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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 0-3658
THE FIRST AMERICAN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Incorporated in California 95-1068610
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 First American Way, Santa Ana, California 92707-5913
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 800-3000
Securities registered pursuant to Section 12(b) of the Act:
Common New York Stock Exchange
Rights to Purchase Series A Junior
Participating Preferred New York Stock Exchange
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(Title of each class) (Name of each exchange on
which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (17 C.F.R. 229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [_]
On March 27, 2000, the aggregate market value of voting stock held by non-
affiliates was $663,697,761.
On March 27, 2000, there were 63,357,203 shares of Common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement are incorporated by
reference in Part III of this report. The definitive proxy statement will be
filed no later than 120 days after the close of Registrant's fiscal year.
This report includes 57 pages.
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PART I
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Item 1. Business.
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The Company
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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 Orange County, California.
In 1924, the Company commenced issuing title insurance policies. In 1986, the
Company began a diversification program by acquiring and developing business
information companies closely related to the real estate transfer and closing
process. In 1998, the Company expanded its diversification program to include
business information companies outside of the real estate transfer and closing
process. The Company is a California corporation and has its executive offices
at 1 First American Way, Santa Ana, California 92707-5913. The Company's
telephone number is (714) 800-3000. Unless the context otherwise indicates, the
"Company," as used herein, refers to The First American Financial Corporation
and its subsidiaries.
General
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The Company, through its subsidiaries, is engaged in the business of
providing business information and related products and services. The Company's
three primary segments are title insurance and services, real estate information
and services, and consumer information and services. The title insurance segment
issues title insurance policies and provides other related services. The real
estate information segment provides tax monitoring, mortgage credit reporting,
property data services, flood certification, field inspection services,
appraisal services, mortgage loan servicing systems, mortgage document
preparation and other related services. The consumer information segment
provides home warranties, property and casualty insurance, resident screening,
pre-employment screening, specialized credit reporting, automotive insurance
tracking, investment advisory, trust and banking services, and other related
services. Financial information regarding each of the Company's business
segments is included in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 8. Financial
Statements and Supplementary Data" of Part II of this report. The Company
believes that its subsidiary, First American Title Insurance Company ("First
American"), is one of the largest title insurers in the United States, based on
operating revenues, and its subsidiary, First American Real Estate Information
Services, Inc., is the nation's largest provider of flood zone determinations,
based on the number of flood zone determination reports 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
subsidiary, First American Home Buyers Protection Corporation, was the second
largest provider of home warranties in the United States, based on the number of
home protection contracts under service. Substantially all of the revenues for
the Company's title insurance and real estate information segments result from
resales and refinancings of residential real estate and, to a lesser extent,
from commercial transactions and the construction and sale of new housing. The
majority of the revenues for the Company's consumer information segment result
from non real estate-related activity. 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, a large portion of 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 the traditional real estate transfer and closing process.
Overview of Title Insurance Industry
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Title to, and the priority of interests in, real estate are determined
in accordance with applicable laws. In most real estate transactions, mortgage
lenders and purchasers of real estate want to be protected from loss or damage
in the event that title is not as represented. In most parts of the United
States, title insurance has become accepted as the most efficient means of
providing such protection.
Title Policies. Title insurance policies insure the interests of
owners and their lenders in the title to real property against loss by reason of
adverse claims to ownership of, or to defects, liens, encumbrances or other
matters affecting such title which exist at the time a title insurance policy is
issued and which were not excluded from the coverage of a title insurance
policy. Title insurance policies are issued on the basis of a title report,
which is prepared after a search of the public records, maps, documents and
prior title policies to ascertain the existence of easements, restrictions,
rights of way, conditions, encumbrances or other matters affecting the title to,
or use of, real property. In certain instances, a visual inspection of the
property is also made. To facilitate the preparation of title reports, copies
of public records, maps, documents and prior title policies may be compiled and
indexed to specific properties in an area. This compilation is known as a
"title plant."
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The beneficiaries of title insurance policies are generally real
estate buyers and mortgage lenders. A title insurance policy indemnifies the
named insured and certain successors in interest against title defects, liens
and encumbrances existing as of the date of the policy and not specifically
excepted from its provisions. The policy typically provides coverage for the
real property mortgage lender in the amount of its outstanding mortgage loan
balance and for the buyer in the amount of the purchase price of the property,
but in some cases might insure for a greater amount where the buyer anticipates
constructing improvements on the property. Coverage under a title insurance
policy issued to a real property mortgage lender generally terminates upon the
sale of the insured property unless the owner carries back a mortgage or makes
certain warranties as to the title.
Before issuing title policies, title insurers seek to limit their risk
of loss by accurately performing title searches and examinations. The major
expenses of a title company relate to such searches and examinations, the
preparation of preliminary reports or commitments and the maintenance of title
plants, and not from claim losses as in the case of property and casualty
insurers.
The Closing Process. Title insurance is essential to the real estate
closing process in most transactions involving real property mortgage lenders.
In a typical residential real estate sale transaction, title insurance is
generally ordered on behalf of an insured by a real estate broker, lawyer,
developer, lender or closer involved in the transaction. Once the order has
been placed, a title insurance company or an agent conducts a title search to
determine the current status of the title to the property. When the search is
complete, the title company or agent prepares, issues and circulates a
commitment or preliminary title report ("commitment") to the parties to the
transaction. The commitment summarizes the current status of the title to the
property, identifies the conditions, exceptions and/or limitations that the
title insurer intends to attach to the policy and identifies items appearing on
the title that must be eliminated prior to closing.
The closing function, sometimes called an escrow in western states, is
often performed by a lawyer, an escrow company or a title insurance company or
agent (such person or entity, the "closer"). Once documentation has been
prepared and signed, and mortgage lender payoff demands are in hand, the
transaction is "closed." The closer records the appropriate title documents and
arranges the transfer of funds to pay off prior loans and extinguish the liens
securing such loans. Title policies are then issued insuring the priority of
the mortgage of the real property mortgage lender in the amount of its mortgage
loan and the buyer in the amount of the purchase price. The time lag between
the opening of the title order and the issuance of the title policy is usually
between 30 and 90 days. The seller and the buyer bear the risk during this time
lag. Any matter affecting title which is discovered during this period would
have to be dealt with to the title insurers' satisfaction or the insurer would
except the matter from the coverage afforded by the title policy. Before a
closing takes place, however, the closer would request that the title insurer
provide an update to the commitment to discover any adverse matters affecting
title and, if any are found, would work with the seller to eliminate them so
that the title insurer would issue the title policy subject only to those
exceptions to coverage which are acceptable to the buyer and the buyer's lender.
Issuing the Policy: Direct vs. Agency. A title policy can be issued
directly by a title insurer or indirectly on behalf of a title insurer through
agents which are not themselves licensed as insurers. Where the policy is
issued by a title insurer, the search is performed by or at the direction of the
title insurer, and the premium is collected and retained by the title insurer.
Where the policy is issued by an agent, the agent performs the search, examines
the title, collects the premium and retains a portion of the premium. The
remainder of the premium is remitted to the title insurer as compensation for
bearing the risk of loss in the event a claim is made under the policy. The
percentage of the premium retained by an agent varies from region to region. A
title insurer is obligated to pay title claims in accordance with the terms of
its policies, regardless of whether it issues its policy directly or indirectly
through an agent.
Premiums. The premium for title insurance is due and earned in full
when the real estate transaction is closed. Premiums are generally calculated
with reference to the policy amount. The premium charged by a title insurer or
an agent is subject to regulation in most areas. Such regulations vary from
state to state.
The Company's Title Insurance Operations
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Overview. The Company, through First American Title Insurance Company
and its subsidiaries, transacts the business of title insurance through a
network of both direct operations and agents. Through this network, the Company
issues policies in all states (except Iowa), the District of Columbia, Puerto
Rico, Guam, the U.S. Virgin Islands, the Bahama Islands, Canada, Mexico,
Bermuda, the United Kingdom and Australia. In Iowa, the Company provides
abstracts of title only, because title insurance is not permitted. Through
acquisitions and start-ups during the mid-1980s, the Company has grown from a
large regional company to a nationwide company, becoming less dependent on
operating revenues from any one state or region.
Based on industry statistics showing premiums written in the major
areas in which the Company operates, in 1998, the Company had the largest or
second largest share of the title insurance market in 30 states and in the
District of
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Columbia. In addition, the Company's national market share grew from 21.5% in
1997 to 22.0% in 1998. Industry statistics for 1999 are not currently available.
The Company plans to continue increasing its share of the title
insurance market through strategic acquisitions and further development of its
existing branch office and agency operations. The Company also will continue to
focus on expanding its share of the higher margin title insurance business
conducted on behalf of commercial clients. The Company believes its national
commercial market share has grown through programs directed at major developers,
lenders and law firms.
Sales and Marketing. The Company markets its title insurance services
to a broad range of customers. The Company believes that its primary source of
business is from referrals from persons in the real estate community, such as
independent escrow companies, real estate brokers, developers, mortgage brokers,
mortgage bankers, financial institutions and attorneys. In addition to the
referral market, the Company markets its title insurance services directly to
large corporate customers and certain mortgage lenders. As title agents
contribute a large portion of the Company's revenues, the Company also markets
its title insurance services to independent agents. The Company's marketing
efforts emphasize the quality and timeliness of its services and its national
presence.
While virtually all personnel in the Company's title insurance
business assist in marketing efforts, the Company maintains a sales force of
approximately 1,000 persons dedicated solely to marketing. This sales force is
located throughout the Company's branch office network. The Company provides
its sales personnel with training in selling techniques, and each branch manager
is responsible for hiring the sales staff and ensuring that sales personnel
under his or her supervision are properly trained. In addition to this sales
force, the Company has approximately 20 sales personnel in its national accounts
department. One of the responsibilities of the national accounts department
sales personnel is the coordination of marketing efforts directed at large real
estate lenders and companies developing, selling, buying or brokering properties
on a multistate basis. The Company also supplements the efforts of its sales
force through general advertising in various trade and professional journals.
The Company's increased commercial sales effort during the past decade
has enabled the Company to expand its commercial business base. Because
commercial transactions involve higher coverage amounts and yield higher
premiums, commercial title insurance business generates greater profit margins
than does residential title insurance business. Accordingly, the Company plans
to continue to emphasize its commercial sales program.
Although sales outside of the United States account for a small
percentage of the Company's revenues, the Company believes that the acceptance
of title insurance in foreign markets has increased in recent years.
Accordingly, the Company plans to continue its international sales efforts,
particularly in Canada, the United Kingdom and Australia.
Underwriting. Before a title insurance policy is issued, a number of
underwriting decisions are made. For example, matters of record revealed during
the title search may require a determination as to whether an exception should
be taken in the policy. The Company believes that it is important for the
underwriting function to operate efficiently and effectively at all decision
making levels so that transactions may proceed in a timely manner. To perform
this function, the Company has underwriters at the branch level, the regional
level and the national level.
Agency Operations. The relationship between the Company and each
agent is governed by an agency agreement which states the conditions under which
the agent is authorized to issue title insurance policies on behalf of the
Company. The agency agreement also prescribes the circumstances under which the
agent may be liable to the Company if a policy loss is attributable to error of
the agent. Such agency agreements typically have a term of one to five years
and are terminable immediately for cause.
Due to the high incidence of agency fraud in the title insurance
industry during the late 1980s, the Company instituted measures to strengthen
its agent selection and audit programs. In determining whether to engage an
independent agent, the Company investigates the agent's experience, background,
financial condition and past performance. The Company maintains loss experience
records for each agent and conducts periodic audits of its agents. The Company
has also increased the number of agent representatives and agent auditors that
it employs. Agent representatives periodically visit agents and examine their
books and records. In addition to periodic audits, a full agent audit will be
triggered if certain "warning signs" are evident. Warning signs that can
trigger an audit include the failure to implement Company-required accounting
controls, shortages of escrow funds and failure to remit underwriting fees on a
timely basis.
Title Plants. The Company's network of title plants constitutes one
of its principal assets. A title search is conducted by searching the public
records or utilizing a title plant. While public records are indexed by
reference to the names of the parties to a given recorded document, most title
plants arrange their records on a geographic basis. Because of this difference,
records of a title plant are generally easier to search. Most title plants also
index prior policies, adding to searching efficiency. Many title plants are
computerized. Certain offices of the Company utilize jointly owned plants or
utilize a plant under a joint user agreement with other title companies. The
Company believes its title plants, whether wholly or partially owned or utilized
under a joint user agreement, are among the best in the industry.
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With the formation of a limited liability corporation ("LLC") with
Experian Group on January 1, 1998, the Company enhanced its investment in title
plants. Experian Group contributed to the LLC its real estate information
division, which the Company believes is the nation's leading operator of title
plants, with the second largest repository of imaged title documents.
The Company's title plants are carried on its balance sheet at
original cost, which includes the cost of producing or acquiring interests in
title plants or the appraised value of subsidiaries' title plants at dates of
acquisition for companies accounted for as purchases. Thereafter, the cost of
daily maintenance of these plants is charged to expense as incurred. A properly
maintained title plant has an indefinite life and does not diminish in value
with the passage of time. Therefore, in accordance with generally accepted
accounting principles, no provision is made for depreciation of these plants.
Since each document must be reviewed and indexed into the title plant, such
maintenance activities constitute a significant item of expense. The Company is
able to offset title plant maintenance costs at its plants through joint
ownership and access agreements with other title insurers and title agents.
Reserves for Claims and Losses. The Company provides for title
insurance losses based upon its historical experience by a charge to expense
when the related premium revenue is recognized. The resulting reserve for known
claims and incurred but not reported claims reflects management's best estimate
of the total costs required to settle all claims reported to the Company and
claims incurred but not reported, and is considered by the Company to be
adequate for such purpose.
In settling claims, the Company occasionally purchases and ultimately
sells the interest of the insured in the real property or the interest of the
claimant adverse to the insured. The assets so acquired are carried at the
lower of cost or fair value, less costs to sell. Notes, real estate and other
assets purchased or otherwise acquired in settlement of claims, net of valuation
reserves, totaled $10.9 million, $2.7 million and $10.6 million, respectively,
as of December 31, 1999.
Reinsurance and Coinsurance. The Company assumes and distributes
large title insurance risks through mechanisms of reinsurance and coinsurance.
In reinsurance agreements, in consideration for a portion of the premium, the
reinsurer accepts that part of the risk which the primary insurer cedes to the
reinsurer over and above the portion retained by the primary insurer. The
primary insurer, however, remains liable for the total risk in the event that
the reinsurer does not meet its obligation. As a general rule, the Company does
not retain more than $40 million of coverage on any single policy. Under
coinsurance agreements, each coinsurer is jointly and severally liable for the
risk insured, or for so much thereof as is agreed to by the parties. The
Company's reinsurance activities account for less than 1% of its total title
insurance operating revenues.
Competition. The title insurance business is highly competitive. The
number of competing companies and the size of such companies varies in the
different areas in which the Company conducts business. Generally, in areas of
major real estate activity, such as metropolitan and suburban localities, the
Company competes with many other title insurers. Approximately 90 title
insurance underwriters are members of the American Land Title Association, the
title insurance industry's national trade association. The Company's major
nationwide competitors in its principal markets include Fidelity National Title
Insurance Company (which also includes Chicago Title, Ticor Title Insurance
Company and Security Union Title Insurance Company) Land America Title Insurance
Company, Stewart Title Guaranty Company and Old Republic Title Insurance Group.
In addition to these nationwide competitors, numerous agency operations
throughout the country provide aggressive competition on the local level.
The Company believes that competition for title insurance business is
based primarily on the quality and timeliness of service, because parties to
real estate transactions are usually concerned with time schedules and costs
associated with delays in closing transactions. In those states where prices
are not established by regulatory authorities, the price of title insurance
policies is also an important competitive factor. The Company believes that it
provides quality service in a timely manner at competitive prices.
The Company's Related Businesses
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As an adjunct to its title insurance business, in 1986 the Company
embarked on a diversification program by acquiring and developing business
information companies closely related to the real estate transfer and closing
process. In 1998, the Company expanded its diversification program to include
business information companies outside of the real estate transfer and closing
process. As a result of these diversification programs, the Company has become
the nation's leading provider of business information and related products
The Real Estate Information and Services Business. The real estate
information service business encompasses tax monitoring, mortgage credit
reporting, flood certification, mortgage loan origination and servicing systems,
mortgage document preparation and other property information services.
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The tax monitoring service, established by the Company in 1987,
advises real property mortgage lenders of the status of property tax payments
due on real estate securing their loans. With the acquisition of TRTS Data
Services, Inc., in November 1991, the Company believes that it is the second
largest provider of tax monitoring services in the United States.
Under a typical contract, a tax service provider monitors, on behalf
of a mortgage lender, the real estate taxes owing on properties securing such
lender's mortgage loans for the life of such loans. In general, providers of
tax monitoring services, such as the Company's tax service, indemnify mortgage
lenders against losses resulting from a failure to monitor delinquent taxes.
Where a mortgage lender requires that tax payments be impounded on behalf of
borrowers, providers of tax monitoring services, such as the Company's tax
service, may be required to monitor and oversee the transfer of these monies to
the taxing authorities and provide confirmation to lenders that such taxes have
been paid.
The Company's primary source of tax service business is from large
multistate mortgage lenders. The Company's only major nationwide competitor in
the tax service business is Transamerica Real Estate Tax Service. Because of
its broad geographic coverage and the large number of mortgage loans not being
serviced by a third party tax service provider, the Company believes that it is
well positioned to increase its market share in the tax service market.
The fee charged to service each mortgage loan varies from region to
region, but generally falls within the $44 to $95 price range and is paid in
full at the time the contract is executed. The Company recognizes revenues
from tax service contracts over the estimated duration of the contracts.
However, income taxes are paid on the entire fee in the year the fee is
received. Historically, the Company has maintained minimal reserves for losses
relating to its tax monitoring service because its losses have been negligible.
The Company's mortgage credit reporting service provides credit
information reports for mortgage lenders throughout the United States. These
reports are derived from two or more credit bureau sources and are summarized
and prepared in a standard form acceptable to mortgage loan originators and
secondary mortgage purchasers. The Company's credit reporting service has grown
primarily through acquisitions. In 1994, the Company acquired all of the
minority interests in its lower tier subsidiaries Metropolitan Credit Reporting
Services, Inc., and Metropolitan Property Reporting Services, Inc. In 1994, the
Company also acquired California Credit Data, Inc., and Prime Credit Reports,
Inc., and in 1995, the Company acquired Credco, Inc. (now named First American
Credco, Inc.). With the acquisition of First American Credco, Inc., the Company
believes that it is now the largest mortgage credit reporting service in the
United States.
In January 1995, the Company acquired Flood Data Services, Inc. (now
named First American Flood Data Services, Inc.). This business furnishes to
mortgage lenders flood zone determination reports, which provide information on
whether or not property securing a loan is in a governmentally delineated
special flood hazard area. Federal legislation passed in 1994 requires that
most mortgage lenders obtain a determination of the current flood zone status at
the time each loan is originated and obtain updates during the life of the loan.
First American Flood Data Services, Inc., is the largest provider of flood zone
determinations in the United States.
