE>
(1) Unless otherwise indicated, sole voting and dispositive power (or shared
power with the named person's spouse). The shares set forth in the table
include the following shares allocated to the following individuals'
accounts in, and held by the Trust Company, as trustee of, the
Corporation's Employee Profit Sharing and Stock Ownership Plan: 7,846
shares for D. P. Kennedy; 7,981 shares for Parker S. Kennedy; 5,333 shares
for Mark R Arnesen; 129 shares for Craig I. DeRoy and 2,411 shares for
Thomas A. Klemens. These individuals do not currently have dispositive
power with respect to these shares. The share amounts shown in the table
also include, for each director other than Messrs. D. P. Kennedy, Parker S.
Kennedy, J. David Chatham and D. Van Skilling, 13,500 shares; and for D. P.
Kennedy 42,000 shares; for Parker S. Kennedy 73,500 shares; for J. David
Chatham and D. Van Skilling 6,750 shares; for Thomas A. Klemens 60,000
shares; for Craig I. DeRoy 35,000 shares; and for Mark R Arnesen 16,500
shares, which those persons have rights to acquire within 60 days of the
date of this proxy statement pursuant to stock options awarded under the
Corporation's compensation plans.
(2) In addition to the shares set forth in the table, 735,297 shares are held
by a nonprofit corporation whose four-member board of directors, which
includes George L. Argyros and his wife, has the power to direct the voting
and the disposition of such shares.
(3) Of the shares set forth in the table, 2,600 are owned by Parker S. Kennedy
directly and 3,223,155 are held by Kennedy Enterprises, L.P., a California
limited partnership, of which Mr. Kennedy is the sole general partner (the
"Partnership"). The limited partnership agreement pursuant to which the
Partnership was formed provides that the General Partner has all powers of
a general partner as provided in the California Uniform Limited Partnership
Act, provided that the General Partner is not permitted to cause the
partnership to sell, exchange or hypothecate any of its shares of stock of
the Corporation without the prior written consent of all of the limited
partners. Mr. Kennedy's father, D. P. Kennedy, is one of the limited
partners.
(4) In addition to the shares set forth in the table, 406,215 shares are held
by the Trust Company as trustee of the Corporation's Pension Trust, as part
of the diversified investment fund of the trust. Parker S. Kennedy, Mark R
Arnesen and Thomas A. Klemens serve on a committee composed of eight
members, a majority of which may, under the terms of the trust agreement
governing the trust, and subject to the fiduciary requirements of the
Employee Retirement Income Security Act of 1974, direct the disposition of
the securities held by the trustee.
9
<PAGE>
EXECUTIVE COMPENSATION
The following tables set forth certain compensation awarded to, earned by, or
paid to the executive officers of the Corporation who were serving as such at
the end of, or who retired during, the Corporation's last completed fiscal year,
which ended December 31, 1998 (the "named executive officers"), for all services
rendered in all capacities to the Corporation and its subsidiaries during the
years covered in the tables.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards
------
Securities
Other Annual Underlying All Other
Bonus(2) Compensation Options (4) Compensation(5)
Name and Salary(1) ($) (3) (# of shares) ($)
Principal Position Year ($) ($)
- ------------------ ---- ----------- --------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
D. P. 1998 317,300 (6) 155,000 -- 30,000 175,794 (7)
Kennedy 1997 301,850 (6) 148,184 -- -- 147,853 (7)
Chairman 1996 301,300 (6) 118,250 -- 90,000 128,659 (7)
Parker S. 1998 401,120 (8) 457,200 -- 30,000 5,626
Kennedy 1997 401,120 (8) 253,966 -- -- 2.998
President 1996 376,100 (8) 192,075 -- 112,500 598
Thomas A. 1998 262,700 (9) 411,326 -- 30,000 5,398
Klemens 1997 227,696 (9) 226,256 -- -- 2,998
Executive Vice 1996 196,120 (9) 188,250 -- 90,000 598
President, Chief
Financial Officer
Craig I. DeRoy 1998 255,900 411,326 -- 30,000 5,398
Executive Vice 1997 220,896 226,256 -- -- 2,998
President, 1996 190,920 180,600 -- 90,000 454
General Counsel
Mark R Arnesen 1998 142,920 112,000 -- 15,000 5,398
Vice President, 1997 130,920 62,346 -- -- 2,923
Secretary, 1996 118,920 38,388 -- 22,500 454
Corporate Counsel
</TABLE>
(1) Includes, in addition to regular salary, a fee of $150 for each meeting of
the Board of Directors attended by the named executive officer during the
years covered in the table.
(2) Consists of cash bonuses and the dollar value of noncash (stock) bonuses.
Officers of the Corporation, its subsidiaries and lower-tier subsidiaries
are eligible for such bonuses,
10
<PAGE>
which are awarded during the year following the fiscal year to which the
bonus relates, based on an evaluation by the Compensation Committee of the
performance of the individual and the Corporation during the preceding
fiscal year. For services rendered during 1998, 1997 and 1996,
respectively, 498, 364 and 288 individuals were awarded cash and/or stock
bonuses. During the three years covered in the table, an average of 194,250
shares of stock has been awarded annually to all participants in the
Corporation's Stock Bonus Plan. With respect to services rendered during
1998, Parker S. Kennedy received an award of 2,600 Common shares having a
fair market value of $57,200, D. P. Kennedy received an award of 2,500 such
shares having a fair market value of $55,000, Thomas A. Klemens and Craig
I. DeRoy each received an award of 2,333 such shares having a fair market
value of $51,326, and Mark R Arnesen received an award of 1,000 such shares
having a fair market value of $22,000. With respect to services rendered
during 1997, Parker S. Kennedy received an award of 1,260 Common shares
having a fair market value of $53,966, D. P. Kennedy received an award of
1,125 such shares having a fair market value of $48,184, Thomas A. Klemens
and Craig I. DeRoy each received an award of 1,080 such shares having a
fair market value of $46,256, and Mark R Arnesen received an award of 405
such shares having a fair market value of $17,346. With respect to services
rendered during 1996, Parker S. Kennedy received an award of 1,650 Common
shares having a fair market value of $42,075, D. P. Kennedy and Thomas A.
Klemens each received awards of 1,500 such shares having a fair market
value of $38,250, Craig I. DeRoy received 1,200 such shares having a fair
market value of $30,600, and Mark R Arnesen received 525 such shares having
a fair market value of $13,388. All share amounts have been adjusted to
reflect the "three-for-two" and "three-for-one" stock splits that occurred
during January and July 1998, respectively.
(3) Certain incidental perquisites or other personal benefits for executive
officers of the Corporation (not otherwise disclosed in this Proxy
Statement) may result from expenses incurred by the Corporation or its
subsidiaries in the interest of attracting and retaining qualified
personnel. The incremental cost to the Corporation and its subsidiaries of
providing such incidental perquisites for each of the Named Executive
Officers did not exceed the lesser of $50,000 or 10% of each officer's
annual salary and bonus reported for each year. In accordance with the
rules of the SEC governing disclosure of executive compensation, the
amounts of such perquisites or other personal benefits are not included in
the table.
(4) The number of shares underlying the stock options disclosed in the table
have been adjusted to reflect the "three-for-two" and "three-for-one" stock
splits that occurred during January and July 1998, respectively.
(5) Consists of the matching contributions made by the Corporation to the named
executive officer's account in the Corporation's 401(k) Savings Plan
during or with respect to the covered fiscal year, plus the dollar value of
insurance premiums paid by, or on behalf of, the Corporation during the
covered fiscal year with respect to term life insurance for the benefit of
such officer.
11
<PAGE>
(6) The compensation shown in the "Salary" column of the table includes fees
totaling $1,400, $950 and $400, which were earned by D. P. Kennedy for
services he rendered as a director of subsidiaries of the Corporation
during 1998, 1997 and 1996, respectively.
(7) The amounts shown in the last column of the Summary Compensation Table
include, for each fiscal year covered, the distributions made to D. P.
Kennedy from the Corporation's Pension Plan, which are required under
provisions of the Internal Revenue Code of 1986, as amended (the "Code").
See "Pension Plan" below. The compensation shown also includes cash and
the value of stock, aggregating $64,561, $43,164 and $28,031, distributed
to D. P. Kennedy during 1998, 1997 and 1996, respectively, from his
accounts in the Corporation's Profit Sharing Plan attributable to
contributions made by the Corporation and its participating subsidiaries in
years prior to those covered in the table and earnings on the
contributions. The distributions were required to be made under provisions
of the Code.
(8) The compensation shown in the "Salary" column of the table includes fees
totaling $200 in each of the years 1998, 1997 and 1996, which were earned
by Parker S. Kennedy for services he rendered as a director of subsidiaries
of the Corporation.
(9) The compensation shown in the "Salary" column of the table includes fees
totaling $6,800 in each of the years 1998 and 1997, and $5,200 in the
year 1996, which were earned by Mr. Klemens for services he rendered as a
director of subsidiaries of the Corporation during those years.
12
<PAGE>
Option Grants Table
<TABLE>
<CAPTION>
Potential Realizable
Value at
Assumed Annual Rates of
Stock Price
Appreciation
Individual Grants for Option Term
- -------------------------------------------------------------------- -------------------------------
% of Total
Number of Options
Securities Granted to
Underlying Employees Exercise or
Options in Fiscal Base Price Expiration
Name Granted Year ($/Sh)(2) Date 5% ($) 10% ($)
- ---- ( # of ----------- ----------- ---------- --------- ---------
------
Shares) (1)
-----------
<S> <C> <C> <C> <C> <C> <C>
D. P. Kennedy 30,000 .745% 23.583 4/23/08 444,937 1,127,557
Parker S. Kennedy 30,000 .745% 23.583 4/23/08 444,937 1,127,557
Thomas A. Klemens 30,000 .745% 23.583 4/23/08 444,937 1,127,557
Craig I. DeRoy 30,000 .745% 23.583 4/23/08 444,937 1,127,557
Mark R Arnesen 15,000 .373% 23.583 4/23/08 222,468 563,778
</TABLE>
(1) Each of the options disclosed in the table is exercisable in 20% annual
increments commencing April 23, 1999, the first anniversary date of the
grant. All prices and share amounts have been adjusted to reflect the
"three-for-one" stock split that occurred during July 1998.
(2) Section 4.2 of the plan pursuant to which the options disclosed in the
table were awarded allows the Compensation Committee discretion to exchange
outstanding options for new, lower-priced options, provided that the lower
exercise price is not less than the "fair market value," as defined in the
plan, of the shares at the time such new options are granted.
13
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values(1)
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options at The-Money Options
Number of Value Fiscal Year-End at Fiscal Year-End ($)(3)
Shares Acquired Realized --------------- -------------------------
Name on Exercise (2) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ----- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
D. P. Kennedy 18,000 -0- 18,000 84,000 475,758 1,683,534
Parker S. Kennedy -- -- 45,000 97,500 1,189,395 2,040,353
Thomas A. Klemens -- -- 36,000 84,000 951,516 1,683,534
Craig I. DeRoy 25,000 506,645 11,000 84,000 290,741 1,683,534
Mark R Arnesen -- -- 9,000 28,500 237,879 484,949
</TABLE>
(1) All prices and share amounts have been adjusted to reflect the "three-for-
two" and "three-for-one" stock splits that occurred during January and July
1998, respectively.
(2) Each of the options disclosed in the table is exercisable in 20% annual
increments commencing on the first anniversary date of the grant.
(3) The value of each unexercised option is based on the difference between the
closing price of the Corporation's Common shares on the New York Stock
Exchange on December 31, 1998, which was $32.125, and the adjusted exercise
price of such option.
14
<PAGE>
Pension Plan
Annual Pension Benefits
<TABLE>
<CAPTION>
Remuneration
(Final Average Pay *) Years of Benefit Service
- ------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5 10 20 30 40 50
$100,000 $ 5,100 $11,200 $23,400 $ 35,600 $ 47,800 $ 60,000
125,000 6,413 14,075 29,400 44,725 60,050 75,375
150,000 7,725 16,950 35,400 53,850 72,300 90,750
175,000 9,038 19,825 41,400 62,975 84,550 106,125
200,000 10,350 22,700 47,400 72,100 96,800 121,500
225,000 11,663 25,575 53,400 81,225 109,050 136,875
250,000 12,975 28,450 59,400 90,350 121,300 152,250
275,000 or more 14,288 31,325 65,400 99,475 133,550 167,625
</TABLE>
______________
* Final Average Pay is defined in the pension plan as the highest consecutive
five-year average salary during the last ten years of employment.