In April 1996, the Company acquired the Excelis Mortgage Loan
Servicing System (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 December 1996, the Company acquired Ward Associates, now known as
First American Field Services. The company was combined with First American's
existing field services company to provide comprehensive inspection and property
preservation services to mortgage lenders nationwide. With the acquisition, the
Company believes that it is now the second largest field services company in the
United States.
In May 1997, the Company purchased all of the operations of 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 home equity mortgage
institutions; 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 is believed by the Company to
be the 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 business transaction with Experian Group
("Experian"), pursuant to which First American Real Estate Solutions LLC
("FARES") was established. Under the transaction, 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. RES is
believed to be the nation's foremost supplier of core real estate data,
providing, among other things, property valuation information, title
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information, tax information and imaged title documents. As a result of this
transaction, the Company believes that FARES will become the nation's largest
and most diverse provider of information technology and decision support
solutions for the mortgage and real estate industries.
In April 1998, the Company acquired Contour Software. This business
supplies mortgage loan origination software to the mortgage industry. Contour
offers a complete line of software products for every facet of mortgage lending,
from qualification to servicing.
In June 1998, the Company acquired Data Tree Corporation. Data Tree is a
supplier of database management and document imaging systems to county
recorders, other governmental agencies and the title industry.
In July 1998, the Company acquired ShadowNet Mortgage Technologies, LLC.
ShadowNet is a provider of electronic mortgage preparation and delivery systems
and now conducts business under the First American Nationwide Documents brand-
name.
The Consumer Information and Services Business. In 1998 the Company
created this business segment to provide non-cyclical, high margin services to a
customer base outside the Company's traditional clientele and to expand the
Company's opportunities for revenue consistency. This business segment markets a
variety of services including automotive credit reporting, direct-to-consumer
credit reporting, multi-family resident screening, pre-employment screening,,
property and casualty insurance and other related services. This segment also
provides home warranties and trust and thrift services.
The automotive and sub-prime automotive credit reporting service provides
auto dealers and lenders with consumer credit reports tailored to the specific
needs of the automotive market. This credit reporting service also offers credit
reports directly to the consumer, accessing information from the nation's three
largest credit bureaus.
The multi-family resident screening service provides landlords with
information regarding a housing applicant's rental payment history, occupancy
responsibilities, eviction actions, credit information and similar background
data.
The pre-employment screening service offers employers a variety of
reports on prospective employees, providing information on criminal records,
warrants, motor vehicle reports, credit reports, drug screens, education, prior
employment, professional licenses and more.
Property and casualty insurance is offered by the consumer information
segment through Five Star Holdings and Great Pacific Insurance Company, both
acquired in 1999.
The Company's home warranty business commenced operations in 1984, in
part with the proceeds of a $1.5 million loan from the Company which was, in
1986, converted to a majority equity interest. The Company currently owns 90%
of its home warranty business, which is operated as a second tier subsidiary,
with the balance owned by management of that subsidiary. The Company's home
warranty business issues one-year warranties which protect homeowners against
defects in household systems and appliances, such as plumbing, water heaters and
furnaces. The Company's home warranty subsidiary currently charges
approximately $245 to $335 for its basic home warranty contract. Optional
coverage is available for air conditioners, pools, spas, washers, dryers and
refrigerators for charges ranging from approximately $25 to $125. For an
additional charge, coverage is renewable annually at the option of the homeowner
upon approval by the home warranty subsidiary. Fees for the warranties are paid
at the closing of the home purchase and are recognized monthly over a 12-month
period. Home warranties are marketed through real estate brokers and agents.
This business is conducted in certain counties of Arizona, California, Georgia,
Nevada, New Mexico, North Carolina, South Carolina, Texas, Utah and Washington.
The principal competitor of the Company's home warranty business is American
Home Shield, a subsidiary of Service Master L.P.
Since 1960, the Company has conducted a general trust business in
California, acting as trustee when so appointed pursuant to court order or
private agreement. In 1985, the Company formed a banking subsidiary into which
its subsidiary trust operation was merged. During August 1999, this subsidiary
converted from a state-chartered bank to a federal savings bank. As of December
31, 1999, the trust operation was administering fiduciary and custodial assets
having a market value in excess of $1.7 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. As of December 31, 1999, the Thrift had
approximately $80.8 million of demand deposits and $87.3 million of loans
outstanding.
Loans made or acquired during the current year, by the Thrift, ranged in
amount from $10,000 to $1,775,000. The average loan balance outstanding at
December 31, 1999, was $282,500. 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. In excess of 97% 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, 1999, was 10%. A number of factors are included in the
determination of average yield, principal among which are loan fees and closing
points amortized to income, prepayment penalties recorded as income, and
amortization of discounts on purchased loans. The Thrift's primary competitors
in the Southern California commercial real estate lending market are local
community banks, other thrift and loan companies and, to a lesser extent,
commercial banks. The Thrift's average loan is 60 months in duration.
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The performance of the Thrift's loan portfolio is evaluated on an
ongoing basis by management of the Thrift. The Thrift places a loan on
nonaccrual status when two payments become past due. When a loan is placed on
nonaccrual status, the Thrift's general policy is to reverse from income
previously accrued but unpaid interest. Income on such loans is subsequently
recognized only to the extent that cash is received and future collection of
principal is probable. Interest income on nonaccrual loans which would have
been recognized during the year ended December 31, 1999, if all of such loans
had been current in accordance with their original terms, totaled $110,600.
The following table sets forth the amount of the Thrift's
nonperforming loans as of the dates indicated.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
(in thousands) 1999 1998 1997 1996 1995
----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Nonperforming Assets:
Loans accounted for on a nonaccrual basis $ 707 $ 898 $ 287 $ 166 $1,956
Accruing loans past due 90 or more days
Troubled debt restructurings
----- ----- ----- ----- ------
Total $ 707 $ 898 $ 287 $ 166 $1,956
===== ===== ===== ===== ======
</TABLE>
Based on a variety of factors concerning the creditworthiness of its
borrowers, the Thrift determined that it had $828,700 of potential problem loans
in existence as of December 31, 1999.
The Thrift's allowance for loan losses is established through charges
to earnings in the form of provision for loan losses. Loan losses are charged
to, and recoveries are credited to, the allowance for loan losses. The
provision for loan losses is determined after considering various factors, such
as loan loss experience, maturity of the portfolio, size of the portfolio,
borrower credit history, the existing allowance for loan losses, current charges
and recoveries to the allowance for loan losses, the overall quality of the loan
portfolio, and current economic conditions, as determined by management of the
Thrift, regulatory agencies and independent credit review specialists. While
many of these factors are essentially a matter of judgment and may not be
reduced to a mathematical formula, the Company believes that, in light of the
collateral securing its loan portfolio, the Thrift's current allowance for loan
losses is an adequate allowance against foreseeable losses.
The following table provides certain information with respect to the
Thrift's allowance for loan losses as well as charge-off and recovery activity.
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------
(in thousands, except percentages) 1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Allowance for Loan Losses:
Balance at beginning of year $1,150 $1,185 $1,050 $1,344 $ 950
------ ------ ------ ------ ------
Charge-Offs:
Real estate-mortgage (346) (164) (136) (766) (194)
Assigned lease payments (34) (5) (9)
(346) (198) (136) (771) (203)
------ ------ ------ ------ ------
Recoveries:
Real estate-mortgage 0 6 26 0
Assigned lease payments 4 22 18 35
------ ------ ------ ------ ------
4 28 44 35
------ ------ ------ ------ ------
Net charge-offs (346) (194) (108) (727) (168)
Provision for losses 101 159 243 433 562
------ ------ ------ ------ ------
Balance at end of year $ 905 $1,150 $1,185 $1,050 $1,344
====== ====== ====== ====== ======
Ratio of net charge-offs during the year to
average loans outstanding during the year .4% .3% .2% 1.4% .4%
====== ====== ====== ====== ======
</TABLE>
The adequacy of the Thrift's allowance for loan losses is based on formula
allocations and specific allocations. Formula allocations are made on a
percentage basis which is dependent on the underlying collateral, the type of
loan and general economic conditions. Specific allocations are made as problem
or potential problem loans are identified and are based upon an evaluation by
the Thrift's management of the status of such loans. Specific allocations may be
revised from time to time as the status of problem or potential problem loans
changes.
8
<PAGE>
The following table shows the allocation of the Thrift's allowance for
loan losses and the percent of loans in each category to total loans at the
dates indicated.
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------
(in thousands, except % of % of % of % of % of
percentages) Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loan Categories:
Real estate-mortgage $ 904 100 $1,100 100 $1,116 100 $1,015 100 $1,300 99
Real estate-construction 3 1
Assigned lease payments - - 39 34 41
Other 1 50 30 1
----- ---- ------ ---- ------ ---- ------ ---- ------ ----
$ 905 100 $1,150 100 $1,185 100 $1,050 100 $1,344 100
===== ==== ====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
Acquisitions
- ------------
Commencing in the 1960s, the Company initiated a growth program with a
view to becoming a nationwide provider of title insurance. This program
included expansion into new geographic markets through internal growth and
selective acquisitions. In 1986 the Company began expanding into other real
estate business information services. In 1998 the Company launched its Consumer
Information and Services Division where a unique mix of products and services is
directed toward non-real estate related markets. To date, the Company has made
numerous strategic acquisitions designed to expand not only its direct title
operations, but also the range of services it can provide to its customers.
During the current year, some of the key acquisitions made by the Company in
furtherance of this strategy were:
<TABLE>
<CAPTION>
Acquired Entity Principal Market(s)
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Title Insurance(1):
Ohio Bar Title Insurance Company Ohio, West Virginia, Indiana, Kentucky, Illinois
Security Abstract and Title Company Kansas
Guarantee Title of Johnson County, Inc. Kansas
Guarantee Title of Wyandotte County, Inc. Kansas
Guarantee Land Title of Leavenworth, Inc. Kansas
Atlantic Title Company, Inc. Maine
Pioneer Agency Pennsylvania
LoneStar Mortgagee Services, LLC California
TitleStar, LLC Texas
Real Estate Information Services:
National Default and Outsourcing Division Nationwide
(Acquired from Barrett Burke Wilson Castle Daffin & Frappier, LLP
Consumer Risk Management:
Tele-Trak, Inc. Nationwide
Ace Information Services Nationwide
Five Star Holdings, Inc. California
National Information Group (2) Nationwide
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On January 1, 1999, the Company, through First American Title Insurance
Company, formed a limited liability company, RELS Title Services LLC, with
Norwest Mortgage, Inc. The purpose of RELS Title Services LLC is to provide
title and escrow services. RELS Title Services LLC is 50% owned by First
American Title Insurance Company and 50% owned by Norwest Mortgage, Inc.
(2) National Information Group was acquired in May 1999 in a transaction
accounted for under the pooling-of-interests method of accounting.
9
<PAGE>
Regulation
- ----------
The title insurance business is heavily regulated by state insurance
regulatory authorities. These authorities generally possess broad powers with
respect to the licensing of title insurers, the types and amounts of investments
that title insurers may make, insurance rates, forms of policies and the form
and content of required annual statements, as well as the power to audit and
examine title insurers. Under state laws, certain levels of capital and surplus
must be maintained and certain amounts of securities must be segregated or
deposited with appropriate state officials. Various state statutes require
title insurers to defer a portion of all premiums in a reserve for the
protection of policyholders and to segregate investments in a corresponding
amount. Further, most states restrict the amount of dividends and distributions
a title insurer may make to its shareholders.
During 1999, the Company entered into the property casualty insurance
business through the acquisitions of Great Pacific Insurance Company (included
in the acquisition of National Information Group) and Five Star Holdings, Inc.
The property and casualty business is subject to regulation by government
agencies in the states in which they transact business. The nature and extent of
such regulation may vary from jurisdiction to jurisdiction, but typically
involves prior approval of the acquisition of "control" of an insurance company,
regulation of certain transactions entered into by an insurance company with any
of its affiliates, the payment of dividends by an insurance company, approval of
premium rates and policy forms for many lines of insurance, standards of
solvency and minimum amounts of capital and surplus which must be maintained. In
order to issue policies on a direct basis in a state, the property and casualty
insurer must generally be licensed by such state. In certain circumstances, such
as dealings initiated directly by citizens or placements through licensed
surplus lines brokers, it may conduct business without being admitted and
without being subject to rate and/or policy forms approval. The Company is
currently licensed to write property and casualty insurance in 46 states and the
District of Columbia.
The Company's home warranty business also is subject to regulation by
insurance authorities in the states in which it conducts such business. The
Company's trust company and industrial loan company are both subject to
regulation by the Federal Deposit Insurance Corporation. In addition, as a
federal savings bank, the Company's trust company is regulated by the United
States Department of the Treasury's Office of Thrift Supervision, and the
Company's industrial loan company is regulated by the California Commissioner of
Corporations.
Investment Policies
- -------------------
The Company invests primarily in cash equivalents, federal and
municipal governmental securities, mortgage loans and investment grade debt and
equity securities. The largely fixed income portfolio is classified in the
Company's financial statements as "available for sale." In addition to the
Company's investment strategy, state laws impose certain restrictions upon the
types and amounts of investments that may be made by the Company's regulated
subsidiaries.
Employees
- ---------
The following table provides a summary of the total number of
employees of the Company as of December 31, 1999:
Business Number of Employees
Title insurance 12,940
Real estate information 6,010
Consumer information 1,115
-------------------
Total 20,065
===================
Item 2. Properties.
- --------------------
In September 1999, the Company moved its executive offices to one of
the newly constructed office buildings at MacArthur Place in Santa Ana,
California. The Orange County branch and certain other operations of the
Company's title insurance segment moved into the two other buildings constructed
on the site later in 1999. The three new buildings are in a campus environment
and total approximately 210,000 square feet. The Company continues to own the
two adjacent buildings in Santa Ana, California, which previously housed its
executive offices. That location, comprising approximately 105,000 square feet
of floor space, continues as the home of the company's trust and banking
division. In addition, there are plans to move certain other divisions into
that complex as their existing leases expire. The Company also owns an 18,000
square foot building located across the street from that complex. This building
is currently used primarily for storage.
10
<PAGE>
The Company's title insurance subsidiary, First American, and its
subsidiaries, own or lease buildings or office space in more than 400 locations
throughout the United States and Canada, principally for their respective title
operations.
The Company's real estate information subsidiary, First American Real
Estate Information Services, Inc. ("FAREISI"), houses its national operations in
a leased 231,000 square foot office building in Dallas, Texas. FAREISI's
corporate headquarters are housed in a leased office building located in St.
Petersburg, Florida. In 1999, the Company completed the construction of two
office buildings in Poway, California. The two buildings total approximately
152,000 square feet and are located on a 17 acre parcel of land. The buildings
are occupied by various divisions of FAREISI. In addition, FAREISI and its
subsidiaries lease office space in more than 75 locations throughout the United
States, principally for their respective operations.
The Company's home warranty subsidiary owns 1.7 acres of land in Van
Nuys, California, which contains a 20,000 square foot office building, a 7,000
square foot warehouse and a parking lot.
Each of the office facilities occupied by the Company or its
subsidiaries is in good condition and adequate for its intended use.
Item 3. Legal Proceedings.
- ---------------------------
On May 19, 1999, The People of the State of California, Kathleen
Connell, Controller of the State of California, and Chuck Quackenbush, Insurance
Commissioner of the State of California, filed a class action suit in the
Sacramento Superior Court. The action seeks to certify as a class of defendants
all "title insurers", all "underwritten title companies" and all "controlled
escrow companies" (as those terms are defined in the California Insurance Code)
--------------
and all "independent escrow companies" (as the term is defined in the California
Financial Code) doing business in the State of California from 1970 to the
- --------------
present who (i) hold dormant, unclaimed escrow funds; (ii) charged California
home buyers and other escrow customers $10.00 or more for delivery services or
administrative fees; (iii) charged California home buyers and other escrow
customers reconveyance fees and/or (iv) earned interest (or its equivalent) from
financial institutions on customers' deposited escrow funds.
The plaintiffs allege that the defendants unlawfully (i) failed to
escheat unclaimed property to the Controller of the State of California on a
timely basis; (ii) charged California home buyers and other escrow customers
fees for services that were never performed or which cost less than the amount
charged; and (iii) devised and carried out schemes with financial institutions
to receive interest, or monies in lieu of interest, on escrow funds deposited by
defendants with financial institutions in demand deposits.
In February 2000, the Company entered into an administrative
settlement with the California Department of Insurance ("DOI"), whereby the DOI
released the Company from any further claim of liability as to the Company's
receipt of earnings credits or any alleged overcharges for various miscellaneous
escrow fee items, such as courier, Federal Express or wire service fees. The
DOI further agreed to direct the Attorney General to dismiss it as a plaintiff
from the action brought by the State of California. In the settlement with the
DOI, the Company agreed to (i) make a contribution to a consumer education fund
and (ii) accept a new regulation to be promulgated by the DOI, whereby earnings
credit programs will be authorized and regulated by the DOI and rate filings
will be required for escrow fees including several specified miscellaneous fee
items.
Subsequent to the filing of the action by the State of California,
First American Title Insurance Company was named and served as a defendant in
two private class actions. The allegations in the complaints include some, but
not all, of the allegations contained in the class action filed by the State of
California. The private class actions independently seek injunctive relief,
attorneys' fees, damages and penalties in unspecified amounts. The private
class actions have been stayed by court orders pending settlement negotiations
relating to the class action filed by the State of California.
The Company does not believe that the ultimate resolution of these
actions will have a materially adverse effect on its financial condition or
results of operations.
The Company is involved in various routine legal proceedings related
to its operations. While the ultimate disposition of each proceeding is not
determinable, the Company does not believe that any of such proceedings will
have a materially adverse effect on its financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
11
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
- ---------------------------------------------------------------------
Matters.
-------
Common Stock Market Prices and Dividends
- ----------------------------------------
The Company's common stock trades on the New York Stock Exchange
(ticker symbol FAF). The approximate number of record holders of common stock
on March 20, 2000, was 3,679.
High and low stock prices and dividends for the last two years were:
- ------------------------------------------------------------------------------
1999 1998
--------------------------- ---------------------------
Cash Cash
- ----------------
Quarter Ended High-low Range Dividends High-low Range Dividends
- ---------------- --------------- --------- --------------- ---------
March 31 $34.81 - $15.81 $.06 $22.88 - $16.08 $.06
June 30 $20.69 - $13.88 $.06 $30.75 - $21.08 $.05
September 30 $19.25 - $12.00 $.06 $41.25 - $25.75 $.06
December 31 $15.13 - $11.50 $.06 $36.06 - $24.94 $.06
- ----------------------------------------------------------------------------
While the Company expects to continue its policy of paying regular quarterly
cash dividends, future dividends will be dependent on future earnings, financial
condition and capital requirements. The payment of dividends is subject to the
restrictions described in Note 2 to the consolidated financial statements
included in "Item 8. Financial Statements and Supplementary Data" of Part II of
this report.
Recent Sales of Unregistered Securities
- ---------------------------------------
In the last three years, the Company has issued unregistered shares of
its common stock to the sellers of the businesses acquired on the dates listed
below:
Consideration
Date Of Sale Number Of Shares Received
- --------------------------------------------------------------------
July 8, 1997 21,600 $ 192,600
November 17, 1997 23,265 $ 315,047
December 31, 1997 2,475 $ 40,630
April 15, 1998 726,564 $15,500,000
May 6, 1998 125,775 $ 2,587,167
May 7, 1998 27,090 $ 435,698
May 29, 1998 111,039 $ 2,850,000
September 15, 1998 17,925 $ 525,000
February 25, 1999 69,584 $ 1,955,000
12
<PAGE>
Item 6. Selected Financial Data.