The above table sets forth estimated annual benefits (assuming such
benefits will be paid in the form of a life annuity) at various compensation
levels and years of service under the Corporation's pension plans. Subject to
certain conditions of age and tenure, all regular employees of the Corporation
and participating subsidiaries are eligible to join the Corporation's qualified
Pension Plan. In order to participate, during plan years ending on or prior to
December 31, 1994, an employee was required to contribute 1 1/2% of pay (salary,
plus cash bonuses, commissions and other pay) to the plan. As a result of
amendments to the Pension Plan that were adopted in 1994, during plan years
commencing after December 31, 1994, an employee is not required to contribute to
the plan in order to participate. A participant generally vests in his accrued
benefit attributable to the Corporation's contributions upon the completion of
three years of service or, if earlier, the attainment of normal retirement age
while an employee. Normal retirement age is defined under the plan as the later
of the employee's attainment of age 65 or his third anniversary of participation
in the plan. Upon retirement at normal retirement age, an employee receives full
monthly benefits which are equal to (when calculated as a life annuity): (i) for
years of credited service with the company as of December 31, 1994, 1% of the
first $1,000 and 1 1/4% of remaining final average pay (i.e., the average of the
monthly "pay," as defined above, during the five highest paid consecutive
calendar years out of the last ten years prior to retirement) times the number
of years of credited service as of December 31, 1994; and (ii) with respect to a
participant's credited service for plan years subsequent to December 31, 1994,
3/4% of the first $1,000 and 1% of the remaining final average pay times the
number of years of credited service subsequent to December 31, 1994. An employee
with at least three years of service may elect to retire after attaining age 55,
but prior to age 65, and receive reduced benefits. The plan is funded by the
Corporation based on actuarial determinations of the amount required to provide
the stated benefits. The table is based on retirement at age 65 or later, with
15
<PAGE>
contributions having been made by the employee in each year of credited service
prior to 1995. The benefits are not subject to deduction for Social Security
payments or any other offsets. Currently, D. P. Kennedy, Parker S. Kennedy,
Thomas A. Klemens, Craig I. DeRoy and Mark R Arnesen have 50, 22, 13, 5 and 13
years, respectively, of credited service.
The compensation levels shown in the Pension Plan table are less than those
set forth in the Summary Compensation Table because the Code limits the maximum
amount of pay that may be considered in determining benefits under the tax-
qualified Pension Plan, and the Corporation's Pension Restoration Plan, which is
described below, does not make up for these limits for pay exceeding $275,000.
As established by the Tax Reform Act of 1986, the limit on pay that could be
recognized by tax-qualified retirement plans was $200,000 in 1989 and was
adjusted for inflation for each year through 1993, when the limit was $235,840.
The Omnibus Budget Reconciliation Act of 1993 decreased this limit to $150,000
for plan years beginning in 1994. The $150,000 limit will also be adjusted for
inflation for years after 1994, but only in increments of $10,000. Effective
January 1, 1997, the limit was increased to $160,000. The highest final average
pay that could be considered in determining benefits accruing under the Pension
Plan before 1994 was $219,224 and the highest final average pay that can
currently be considered in determining benefits accruing after 1993 is $156,000.
During 1996, the Corporation adopted an unfunded, nonqualified plan
designed to make up for the benefit accruals that are restricted by the indexed
$150,000 pay limit (the "Pension Restoration Plan"). However, in order to limit
its expense, the Pension Restoration Plan does not make up for benefit accruals
on compensation exceeding $275,000. The Pension Restoration Plan also makes up
for benefits that cannot be paid from the Pension Plan because of limitations
imposed by Code Section 415 and related regulations. Vesting of benefits
payable to an employee under the Pension Restoration Plan occurs at the same
time that vesting occurs for that employee in his or her Pension Plan benefits.
The Pension Restoration Plan is effective as of January 1, 1994, but only covers
employees who were participants in the Pension Plan on that date, which, as
noted above, is the date as of which the pay limit for the Pension Plan was
reduced from $235,840 to $150,000.
Pursuant to the provisions of the Code, during 1998, 1997 and 1996,
respectively, mandatory distributions totaling $105,371, $101,227 and $98,348
were made to D. P. Kennedy from the Pension Plan. As stated in note (7) of the
Summary Compensation Table set forth above, these amounts are included in the
last column of such table.
Supplemental Benefit Plan
The Corporation maintains an Executive Supplemental Benefit Plan (the
"Executive Plan") which it believes will assist it in attracting and retaining
highly qualified individuals for upper management positions. The Executive Plan
provides retirement benefits for, and pre-retirement death benefits with respect
to, certain key management personnel selected by the Board of Directors. Under
the Executive Plan, upon retirement at normal retirement date (the later of age
65 or, unless waived by the Board of Directors, completion of 10 years of
service), a participant receives a joint life and 50% survivor annuity benefit
equal to 35% of "final average compensation." "Final average compensation" is
the average annual compensation, composed of base salary, plus cash and stock
bonuses, for those three calendar years of the preceding 10 years
16
<PAGE>
of employment in which it is the highest. The benefit is reduced by 5% for each
year prior to normal retirement date in which retirement occurs and, until age
70, increased by 5% (compounded in order to approximate the annuitized value of
the benefit had retirement occurred at age 65) for each year after such date in
which retirement occurs (the "annuitized benefit"). With respect to such
postponed retirement, the Executive Plan takes into account covered compensation
received until age 70, so that the retirement benefit of an executive who
retires after normal retirement date is determined as the greater of the
annuitized benefit or the benefit calculated using final average compensation
(as defined above) until age 70.
To be eligible to receive benefits under the Executive Plan, a participant
must be at least age 55, have been employed by the Corporation or a subsidiary
for at least 10 years and, unless waived by the Board of Directors, covered by
the Executive Plan for at least five years. A pre-retirement death benefit is
provided consisting of 10 annual payments, each of which equals 50% of final
average compensation. Vesting of rights under the Executive Plan is accelerated
in the event of a "Change in Control" (as defined in the Executive Plan) of the
Corporation.
Currently 49 employees, including D. P. Kennedy, Parker S. Kennedy, Thomas
A. Klemens, Craig I. DeRoy and Mark R Arnesen, have been selected to participate
in the Executive Plan. The annual benefit payable under the Executive Plan to
D. P. Kennedy in the event of his retirement is $108,936. The estimated annual
benefits payable under the Executive Plan to Parker S. Kennedy, Thomas A.
Klemens, Craig I. DeRoy and Mark R Arnesen upon retirement at normal retirement
age, assuming compound annual increases of 5.0% in the relevant portions of
compensation shown above in the Summary Compensation Table, are $374,457,
$295,453, $320,746 and $152,347, respectively.