- --------------------------------
The selected consolidated financial data for the Company for the five-year
period ended December 31, 1999, has been derived from the audited Consolidated
Financial Statements. The selected consolidated financial data should be read
in conjunction with the Consolidated Financial Statements and Notes thereto,
"Item 1- Business - Acquisitions," and "Item 7 - Management's Discussion and
Analysis - Results of Operations."
The First American Financial Corporation and Subsidiary Companies
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands, except percentages, per share Year Ended December 31
amounts and employee data) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $2,988,169 $2,943,880 $1,962,001 $1,654,976 $1,293,210
Income before cumulative effect of a change in
accounting for tax service contracts (Note A) $ 88,643 $ 201,527 $ 67,765 $ 55,766 $ 2,934
Cumulative effect of a change in accounting for tax
service contracts (Note A) $ (55,640)
Net income $ 33,003 $ 201,527 $ 67,765 $ 55,766 $ 2,934
Total assets $2,116,414 $1,852,731 $1,220,377 $1,010,556 $ 907,252
Notes and contracts payable $ 196,815 $ 143,466 $ 51,720 $ 72,761 $ 77,430
Mandatorily redeemable preferred securities $ 100,000 $ 100,000 $ 100,000
Stockholders' equity $ 815,991 $ 762,265 $ 442,783 $ 384,931 $ 338,659
Return on average stockholders' equity (Note B) 10.9% 33.4% 16.4% 15.4% .9%
Cash dividends on common shares $ 15,840 $ 13,894 $ 14,035 $ 7,928 $ 6,850
Per share of common stock (Note C) -
Basic:
Income before cumulative effect of a change
in accounting for tax service contracts $ 1.37 $ 3.35 $ 1.19 $ .98 $ .05
Cumulative effect of a change in accounting for
tax service contracts (.86)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ .51 $ 3.35 $ 1.19 $ .98 $ .05
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted:
Income before cumulative effect of a change
in accounting for tax service contracts $ 1.34 $ 3.21 $ 1.16 $ .98 $ .05
Cumulative effect of a change in accounting for
tax service contracts (.84)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ .50 $ 3.21 $ 1.16 $ .98 $ .05
- ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity $ 12.54 $ 12.08 $ 7.74 $ 6.76 $ 5.96
Cash dividends $ .24 $ .23 $ .25 $ .14 $ .12
Number of common shares outstanding (Note C)--
Weighted average during the year
Basic 64,669 60,194 57,092 56,652 56,812
Diluted 66,351 62,720 58,482 57,112 56,812
End of year 65,068 63,120 57,186 56,965 56,849
Title orders opened (Note D) 1,334 1,585 1,173 1,027 894
Title orders closed (Note D) 1,120 1,210 886 775 667
Number of employees 20,065 19,669 13,156 11,611 10,149
</TABLE>
All consolidated results reflect the 1999 acquisition of NAIG accounted for
under the pooling-of-interests method of accounting.
Note A - See Note 1 to the consolidated financial statements for a description
of the change in accounting for tax service contracts.
Note B - Return on average stockholders' equity for 1999 excludes the cumulative
effect of a change in accounting for tax service contracts from both net income
and stockholders' equity.
Note C - Per share information relating to net income is based on weighted
average number of shares outstanding for the years presented. Per share
information relating to stockholders' equity is based on shares
outstanding at the end of each year.
Note D - Title order volumes are those processed by the direct title operations
of the Company and do not include orders processed by agents.
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
-------------
Any statements in this document that look forward in time involve risks and
uncertainties, including but not limited to the following: the effect of
interest rate fluctuations; changes in the performance of the real estate
markets; the effect of changing economic conditions; general volatility in the
capital markets; the demand for and the acceptance of the Company's products;
changes in applicable government regulations; continued consolidation among the
Company's significant customers; consolidation among significant competitors;
the impact of legal proceedings commenced by the California attorney general and
related litigation; the continued ability to identify businesses to be acquired;
and changes in the Company's ability to integrate businesses which it acquires.
The Company's actual results, performance or achievement could differ materially
from those expressed in, or implied by, any forward-looking statements.
Accordingly, no assurances can be given that any of the events anticipated by
the forward-looking statements will transpire or occur or, if any of them do,
what impact they will have on the results of operations or financial condition
of the Company.
Results of Operations
- ---------------------
Overview - The majority of the revenues for the Company's title
insurance and real estate information segments depend, in large part, upon the
level of real estate activity and the cost and availability of mortgage funds.
Revenues for these segments result primarily from resales and refinancings of
residential real estate and, to a lesser extent, from commercial transactions
and the construction and sale of new housing. The majority of the revenues for
the Company's consumer information segment result from activities not related to
real estate. Traditionally, the greatest volume of real estate activity,
particularly residential resale, has occurred in the spring and summer months.
However, changes in interest rates, as well as other economic factors, can cause
fluctuations in the traditional pattern of real estate activity. 1997 was a
year in which relatively low mortgage interest rates, stability in the real
estate marketplace and increasing property values prompted a resurgence in
refinance and home equity transactions, primarily towards the latter part of the
year. These factors, as well as market share increases in all of the Company's
primary businesses, culminated in a record-setting year. Further rate declines
started in the fourth quarter of 1997 and continued throughout 1998. This,
coupled with higher consumer confidence, led to nationwide record-setting
residential resale and refinance transactions, which, together with the
particularly strong California real estate market, resulted in record-setting
revenues and net income for the Company in 1998. The favorable conditions
present throughout 1998 continued into 1999, resulting in record-setting
revenues for the first half of the year. However, commencing in the second
quarter 1999, new orders began to soften as rising interest rates led to a
significant decline in refinance transactions, although residential resale and
commercial activity remained relatively strong. During the second half of the
year, the trend of higher interest rates continued. New orders, including
residential resale orders, continued to decline. This, coupled with fourth
quarter seasonal factors, led to a decrease in operating revenues. In
response, the Company instituted personnel reductions and other cost-
containment programs; however, because of separation costs, the benefits of the
reductions in the latter part of the year will not be fully realized until 2000.
Also impacting 1999 were a revenue recognition accounting change for the
Company's tax service contracts, which decreased revenues by $22.7 million, and
Y2K expenses of $24.8 million. See Operating Revenues in Note 1 to the
consolidated financial statements for a detailed description of the accounting
change. Results for 1998 and 1997 have been restated to reflect the 1999
acquisition of National Information Group (NAIG), accounted for under the
pooling-of-interests method of accounting.
Operating revenues - A summary by segment of the Company's operating revenues is
as follows:
<TABLE>
<CAPTION>
(in thousands, except percentages) 1999 % 1998 % 1997 %
---------- ---- ---------- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
Title Insurance:
Direct Operations $1,067,133 36 $1,097,989 38 $ 761,774 39
Agency Operations 1,086,746 37 965,228 34 700,193 36
---------- ---- ---------- ---- ---------- ----
2,153,879 73 2,063,217 72 1,461,967 75
Real Estate Information 574,784 20 630,510 22 343,076 18
Consumer Information 207,533 7 173,380 6 127,862 7
---------- ---- ---------- ---- ---------- ----
$2,936,196 100 $2,867,107 100 $1,932,905 100
========== ==== ========== ==== ========== ====
</TABLE>
Operating revenues from direct title operations decreased 2.8% in 1999 from 1998
and increased 44.1% in 1998 over 1997. The decrease in 1999 from 1998 was
attributable to a decrease in the number of title orders closed by the Company's
direct title operations, offset in part by an increase in the average revenues
per order closed. The increase in 1998 over 1997 was attributable to an
increase in the number of title orders closed by the Company's direct title
operations, as well as an increase in the average revenues per order closed.
The Company's direct title operations closed 1,119,900, 1,210,200 and 885,600
title orders during 1999, 1998 and 1997, respectively, representing a decrease
of 7.5% in 1999 from 1998 and an increase of 36.7% in 1998 over 1997. The
decrease in 1999 from 1998 was
14
<PAGE>
primarily due to the significant decrease in refinance transactions experienced
during the second half of 1999. The increase in 1998 over 1997 was primarily due
to the continuation of lower mortgage interest rates which led to an increase in
overall transaction volume nationwide (including California, a state highly
concentrated with direct operations) and increases in the Company's title
insurance national market share. The average revenues per order closed were
$953, $907 and $860 for 1999, 1998 and 1997, respectively, representing
increases of 5.1% in 1999 over 1998 and 5.5% in 1998 over 1997. These increases
were primarily attributable to appreciating home values, an increased mix of
resale activity and a resurgence in commercial real estate transactions.
Operating revenues from agency title operations increased 12.6% in 1999 over
1998 and 37.9% in 1998 over 1997. These fluctuations were primarily attributable
to the same factors affecting direct operations mentioned above, compounded by
the inherent delay in the reporting of transactions by agents.
Real estate information operating revenues decreased 8.8% in 1999 from
1998 and increased 83.8% in 1998 over 1997. These fluctuations were primarily
attributable to the same factors affecting title insurance mentioned above, as
well as acquisition activity. In addition, the decrease in 1999 from 1998 was
also due to a $22.7 million reduction in tax service operating revenues
attributable to the change in revenue recognition policy. Operating revenues of
$19.3 million and $141.0 million were contributed by new acquisitions in 1999
and 1998, respectively.
Consumer information operating revenues increased 19.7% in 1999 over 1998
and 35.6% in 1998 over 1997. These increases were primarily attributable to an
increased awareness and acceptance of this business segment's products,
increased market share and acquisition activity. Operating revenues of $8.1
million and $3.5 million were contributed by new acquisitions in 1999 and 1998,
respectively.
Investment and other income - Investment and other income decreased $24.8
million in 1999 from 1998 and increased $47.7 million in 1998 over 1997. The
decrease in 1999 from 1998 was primarily due to an investment gain of $32.4
million recognized in 1998 relating to the joint venture agreement with
Experian, offset in part by a 24.8% increase in the average investment portfolio
balance and a $5.2 million gain resulting from stock received in the
demutualization of a life insurance company which insures a large portion of the
Company's corporate-owned life insurance portfolio. The increase in 1998 over
1997 was primarily attributable to the investment gain of $32.4 million
mentioned above, as well as a 36.9% increase in the average investment portfolio
balance due to the investment of excess cash flow from operations and a portion
of the proceeds from the Company's $100 million senior debentures (see Note 8 to
consolidated financial statements).
Salaries and other personnel costs - A summary by segment of the Company's
salaries and other personnel costs is as follows:
<TABLE>
<CAPTION>
(in thousands, except percentages) 1999 % 1998 % 1997 %
---------- ---- -------- ---- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Title Insurance $ 729,720 71 $659,289 70 $498,424 73
Real Estate Information 231,696 22 221,237 23 132,170 19
Consumer Information 59,106 6 51,425 6 40,879 6
Corporate 14,250 1 13,562 1 10,979 2
---------- ---- -------- ---- -------- ---
$1,034,772 100 $945,513 100 $682,452 100
========== ==== ======== ==== ======== ---
</TABLE>
The Company's title insurance segment (primarily direct operations) is
labor intensive; accordingly, a major variable expense component is salaries and
other personnel costs. This expense component is affected by two competing
factors: the need to monitor personnel changes to match corresponding or
anticipated new orders, and the need to provide quality service. In addition,
this segment's growth in operations that specialize in builder and lender
business has created ongoing fixed costs required to service accounts.
Title insurance personnel expenses increased 10.7% in 1999 over 1998 and
32.3% in 1998 over 1997. The increase in 1999 over 1998 was primarily due to
the relatively high number of employees added during the latter part of 1998 and
the beginning of 1999 in order to service the volume of orders processed during
those periods. The Company initiated personnel and other cost reduction
programs in response to the subsequent decrease in business volume. During the
fourth quarter and full year 1999, title insurance staffing levels were reduced
by approximately 6% and 14%, respectively; however, because of separation costs,
the benefits of the fourth quarter reductions will not be fully realized until
2000. Contributing to the increase in salaries and other personnel costs in
1999 were $20.8 million of personnel costs associated with new acquisitions.
The increase in 1998 over 1997 was primarily attributable to the costs incurred
servicing the increasing volume of business and $63.0 million of personnel costs
associated with new acquisitions, offset in part by productivity gains as
measured by new orders per person. Contributing to the increases for both 1999
and 1998 was an increased volume of labor-intensive residential resale
transactions. The Company's direct title operations opened 1,334,100, 1,585,400
and 1,173,300 title orders in 1999, 1998 and 1997, respectively, representing a
decrease of 15.9% in 1999 from 1998 and an increase of 35.1% in 1998 over 1997.
15
<PAGE>
Real estate information personnel expenses increased 4.7% in 1999 over 1998
and 67.4% in 1998 over 1997. The increase in 1999 over 1998 was primarily
attributable to $7.6 million of personnel costs associated with new acquisitions
and costs incurred in connection with Y2K. The increase in 1998 over 1997 was
primarily due to costs incurred servicing the increase in business volume and
$61.9 million of costs associated with new acquisitions. Contributing to the
increases in both 1999 and 1998 were higher overhead costs attributable to the
integration of new acquisitions and costs associated with in-house development
of new electronic communication delivery systems for information-based products
to interface with customer needs.
Consumer information personnel expenses increased 14.9% in 1999 over 1998
and 25.8% in 1998 over 1997. These increases were primarily attributable to
additional personnel required to service the increased business volume and
acquisition activity. Personnel expenses associated with new acquisitions were
$2.7 million and $1.1 million for 1999 and 1998 respectively.
Premiums retained by agents - A summary of agent retention and agent revenues is
as follows:
(in thousands, except percentages) 1999 1998 1997
---------- ----------- ----------
Agent Retention $ 871,036 $773,030 $563,137
========== =========== ==========
Agent Revenues $1,086,746 $965,228 $700,193
========== =========== ==========
% Retained by Agents 80.2% 80.1% 80.4%
========== =========== ==========
The premium split between underwriter and agents is in accordance with
their respective agency contracts and can vary from region to region due to
divergencies in real estate closing practices, as well as rating structures. As
a result, the percentage of title premiums retained by agents may vary due to
the geographical mix of revenues from agency operations.
Other operating expenses - A summary by segment of the Company's other operating
expenses is as follows:
<TABLE>
<CAPTION>
(in thousands, except percentages) 1999 % 1998 % 1997 %
-------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Title Insurance $327,182 48 $307,055 49 $247,579 56
Real Estate Information 249,987 37 253,695 40 146,671 34
Consumer Information 72,996 11 58,243 9 32,835 8
Corporate 28,691 4 14,424 2 10,591 2
-------- ---- -------- ---- -------- ----
$678,856 100 $633,417 100 $437,676 100
======== ==== ======== ==== ======== ====
</TABLE>
Title insurance other operating expenses (principally direct operations)
increased 6.6% in 1999 over 1998 and 24.0% in 1998 over 1997. The increase in
1999 over 1998 was primarily due to $9.7 million of costs associated with new
acquisitions, Y2K expenses of $5.8 million, a $2.5 million charge resulting from
a previously announced fine imposed by the California insurance commissioner,
approximately $2.0 million in impaired asset write-offs, and general price-level
increases, offset in part by a reduction in certain incremental costs associated
with the decline in title order volume. The increase in 1998 over 1997 was
primarily attributable to an increase in the incremental costs associated with
the increased order volume, marginal price-level increases, Y2K costs and
acquisition activity.
Real estate information other operating expenses decreased 1.5% in 1999
from 1998 and increased 73% in 1998 over 1997. The decrease in 1999 from 1998
was primarily due to a reduction in costs resulting from the Company's cost-
containment programs initiated in response to the decline in business volume,
offset in part by $6.9 million of costs associated with new acquisitions and Y2K
expenses of $19.0 million. The increase in 1998 over 1997 was primarily
attributable to costs incurred servicing the increased business activity, as
well as $60.6 million of other operating costs relating to new acquisitions,
offset in part by cost-containment programs.
Consumer information other operating expenses increased 25.3% in 1999 over
1998 and 77.4% in 1998 over 1997. These increases were primarily attributable
to costs incurred servicing the increased business volume, as well as
acquisition activity. Other operating expenses associated with new acquisitions
were $3.3 million in 1999 and $1.8 million in 1998.
Corporate other operating expenses increased 98.9% in 1999 over 1998 and
36.2% in 1998 over 1997. The increase in 1999 over 1998 was primarily
attributable to $10.8 million of nonrecurring merger-related charges incurred in
the NAIG acquisition. The increase in 1998 over 1997 was primarily due to
increased costs associated with supporting the overall growth of the Company's
businesses.
16
<PAGE>
Provision for title losses and other claims - A summary by segment of the
Company's provision for title losses and other claims is as follows:
<TABLE>
<CAPTION>
(in thousands, except percentages) 1999 % 1998 % 1997 %
-------- ---- -------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Title Insurance $ 65,925 57 $ 68,697 55 $52,924 55
Real Estate Information 10,391 9 17,428 14 8,806 9
Consumer Information 39,902 34 38,053 31 35,075 36
-------- ---- -------- ---- ------- ----
$116,218 100 $124,178 100 $96,805 100
======== ==== ======== ==== ======= ====
</TABLE>
The provision for title insurance losses, expressed as a percentage of
title insurance operating revenues, was 3.1% in 1999, 3.3% in 1998 and 3.6% in
1997. These decreases reflect ongoing improvement in title insurance claims
experience. The provision for consumer information losses principally reflects
home warranty claims, and to a lesser extent, property and casualty insurance
claims. The provision for home warranty claims, expressed as a percentage of
home warranty operating revenues, was 49.8% in 1999, 56.2% in 1998 and 58.3% in
1997. This decreasing trend reflects the relative change in the average number
of claims per contract experienced during these periods. The provision for
property and casualty insurance losses expressed as a percentage of property and
casualty insurance operating revenues approximated 32.5% for the three-year
period ended December 31, 1999.
Depreciation and amortization - Depreciation and amortization, as well as
capital expenditures, are summarized in Note 19 to the consolidated financial
statements.
Premium taxes - A summary by pertinent segment of the Company's premium taxes is
as follows:
<TABLE>
<CAPTION>
(in thousands, except percentages) 1999 % 1998 % 1997 %
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Title Insurance $21,265 93 $19,959 94 $16,034 93
Consumer Information 1,632 7 1,376 6 1,204 7
------- ---- ------- ---- ------- ----
$22,897 100 $21,335 100 $17,238 100
======= ==== ======= ==== ======= ====
</TABLE>
Insurers are generally not subject to state income or franchise taxes.
However, in lieu thereof, a "premium" tax is imposed on certain operating
revenues, as defined by statute. Tax rates and bases vary from state to state;
accordingly, the total premium tax burden is dependent upon the geographical mix
of operating revenues. The Company's underwritten title company (noninsurance)
subsidiaries are subject to state income tax and do not pay premium tax.
Accordingly, the Company's total tax burden at the state level is composed of a
combination of premium taxes and state income taxes. Premium taxes attributable
to title insurance operations, as a percentage of title insurance operating
revenues, were approximately 1% for the three- year period ended December 31,
1999.
Interest - Interest expense decreased 8.9% in 1999 from 1998 and increased 85.5%
in 1998 over 1997. The decrease in 1999 from 1998 was primarily due to $2.5
million of capitalized interest expense related to the development of internal-
use software and the construction of the Company's new corporate headquarters,
offset in part by increased interest expense associated with debt incurred in
connection with company acquisitions. The increase in 1998 over 1997 was
primarily due to $5.5 million of interest expense related to the 7.55% senior
debentures issued in April 1998, as well as incremental interest expense of $2.8
million related to the mandatorily redeemable preferred securities (outstanding
for the full year 1998).
Income before income taxes, minority interests and cumulative effect of a change
in accounting principle - A summary by segment is as follows:
<TABLE>
<CAPTION>
(in thousands, except percentages) 1999 % 1998 % 1997 %
-------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Title Insurance $128,738 58 $227,906 62 $ 79,602 56
Real Estate Information 54,914 25 110,069 30 40,608 28
Consumer Information 38,080 17 28,455 8 22,134 16
-------- ---- -------- ---- -------- ----
221,732 100 366,430 100 142,344 100
==== ==== ====
Corporate (51,760) (1,379) (27,967)
-------- -------- --------
$169,972 $365,051 $114,377
======== ======== ========
</TABLE>
The Company's profit margins vary according to a number of factors,
including the volume, composition (residential or commercial) and type (resale,
refinancing or new construction) of real estate activity. For example, in title
insurance operations, commercial transactions tend to generate higher revenues
and greater profit margins than
17
<PAGE>
residential transactions. Further, profit margins from refinancing activities
are lower than those from resale activities because in many states there are
premium discounts on, and cancellation rates are higher for, refinancing
transactions. Cancellations of title orders adversely affect profits because
costs are incurred in opening and processing such orders but revenues are not
generated. Also, the Company's direct title insurance business has significant
fixed costs in addition to its variable costs. Accordingly, profit margins from
the Company's direct title insurance business improve as the volume of title
orders closed increases. Title insurance profit margins are also affected by the
percentage of operating revenues generated by agency operations. Profit margins
from direct operations are generally higher than from agency operations due
primarily to the large portion of the premium that is retained by the agent.
Real estate information profits are generally unaffected by the type of real
estate activity but increase as the volume of residential real estate loan
transactions increases. Consumer information profits increase as the volume of
transactions increases and are not affected by real estate activity. In general,
the title insurance business is a lower-margin business when compared to the
Company's other segments. The lower margins reflect the high fixed cost of
producing title evidence, whereas the corresponding revenues are subject to
regulatory and competitive pricing constraints.
The increase in net corporate expenses in 1999 over 1998 was primarily due
to an investment gain of $32.4 million recognized in 1998 relating to the joint
venture agreement with Experian; and in 1999, $10.8 million of nonrecurring
merger-related charges incurred in the NAIG acquisition; and decreased equity in
earnings of unconsolidated subsidiaries. The decrease in net corporate expenses
in 1998 from 1997 was primarily attributable to the investment gain of $32.4
million mentioned above.
Income taxes - The Company's effective income tax rate, which includes a
provision for state income and franchise taxes for non-insurance subsidiaries,
was 36.7%, 35.2% and 37.5% for 1999, 1998 and 1997, respectively. The
differences in the effective tax rate were primarily due to changes in the ratio
of permanent differences to income before income taxes and minority interests
and changes in state income and franchise taxes resulting from fluctuations in
the Company's non insurance subsidiaries' contribution to pretax profits.
Information regarding items included in the reconciliation of the effective rate
with the federal statutory rate is contained in Note 10 to the consolidated
financial statements.
Minority interests -Minority interests in net income of consolidated
subsidiaries decreased $16.0 million in 1999 from 1998 and increased $31.3
million in 1998 over 1997. These fluctuations were primarily due to the
relative change in the operating results of the Company's joint venture with
Experian.
Net income - Net income and per share information are summarized as follows:
<TABLE>
<CAPTION>
(in thousands, except per share amounts) 1999 1998 1997
------- -------- -------
<S> <C> <C> <C>
Income before cumulative effect
of a change in accounting
for tax service contracts $88,643 $201,527 $67,765
======= ======== =======
Net income $33,003 $201,527 $67,765
======= ======== =======
Per share of common stock:
Income before cumulative effect
of a change in accounting:
for tax service contracts
Basic $ 1.37 $ 3.35 $ 1.19
======= ======== =======
Diluted $ 1.34 $ 3.21 $ 1.16
======= ======== =======
Net income:
Basic $ 0.51 $ 3.35 $ 1.19
======= ======== =======
Diluted $ 0.50 $ 3.21 $ 1.16
======= ======== =======
Weighted average shares:
Basic 64,669 60,194 57,092
======= ======== =======
Diluted 66,351 62,720 58,482
======= ======== =======
</TABLE>
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities amounted to $173.2 million, $361.6
million and $117.4 million for 1999, 1998 and 1997, respectively, after net
claim payments of $119.3 million, $100.9 million and $88.1 million,
respectively. The principal nonoperating uses of cash and cash equivalents for
the three-year period ended December 31, 1999, were for capital expenditures,
additions to the investment portfolio, company acquisitions in 1999 and 1997,
dividends and the repayment of debt. The most significant nonoperating sources
of cash and cash equivalents were proceeds from the sales and maturities of
certain investments, proceeds in 1999 from the sale-leaseback of certain
18
<PAGE>
property and equipment, proceeds in 1998 from the issuance of senior debentures
and proceeds in 1997 from the issuance of mandatorily redeemable preferred
securities. The net effect of all activities on total cash and cash equivalents
was a decrease of $31.3 million for 1999, an increase of $197.9 million for 1998
and an increase of $8.3 million for 1997.
On April 7, 1998, the Company issued and sold $100.0 million of 7.55%
senior debentures, due April 1, 2028. The Company used a portion of the net
proceeds from the sale to repay certain obligations and purchase land for the
Company's new corporate facilities. The remaining proceeds were invested in
debt and equity securities.
On July 2, 1999, the Company increased its lines of credit to $175.0
million. Pursuant to the terms of the credit agreements, the Company is
required to maintain minimum levels of capital and earnings and meet
predetermined debt-to-capitalization ratios. The lines of credit are currently
unused.
Notes and contracts payable, as a percentage of total capitalization, was
16.4%, as of December 31, 1999, as compared with 13% as of the prior year end.
This increase was primarily attributable to debt incurred in connection with
company acquisitions, offset, in part, by an increase in the capital base
primarily due to shares issued in connection with company acquisitions and net
income for the period. Notes and contracts payable are more fully described in
Note 8 to the consolidated financial statements.
Pursuant to various insurance and other regulations, the maximum amount of
dividends, loans and advances available to the Company in 2000 from its
insurance subsidiaries is $133.1 million. Such restrictions have not had, nor
are they expected to have, an impact on the Company's ability to meet its cash
obligations.
During the latter part of 1999, the Company successfully completed its Y2K
plan. The plan, which was created with the help of an outside consulting firm
in January 1997, was completed at a total cost of $40.0 million.
Due to the Company's significant liquid asset position and its consistent
ability to generate cash flows from operations, management believes that its
resources are sufficient to satisfy its anticipated operational cash
requirements. The Company's strong financial position will enable management to
react to future opportunities for acquisitions or other investments in support
of the Company's continued growth and expansion.
19
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
The Company's primary exposure to market risk relates to interest rate risk
associated with certain other financial instruments. Although the Company
monitors its risk associated with fluctuations in interest rates, it does not
currently use derivative financial instruments to hedge these risks. The table
below provides information about certain assets and liabilities that are
sensitive to changes in interest rates and presents cash flows and the related
weighted average interest rates by expected maturity dates. The Company is also
subject to equity price risk as related to its equity securities. At December
31, 1999, the Company had equity securities with a book value of $25.2 million
and fair value of $39.3 million. Although the Company has operations in certain
foreign countries, these operations, in the aggregate, are not material to the
Company's financial condition or results of operations.
<TABLE>
<CAPTION>
Fair
(in thousands) 2000 2001 2002 2003 2004 Thereafter Total Value
- ------------------------------------------------------------------------------------------------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Rate Sensitive Assets
- ------------------------------
Deposits with Savings and
Loan Associations and Banks
Book Value $32,225 $ 32,225 $ 32,225
Average Interest Rate 4.12% 100.00%
Debt Securities
Book Value $15,476 $38,736 $13,217 $16,168 $6,507 $143,175 $233,279 $226,369
Average Interest Rate 5.97% 6.16% 5.95% 5.84% 6.06% 5.66% 97.04%
Loans Receivable
Book Value $ 2,867 $ 4,744 $ 2,580 $ 2,892 $ 1,924 $ 72,331 $ 87,338 $ 87,714
Average Interest Rate 7.24% 10.25% 9.54% 8.81% 10.12% 9.32% 100.43%
Interest-Rate Sensitive Liabilities
- -----------------------------------
Variable Rate Demand Deposits
Book Value $11,117 $ 11,117 $ 11,117
Average Interest Rate 4.45% 100.00%
Fixed Rate Demand Deposits
Book Value $51,976 $12,038 $ 2,777 $ 2,253 $ 682 $ 69,726 $ 69,510
Average Interest Rate 5.98% 5.94% 5.80% 5.83% 6.03% 99.69%
Notes and Contracts Payable
Book Value $23,004 $21,203 $13,982 $12,260 $ 9,893 $116,473 $196,815 $195,700
Average Interest Rate 7.63% 7.63% 7.88% 7.98% 7.66% 7.52% 99.41%
Mandatorily Redeemable
Preferred Securities
Book Value $100,000 $100,000 $100,000
Average Interest Rate 8.50% 100.00%
</TABLE>
20
<PAGE>
Item 8. Financial Statements and Supplementary Data.
- ----------------------------------------------------
Separate financial statements for subsidiaries not consolidated and 50% or less
owned persons accounted for by the equity method have been omitted because, if
considered in the aggregate, they would not constitute a significant subsidiary.
INDEX
-----
<TABLE>
<CAPTION>
Page No.
-------
<S> <C>
Report of Independent Accountants 22
Financial Statements:
Consolidated Balance Sheets 23
Consolidated Statements of Income 25
Consolidated Statements of Stockholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28
Unaudited Quarterly Financial Data 44
Financial Statement Schedules:
I. Summary of Investments - Other than Investments in Related Parties 45
III. Supplementary Insurance Information 46
IV. Reinsurance 48
V. Valuation and Qualifying Accounts 49
</TABLE>
Financial statement schedules not listed are either omitted because they
are not applicable or the required information is shown in the consolidated
financial statements or in the notes thereto.
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The First American Financial Corporation:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of The
First American Financial Corporation and its subsidiaries at December 31, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedules listed in the accompanying index
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedules are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1 to the financial statements, the Company changed its
method of recognizing revenue for tax service contracts in 1999.
PricewaterhouseCoopers LLP
Costa Mesa, California
February 15, 2000
22
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 350,010,000 $ 381,293,000
- ------------------------------------------------------------------------------------------------------------
Accounts and accrued income receivable,
less allowances ($13,669,000 and $10,715,000) 180,824,000 201,165,000
- ------------------------------------------------------------------------------------------------------------
Income taxes receivable 8,606,000
- ------------------------------------------------------------------------------------------------------------
Investments:
Deposits with savings and loan associations and banks 32,225,000 39,480,000
Debt securities 226,369,000 235,628,000
Equity securities 39,266,000 32,573,000
Other long-term investments 86,686,000 63,244,000
- ------------------------------------------------------------------------------------------------------------
384,546,000 370,925,000
- ------------------------------------------------------------------------------------------------------------
Loans receivable 87,338,000 72,035,000
- ------------------------------------------------------------------------------------------------------------
Property and equipment, at cost:
Land 41,662,000 34,578,000
Buildings 145,204,000 112,664,000
Furniture and equipment 379,975,000 356,338,000
Less - accumulated depreciation (173,527,000) (181,489,000)
- ------------------------------------------------------------------------------------------------------------
393,314,000 322,091,000
- ------------------------------------------------------------------------------------------------------------
Title plants and other indexes 250,723,000 216,711,000
- ------------------------------------------------------------------------------------------------------------
Assets acquired in connection with claim settlements 24,196,000 17,051,000
- ------------------------------------------------------------------------------------------------------------
Deferred income taxes 48,284,000 16,324,000
- ------------------------------------------------------------------------------------------------------------
Goodwill and other intangibles, less accumulated
amortization ($27,707,000 and $20,434,000) 284,390,000 187,106,000
- ------------------------------------------------------------------------------------------------------------
Other assets 104,183,000 68,030,000
- ------------------------------------------------------------------------------------------------------------
$2,116,414,000 $1,852,731,000
</TABLE>
See Notes to Consolidated Financial Statements
23
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31
1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Demand deposits $ 80,843,000 $ 67,404,000
- --------------------------------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities:
Accounts payable 38,899,000 21,887,000
Salaries and other personnel costs 78,803,000 88,579,000
Pension costs 65,796,000 50,100,000
Other 97,200,000 104,268,000
- --------------------------------------------------------------------------------------------------------------------
280,698,000 264,834,000
- --------------------------------------------------------------------------------------------------------------------
Deferred revenue 279,766,000 119,202,000
- --------------------------------------------------------------------------------------------------------------------
Reserve for known and incurred but not reported claims 273,724,000 272,921,000
- --------------------------------------------------------------------------------------------------------------------
Income taxes payable 22,734,000
- --------------------------------------------------------------------------------------------------------------------
Notes and contracts payable 196,815,000 143,466,000
- --------------------------------------------------------------------------------------------------------------------
Minority interests in consolidated subsidiaries 88,577,000 99,905,000
- --------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 13)
- --------------------------------------------------------------------------------------------------------------------
Mandatorily Redeemable Preferred Securities of the Company's
Subsidiary Trust Whose Sole Assets Are the Company's $100,000,000
8.5% Deferrable Interest Subordinated Notes Due 2012 (Note 14) 100,000,000 100,000,000
- --------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $1 par value
Authorized - 500,000 shares; Outstanding - None
Common stock, $1 par value (Note 15)
Authorized - 108,000,000 shares
Outstanding - 65,068,000 and 63,120,000 shares 65,068,000 63,120,000
Additional paid-in capital 184,759,000 146,624,000
Retained earnings 561,946,000 544,783,000
Accumulated other comprehensive income (Note 16) 4,218,000 7,738,000
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 815,991,000 762,265,000
- --------------------------------------------------------------------------------------------------------------------
$2,116,414,000 $1,852,731,000
</TABLE>
See Notes to Consolidated Financial Statements
24
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Operating revenues $ 2,936,196,000 $ 2,867,107,000 $ 1,932,905,000
Investment and other income 51,973,000 76,773,000 29,096,000
- ---------------------------------------------------------------------------------------------------------------------------
2,988,169,000 2,943,880,000 1,962,001,000
- ---------------------------------------------------------------------------------------------------------------------------
Expenses
Salaries and other personnel costs 1,034,772,000 945,513,000 682,452,000
Premiums retained by agents 871,036,000 773,030,000 563,137,000
Other operating expenses 678,856,000 633,417,000 437,676,000
Provision for title losses and other claims 116,218,000 124,178,000 96,805,000
Depreciation and amortization 77,031,000 62,263,000 40,025,000
Premium Taxes 22,897,000 21,335,000 17,238,000
Interest 17,387,000 19,093,000 10,291,000
- ---------------------------------------------------------------------------------------------------------------------------
2,818,197,000 2,578,829,000 1,847,624,000
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes, minority interests and cumulative effect 169,972,000 365,051,000 114,377,000
of a change in accounting principle
Income taxes 62,300,000 128,512,000 42,936,000
- ---------------------------------------------------------------------------------------------------------------------------
Income before minority interests and cumulative effect of a change 107,672,000 236,539,000 71,441,000
in accounting principle
Minority interests 19,029,000 35,012,000 3,676,000
- ---------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in accounting principle 88,643,000 201,527,000 67,765,000
Cumulative effect of a change in accounting for tax service
contracts, net of income taxes and minority interests (Note 1) (55,640,000)
- ---------------------------------------------------------------------------------------------------------------------------
Net income 33,003,000 201,527,000 67,765,000
- ---------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax (Note 16):
Unrealized gain(loss) on securities (4,283,000) 3,269,000 2,751,000
Minimum pension liability adjustment 763,000 (1,206,000)
- ---------------------------------------------------------------------------------------------------------------------------
(3,520,000) 2,063,000 2,751,000
- ---------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 29,483,000 $ 203,590,000 $ 70,516,000
Per share amounts:
Basic:
Income before cumulative effect of a change
in accounting for tax service contracts $ 1.37 $ 3.35 $ 1.19
Cumulative effect of a change in accounting for
tax service contracts (.86)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ .51 $ 3.35 $ 1.19
- ---------------------------------------------------------------------------------------------------------------------------
Diluted:
Income before cumulative effect of a change in accounting
for tax service contracts $ 1.34 $ 3.21 $ 1.16
Cumulative effect of a change in accounting for
tax service contracts (.84)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ .50 $ 3.21 $ 1.16
- ---------------------------------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding:
Basic 64,669,000 60,194,000 57,092,000
Diluted 66,351,000 62,720,000 58,482,000
</TABLE>
See Notes to Consolidated Financial Statements
25
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional other
Common paid-in Retained comprehensive
Shares Stock capital earnings income
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 56,966,000 $ 56,966,000 $ 21,621,000 $ 303,420,000 $ 2,924,000
Net income for 1997 67,765,000
Cash dividends on common shares (14,035,000)
Shares issued in connection with
company acquisitions 48,000 48,000 500,000
Shares issued in connection with
benefit and savings plans 718,000 718,000 5,268,000
Purchase of company shares (546,000) (546,000) (4,617,000)
Other comprehensive income 2,751,000
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 57,186,000 57,186,000 22,772,000 357,150,000 5,675,000
Net income for 1998 201,527,000
Cash dividends on common shares (13,894,000)
Shares issued in connection with
company acquisitions 4,458,000 4,458,000 100,854,000
Shares issued in connection with
benefit and savings plans 1,476,000 1,476,000 22,998,000
Other comprehensive income 2,063,000
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 63,120,000 63,120,000 146,624,000 544,783,000 7,738,000
Net income for 1999 33,003,000
Cash dividends on common shares (15,840,000)
Shares issued in connection with
company acquisitions 1,398,000 1,398,000 27,195,000
Shares issued in connection with
benefit and savings plans 794,000 794,000 13,789,000
Purchase of company shares (244,000) (244,000) (2,849,000)
Other comprehensive loss (3,520,000)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 65,068,000 $ 65,068,000 $ 184,759,000 $ 561,946,000 $ 4,218,000
</TABLE>
See Notes to Consolidated Financial Statements.