The Executive Plan is unfunded. The Corporation purchases insurance, of
which it is the owner and beneficiary, on the lives of the Executive Plan
participants. This insurance is designed to recover, over the life of the
Executive Plan, costs incurred by the Corporation with respect to it.
Directors' Compensation
Each director who is not an employee of the Corporation or its subsidiaries
receives annual compensation of $20,000, a fee of $1,000 for attending each
meeting of the Board of Directors, and $500 for attending each committee
meeting. Each director who is such an employee receives a fee of $150 for
attending each meeting of the Board. Directors are reimbursed for their
expenses incurred in attending meetings of the Board and its committees. For
fiscal year 1998, each nonemployee director was awarded an option to purchase
6,750 Common shares of the Corporation at an exercise price of $23.583 per
share. These options become exercisable on April 23, 1999.
Pursuant to Item 402(a)(9) of Regulation S-K of the SEC under the
Securities Exchange Act of 1934 (the "Exchange Act"), the following Report of
the Compensation Committee on Executive Compensation and the Comparative
Cumulative Total Return to Shareholders graph shall not be deemed to be
incorporated by reference into any previous filing by the Corporation under
either the Securities Act of 1933 (the "Securities Act") or the Exchange Act
that incorporates future Securities Act or Exchange Act filings in whole or in
part by reference.
17
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
Compensation Policy
The Corporation's compensation program, which has been endorsed by the
Compensation Committee, is designed to enhance shareholder value by providing
that a large part of the executive compensation be related to the performance of
the Corporation as well as to the contribution of each individual officer. The
Corporation's policy is further designed to develop and administer programs that
will (i) attract and retain key executives critical to the long-term success of
the Corporation, (ii) provide median compensation levels that are competitive
with those of the Corporation's competitors, (iii) motivate executives to
enhance long-term shareholder value in the Corporation, and (iv) integrate the
Corporation's compensation programs with its annual planning and measurement
processes. The annual bonus programs include a cash bonus program as well as
stock option and stock bonus plans designed to encourage and create ownership
and retention of the Corporation's shares by the key employees.
Responsibilities of the Compensation Committee
The Compensation Committee was established in 1979, and is composed of six
independent directors, none of whom is a former or current officer or employee
of the Corporation or any of its subsidiaries. The Compensation Committee
reviews and approves the base salaries, as well as the annual bonus programs,
incentive plans and executive benefit plans. The Compensation Committee as
needed engages compensation and benefits-consulting firms to assist the
Compensation Committee in the performance of its duties. For the year 1998, the
Compensation Committee analyzed the reasonableness of the compensation paid to
executive officers and analyzed the Corporation's compensation and benefit
programs. In addition, the Compensation Committee reviewed information on
general compensation trends of related companies. For the purpose of this
analysis, the Compensation Committee used the group of companies whose returns
to shareholders compose the peer group index shown in the performance graph
below. The Compensation Committee also reviewed published compensation surveys
for comparative results against the Corporation's compensation level. The
Compensation Committee has reviewed the compensation of the Corporation's
executive officers for 1998, and believes that the compensation for all
executive officers is reasonable in view of the Corporation's performance and
industry compensation levels. Measures used for determining the appropriate
level of compensation for executive officers include competitive position,
profit, profit retention (ratio of profits to revenue), and ability to select
and develop executive replacement personnel.
CEO Compensation
The Compensation Committee maintained Parker S. Kennedy's base salary for
the year 1998 at $400,020, which also was the level established for the year
1997. Mr. Kennedy's salary for the year 1998 was, in the opinion of the
Compensation Committee, within the median salary
18
<PAGE>
range for chief executive officers in the group of comparable companies. When
determining the appropriate salary level, the Compensation Committee considered
the Corporation's steadily improving performance during the year 1997, as
compared with the prior year, but decided to maintain a conservative approach to
base salary adjustments while maintaining flexibility, through the bonus and
stock option programs, to establish appropriate rewards and incentives in light
of individual and corporate performance.
Reflecting the Compensation Committee's commitment to relating a portion of
each executive officer's compensation to the annual results of the Corporation,
Parker S. Kennedy received a cash bonus of $400,000, representing 100% of his
1998 base salary. This bonus was intended to reward Mr. Kennedy for his
leadership for the year 1998, which resulted in the highest revenues and net
income in the Corporation's history. Mr. Kennedy also was awarded 2,600 Common
shares for his performance during 1998 and options to acquire 30,000 Common
shares.
Compensation Committee
Lewis W. Douglas, Jr., Chairman
Gary J. Beban
J. David Chatham
The Hon. William G. Davis
James L. Doti
Paul B. Fay, Jr.
COMPARATIVE CUMULATIVE TOTAL RETURN TO SHAREHOLDERS
Since December 3, 1993, the Corporation's Common shares have been listed
and trading on the New York Stock Exchange under the trading symbol "FAF."
Previously, such shares were traded on the national over-the-counter market and
were designated and quoted on the National Association of Securities Dealers
Automated Quotations National Market System ("NASDAQ-NMS") under the trading
symbol "FAMR." The following graph compares the yearly percentage change in the
cumulative total shareholder return on the Corporation's Common shares, assuming
reinvestment of dividends, with the corresponding changes in the cumulative
total returns of the Standard & Poor's 500 Composite Stock Price Index, the
Standard & Poor's Financial Index and a peer group index consisting of the
following six companies: Chicago Title Corp., Fidelity National Financial, Inc.,
LandAmerica Financial Group, Inc., Old Republic International Corp., Reliance
Group Holdings, Inc., and Stewart Information Services Corp., in each case
assuming reinvestment of dividends. The cumulative total shareholder return of
the peer group of companies has been included in the graph to provide a
comparison with other publicly held companies having subsidiaries that transact
the business of title insurance on a nationwide basis.
19
<PAGE>
Comparison of Eight Year Cumulative Total Return*
Among The First American Financial Corporation**, S&P 500 Composite Index**,
S&P Financial Index** and Custom Peer Group**
[Performance Graph appears here]
<TABLE>
<CAPTION>
The First American
Financial Custom Peer S&P Financial S&P Composite
Corporation Group Index Index
------------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
12/31/90 $ 100 $100 $100 $100
12/31/91 $ 176 $144 $146 $130
12/31/92 $ 401 $199 $175 $140
12/31/93 $ 543 $230 $189 $155
12/30/94 $ 275 $197 $182 $157
12/29/95 $ 438 $312 $280 $215
12/31/96 $ 687 $342 $379 $265
12/31/97 $1,253 $508 $562 $353
12/31/98 $2,471 $661 $626 $454
</TABLE>
* Adjusted for reinvestment of dividends. Stock price performance shown is
not indicative of future price performance.
** As calculated by Bloomberg Financial Services, to include the reinvestment
of dividends.
20
<PAGE>
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Name Position Held Age
- ---- ------------- ---
<S> <C> <C>
D. P. Kennedy Chairman 80
Parker S. Kennedy President 51
Thomas A. Klemens Executive Vice President, 48
Chief Financial Officer
Craig I. DeRoy Executive Vice President, General Counsel 46
Mark R Arnesen Vice President, Secretary, 46
Corporate Counsel
</TABLE>
All officers of the Corporation are appointed annually by the Board of
Directors subsequent to its election.
D. P. Kennedy has been Chairman of the Corporation since 1993, and served
as its President from 1963 to 1993. Parker S. Kennedy, who is D. P. Kennedy's
son, has been President of the Corporation since 1993, and served as its
Executive Vice President from 1986 to 1993. He has been employed by the
Corporation's subsidiary, First American Title Insurance Company ("First
American"), since 1977 and became a Vice President of that company in 1979.
During 1983, he was appointed its Executive Vice President, in 1989 was
appointed its President, and in 1999 was appointed its Chairman. Thomas A.
Klemens has been Executive Vice President, Chief Financial Officer of the
Corporation since 1996, served as its Vice President, Chief Financial Officer
from 1993 to 1996, and served as its principal accounting officer from 1992 to
1993. Mr. Klemens has been employed by First American as Vice President since
1985, and served as its Controller from 1985 to 1993 and as its Chief Financial
Officer from 1993 to 1998. Craig I. DeRoy has been Executive Vice President,
General Counsel of the Corporation since 1996, and served as its Vice President,
General Counsel from 1993 to 1996. Mr. DeRoy has been employed by First American
as Vice President since 1993 and served as its General Counsel from 1993 to
1998. Mr. DeRoy was the principal shareholder and chief executive officer of
Corporate Risk Management, Inc., an environmental and regulatory consulting firm
whose business constituted his principal occupation from 1992 until his
employment by the Corporation and First American in 1993. From 1990 to 1992,
Mr. DeRoy served as Executive Vice President and chief operating officer of
First Environmental Review Insurance Company, where he helped pioneer a new form
of property insurance coverage for environmental risks. Mark R Arnesen has been
Vice President, Secretary and Corporate Counsel of the Corporation and First
American since 1992, has been employed by First American since 1979, and has
been a Vice President of the latter company since 1989.
21
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Rules adopted by the SEC under Section 16(a) of the Exchange Act require
the Corporation's officers and directors, and persons who own more than ten
percent of the issued and outstanding Common shares of the Corporation, to file
reports of their ownership, and changes in ownership, of such securities with
the SEC on SEC Forms 3, 4 or 5, as appropriate. Officers, directors and
greater-than-ten-percent shareholders are required by the SEC's regulations to
furnish the Corporation with copies of all forms they file pursuant to Section
16(a).
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that they were not
required to file a Form 5 to report previously unreported ownership or changes
in ownership, the Corporation believes that, during its fiscal year ending
December 31, 1998, its officers, directors and greater-than-ten-percent
beneficial owners complied with all filing requirements under Section 16(a),
except that Director Roslyn B. Payne was late in filing a report on Form 4
covering her acquisition of Common shares during May 1998 in the transaction
described above in the section entitled "Transactions with Management and
Others."
22
<PAGE>
ITEM 2. PROPOSAL TO AMEND THE CORPORATION'S RESTATED ARTICLES OF INCORPORATION
TO INCREASE ITS AUTHORIZED COMMON STOCK
The shareholders will be asked to approve a proposal to amend article
SIXTH of the Corporation's Restated Articles of Incorporation to increase the
total number of authorized Common shares by 72,000,000 shares (the "Proposed
Amendment to Articles").
GENERAL
The Board of Directors has approved the Proposed Amendment to
Articles. However, in order to implement the Proposed Amendment to Articles,
the Proposed Amendment to Articles must be approved by the affirmative vote of a
majority of the outstanding Common shares that are entitled to vote. This means
that at least 30,125,228 Common shares must be voted "for" this proposal in
order to approve it.
As of March 4, 1999, of the 108,000,000 Common shares currently
authorized, 60,656,670 shares were issued and outstanding. Of the 47,343,330
unissued, authorized Common shares, 14,534,813 shares have been reserved for
issuance upon the exercise of outstanding options and issuance to the
Corporation's employees participating in The First American Financial
Corporation 401(k) Savings Plan, and 7,200,000 for pending acquisitions.
Accordingly, on March 4, 1999, there were only 25,608,517 unreserved Common
shares available for issuance. If this proposal is approved by the shareholders,
we will have authorized and available for issuance 97,608,517 Common shares
(excluding shares reserved for issuance upon the exercise of options, issuance
to participants in the Corporation's 401(k) Savings Plan and for pending
acquisitions).
THE PROPOSED AMENDMENT TO ARTICLES
If the Proposed Amendment to Articles is approved, the first paragraph
of article SIXTH of the Corporation's Restated Articles of Incorporation will be
amended to read as follows:
"SIXTH: This Corporation is authorized to issue two classes of shares,
to be designated Common and Preferred respectively. The number of Common
shares authorized to be issued is 180,000,000. The aggregate par value of
such Common shares is $180,000,000 and the par value of each such share is
$1.00. Each Common share shall have one vote per share. The number of
Preferred shares authorized to be issued is 500,000. The aggregate value
of such Preferred shares is $500,000 and the par value of each such share
is $1.00. The Board of Directors may fix by resolution the rights,
preferences, privileges and restrictions of any wholly unissued class or
series of shares other than the Common shares, and the series designation
and number of shares to constitute any series (which number may thereafter
in the same manner be increased or decreased), and a certificate of
determination shall then be filed with the California Secretary of State."
23
<PAGE>
If approved by the shareholders, the Proposed Amendment to Articles
would take effect on the date the Proposed Amendment to Articles is accepted for
filing by the California Secretary of State. If approved by the shareholders,
the Proposed Amendment to Articles will be filed immediately following the
shareholders' meeting, unless we subsequently determine that the Proposed
Amendment to Articles is not in the best interests of the Corporation and the
shareholders.
REASON FOR THE AMENDMENT
We believe that it is in the best interests of the Corporation and its
shareholders to increase the authorized number of Common shares that may be
issued for general corporate purposes. The proposed increase would provide the
Corporation with additional flexibility to raise capital, to acquire businesses
and properties using our Common shares and to provide appropriate incentives to
our officers, directors and employees.