26
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Demutualization
Cumulative effect Year Ended December 31
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 33,003,000 $ 201,527,000 $ 67,765,000
Adjustments to reconcile net income to cash provided by operating activities-
Provision for title losses and other claims 116,218,000 124,178,000 96,805,000
Depreciation and amortization 77,031,000 62,263,000 40,025,000
Minority interests in net income 19,029,000 35,012,000 3,676,000
Cumulative effect of a change in accounting principle (Note 1) 55,640,000
Investment gain (5,160,000) (32,449,000)
Other, net (1,164,000) 2,226,000 933,000
Changes in assets and liabilities excluding effects of
company acquisitions and noncash transactions-
Claims paid, including assets acquired, net of recoveries (119,279,000) (100,855,000) (88,085,000)
Net change in income tax accounts (26,895,000) 34,382,000 12,097,000
Decrease (increase) in accounts and accrued income receivable 27,037,000 (42,570,000) (28,700,000)
Increase in accounts payable and accrued liabilities 1,745,000 71,075,000 10,025,000
Increase in deferred revenue 25,189,000 10,203,000 8,674,000
Other, net (29,175,000) (3,437,000) (5,768,000)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 173,219,000 361,555,000 117,447,000
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net cash effect of company acquisitions/dispositions (73,700,000) 8,953,000 (59,217,000)
Net decrease (increase) in deposits with banks 7,648,000 (3,771,000) (7,355,000)
Purchases of debt and equity securities (92,463,000) (144,388,000) (136,623,000)
Proceeds from sales of debt and equity securities 88,219,000 32,302,000 39,240,000
Proceeds from maturities of debt securities 21,789,000 36,729,000 78,948,000
Net decrease (increase) in other long-term investments 6,797,000 (1,580,000) (1,117,000)
Net increase in loans receivable (15,303,000) (8,657,000) (9,122,000)
Capital expenditures (212,588,000) (160,526,000) (77,976,000)
Net proceeds from sale of property and equipment 86,037,000 3,361,000 1,646,000
- ----------------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (183,564,000) (237,577,000) (171,576,000)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in demand deposits 13,439,000 4,929,000 11,154,000
Proceeds from issuance of notes 4,740,000 9,268,000
Repayment of debt (14,897,000) (28,058,000) (41,965,000)
Proceeds from issuance of senior debentures 99,456,000
Proceeds from the issuance of mandatorily redeemable preferred securities 100,000,000
Purchase of Company shares (3,093,000) (5,163,000)
Proceeds from exercise of stock options 4,350,000 3,413,000 2,482,000
Proceeds from issuance of stock to employee savings plan 4,794,000 18,144,000 980,000
Distributions to minority shareholders (9,691,000) (14,762,000) (299,000)
Cash dividends (15,840,000) (13,894,000) (14,035,000)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash (used for) provided by financing activities (20,938,000) 73,968,000 62,422,000
- ----------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (31,283,000) 197,946,000 8,293,000
Cash and cash equivalents - Beginning of year 381,293,000 183,347,000 175,054,000
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - End of year $ 350,010,000 $ 381,293,000 $ 183,347,000
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental information:
Cash paid during the year for:
Interest $ 19,454,000 $ 17,429,000 $ 8,608,000
Premium taxes $ 27,527,000 $ 18,433,000 $ 18,103,000
Income taxes $ 91,926,000 $ 97,474,000 $ 32,865,000
Noncash investing and financing activities:
Shares issued for benefits plans $ 5,439,000 $ 2,917,000 $ 2,524,000
Company acquisitions in exchange for common stock $ 28,593,000 $ 105,312,000 $ 548,000
Liabilities in connection with company acquisitions $ 96,305,000 $ 118,718,000 $ 48,294,000
</TABLE>
See Notes to Consolidated Financial Statements
27
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
Description of the Company:
The First American Financial Corporation (the Company), through its
subsidiaries, is engaged in the business of providing business information and
related products and services. The Company's three primary business segments are
title insurance and services, real estate information and services and consumer
information and services. The title insurance segment issues residential and
commercial title insurance policies, and provides escrow services, equity loan
services, tax-deferred exchanges and other related products. The real estate
information segment provides tax monitoring, mortgage credit reporting, property
data services, flood certification, field inspection services, appraisal
services, mortgage loan servicing systems and mortgage document preparation. The
consumer information segment provides home warranties, property and casualty
insurance, resident screening, pre-employment screening, specialized credit
reporting, automotive insurance tracking, investment advisory and trust and
thrift services.
Significant Accounting Policies:
Principles of consolidation
The consolidated financial statements include the accounts of The
First American Financial Corporation and all majority-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated. All
consolidated results reflect the 1999 acquisition of National Information Group
accounted for under the pooling-of-interests method of accounting. Certain 1997
and 1998 amounts have been reclassified to conform with the 1999 presentation.
Cash equivalents
The Company considers cash equivalents to be all short-term
investments which have an initial maturity of 90 days or less and are not
restricted for statutory deposit or premium reserve requirements. The carrying
amount for cash equivalents is a reasonable estimate of fair value due to the
short-term maturity of these investments.
Investments
Deposits with savings and loan associations and banks are short-term
investments with initial maturities of more than 90 days. The carrying amount
of these investments is a reasonable estimate of fair value due to their short-
term nature.
Debt securities are carried at fair value and consist primarily of
investments in obligations of the United States Treasury, various corporations
and certain state and political subdivisions.
Equity securities are carried at fair value and consist primarily of
investments in marketable common stocks of corporate entities in which the
Company's ownership does not exceed 20%.
Other long-term investments consist primarily of investments in
affiliates, which are accounted for under the equity method of accounting, and
notes receivable, which are carried at the lower of cost or fair value less
costs to sell.
The Company classifies its debt and equity securities portfolio as
available-for-sale and, accordingly, includes unrealized gains and losses, net
of related tax effects, as a component of other comprehensive income. Realized
gains and losses on investments are determined using the specific identification
method.
Property and equipment
Effective January 1, 1999, the Company adopted Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." SOP 98-1 requires the Company to capitalize interest costs
incurred and certain payroll-related costs of employees directly associated with
developing software, in addition to incremental payments to third parties. The
adoption of SOP 98-1 did not have a material effect on the Company's financial
condition or results of operations.
Furniture and equipment includes computer software acquired and
developed for internal use and for use with the Company's products. Software
development costs are capitalized from the time technological feasibility is
established until the software is ready for use.
Depreciation on buildings and on furniture and equipment is computed
using the straight-line method over estimated useful lives of 25 to 45 and three
to 10 years, respectively. Capitalized software costs are amortized using the
straight-line method over estimated useful lives of three to 10 years.
28
<PAGE>
Title plants and other indexes
Title plants and other indexes are carried at original cost. The
costs of daily maintenance (updating) of these plants and other indexes are
charged to expense as incurred. Because properly maintained title plants and
other indexes have indefinite lives and do not diminish in value with the
passage of time, no provision has been made for depreciation.
Assets acquired in connection with claim settlements
In connection with settlement of title insurance and other claims, the
Company sometimes purchases mortgages, deeds of trust, real property, or
judgment liens. These assets, sometimes referred to as "salvage assets," are
carried at the lower of cost or fair value less costs to sell.
Goodwill and other intangibles
Goodwill recognized in business combinations is amortized over its
estimated useful life ranging from 20 to 40 years. Other intangibles, which
include customer lists and covenants not to compete are amortized over their
estimated useful lives, ranging from three to 20 years. The Company
periodically evaluates the amortization period assigned to each intangible asset
to ensure that there have not been any events or circumstances that warrant
revised estimates of useful lives.
Impairment of goodwill, loans receivable and other long-lived assets
The Company periodically reviews the carrying value of goodwill, loans
receivable and other long-lived assets for impairment when events or
circumstances warrant such a review.
To the extent that the undiscounted cash flows related to the
businesses underlying the goodwill are less than the carrying value of the
related goodwill, such goodwill will be reduced to the amount of the
undiscounted cash flows.
A loan is impaired when, based on current information and events, it
is probable that the Company will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Impaired loans receivable are
measured at the present value of expected future cash flows discounted at the
loan's effective interest rate. As a practical expedient, the loan may be
valued based on its observable market price or the fair value of the collateral,
if the loan is collateral-dependent.
To the extent that the undiscounted cash flows related to other long-
lived assets are less than the assets' carrying value, the carrying value of
such assets is reduced to the assets' fair value.
Reserve for known and incurred but not reported claims
The Company provides for title insurance losses based upon its
historical experience by a charge to expense when the related premium revenue is
recognized. Title insurance losses and other claims associated with ceded
reinsurance are provided for as the Company remains contingently liable in the
event that the reinsurer does not satisfy its obligations. The reserve for
known and incurred but not reported claims reflects management's best estimate
of the total costs required to settle all claims reported to the Company and
claims incurred but not reported. The process applied to estimate claims costs
is subject to many variables, including changes and trends in the type of title
insurance policies issued, the real estate market and the interest rate
environment. It is reasonably possible that a change in the estimate will occur
in the future.
The Company provides for claims losses relating to its home warranty
business based on the average cost per claim as applied to the total of new
claims incurred. The average cost per claim is calculated using the average of
the most recent 12 months of claims experience.
Operating revenues
Title insurance - Title premiums on policies issued directly by the Company are
recognized on the effective date of the title policy and escrow fees are
recorded upon close of the escrow. Revenues from title policies issued by
independent agents are recorded when notice of issuance is received from the
agent.
Real estate information - In December 1999, the Company adopted Staff Accounting
Bulletin No. 101 (SAB), "Revenue Recognition in Financial Statements." The SAB,
which became effective January 1, 1999, applies to the Company's tax service
operations and requires the deferral of the tax service fee and the recognition
of that fee as revenue ratably over the expected service period. The
amortization rates applied to recognize the revenues assume a 10-year contract
life and are adjusted to reflect prepayments. The Company periodically reviews
its tax service contract portfolio to determine if there have been changes in
contract lives and/or changes in the number and/or timing of prepayments.
Accordingly, the Company may adjust the rates to reflect current trends. SAB No.
101 finalizes a series of changes instituted by the Securities and Exchange
Commission concerning revenue recognition policies. As a result of adopting the
SAB, in 1999, the Company reported a charge of $55.6 million, net of income
taxes and minority interests, as a cumulative change in accounting principle,
reduced net income by $10.9 million, or $.16 per diluted share and restated its
quarterly information. Assuming the SAB had been adopted on January 1, 1997,
pro forma net income and net income per diluted share for 1998 and 1997 would
have been $188.3 million, or $3.00, and $59.8 million, or $1.02, respectively.
29
<PAGE>
Consumer Information - Revenues from home warranty contracts are recognized
ratably over the 12-month duration of the contracts. Interest on loans with the
Company's thrift subsidiary is recognized on the outstanding principal balance
on the accrual basis. Loan origination fees and related direct loan origination
costs are deferred and recognized over the life of the loan.
Premium taxes
Title insurance, property and casualty insurance and home warranty
companies, like other types of insurers, are generally not subject to state
income or franchise taxes. However, in lieu thereof, most states impose a tax
based primarily on insurance premiums written. This premium tax is reported as a
separate line item in the consolidated statements of income in order to provide
a more meaningful disclosure of the taxation of the Company.
Income taxes
Taxes are based on income for financial reporting purposes and include
deferred taxes applicable to temporary differences between the financial
statement carrying amount and the tax basis of certain of the Company's assets
and liabilities.
Earnings per share
Basic earnings per share are computed by dividing net income available
to common stockholders by the weighted-average number of common shares
outstanding. The computation of diluted earnings per share is similar to the
computation of basic earnings per share except that the weighted-average number
of common shares outstanding is increased to include the number of additional
common shares that would have been outstanding if potential dilutive common
shares had been issued.
The Company's only potential dilutive common shares are stock options
(see Note 12). Stock options are reflected in diluted earnings per share by
application of the treasury stock method.
Risk of real estate market
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 revenues can be adversely affected during periods of
high interest rates and/or limited money supply.
Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the statements. Actual results could differ from the
estimates and assumptions used.
Fiduciary assets and liabilities
Assets and liabilities of the trusts and escrows administered by the
Company are not included in the consolidated balance sheets.
NOTE 2.
Statutory Restrictions on Investments and Stockholders' Equity:
Investments carried at $16.5 million were on deposit with state
treasurers in accordance with statutory requirements for the protection of
policyholders at December 31, 1999.
Pursuant to insurance and other regulations of the various states in
which the Company's insurance subsidiaries operate, the amount of dividends,
loans and advances available to the Company is limited, principally for the
protection of policyholders. Under such statutory regulations, the maximum
amount of dividends, loans and advances available to the Company from its
insurance subsidiaries in 2000 is $133.1 million.
The Company's title insurance subsidiary, First American Title
Insurance Company, maintained statutory capital and surplus of $394.2 million
and $301.6 million at December 31, 1999 and 1998, respectively. Statutory net
income for the years ended December 31, 1999, 1998 and 1997 was $71.2 million,
$137.3 million and $35.9 million, respectively.
30
<PAGE>
NOTE 3.
Debt and Equity Securities:
The amortized cost and estimated fair value of investments in debt
securities are in the table below. The fair value of debt and equity securities
was estimated using quoted market prices.
<TABLE>
<CAPTION>
Amortized Gross Unrealized Estimated
(in thousands) Cost Gains Losses Fair Value
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1999
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 38,049 $ 156 $ (345) $ 37,860
Corporate securities 135,230 1,542 (4,118) 132,654
Obligations of states and
political subdivisions 32,547 91 (2,293) 30,345
Mortgage-backed securities 27,453 21 (1,964) 25,510
- ------------------------------------------------------------------------------------------------------------------------
$233,279 $1,810 $(8,720) $226,369
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 38,056 $1,169 $ (14) $ 39,211
Corporate securities 75,840 1,759 (40) 77,559
Obligations of states and
political subdivisions 95,178 2,314 (48) 97,444
Mortgage-backed securities 21,405 77 (68) 21,414
- ------------------------------------------------------------------------------------------------------------------------
$230,479 $5,319 $ (170) $235,628
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1999, by contractual maturities, are as follows:
<TABLE>
<CAPTION>
Amortized Estimated
(in thousands) Cost Fair Value
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 15,476 $ 15,488
Due after one year through five years 106,156 105,616
Due after five years through 10 years 59,421 56,559
Due after 10 years 24,773 23,196
- --------------------------------------------------------------------------------------------
205,826 200,859
Mortgage-backed securities 27,453 25,510
- --------------------------------------------------------------------------------------------
$233,279 $226,369
- --------------------------------------------------------------------------------------------
</TABLE>
The cost and estimated fair value of investments in equity securities are
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Estimated
(in thousands) Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------------------------------------------------
December 31, 1999
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Preferred stock:
Other $ 4,339 $ - $ $ 4,339
- --------------------------------------------------------------------------------------------------------------------------
Common stocks:
Corporate securities 20,601 14,633 (710) 34,524
Other 245 158 - 403
- --------------------------------------------------------------------------------------------------------------------------
$25,185 $14,791 $ (710) $39,266
- --------------------------------------------------------------------------------------------------------------------------
December 31, 1998
- --------------------------------------------------------------------------------------------------------------------------
Preferred stock:
Other $ 4,802 $ 164 $ (44) $ 4,922
- --------------------------------------------------------------------------------------------------------------------------
Common stocks:
Corporate securities 18,944 9,429 (1,051) 27,322
Other 214 115 - 329
- --------------------------------------------------------------------------------------------------------------------------
$23,960 $ 9,708 $(1,095) $32,573
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Sales of debt and equity securities resulted in realized gains of $3.5
million, $1.4 million and $0.7 million; and realized losses of $1.6 million,
$0.2 million and $0.3 million for the years ended December 31, 1999, 1998 and
1997, respectively.
31
<PAGE>
NOTE 4.
Loans Receivable:
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31
(in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate-mortgage $89,421 $74,093
Other 94 107
89,515 74,200
- ----------------------------------------------------------------------------------------------------------------
Unearned income on lease contracts (11) (15)
Allowance for loan losses (905) (1,150)
Participations sold (983) (770)
Deferred loan fees, net (278) (230)
$87,338 $72,035
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Real estate loans are secured by properties located in California. The
average yield on the Company's loan portfolio was 10% for the years ended
December 31, 1999 and 1998. Average yields are affected by amortization of
discounts on loans purchased from other institutions, prepayment penalties
recorded as income, loan fees amortized to income and the market interest rates
charged by thrift and loan institutions.
The fair value of loans receivable was $87.7 million and $72.2 million at
December 31, 1999 and 1998, respectively, and was estimated based on the
discounted value of the future cash flows using the current rates being offered
for loans with similar terms to borrowers of similar credit quality.
The allowance for loan losses is maintained at a level that is considered
appropriate by management to provide for known risks in the portfolio.
NOTE 5.
Assets Acquired in Connection with Claim Settlements:
December 31
(in thousands) 1999 1998
- -------------------------------------------------------------
Notes receivable $10,863 $11,833
Real estate 2,720 4,880
Judgments and other 10,613 338
- -------------------------------------------------------------
$24,196 $17,051
- -------------------------------------------------------------
The above amounts are net of valuation reserves of $4.9 million and $12.3
million at December 31, 1999 and 1998, respectively.
The fair value of notes receivable was $11.1 million and $12.2 million at
December 31, 1999 and 1998, respectively, and was estimated based on the
discounted value of future cash flows using the current rates at which similar
loans would be made to borrowers of similar credit quality.
The activity in the valuation reserve is summarized as follows:
December 31
(in thousands) 1999 1998
- -------------------------------------------------------------
Balance at beginning of year $12,256 $11,135
Valuation reserve adjustments (6,093) 3,951
Dispositions (1,307) (2,830)
- --------------------------------------------------------------
Balance at end of year $ 4,856 $12,256
- --------------------------------------------------------------
32
<PAGE>
NOTE 6.
Demand Deposits:
Passbook and investment certificate accounts are summarized as
follows:
December 31
(in thousands except percentages) 1999 1998
- ----------------------------------------------------------------------
Passbook accounts $11,117 $12,502
- ----------------------------------------------------------------------
Certificate accounts:
Less than one year 51,976 33,980
One to five years 17,750 20,922
- ----------------------------------------------------------------------
69,726 54,902
- ----------------------------------------------------------------------
$80,843 $67,404
- ----------------------------------------------------------------------
Annualized interest rates:
Passbook accounts 4%-5% 4%-5%
Certificate accounts 5%-8% 5%-8%
The carrying value of the passbook accounts approximates fair value
due to the short-term nature of this liability. The fair value of investment
certificate accounts was $69.5 million and $55.4 million at December 31, 1999
and 1998, respectively, and was estimated based on the discounted value of
future cash flows using a discount rate approximating current market for similar
liabilities.
NOTE 7.
Reserve for Known and Incurred But Not Reported Claims:
Activity in the reserve for known and incurred but not reported claims
is summarized as follows:
December 31
(in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------
Balance at beginning of year $272,921 $254,058 $247,443
- ----------------------------------------------------------------------------
Provision related to:
Current year 122,311 121,118 92,009
Prior years (6,093) 3,060 4,796
- ----------------------------------------------------------------------------
116,218 124,178 96,805
- ----------------------------------------------------------------------------
Payments related to:
Current year 58,915 52,164 43,226
Prior years 54,029 46,359 41,901
- ----------------------------------------------------------------------------
112,944 98,523 85,127
- ----------------------------------------------------------------------------
Other (2,471) (6,792) (5,063)
- ----------------------------------------------------------------------------
Balance at end of year $273,724 $272,921 $254,058
- ----------------------------------------------------------------------------
"Other" primarily represents reclassifications to the reserve for
assets acquired in connection with claim settlements. "Other" for 1999
includes $7,955 in purchase accounting adjustments related to Company
acquisitions and $11,251 related to Company dispositions. Claims activity
associated with reinsurance is not material and, therefore, not presented
separately.
NOTE 8.
Notes and Contracts Payable:
December 31
(in thousands) 1999 1998
- ------------------------------------------------------------------------------
7.55% senior debentures, due April, 2028 $ 99,486 $ 99,468
Secured notes payable pursuant to amended
credit agreement - 2,040
Trust deed notes with maturities through
2007, secured by land and buildings with a net
book value of $3,437, average rate of 10.5% 3,022 3,952
Other notes and contracts payable with
maturities through 2007, average rate of 7.5% 94,307 38,006
- ------------------------------------------------------------------------------
$196,815 $143,466
- ------------------------------------------------------------------------------
33
<PAGE>
In April 1999, the Company paid off the fixed-rate indebtedness
portion of the 1997 amended credit agreement. The $75.0 million line of credit
established under the amended credit agreement remained in effect. In July
1999, the Company entered into a new credit agreement that provided for an
additional $100.0 million line of credit. Under the terms of the credit
agreements, the Company is required to maintain minimum levels of capital and
earnings and meet predetermined debt-to-capitalization ratios. Both lines of
credit expire in July 2002 and were unused at December 31, 1999.
In April 1998, the Company issued and sold $100.0 million of 7.55%
senior debentures, due April 2028. The 30-year bonds were issued at 99.456% of
the principal amount.
The aggregate annual maturities for notes and contracts payable in
each of the five years after December 31, 1999, are as follows:
(in thousands) Year
- -----------------------------------------------------------
2000 $23,004
2001 $21,203
2002 $13,982
2003 $12,260
2004 $ 9,893
The fair value of notes and contracts payable was $195.7 million and
$130.9 million at December 31, 1999 and 1998, respectively, and was estimated
based on the current rates offered to the Company for debt of the same remaining
maturities. The weighted-average interest rate for the Company's notes and
contracts payable was 7.5% at December 31, 1999 and 1998.
NOTE 9.
Investment and Other Income:
The components of investment and other income are as follows:
(in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------
Interest:
Cash equivalents and deposits
with savings and loan
associations and banks $11,921 $10,706 $ 7,051
Debt securities 15,199 14,547 11,354
Other long-term investments 5,163 7,023 3,550
- ------------------------------------------------------------------------------
32,283 32,276 21,955
- ------------------------------------------------------------------------------
Investment gain 5,160 32,449 -
Dividends on marketable equity securities 630 409 469
Equity in earnings of
unconsolidated affiliates 3,553 4,614 2,304
Net gain on sales of debt
and equity securities 1,854 1,154 445
Other 8,493 5,871 3,923
- ------------------------------------------------------------------------------
$51,973 $76,773 $29,096
- ------------------------------------------------------------------------------
34
<PAGE>
NOTE 10.
Income Taxes:
Income taxes are summarized as follows:
(in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------
Current:
Federal $51,237 $101,238 $28,491
State 7,183 12,520 4,075
- ----------------------------------------------------------------------------
58,420 113,758 32,566
- ----------------------------------------------------------------------------
Deferred:
Federal 3,260 13,584 9,600
State 620 1,170 770
3,880 14,754 10,370
- ----------------------------------------------------------------------------
$62,300 $128,512 $42,936
- ----------------------------------------------------------------------------
Income taxes differ from the amounts computed by applying the federal income tax
rate of 35%. A reconciliation of this difference is as follows:
in thousands 1999 1998 1997
- ----------------------------------------------------------------------------
Taxes calculated at
federal rate $52,830 $115,514 $38,819
Tax exempt interest income (1,367) (1,684) (839)
Tax effect of minority
interests 826 1,273 1,286
State taxes, net of federal
benefit 5,071 9,043 3,941
Exclusion of certain meals
and entertainment expenses 4,519 3,794 2,889
Other items, net 421 572 (3,160)
- ----------------------------------------------------------------------------
$62,300 $128,512 $42,936
- ----------------------------------------------------------------------------
The primary components of temporary differences which give rise to the Company's
net deferred tax asset are as follows:
December 31
(in thousands) 1999 1998
- ----------------------------------------------------------------------------
Deferred tax assets:
Deferred revenue $ 67,540 $25,952
Employee benefits 24,892 14,407
Bad debt reserves 7,291 7,412
Acquisition reserve 114 520
State taxes 872 2,262
Other 3,938 6,235
- ----------------------------------------------------------------------------
104,647 56,788
- ----------------------------------------------------------------------------
Deferred tax liabilities:
Depreciable and amortizable assets 31,616 21,426
Investment gain 11,357 11,357
Claims and related salvage 8,679 (3,139)
Accumulated other comprehensive income 2,271 4,166
Other 2,440 6,654
- ----------------------------------------------------------------------------
56,363 40,464
- ----------------------------------------------------------------------------
Net deferred tax asset $ 48,284 $16,324
- ----------------------------------------------------------------------------
35
<PAGE>
NOTE 11.
Employee Benefit Plans:
The Company has pension and other retirement benefit plans covering
substantially all employees. The Company's principal pension plan, amended to
be noncontributory effective January 1, 1995, is a qualified defined benefit
plan with benefits based on the employee's years of service and the highest five
consecutive years' compensation during the last 10 years of employment. The
Company's policy is to fund all accrued pension costs. Contributions are
intended to provide not only for benefits attributable to past service, but also
for those benefits expected to be earned in the future. The Company also has
nonqualified, unfunded supplemental benefit plans covering certain key
management personnel. Benefits under these plans are intended to be funded with
proceeds from life insurance policies purchased by the Company on the lives of
the executives.
Effective January 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." SFAS No. 132 revises employers' disclosures about
pension and other postretirement benefit plans but does not change the
measurement or recognition of those plans.
Net periodic pension cost for the Company's pension and other
retirement benefit plans includes the following components:
(in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------
Expense:
Service Cost $ 23,726 $14,863 $10,550
Interest Cost 15,376 13,067 11,178
Actual Return on Plan Assets (11,751) (9,196) (7,421)
Amortization of net transition obligation 309 309 309
Amortization of prior service cost 143 143 143
Amortization of net loss 1,746 1,408 945
- ------------------------------------------------------------------------------
$ 29,549 $20,594 $15,704
- ------------------------------------------------------------------------------
36
<PAGE>
The following table provides a reconciliation of benefit obligations, plan
assets and funded status of the plans at:
<TABLE>
<CAPTION>
December 31
(in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------
Unfunded Unfunded
Funded Supplemental Funded Supplemental
Pension Benefit Pension Benefit
Plans Plans Plans Plans
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at
beginning of year $184,397 $ 38,176 $141,689 $ 32,134
Service costs 22,224 1,502 13,772 1,091
Interest costs 12,451 2,925 10,586 2,481
Actuarial (gains) losses (24,186) 606 23,590 3,895
Benefits paid (6,711) (1,633) (5,240) (1,425)
- -----------------------------------------------------------------------------------------------------------
Projected benefit obligation
at end of year 188,175 41,576 184,397 38,176
- -----------------------------------------------------------------------------------------------------------
Change in plan assets:
Plan assets at fair value
at beginning of year 141,233 - 109,358 -
Actual return on plan assets 9,331 - 26,857 -
Company contributions 8,157 - 10,258 -
Benefits paid (6,711) - (5,240) -
- -----------------------------------------------------------------------------------------------------------
Plan assets at fair value
at end of year 152,010 - 141,233 -
- -----------------------------------------------------------------------------------------------------------
Reconciliation of funded status:
Funded status of the plans (36,165) (41,576) (43,164) (38,176)
Unrecognized net actuarial loss 741 9,765 23,543 9,856
Unrecognized prior
service cost (367) 1,237 (412) 1,426
Unrecognized net transition
(asset) obligation (152) 721 (204) 1,081
- -----------------------------------------------------------------------------------------------------------
Accrued pension cost (35,943) (29,853) (20,237) (25,813)
- -----------------------------------------------------------------------------------------------------------
Amounts recognized in the
statement of financial
position consist of:
Accrued benefit liability (35,943) (31,732) (20,237) (29,863)
Intangible asset - 1,198 - 2,194
Minimum pension
liability adjustment - 681 - 1,856
- -----------------------------------------------------------------------------------------------------------
$(35,943) $(29,853) $(20,237) $(25,813)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The rate of increase in future compensation levels for the plans of
4.5% and the weighted average discount rates of 7.5% and 6.75% were used in
determining the actuarial present value of the projected benefit obligation at
December 31, 1999 and 1998, respectively. The majority of pension plan assets
are invested in U.S. government securities, time deposits and common stocks with
projected long-term rates of return of 9%.
The Company's principal profit sharing plan was amended effective
January 1, 1995, to discontinue future contributions. The plan holds 5,799,000
and 6,081,000 shares of the Company's common stock, representing 9% and 10% of
the total shares outstanding at December 31, 1999 and 1998 respectively.
The Company also has a Stock Bonus Plan (the Plan) for key employees
pursuant to which 154,000, 186,000 and 258,000 common shares were issued in
1999, 1998 and 1997, respectively, resulting in a charge to operations of $3.4
million, $2.7 million and $2.2 million, respectively. The Plan, as amended
December 9, 1992, provides that a total of up to 1,350,000 common shares may be
awarded in any one year.
Effective January 1, 1995, the Company adopted The First American
Financial Corporation 401(k) Savings Plan (The Savings Plan), which is available
to substantially all employees. The Savings Plan allows for employee-elective
contributions up to the maximum deductible amount as determined by the Internal
Revenue Code. The Company makes contributions to The Savings Plan based on
profitability, as well as contributions of the participants.
37
<PAGE>
The Company's expense related to The Savings Plan amounted to $13.7 million,
$14.4 million and $6.4 million for the years ended December 31, 1999, 1998 and
1997, respectively.
NOTE 12.
Stock Option Plans:
On April 24, 1996, the Company implemented The First American
Financial Corporation 1996 Stock Option Plan (the Stock Option Plan). Under the
Stock Option Plan, options are granted to certain employees to purchase the
Company's common stock at a price no less than the market value of the shares on
the date of the grant. The maximum number of shares that may be subject to
options is 11,625,000. Currently outstanding options become exercisable one to
five years, and expire 10 years, from the grant date. On April 24, 1997, the
Company implemented The First American Financial Corporation 1997 Directors'
Stock Plan (the Directors' Plan). The Directors' Plan is similar to the
employees' Stock Option Plan, except that the maximum number of shares that may
be subject to options is 1,800,000 and the maximum number of shares that may be
purchased pursuant to options granted shall not exceed 6,750 shares during any
12-consecutive-month period.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
In accounting for its plan, the Company, as allowable under the provisions of
SFAS No. 123, applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." As a result of this election, the Company does
not recognize compensation expense for its stock option plans. Had the Company
determined compensation cost based on the fair value for its stock options at
grant date, as set forth under SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts as follows:
(in thousands, except per share amounts) 1999 1998 1997
- ----------------------------------------------------------------------------
Net income:
As reported $33,003 $201,527 $67,765
Pro forma $21,790 $183,845 $66,533
Earnings per share:
As reported
Basic .51 $ 3.35 $ 1.19
Diluted .50 $ 3.21 $ 1.16
Pro forma
Basic .34 $ 3.05 $ 1.17
Diluted .33 $ 2.93 $ 1.14
The fair value of each option grant is estimated at the grant date
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively; dividend yield
of 1.5%, 1% and 1.2%; expected volatility of 39.6%, 36% and 38.1%; risk-free
interest rate of 5.8%, 5.7% and 6.3%; and expected life of seven years.
Transactions involving stock options are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise
(in thousands, except weighted-average exercise price) Outstanding Price
- -------------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1996 3,782 $ 6.55
Granted during 1997 400 $11.66
Exercised during 1997 (382) $ 6.51
Forfeited during 1997 (351) $ 8.36
- -------------------------------------------------------------------------------------
Balance at December 31, 1997 3,449 $ 6.97
Granted during 1998 4,305 $23.32
Exercised during 1998 (564) $ 6.52
Forfeited during 1998 (283) $14.16
- -------------------------------------------------------------------------------------
Balance at December 31, 1998 6,907 $16.94
Granted during 1999 224 $17.23
Exercised during 1999 (453) $ 8.54
Forfeited during 1999 (400) $18.61
- -------------------------------------------------------------------------------------
Balance at December 31, 1999 6,278 $17.37
- -------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
The following table summarizes stock options outstanding and exercisable at
December 31, 1999:
<TABLE>
<CAPTION>
(shares in thousands) Outstanding
- ----------------------------------------------------------------------
Average Average
Range of Life Exercise
Exercise Prices Options (Years) (a) Price
- ----------------------------------------------------------------------
<S> <C> <C> <C>
$ 5.69 - $ 8.54 1,977 6.6 $ 5.78
$ 8.77 - $13.15 138 7.0 $10.01
$13.25 - $19.87 321 8.6 $16.45
$20.34 - $30.50 3,816 8.3 $23.63
$32.00 - $33.44 26 8.9 $32.27
-------------------------------------------
$ 5.69 - $33.44 6,278 7.0 $17.38
-------------------------------------------
</TABLE>
(a) Average contractual life remaining in years
NOTE 13.
Commitments and Contingencies:
The Company leases certain office facilities, automobiles and
equipment under operating leases, which, for the most part, are renewable. The
majority of these leases also provide that the Company will pay insurance and
taxes. In December 1999, the Company entered into a sale-leaseback agreement
with regard to certain furniture and equipment with a net book value of $65.7
million. Proceeds from the sale amounted to $80.1 million and a gain of $14.4
million has been included in deferred revenue and will be amortized over the
life of the lease. Under the agreement, the Company agreed to lease the
equipment for five years with minimum annual lease payments of $15.2 million.
At the end of the term of the lease, the Company has the option to acquire the
equipment or return it to the lessor.
Future minimum rental payments under operating leases that have
initial or remaining noncancelable lease terms in excess of one year as of
December 31, 1999, are as follows:
(in thousands) Year
- ------------------------------------------------------------
2000 $114,880
2001 93,747
2002 77,027
2003 60,037
2004 46,901
Later Years 67,915
- ------------------------------------------------------------
$460,507
- ------------------------------------------------------------
Total rental expense for all operating leases and month-to-month rentals was
$126.3 million, $110.3 million and $79.7 million for 1999, 1998 and 1997,
respectively.
NOTE 14.
Mandatorily Redeemable Preferred Securities:
On April 22, 1997, the Company issued and sold $100.0 million of 8.5%
trust preferred securities, due in 2012, through its wholly owned subsidiary,
First American Capital Trust. In connection with the subsidiary's issuance of
the preferred securities, the Company issued to the subsidiary trust 8.5%
subordinated interest notes, due 2012. The sole assets of the subsidiary are
and will be the subordinated interest notes. The Company's obligations under
the subordinated interest notes and related agreements, taken together,
constitute a full and unconditional guarantee by the Company of the subsidiary's
obligations under the preferred securities. Distributions payable on the
securities are included as interest expense in the Company's consolidated income
statement.
NOTE 15.
Stockholders' Equity:
In December 1999, the Company announced plans to repurchase up to 5%
of its then issued and outstanding shares. The amount of any share repurchases
will depend on, among other factors, the market performance of the shares; the
availability of, and alternate uses of, the Company's funds; and Securities and
Exchange Commission regulations. Pursuant to the terms of the repurchase
program, the Company had repurchased and retired 140,000 of its issued and
outstanding shares as of December 31, 1999.
On October 23, 1997, the Company adopted a Shareholder Rights Plan
(the Rights Plan). Under the Rights Plan, after the close of business on
November 15, 1997, each holder of the Company's common shares received a
39
<PAGE>
dividend distribution of one Right for each common share held. Each Right
entitles the holder thereof to buy a preferred share fraction equal to 1/100,000
of a share of Series A Junior Participating Preferred Shares of the Company at
an exercise price of $265 per preferred share fraction. Each fraction is
designed to be equivalent in voting and dividend rights to one common share.
The Rights will be exercisable and will trade separately from the
common shares only if a person or group, with certain exceptions, acquires
beneficial ownership of 15% or more of the Company's common shares or commences
a tender or exchange offer that would result in such person or group
beneficially owning 15% or more of the common shares then outstanding. The
Company may redeem the Rights at $0.001 per Right at any time prior to the
occurrence of one of these events. All Rights expire on October 23, 2007.
Each Right will entitle its holder to purchase, at the Right's then-
current exercise price, preferred share fractions (or other securities of the
Company) having a value of twice the Right's exercise price. This amounts to
the right to buy preferred share fractions of the Company at half price. Rights
owned by the party triggering the exercise of Rights will be void and therefore
will not be exercisable.
In addition, if after any person has become a 15%-or-more stockholder,
the Company is involved in a merger or other business combination transaction
with another person in which the Company's common shares are changed or
converted, or if the Company sells 50% or more of its assets or earning power to
another person, each Right will entitle its holder to purchase, at the Right's
then-current exercise price, common stock of such other person (or its parent)
having a value of twice the Right's exercise price.
NOTE 16.
Other Comprehensive Income:
Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income.
Components of other comprehensive income are as follows:
<TABLE>
<CAPTION>
Minimum Accumulated
Unrealized Pension Other
Gains on Liability Comprehensive
(in thousands) Securities Adjustment Income
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1996 2,924 - 2,924
Pretax change 4,232 - 4,232
Tax expense (1,481) - (1,481)
- ----------------------------------------------------------------------------
Balance at December 31, 1997 5,675 - 5,675
Pretax change 5,028 $(1,856) 3,172
Tax (expense) benefit (1,759) 650 (1,109)
- ----------------------------------------------------------------------------
Balance at December 31, 1998 $ 8,944 $(1,206) $ 7,738
Pretax change (6,591) $ 1,175 (5,416)
Tax benefit (expense) 2,308 (412) 1,896
- ----------------------------------------------------------------------------
Balance at December 31, 1999 $ 4,661 $ (443) $ 4,218
- ----------------------------------------------------------------------------
</TABLE>
The change in other unrealized gains (losses) on debt and equity
securities includes reclassification adjustments of $3.7 million, $1.2 million
and $0.4 million of net realized gains for the years ended December 31, 1999,
1998 and 1997, respectively.
NOTE 17.
Litigation
On May 19, 1999, The People of the State of California, Kathleen
Connell, Controller of the State of California, and Chuck Quackenbush, Insurance
Commissioner of the State of California, filed a class action suit in the
Sacramento Superior Court. The action seeks to certify as a class of defendants
all "title insurers", all "underwritten title companies" and all "controlled
escrow companies" (as those terms are defined in the California Insurance Code)
--------------
and all "independent escrow companies" (as the term is defined in the California
Financial Code) doing business in the State of California from 1970 to the
- --------------
present who (i) hold dormant, unclaimed escrow funds; (ii) charged California
home buyers and other escrow customers $10.00 or more for delivery services or
administrative fees; (iii) charged California home buyers and other escrow
customers reconveyance fees and/or (iv) earned interest (or its equivalent) from
financial institutions on customers' deposited escrow funds.
The plaintiffs allege that the defendants unlawfully (i) failed to
escheat unclaimed property to the Controller of the State of California on a
timely basis; (ii) charged California home buyers and other escrow customers
fees for services that were never performed or which cost less than the amount
charged; and (iii) devised and carried out schemes with financial institutions
to receive interest, or monies in lieu of interest, on escrow funds deposited by
defendants with financial institutions in demand deposits.