EFFECT OF THE AMENDMENT
The authorization of additional Common shares will not affect the
terms of the Common shares, the rights of the holders of outstanding Common
shares or the Corporation's Preferred shares. Unless otherwise required by
applicable law or regulation, all authorized but unissued Common shares (the
"Remaining Authorized Shares") will be issuable, without further approval of the
Corporation's shareholders, on such terms, and for such consideration, as may be
determined by the Board of Directors. As the holders of outstanding Common
shares do not possess preemptive rights, the issuance of any Remaining
Authorized Shares may have the effect of diluting the earnings per share and
book value per share of the Common shares outstanding immediately prior to such
issuance. In addition, upon the issuance of Remaining Authorized Shares to
persons other than existing shareholders, the percentage ownership of a holder
of Common shares in the Corporation will be reduced.
Although the purpose of seeking an increase in the number of
authorized Common shares is not intended for anti-takeover purposes, the Board
of Directors could issue and sell Remaining Authorized Shares and Preferred
shares so as to dilute the stock ownership of a person that is seeking to obtain
control of the Corporation. This power may have the effect of discouraging
unsolicited attempts to obtain control of the Corporation.
ANTI-TAKEOVER MEASURES
The Corporation is required by SEC rules to disclose to the
shareholders those provisions of its Restated Articles of Incorporation and
Bylaws that would have an effect of delaying, deferring or preventing a change
in control of the Corporation and that would operate only with respect to an
extraordinary corporate transaction. The Corporation has adopted a "rights
plan" and, in connection therewith, has established the rights, preferences and
privileges of a series of Preferred shares.
On October 23, 1997, the Board of Directors authorized the creation of
1,000 Series A Junior Participating Preferred Shares, $1.00 par value (the
"Series A Preferred Shares"). No Series A Preferred Shares are presently
outstanding. However, by a dividend distribution made to shareholders of record
at the close of business on November 15, 1997, the Corporation distributed a
right to acquire one one-hundred thousandth (the "Preferred Share Fraction") of
a Series A Preferred Share (a "Right") at a price of $265 in respect of each
Common share outstanding on the record date. The purchase price is subject to
adjustment under certain circumstances. Each Preferred Share Fraction carries
voting and dividend rights that are intended to produce the equivalent of one
Common share. The voting and dividend rights of the Series A Preferred Shares
are subject to adjustment in the event of dividends, subdivisions and
combinations with respect to the Common shares of the Corporation.
The Rights were issued pursuant to the Rights Agreement, dated as of
October 23, 1997 (as it may be amended, modified or supplemented from time to
time, the "Rights Agreement"), between the Company and Wilmington Trust Company,
as Rights Agent, a copy of which will be furnished to shareholders without
charge upon request in writing to the Secretary of the Corporation at the
address indicated on the first page of this Proxy Statement.
The Rights are not exercisable until certain "change in control"
events that are described in the Rights Agreement. The Rights will expire at the
close of business on October 23, 2007 unless the Corporation redeems the Rights
before that date.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the
Corporation without conditioning the offer on the Rights being redeemed or a
substantial number of Rights being acquired. The Rights should not interfere
with any merger or other business combination approved by the Board of Directors
of the Corporation.
24
<PAGE>
ITEM 3. PROPOSAL TO AMEND THE CORPORATION'S 1996 STOCK OPTION
PLAN
The shareholders will be asked to approve a proposal to amend the
Corporation's 1996 Stock Option Plan (the "Plan") to increase by 3,000,000 the
number of Common shares available for grant thereunder (the "Proposed Plan
Increase").
General
The Board of Directors adopted the Plan on February 21, 1996, and the Plan
was approved by the shareholders of the Corporation on April 24, 1996. The Plan
is intended to assist the Corporation in attracting, retaining and motivating
the best qualified officers and other key employees and to enhance the long-term
mutuality of interest between the Corporation's shareholders and its officers
and key employees through the grant to officers and other key employees of the
Corporation and its subsidiaries ("Employees") of options to purchase the Common
shares of the Corporation, par value $1.00 per share (the "Stock"). The
principal features of the Plan are summarized below, but such summary is
qualified in its entirety by reference to the full text of the Plan, a copy of
which will be furnished to shareholders without charge upon request in writing
to the Secretary of the Corporation at the address indicated on the first page
of this proxy statement.
Under the Plan, the Compensation Committee may grant stock options to
Employees. There are currently approximately 1,000 Employees who are
potentially eligible for participation under the Plan. The number of grantees
selected to participate may vary from year to year. Although the Compensation
Committee has previously granted options to purchase Stock to Employees under
the Plan, the Compensation Committee has not identified specific individuals who
will be receiving a grant of options under the Plan in the immediate future and
therefore it is not possible at this time to determine the benefits that may be
provided to the Corporation's executive officers and other Employees.
Originally, the maximum number of Common shares of the Corporation that
could be subject to options outstanding at any time under the Plan was
1,250,000. That number was adjusted by the Compensation Committee to 1,875,000,
to account for the "three-for-two" stock split that occurred in January 1998.
On April 23, 1998, the shareholders of the Corporation approved an increase of
1,000,000 shares which had been recommended by the Board of Directors, bringing
the total number of shares that could be subject to options under the Plan to
2,875,000. That number was later adjusted by the Compensation Committee to
8,625,000, to account for the "three-for-one" stock split that occurred in July
1998. If there is a further stock split, stock dividend, recapitalization, or
other relevant change affecting the Corporation's Common shares, appropriate
adjustments may be made by the Compensation Committee in the number of shares
that may be issued in the future and in the numbers of shares and option
exercise prices under all outstanding grants made before such event. If shares
under a grant are not issued, those shares will again be available for inclusion
in future grants. No more than 15 percent of the Common shares authorized under
the Plan may be issued to an individual Employee.
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The Proposed Amendment
If the Proposed Plan Increase is approved, Section 5.1 of the Plan will be
amended to read as follows:
"Number. Subject to the provisions of Section 5.3, the number of shares of
------
Stock subject to Options under the Plan may not exceed 11,625,000 shares.
The shares to be delivered under the Plan may consist, in whole or in part,
of treasury Stock or authorized but unissued Stock, not reserved for any
other purpose."