40
<PAGE>
In February 2000, the Company entered into an administrative
settlement with the California Department of Insurance (DOI), whereby the DOI
released the Company from any further claim of liability as to the Company's
receipt of earnings credits or any alleged overcharges for various miscellaneous
escrow fee items, such as courier, Federal Express or wire service fees. The
DOI further agreed to direct the attorney general to dismiss it as a plaintiff
from the action brought by the State of California. In the settlement with the
DOI, the Company agreed to (i) make a contribution to a consumer education fund
and (ii) accept a new regulation to be promulgated by the DOI, whereby earnings
credit programs will be authorized and regulated by the DOI and rate filings
will be required for escrow fees including several specified miscellaneous fee
items.
Subsequent to the filing of the action by the State of California,
First American Title Insurance Company was named and served as a defendant in
two private class actions. The allegations in the complaints include some, but
not all, of the allegations contained in the class action filed by the State of
California. The private class actions independently seek injunctive relief,
attorneys' fees, damages and penalties in unspecified amounts. The private
class actions have been stayed by court orders pending settlement negotiations
relating to the class action filed by the State of California.
The Company does not believe that the ultimate resolution of these
actions will have a materially adverse effect on its financial condition or
results of operations.
The Company is involved in various routine legal proceedings related
to its operations. While the ultimate disposition each proceeding is not
determinable, the Company does not believe that any such proceedings will
have a materially adverse effect on its financial condition or results of
operations.
NOTE 18.
Business Combinations:
Effective May 14, 1999, the Company completed its merger of National
Information Group (NAIG). Under the terms of the definitive merger agreement,
each of the NAIG shareholders received .67 of a share of the Company's common
stock for each NAIG common share they owned. To complete the merger, the
Company issued 3,004,800 shares, in exchange for 100% of the outstanding common
stock of NAIG. The information services provided by NAIG include outsourcing
services, flood zone determination services, real estate tax tracking, hazard
and motor vehicle insurance tracking, lender-placed insurance and flood
insurance. This merger was accounted for under the pooling-of-interests method
of accounting and, as a result, the Company has restated all previously reported
results to reflect this merger.
Included in other operating expenses for the 12 months ended December
31, 1999, were merger-related charges of $10.8 million, $7.0 million after tax,
or 10 cents per diluted share. These nonrecurring charges include severance
payments, lease terminations and consulting services. Combined and separate
results of the Company and NAIG during the periods preceding the acquisitions
were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
(in thousands) December 31, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
The First American Financial Corporation $2,877,328 $1,908,923
NAIG 66,552 53,078
- ---------------------------------------------------------------------------------------------------------
$2,943,880 $1,962,001
- ---------------------------------------------------------------------------------------------------------
Net income:
The First American Financial Corporation $ 198,710 $ 64,499
NAIG 2,817 3,266
- ---------------------------------------------------------------------------------------------------------
$ 201,527 $ 67,765
- ---------------------------------------------------------------------------------------------------------
Net income (loss) per diluted share:
The First American Financial Corporation $ 3.32 $ 1.16
NAIG (.11)
- ---------------------------------------------------------------------------------------------------------
$ 3.21 $ 1.16
- ---------------------------------------------------------------------------------------------------------
</TABLE>
During the year ended December 31, 1999, the Company acquired 25
companies. The purchase method of accounting was used for 24 of the
acquisitions and the pooling-of-interests method was used for one.
The 24 acquisitions accounted for under the purchase method of
accounting were individually not material and are included in the following
business segments; 20 in the title insurance segment, three in the real estate
information services segment and one in the consumer information segment. Their
aggregate purchase price was $71.8 million in cash, $53.5 million in notes and
1,119,321 shares of the Company's common stock. The purchase price for each was
allocated to the assets acquired and liabilities assumed based on estimated fair
values and approximately $110.7 million in goodwill was recorded. Goodwill is
being amortized on a straight-line basis over its estimated useful
41
<PAGE>
life ranging from 20 to 30 years. The operating results of these acquired
companies were included in the Company's consolidated financial statements from
their respective acquisition dates. Assuming these acquisitions had occurred
January 1, 1998, pro forma revenues, net income and net income per diluted share
would have been $3.07 billion, $36.8 million and $.55, respectively, for the
year ended December 31, 1999; and $3.08 billion, $207.6 million and $3.25,
respectively, for the year ended December 31, 1998. All pro forma results
include amortization of goodwill and interest expense on acquisition debt. The
pro forma results are not necessarily indicative of the operating results that
would have been obtained had the acquisitions occurred at the beginning of the
periods presented, nor are they necessarily indicative of future operating
results.
On January 1, 1998, the Company formed a limited liability corporation
(LLC) with Experian Group (Experian). The purpose of the LLC is to combine
certain operations of the Company's subsidiary, First American Real Estate
Information Services, Inc. (FAREISI), with Experian's Real Estate Solutions
division (RES). The LLC is 80% owned by the Company and 20% owned by Experian.
RES is a supplier of core real estate data, providing, among other things,
property valuation information, title and tax information and imaged title
documents. The Company treated the transaction as an acquisition of the assets
and liabilities of RES in consideration for a 20% interest in FAREISI. As a
result of the transaction, the Company recognized an investment gain of $32.4
million in the first quarter 1998. The operating results of the LLC are
included in the Company's consolidated financial statements commencing January
1, 1998.
NOTE 19.
Segment Financial Information:
The Company's operations include three reportable segments: title
insurance and services, real estate information and services and consumer
information and services. The title insurance segment issues policies, which are
insured statements of the condition of title to real property, and provides
other related services. The real estate information property and casualty
insurance segment provides to lender customers the status of tax payments on
real property securing their loans, mortgage credit information derived from at
least two credit bureau sources, flood zone determination reports that provide
information on whether or not a property is in a special flood hazard area, as
well as other real estate-related information services. The consumer information
segment provides home warranties, which protect homeowners against defects in
home fixtures; automotive tracking services; resident screening; pre-employment
screening; property and casualty insurance; trust and banking services;
investment advisory and other related services.
The title insurance and real estate information segments operate
through networks of offices nationwide. The Company provides its title services
through both direct operations and agents throughout the United States. It also
offers title services abroad in Australia, the Bahama Islands, Canada, England,
Guam, Ireland, Mexico, Puerto Rico, Scotland, South Korea, and the U.S. Virgin
Islands. To date, the international title operations have not been material to
the Company's financial condition or results of operations. The consumer
information segment provides home warranty services in Arizona, California,
Georgia, Nevada, North Carolina, South Carolina, Texas, Utah and Washington.
Trust, banking and thrift services are provided in Southern California.
Investment advisory, automotive tracking, resident screening, pre-employment
screening and lender-placed flood and hazard insurances are offered nationwide.
42
<PAGE>
Selected financial information about the Company's operations by
segment for each of the past three years is as follows:
<TABLE>
<CAPTION> Income (Loss)
Before Income
Taxes, Minority Depreciation
Interests and and Capital
(IN THOUSANDS) Revenues Cumulative Effect Assets Amortization Expenditures
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
- -------------------------------------------------------------------------------------------------------------------------
Title Insurance $2,182,434 $128,738 $1,042,860 $36,839 $124,027
Real Estate
Information 582123 54914 710,613 32541 85,186
Consumer Information 216,078 38,080 286,725 4,289 2,043
Corporate 7,534 (51,760) 76,216 3,362 1,332
- -------------------------------------------------------------------------------------------------------------------------
$2,988,169 $169,972 $2,116,414 $77,031 $212,588
- -------------------------------------------------------------------------------------------------------------------------
1998
- -------------------------------------------------------------------------------------------------------------------------
Title Insurance $2,087,106 $227,906 $ 858,326 $29,375 $100,560
Real Estate
Information 632,997 110,069 628,116 28,038 58,258
Consumer Information 180,147 28,455 235,354 2,562 1,708
Corporate 43,630 (1,379) 130,935 2,288 -
- -------------------------------------------------------------------------------------------------------------------------
$2,943,880 $365,051 $1,852,731 $62,263 $160,526
- -------------------------------------------------------------------------------------------------------------------------
1997
- -------------------------------------------------------------------------------------------------------------------------
Title Insurance $1,482,993 $ 79,602 $ 656,622 $23,501 $ 39,190
Real Estate
Information 342,987 40,608 317,089 13,704 35,087
Consumer Information 133,717 22,134 212,677 1,569 3,449
Corporate 2,304 (27,967) 33,989 1,251 250
- -------------------------------------------------------------------------------------------------------------------------
$1,962,001 $114,377 $1,220,377 $40,025 $ 77,976
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Corporate consists primarily of unallocated interest expense, minority
interests, equity in earnings of affiliated companies and personnel and other
operating expenses associated with the Company's home office facilities.
43
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Quarterly Financial Data
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
(in thousands, except per share amounts) March 31 June 30 September 30 December 31
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------
Revenues:
As reported $ 706,926 $ 770,398 $ 762,592 $ 700,393
Pooling adjustment 15,116 - - -
Change in accounting for tax service contracts 8,825 11,457 12,462 -
- ---------------------------------------------------------------------------------------------------------------------------
As restated $ 730,867 $ 781,855 $ 775,054 $ 700,393
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes, minority interests and
cumulative effect of a change in accounting principle:
As reported $ 45,365 $ 51,553 $ 38,378 $ 3,436
Pooling adjustment (1,504) - -
Change in accounting for tax service contracts 8,825 11,457 12,462
- ---------------------------------------------------------------------------------------------------------------------------
As restated $ 52,686 $ 63,010 $ 50,840 $ 3,436
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss):
As reported $ 24,877 $ 29,226 $ 21,940 $ (2,244)
Pooling adjustment (1,004) - - -
Change in accounting for tax service contracts 4,210 5,585 6,053 -
Cumulative effect of a change in accounting for
tax service contracts (55,640) - - -
- ---------------------------------------------------------------------------------------------------------------------------
As restated $ (27,557) $ 34,811 $ 27,993 $ (2,244)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share:
Basic:
As reported $ .41 $ .45 $ .34 $ (.03)
Pooling adjustment (.03) - - -
Change in accounting for tax service contracts .06 .09 .09 -
Cumulative effect of a change in accounting for
tax service contracts (.87) - - -
- ---------------------------------------------------------------------------------------------------------------------------
As restated $ (.43) $ .54 $ .43 $ (.03)
- ---------------------------------------------------------------------------------------------------------------------------
Diluted:
As reported $ .40 $ .44 $ .33 $ (.03)
Pooling adjustment (.02) - - -
Change in accounting for tax service contracts .05 .08 .09 -
Cumulative effect of a change in accounting for
tax service contracts (.85) - - -
- ---------------------------------------------------------------------------------------------------------------------------
As restated $ (.42) $ .52 $ .42 $ (.03)
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Revenues $ 628,216 $ 726,420 $ 775,028 $ 814,216
Income before income taxes and minority interests $ 82,768 $ 84,635 $ 101,761 $ 95,887
Net income $ 45,321 $ 46,126 $ 56,200 $ 53,880
Net income per share:
Basic $ .79 $ .78 $ .91 $ .86
Diluted $ .76 $ .75 $ .87 $ .82
</TABLE>
In December, 1999, the Company adopted Staff Accounting Bulletin No. 101 (SAB),
"Revenue Recognition in Financial Statements", which became effective January 1,
1999. In conformity with the SAB the Company has restated its results for the
first three quarters of 1999. See Note 1 to the consolidated financial
statements for further discussion.
All financial results presented include the effect of the 1999 acquisition of
NAIG accounted for under the pooling of interests method of accounting.
44
<PAGE>
SCHEDULE I
1 OF 1
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1999
<TABLE>
<CAPTION>
Column A Column B Column C Column D
-------- -------- -------- --------
Amount at which
shown in the
Type of Investment Cost Market Value balance sheet
------------------ ---- ------------ -------------
<S> <C> <C> <C>
Deposits with savings and loan associations and banks:
Registrant $ 50,000 $ 50,000 $ 50,000
------------ ------------ ------------
Consolidated $ 32,225,000 $ 32,225,000 $ 32,225,000
------------ ------------ ------------
Debt securities:
Registrant - None
Consolidated -
U.S. Treasury securities $ 38,049,000 $ 37,860,000 $ 37,860,000
Corporate securities 135,230,000 132,654,000 132,654,000
Obligations of states and political
subdivisions
32,547,000 30,345,000 30,345,000
Mortgage-backed securities 27,453,000 25,510,000 25,510,000
------------ ------------ ------------
$233,279,000 $226,369,000 $226,369,000
------------ ------------ ------------
Equity securities:
Registrant - None
Consolidated $ 25,185,000 $ 39,266,000 $ 39,266,000
------------ ------------ ------------
Other long-term investments:
Registrant - None
Consolidated $ 86,686,000 $ 86,686,000 $ 86,686,000
------------ ------------ ------------
Total Investments:
Registrant $ 50,000 $ 50,000 $ 50,000
============ ============ ============
Consolidated $377,375,000 $384,546,000 $384,546,000
============ ============ ============
</TABLE>
45
<PAGE>
SCHEDULE III
1 OF 2
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INSURANCE INFORMATION
BALANCE SHEET CAPTIONS
Column A Column B Column C Column D
-------- -------- -------- --------
Deferred Policy Claims Deferred
Segment Acquisition Costs Reserves Revenues
------- ----------------- -------- --------
1999
- ----
Title Insurance $ 245,376,000 $ 14,429,000
Real Estate Information 16,600,000 213,880,000
Consumer Information 11,534,000 11,748,000 51,457,000
Corporate
----------- ------------- -------------
Total $11,534,000 $ 273,724,000 $ 279,766,000
=========== ============= =============
1998
- ----
Title Insurance $ 248,723,000
Real Estate Information 17,857,000 $ 83,801,000
Consumer Information 7,590,000 6,341,000 35,401,000
Corporate
----------- ------------- -------------
Total $ 7,590,000 $ 272,921,000 $ 119,202,000
=========== ============= =============
46
<PAGE>
SCHEDULE III
2 OF 2
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INSURANCE INFORMATION
INCOME STATEMENT CAPTIONS
<TABLE>
<CAPTION>
Column A Column F Column G Column H Column I Column J Column K
-------- -------- -------- -------- -------- -------- --------
Amortization
of Deferred
Net Policy Other Net
Operating Investment Loss Acquisition Operating Premiums
Segment Revenues Income Provision Costs Expenses Written
------- -------- ------ --------- ----- -------- -------
<S> <C> <C> <C> <C> <C> <C>
1999
- ----
Title Insurance $2,153,879,000 $ 28,555,000 $ 65,925,000 $ 327,182,000
Real Estate Information 574,784,000 7,339,000 10,391,000 249,987,000
Consumer Information 207,533,000 8,545,000 39,902,000 $ 11,385,000 61,611,000 $ 18,031,000
Corporate 7,534,000 28,691,000
---------------- ---------------- ---------------- --------------- --------------- ----------------
Total $2,936,196,000 $ 51,973,000 $ 116,218,000 $ 11,385,000 $ 667,471,000 $ 18,031,000
=============== ================ ================ =============== =============== ================
1998
- ----
Title Insurance $2,063,217,000 $ 23,889,000 $ 68,697,000 $ 307,055,000
Real Estate Information 630,510,000 2,487,000 17,428,000 254,118,000
Consumer Information 173,380,000 6,767,000 38,053,000 $ 9,286,000 48,534,000 $ 14,290,000
Corporate 43,630,000 14,424,000
---------------- ---------------- ---------------- --------------- --------------- ----------------
Total $2,867,107,000 $ 76,773,000 $ 124,178,000 $ 9,286,000 $ 624,131,000 $ 14,290,000
================ ================ ================ =============== =============== ================
1997
- ----
Title Insurance $1,461,967,000 $ 21,026,000 $ 52,924,000 $ 247,579,000
Real Estate Information 343,076,000 (89,000) 9,874,000 146,671,000
Consumer Information 127,862,000 5,855,000 34,007,000 $ 9,250,000 23,585,000 $ 20,501,000
Corporate 2,304,000 10,591,000
---------------- ---------------- ---------------- --------------- --------------- ----------------
Total $1,932,905,000 $ 29,096,000 $ 96,805,000 $ 9,250,000 $ 428,426,000 $ 20,501,000
================ ================ ================ =============== =============== ================
</TABLE>
47
<PAGE>
SCHEDULE IV
1 OF 1
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
REINSURANCE
<TABLE>
<CAPTION>
Insurance Percentage
operating Ceded to Assumed Insurance of amount
revenues before other from other operating assumed to
Segment reinsurance companies companies revenues operating revenues
------- --------------- --------- ---------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Title Insurance
1999 2,153,726,000 3,401,000 3,554,000 2,153,879,000 0.2%
=============== ========= ========== ============= ==================
1998 2,062,679,000 4,151,000 4,689,000 2,063,217,000 0.2%
=============== ========= ========== ============= ==================
1997 1,461,551,000 3,609,000 4,025,000 1,461,967,000 0.3%
=============== ========= ========== ============= ==================
Consumer Information
1999 21,593,000 3,562,000 1,000 18,032,000 0.0%
=============== ========= ========== ============= ==================
1998 17,915,000 3,637,000 (1,000) 14,277,000 0.0%
=============== ========= ========== ============= ==================
1997 23,859,000 3,640,000 (10,000) 20,209,000 0.0%
=============== ========= ========== ============= ==================
</TABLE>
48
<PAGE>
SCHEDULE V
1 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 1999
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------------------------------------- -------- --------
Additions
--------------------------------------
Balance at Charged to Charged Deductions Balance
beginning costs and to other from at end
Description of period expenses accounts reserve of period
----------- ------------ ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Reserve deducted from
accounts receivable:
Registrant - None
Consolidated $ 10,715,000 $ 12,278,000 $ 9,324,000 (A) $ 13,669,000
============ ============ ============ ============
Reserve for title losses
and other claims:
Registrant - None
Consolidated $272,921,000 $116,218,000 $ 2,797,000 (B) $118,212,000 (C) $273,724,000
============ ============ ============ ============ ============
Reserve deducted from
loans receivable:
Registrant - None
Consolidated $ 1,150,000 $ 102,000 $ 347,000 (A) $ 905,000
============ ============ ============ ============
Reserve deducted from
assets acquired in
connection with
claim settlements:
Registrant - None
Consolidated $ 12,256,000 $ (6,093,000) $ 1,307,000 (D) $ 4,856,000
============ ============ ============ ============
Reserve deducted from
other assets:
Registrant - None
Consolidated $ 1,934,000 $ 817,000 $ 692,000 (D) $ 2,059,000
============ ============ ============ ============
</TABLE>
Note A - Amount represents accounts written off, net of recoveries.
Note B - Amount represents net $7,955,000 in purchase accounting adjustments,
$11,251,000 related to the disposition of a subsidiary and $6,093,000
from the reserve for assets acquired in connection with claim
settlements.
Note C - Amount represents claim payments, net of recoveries.
Note D - Amount represents elimination of reserve in connection with disposition
and/or revaluation of the related asset.