Reason for the Amendment
As discussed above, the aggregate number of Common shares that may
presently be issued under the Plan is 8,625,000. Of that aggregate number,
7,202,350 shares have been issued pursuant to exercise of, or remain subject to,
options previously awarded under the Plan. The Proposed Plan Increase would
enable the Corporation to award options to a broader group of officers and key
employees than would otherwise be feasible given the limited number of shares
remaining available for grant under the Plan, which amount, in the opinion of
the Compensation Committee, is insufficient to continue to meet the goals of the
Plan outlined above.
Grants Under the Plan
The Compensation Committee may grant to Employees nonqualified stock
options and stock options qualifying as incentive stock options under the Code.
The exercise price of either a nonqualified stock option or an incentive stock
option will be no less than the fair market value of the Common shares on the
date of grant. The fair market value of the Corporation's Common shares on
March 10, 1999, was $23.875 per share. To exercise an option, an Employee may
pay the exercise price in cash or, if permitted by the Compensation Committee,
by delivering previously acquired Common shares of the Corporation or a
combination of such shares and cash.
The term of each option will be fixed by the Compensation Committee but may
not exceed 10 years from the date of grant. The Compensation Committee will
determine the time or times when each option may be exercised. Options may be
made exercisable in installments, and the exercisability of options may be
accelerated by the Compensation Committee.
In the event of termination of employment by reason of long-term disability
or death, any option held by the Employee may thereafter be exercised in full
for a period of one year. In the event of an Employee's termination of
employment for "cause" (as defined in the Plan), any options held by him will be
forfeited. In the event of an Employee's termination of employment by reason of
"retirement" (as defined in the Plan), any options held by him will be
exercisable, to the extent exercisable at the date of termination, for a period
of 90 days. In the event of an Employee's termination of employment for any
reason other than retirement, disability, death or cause, any options held by
him will be exercisable, to the extent exercisable at the date of
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termination, for a period of five days. Notwithstanding the above, no option
shall be exercisable following the stated term of such option.
The Plan provides that, in the event of a "Change in Control" (as defined
in the Plan), each outstanding option shall become fully exercisable.
Options awarded under the Plan are not transferable except by will or the
laws of descent and distribution and may be exercised only by the grantee during
his lifetime. The Board may terminate or suspend the Plan at any time but such
termination or suspension will not affect any stock options then outstanding
under the Plan. Unless earlier terminated by action of the Board, the Plan will
continue in effect until February 21, 2006, but options granted prior to that
date will continue in effect until they expire in accordance with their terms.
The Board may also amend the Plan in any respect. It is presently intended that
all material amendments to the Plan will be submitted to the shareholders for
their approval to the extent required by Rule 16b-3 promulgated by the SEC under
the Exchange Act, or the federal tax laws applicable to incentive stock options.
The Compensation Committee may amend the term of any option theretofore granted,
retroactively or prospectively, but no such amendment will adversely affect the
option without the holder's consent.
Certain Federal Income Tax Consequences
The following is a brief summary of the principal federal income tax
consequences to the Corporation and participants in the Plan based on federal
income tax laws currently in effect. This summary is not intended to cover all
tax consequences that may apply to such participants or to the Corporation, such
as those under applicable state, local or foreign tax laws.
An individual will not recognize income upon the grant of a nonqualified
stock option. The individual will generally recognize ordinary income upon the
exercise of a nonqualified stock option, in which event the Corporation will
receive a tax deduction equal to the amount of income recognized, provided that
any applicable tax reporting requirements are satisfied. The amount of such
ordinary income and deduction is generally the excess, if any, of the fair
market value on the exercise date of the Common shares acquired over the
aggregate exercise price paid. Any ordinary income recognized by an individual
upon the exercise of a nonqualified option will increase his tax basis for the
shares received. Upon a subsequent sale or exchange of such shares, the
individual will recognize capital gain or loss to the extent of the difference
between the selling price of such shares and his tax basis in such shares.
An individual generally will not recognize income upon either the grant of
an incentive stock option or upon the exercise of the incentive stock option
(but such exercise is not exempt from the alternative minimum tax). The
individual will recognize gain or loss, depending on his basis in the stock
(which is generally equal to the exercise price paid for the shares), upon the
sale or other disposition of the Common shares acquired upon exercise. If
certain statutory holding periods are met and the individual has been an
employee of the Corporation at all times from the grant of the incentive stock
option to the day three months before such exercise (or twelve months in the
case of termination of employment due to disability), such gain or loss will be
long-term capital gain or loss and the Corporation will not be entitled to any
federal income
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tax deduction. If the holding periods are not met, the individual will generally
be required to report as ordinary income for the year in which such sale or
disposition occurred the excess, with certain adjustments, of the fair market
value of the underlying shares on the date of exercise of the incentive stock
option over the exercise price thereof. The Corporation will be entitled to a
tax deduction equal to the amount of ordinary income so reported by such
individual.
Under Section 162(m) of the Code, the Corporation may be limited as to
federal income tax deductions to the extent that total annual compensation in
excess of $1 million is paid to the chief executive officer of the Corporation
or any one of the other four highest paid executive officers who are employed by
the Corporation on the last day of the taxable year. However, certain
"performance-based compensation," the material terms of which are disclosed to
and approved by the Corporation's shareholders, is not subject to this deduction
limitation. The Corporation has structured the Plan with the intention that
compensation resulting from options granted under the Plan would be qualified
performance-based compensation and deductible without regard to the limitations
otherwise imposed by Section 162(m) of the Code.
Under certain circumstances, accelerated vesting or exercise of options
under the Plan in connection with a "Change in Control" of the Corporation might
be deemed to be an "excess parachute payment" for purposes of the golden
parachute payment provisions of Section 280G of the Code. To the extent it is
so considered, the individual would be subject to an excise tax equal to 20% of
the amount of the excess parachute payment, and the Corporation would be denied
a tax deduction for the excess parachute payment.
FOR THE REASONS SET FORTH IN ITEM 3 ABOVE, THE BOARD OF DIRECTORS
RECOMMENDS A VOTE "FOR" THE PROPOSED AMENDMENT.
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RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
The firm of PricewaterhouseCoopers LLP has been selected by the Audit
Committee of the Board of Directors as independent accountants to audit the
books and accounts of the Corporation and its subsidiaries for the year ending
December 31, 1999. This firm has served as independent accountants for the
Corporation since 1954.
A representative of PricewaterhouseCoopers LLP will be present at the
Annual Meeting of Shareholders with an opportunity to make any desired statement
and to answer any appropriate questions by the shareholders.
SHAREHOLDER PROPOSAL
In order that a proposal by a shareholder be included in the proxy
statement and proxy for the next Annual Meeting of Shareholders of the
Corporation, such proposal must be received no later than _________, 1999,
assuming that the date of such meeting is not advanced by more than 30 calendar
days, or delayed by more than 90 calendar days, from the date of the current
annual meeting. In such event, the Corporation will provide notice of the date
by which such proposals must be received in order to be included.
Pursuant rules promulgated by the SEC, any shareholder who intends to
present a proposal at the next Annual Meeting of Shareholders of the Corporation
without requesting the Corporation to include such proposal in the Corporation's
proxy statement should be aware that he must notify the Corporation not later
than ____________, 2000, of his intention to present the proposal. Otherwise,
the Corporation may exercise discretionary voting with respect to such
shareholder proposal pursuant to authority conferred on the Corporation by
proxies to be solicited by the Board of Directors of the Corporation and
delivered to the Corporation in connection with the meeting.
APPRAISAL RIGHTS
Under the Restated Articles of Incorporation and relevant sections of the
California Corporations Code, holders of the Corporation's Common shares are not
entitled to appraisal rights in connection with the proposals to be voted upon
at the meeting.
GENERAL INFORMATION
The Corporation will, upon the written request of any person who is a
beneficial owner of its shares on the Record Date for the forthcoming annual
meeting, furnish without charge a copy of its annual report to the SEC on Form
10-K for the year 1998 and will furnish, at a charge of $10, a copy of the
exhibits thereto. Such request should contain a representation that the person
requesting this material was a beneficial owner of the Corporation's shares on
the Record Date and be sent to the Secretary of the Corporation at the address
indicated on the first page of this Proxy Statement.
The costs of soliciting proxies will be borne by the Corporation. In
addition to
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solicitation by mail, officers and regular employees of the Corporation's
subsidiaries may solicit proxies personally, by telephone or facsimile. Morrow &
Company, Inc., 445 Park Avenue, New York, New York 10022, has been engaged to
solicit proxies in such manner at an estimated cost of $5,500 plus reimbursement
of reasonable expenses.
The Board of Directors is not aware of any matters to come before the
meeting other than those set forth on the notice accompanying this Proxy
Statement, and the report of the President. If any other matters come before
the meeting, the holders of the proxies will vote thereon in their discretion.
By Order of the Board of Directors
Mark R Arnesen
Secretary
Santa Ana, California
March , 1999
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[Logo The First American Financial Corporation]
(R)
The First American Financial Corporation
FIRST AMERICAN SQUARE 114 EAST FIFTH STREET, SANTA ANA, CA 92701-4642
<PAGE>
[Logo]
The First American Financial Corporation
Annual Meeting of Shareholders of
The First American Financial Corporation
Thursday, April 22, 1999
2:00 p.m.
At the main office of
First American Title Insurance Company
114 East Fifth Street, Santa Ana, California 92701
YOUR VOTE IS IMPORTANT TO THE COMPANY
-------------------------------------
Please complete, sign and return your proxy by tearing off the bottom
portion of this sheet and returning it in the enclosed postpaid envelope.
- FOLD AND DETACH HERE -
- --------------------------------------------------------------------------------
The First American Financial Corporation
FIRST AMERICAN SQUARE 114 EAST FIFTH STREET, SANTA ANA, CALIFORNIA 92701
(714) 558-3211
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of The First American Financial Corporation hereby
appoints D. P. Kennedy, Parker S. Kennedy and Mark R Arnesen, and each of
them, with power to each of substitution, to attend the annual meeting of the
shareholders of said corporation to be held April 22, 1999, at 2:00 p.m. in
the main office of First American Title Insurance Company, 114 East Fifth
Street, Santa Ana, California, and any adjournments thereof; and thereat to
vote the shares of the undersigned with respect to (1) the election of
directors, (2) the approval of the proposed amendment to the Restated Articles
of Incorporation of The First American Financial Corporation increasing the
number of authorized Common shares and (3) the approval of the proposed
amendment to The First American Financial Corporation 1996 Stock Option Plan,
as indicated on the reverse side hereof, with all powers which the undersigned
would have if acting in person, including the right in their discretion to
cumulate and distribute the aggregate cumulative votes in respect of such
shares as they choose among those nominees as to whom the undersigned has not
withheld authority; and with discretionary authority to act on such other
matters as may properly come before said meeting or any adjournments or
postponements thereof.
THE SHARES REPRESENTED HEREBY SHALL BE VOTED SPECIFICALLY ON THE PROPOSALS
LISTED ON THE REVERSE SIDE HEREOF AS THERE SPECIFIED. WHERE NO SPECIFICATION
IS MADE, SAID SHARES SHALL BE VOTED FOR THE PROPOSALS.
(Continued and to be signed on other side)
<PAGE>
[Logo]
The First American Financial Corporation
- --------------------------------------------------------------------------------
(Continued from other side)
The Board of Directors recommends a vote FOR items 1, 2 and 3 listed below.
1. Election of Directors FOR ___ all nominees listed below (except as marked
to the contrary below) WITHHOLD AUTHORITY ___ for all nominees listed below
George L. Argyros, Gary J. Beban, J. David Chatham, William G. Davis, James
L. Doti, Lewis W. Douglas, Jr., Paul B. Fay, Jr., D. P. Kennedy, Parker S.
Kennedy, Anthony R. Moiso, Frank O'Bryan, Roslyn B. Payne, D. Van Skilling
and Virginia Ueberroth.
(INSTRUCTION: to withhold authority to vote for any individual nominee(s),
write the name(s) of such nominee(s) on the line below.)
- --------------------------------------------------------------------------------
2. Amendment of Restated Articles of Incorporation to increase to 180,000,000
the number of Common shares authorized to be issued.
FOR___ AGAINST___ ABSTAIN___
3. Amendment of 1996 Stock Option Plan to increase by 3,000,000 the number of
Common shares that may be issued pursuant to stock options granted
thereunder.
FOR___ AGAINST___ ABSTAIN___
_______________________ _______________________ Dated..................., 1999
Please sign exactly as name appears on stock certificate as shown hereon.
If shares are jointly held, this proxy should be signed by each such joint
owner. Executors, administrators, guardians or others signing in a fiduciary
capacity should state their full title as such. A proxy executed by a
corporation should be signed in its name by its president or any vice president
and attested to by its secretary or an assistant secretary; if otherwise
executed, please furnish proof of authority.
PLEASE SIGN AND RETURN THIS PROXY PROMPTLY IN THE ENCLOSED POSTPAID ENVELOPE.