49
<PAGE>
SCHEDULE V
2 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------------------------------------- -------- --------
Additions
--------------------------------------
Balance at Charged to Charged Deductions Balance
beginning costs and to other from at end
Description of period expenses accounts reserve of period
----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Reserve deducted from
accounts receivable:
Registrant - None
Consolidated $ 7,602,000 $ 11,095,000 $ 7,982,000 (A) $ 10,715,000
============ ============ ============ ============
Reserve for title losses
and other claims:
Registrant - None
Consolidated $254,058,000 $124,178,000 $ (3,596,000)(B) $101,719,000 (C) $272,921,000
============ ============ ============ ============ ============
Reserve deducted from
loans receivable:
Registrant - None
Consolidated $ 1,185,000 $ 159,000 $ 194,000 (A) $ 1,150,000
============ ============ ============ ============
Reserve deducted from
assets acquired in
connection with
claim settlements:
Registrant - None
Consolidated $ 11,135,000 $ 3,951,000 $ 2,830,000 (D) $ 12,256,000
============ ============ ============ ============
Reserve deducted from
other assets:
Registrant - None
Consolidated $ 1,807,000 $ 263,000 $ 136,000 (D) $ 1,934,000
============ ============ ============ ============
</TABLE>
Note A - Amount represents accounts written off, net of recoveries.
Note B - Amount represents $355,000 in purchase accounting adjustments, net of a
reclassification of $3,951,000 to the reserve for assets acquired in
connection with claim settlements.
Note C - Amount represents claim payments, net of recoveries.
Note D - Amount represents elimination of reserve in connection with disposition
and/or revaluation of the related asset.
50
<PAGE>
SCHEDULE V
3 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 1997
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------------------------------------- -------- --------
Additions
--------------------------------------
Balance at Charged to Charged Deductions Balance
beginning costs and to other from at end
Description of period expenses accounts reserve of period
----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Reserve deducted from
accounts receivable:
Registrant - None
Consolidated $ 5,351,000 $ 4,510,000 $ 2,259,000 (A) $ 7,602,000
============ ============ ============ ============
Reserve for title losses
and other claims:
Registrant - None
Consolidated $247,443,000 $ 96,805,000 $ (4,633,000)(B) $ 85,557,000 (C) $254,058,000
============ ============ ============ ============ ============
Reserve deducted from
loans receivable:
Registrant - None
Consolidated $ 1,050,000 $ 243,000 $ 108,000 (A) $ 1,185,000
============ ============ ============ ============
Reserve deducted from
assets acquired in
connection with
claim settlements:
Registrant - None
Consolidated $ 10,278,000 $ 4,678,000 $ 3,821,000 (D) $ 11,135,000
============= ============ ============ ============
Reserve deducted from
deferred income taxes:
Registrant - None
Consolidated $ 438,000 $ 438,000 (E)
============= ============
Reserve deducted from
other assets:
Registrant - None
Consolidated $ 1,387,000 $ 640,000 $ 220,000 (D) $ 1,807,000
============= ============ ============ ============
</TABLE>
Note A - Amount represents accounts written off, net of recoveries.
Note B - Amount represents $45,000 in purchase accounting adjustments, net of a
reclassification of $4,678,000 to the reserve for assets acquired in
connection with claim settlements.
Note C - Amount represents claim payments, net of recoveries.
Note D - Amount represents elimination of reserve in connection with disposition
and/or revaluation of the related asset.
Note E - Amount represents elimination of reserve in connection with the
expiration of the related temporary differences.
51
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure.
- ---------------------
None
PART III
--------
The information required by Items 10 through 13 of this report is set
forth in the sections entitled "Who are the Largest Principal Shareholders
Outside of Management?" "Election of Directors," "Transactions with Management
and Others," "Security Ownership of Management," "Executive Compensation,"
"Report of the Compensation Committee on Executive Compensation," "Comparative
Cumulative Total Return to Shareholders," "Executive Officers", "Section 16(a)
Beneficial Ownership Reporting Compliance," "Compensation Committee Interlocks
and Insider Participation," "Stock Option Exercises," "Pension Plan,"
"Supplemental Benefit Plan," "Change of Control Arrangements" and "Directors
Compensation" in the Company's definitive proxy statement, which sections are
incorporated in this report and made a part hereof by reference. The definitive
proxy statement will be filed no later than 120 days after close of Registrant's
fiscal year.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
-----------------------------------------------------------------
(a) 1. & 2. Financial Statements and Financial Statement Schedules
The Financial Statements and Financial Statement
Schedules filed as part of this report are listed in
the accompanying index at page 21 in Item 8 of Part II
of this report.
3. Exhibits (Each management contract or compensatory plan
or arrangement in which any director or named executive
officer of The First American Financial Corporation, as
defined by Item 402(a)(3) of Regulation S-K (17 C.F.R.
(S)229.402(a)(3)), participates that is included among
the exhibits listed below is identified by an asterisk
(*).)
(2) Agreement and Plan of Merger, dated as of
November 17, 1998, among The First American
Financial Corporation, National Insurance
Group, and Pea Soup Acquisition Corp.,
incorporated by reference herein from Exhibit
2.1 of Form 8-K filed by National Information
Group on November 25, 1998.
(3)(a) Restated Articles of Incorporation of The
First American Financial Corporation dated
July 14, 1998, incorporated by reference
herein from Exhibit 3.1 of Amendment No. 1,
dated July 28, 1998, to the Company's
Registration Statement No. 333-53681 on Form
S-4.
(3)(b) Certificate of Amendment of Restated Articles
of Incorporation of The First American
Financial Corporation dated April 23, 1999,
incorporated by reference herein from Exhibit
(3) of Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
(3)(c) Bylaws of The First American Financial
Corporation, as amended.
(4)(a) Rights Agreement, dated as of October 23,
1997, incorporated by reference herein from
Exhibit 4 of Registration Statement on Form
8-A dated November 7, 1997.
(4)(b) Junior Subordinated Indenture, dated as of
April 22, 1997, incorporated by reference
herein from Exhibit (4.2) of Quarterly Report
on Form 10-Q for the quarter ended June 30,
1997.
(4)(c) Form of New 8.50% Junior Subordinated
Deferrable Interest Debenture, incorporated
by reference herein from Exhibit 4.2 of
Registration Statement No. 333-35945 on Form
S-4 dated September 18, 1997.
(4)(d) Certificate of Trust of First American
Capital Trust I, incorporated by reference
herein from Exhibit 4.3 of Registration
Statement No. 333-35945 on Form S-4 dated
September 18, 1997.
(4)(e) Amended and Restated Declaration of Trust of
First American Capital Trust I dated as of
April 22, 1997, incorporated by reference
herein from Exhibit (4.3) of Quarterly Report
on Form 10-Q for the quarter ended June 30,
1997.
53
<PAGE>
(4)(f) Form of New 8.50% Capital Security (Liquidation
Amount $1,000 per Capital Security), incorporated
by reference herein from Exhibit 4.6 of
Registration Statement No. 333-35945 on Form S-4
dated September 18, 1997.
(4)(g) Form of New Guarantee Agreement, incorporated by
reference herein from Exhibit 4.7 of Registration
Statement No. 333-35945 on Form S-4 dated
September 18, 1997.
(4)(h) Senior Indenture, dated as of April 7, 1998,
between The First American Financial Corporation
and Wilmington Trust Company as Trustee,
incorporated by reference herein from Exhibit (4)
of the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.
*(10)(a) Description of Stock Bonus Plan, as amended,
incorporated by reference herein from Exhibit
(10)(a) of Annual Report on Form 10-K for the
fiscal year ended December 31, 1992.
*(10)(b) Executive Supplemental Benefit Plan dated April
10, 1986, and Amendment No. 1 thereto dated
October 1, 1986, incorporated by reference herein
from Exhibit (10)(b) of Annual Report on Form 10-K
for the fiscal year ended December 31, 1988.
*(10)(c) Amendment No. 2, dated March 22, 1990, to
Executive Supplemental Benefit Plan, incorporated
by reference herein from Exhibit (10)(c) of
Annual Report on Form 10-K for the fiscal year
ended December 31, 1989.
*(10)(d) Amendment No. 3, dated July 7, 1998, to Executive
Supplemental Benefit Plan, incorporated by
reference herein from Exhibit (10)(d) of Annual
Report on Form 10-K for the fiscal year ended
December 31, 1998.
*(10)(e) Amendment No. 4, dated March 22, 2000, to
Executive Supplemental Benefit Plan.
*(10)(f) Management Supplemental Benefit Plan dated July
20, 1988, incorporated by reference herein from
Exhibit (10) of Quarterly Report on Form 10-Q for
the quarter ended June 30, 1992.
*(10)(g) Amendment No. 1, dated July 7, 1998, to Management
Supplemental Benefit Plan, incorporated by
reference herein from Exhibit (10)(f) of Annual
Report on Form 10-K for the fiscal year ended
December 31, 1998.
*(10)(h) Amendment No. 2, dated March 22, 2000, to
Management Supplemental Benefit Plan.
*(10)(i) Pension Restoration Plan (effective as of January
1, 1994), incorporated by reference herein from
Exhibit (10)(e) of Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
*(10)(j) 1996 Stock Option Plan, incorporated by reference
herein from Exhibit 4 of Registration Statement
No. 333-19065 on Form S-8 dated December 30, 1996.
*(10)(k) Amendment No. 1, dated February 26, 1998, to 1996
Stock Option Plan, incorporated by reference
herein from Exhibit (10)(i) of Annual Report on
Form 10-K for the fiscal year ended December 31,
1998.
54
<PAGE>
*(10)(l) Amendment No. 2, dated June 22, 1998, to 1996
Stock Option Plan, incorporated by reference
herein from Exhibit (10)(j) of Annual Report on
Form 10-K for the fiscal year ended December 31,
1998.
*(10)(m) Amendment No. 3, dated July 7, 1998, to 1996 Stock
Option Plan, incorporated by reference herein from
Exhibit (10)(k) of Annual Report on Form 10-K for
the fiscal year ended December 31, 1998.
*(10)(n) Amendment No. 4, dated April 22, 1999, to 1996
Stock Option Plan, incorporated by reference
herein from Exhibit (10)(a) of Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999.
*(10)(o) Amendment No. 5, dated February 29, 2000, to 1996
Stock Option Plan.
*(10)(p) Change in Control Agreement (Executive Form) dated
November 12, 1999.
*(10)(q) Change in Control Agreement (Management Form)
dated November 12, 1999.
*(10)(r) 1997 Directors' Stock Plan, incorporated by
reference herein from Exhibit 4.1 of Registration
Statement No. 333-41993 on Form S-8 dated December
11, 1997.
*(10)(s) Amendment No. 1 to 1997 Directors' Stock Plan
dated February 26, 1998, incorporated by reference
herein from Exhibit (10)(m) of Annual Report on
Form 10-K for the fiscal year ended December 31,
1998.
*(10)(t) Amendment No. 2 to 1997 Directors' Stock Plan
dated July 7, 1998, incorporated by reference
herein from Exhibit (10)(n) of Annual Report on
Form 10-K for the fiscal year ended December 31,
1998.
(10)(u) Registration Rights Agreement, dated April 22,
1997, incorporated by reference herein from
Exhibit (10.1) of Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997.
*(10)(v) The First American Financial Corporation Deferred
Compensation Plan dated March 10, 2000.
(10)(w) The First American Financial Corporation Deferred
Compensation Plan Trust Agreement dated March 10,
2000.
(10)(x) Contribution and Joint Venture Agreement By and
Among The First American Financial Corporation and
Experian Information Solutions, Inc., et al.,
dated November 30, 1997, incorporated by reference
herein from Exhibit (10)(a) of the Quarterly
Report on Form 10-Q for the quarter ended March
31, 1998.
(10)(y) Operating Agreement for First American Real Estate
Solutions LLC, a California Limited Liability
Company, By and Among First American Real Estate
Information Services, Inc., and Experian
Information Solutions, Inc., et al., dated
November 30, 1997, incorporated by reference
herein from Exhibit (10)(b) of the Quarterly
Report on Form 10-Q for the quarter ended March
31, 1998.
(10)(z) Data License Agreement dated November 30, 1997,
incorporated by reference herein from Exhibit
(10)(d) of the Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998.
55
<PAGE>
(10)(aa) Reseller Services Agreement dated as of November
30, 1997, incorporated by reference herein from
Exhibit (10)(g) of the Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998.
(10)(bb) Amendment to Reseller Services Agreement For
Resales to Consumers dated as of November 30,
1997, incorporated by reference herein from
Exhibit (10)(h) of the Quarterly Report on Form
10-Q for the quarter ended March 31, 1998.
(10)(cc) Trademark License Agreement, dated as of November
30, 1997, incorporated by reference herein from
Exhibit (10)(i) of the Quarterly Report on Form
10-Q for the quarter ended March 31, 1998.
(10)(dd) Amended and Restated Credit Agreement dated as of
July 29, 1997, incorporated by reference herein
from Exhibit (4.4) of Quarterly Report on Form
10-Q for the quarter ended June 30, 1997.
(10)(ee) Amendment No. 1 dated as of November 10, 1997, to
Amended and Restated Credit Agreement dated as of
July 29, 1997, incorporated by reference herein
from Exhibit (4.1) of Quarterly Report on Form
10-Q for the quarter ended September 30, 1997.
(10)(ff) Credit Agreement dated as of July 2, 1999,
incorporated by reference herein from Exhibit
(10)(b) of Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999.
(21) Subsidiaries of the registrant.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
During the last quarter of the period covered by this report, the Company
filed a current report on Form 8-K dated December 21, 1999, reporting on
earnings expectations for the fourth quarter of 1999 and the first quarter
of 2000, and announcing a program for repurchasing a portion of the
Company's issued and outstanding Common shares.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE FIRST AMERICAN FINANCIAL CORPORATION (Registrant)
By /S/ PARKER S. KENNEDY
--------------------------------------------------------------------
Parker S. Kennedy, President
(Principal Executive Officer)
Date: March 28, 2000
--------------------------------------------------------------------
By: /S/ THOMAS A. KLEMENS
--------------------------------------------------------------------
Thomas A. Klemens, Executive Vice President, Chief Financial Officer
Financial and Accounting Officer)
Date: March 28, 2000
--------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
By: /S/ D.P. KENNEDY By: /S/ JAMES L. DOTI
--------------------------- -----------------------------
D.P. Kennedy James L. Doti, Director
Chairman and Director
Date March 28, 2000 Date: March 28, 2000
--------------------------- -----------------------------
By: /S/ PARKER S. KENNEDY By /S/ LEWIS W. DOUGLAS, JR.
--------------------------- -----------------------------
Parker S. Kennedy, Lewis W. Douglas, Jr.,
President and Director Director
Date: March 28, 2000 Date: March 28, 2000
--------------------------- -----------------------------
By: /S/ THOMAS A. KLEMENS By: /S/ PAUL B. FAY, JR.
--------------------------- -----------------------------
Thomas A. Klemens Paul B. Fay, Jr., Director
Executive Vice President Date: March 28, 2000
Chief Financial Officer -----------------------------
Date: March 28, 2000 By: /S/ FRANK O'BRYAN
--------------------------- -----------------------------
Frank O'Bryan, Director
By: /S/ GEORGE L. ARGYROS Date: March 28, 2000
--------------------------- -----------------------------
George L. Argyros, Director
Date: March 28, 2000 By: /S/ ROSLYN B. PAYNE
--------------------------- -----------------------------
Roslyn B. Payne, Director
By: /S/ GARY J. BEBAN Date: March 28, 2000
--------------------------- -----------------------------
Gary J. Beban, Director
Date: March 28, 2000 By: /S/ D. VAN SKILLING
--------------------------- -----------------------------
D. Van Skilling, Director
By: /S/ J. DAVID CHATHAM Date: March 28, 2000
--------------------------- -----------------------------
J. David Chatham, Director
Date: March 28, 2000 By: /S/ VIRGINIA UEBERROTH
--------------------------- -----------------------------
Virginia Ueberroth, Director
By: Date: March 28, 2000
--------------------------- -----------------------------
William G. Davis, Director
Date:
---------------------------
57
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit No. Description Numbered Page
- ----------- ----------- -------------
(2) Agreement and Plan of Merger, dated as
of November 17, 1998, among The First
American Financial Corporation, National
Insurance Group, and Pea Soup
Acquisition Corp., incorporated by
reference herein from Exhibit 2.1 of
Form 8-K filed by National Information
Group on November 25, 1998.
(3)(a) Restated Articles of Incorporation of
The First American Financial Corporation
dated July 14, 1998, incorporated by
reference herein from Exhibit 3.1 of
Amendment No. 1, dated July 28, 1998, to
the Company's Registration Statement No.
333-53681 on Form S-4.
3(b) Certificate of Amendment of Restated
Articles of Incorporation of The First
American Financial Corporation dated
April 23, 1999, incorporated by
reference herein from Exhibit (3) of
Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
(3)(c) Bylaws of The First American Financial
Corporation, as amended.
(4)(a) Rights Agreement, dated as of October
23, 1997, incorporated by reference
herein from Exhibit 4 of Registration
Statement on Form 8-A dated November 7,
1997.
(4)(b) Junior Subordinated Indenture, dated as
of April 22, 1997, incorporated by
reference herein from Exhibit (4.2) of
Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
(4)(c) Form of New 8.50% Junior Subordinated
Deferrable Interest Debenture,
incorporated by reference herein from
Exhibit 4.2 of Registration Statement
No. 333-35945 on Form S-4 dated
September 18, 1997.
<PAGE>
(4)(d) Certificate of Trust of First American
Capital Trust I, incorporated by
reference herein from Exhibit 4.3 of
Registration Statement No. 333-35945 on
Form S-4 dated September 18, 1997.
(4)(e) Amended and Restated Declaration of
Trust of First American Capital Trust I
dated as of April 22, 1997, incorporated
by reference herein from Exhibit (4.3)
of Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
(4)(f) Form of New 8.50% Capital Security
(Liquidation Amount $1,000 per Capital
Security), incorporated by reference
herein from Exhibit 4.6 of Registration
Statement No. 333-35945 on Form S-4
dated September 18, 1997.
(4)(g) Form of New Guarantee Agreement,
incorporated by reference herein from
Exhibit 4.7 of Registration Statement
No. 333-35945 on Form S-4 dated
September 18, 1997.
(4)(h) Senior Indenture, dated as of April 7,
1998, between The First American
Financial Corporation and Wilmington
Trust Company as Trustee, incorporated
by reference herein from Exhibit (4) of
the Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998.
*(10)(a) Description of Stock Bonus Plan, as
amended, incorporated by reference
herein from Exhibit (10)(a) of Annual
Report on Form 10-K for the fiscal year
ended December 31, 1992.
*(10)(b) Executive Supplemental Benefit Plan
dated April 10, 1986, and Amendment No.
1 thereto dated October 1, 1986,
incorporated by reference herein from
Exhibit (10)(b) of Annual Report on Form
10-K for the fiscal year ended December
31, 1988.
*(10)(c) Amendment No. 2, dated March 22, 1990,
to Executive Supplemental Benefit Plan,
incorporated by reference herein from
Exhibit (10)(c) of Annual Report on Form
10-K for the fiscal year ended December
31, 1989.
<PAGE>
*(10)(d) Amendment No. 3, dated July 7, 1998, to
Executive Supplemental Benefit Plan,
incorporated by reference herein from
Exhibit (10)(d) of Annual Report on Form
10-K for the fiscal year ended December
31, 1998.
*(10)(e) Amendment No. 4, dated March 22, 2000,
to Executive Supplemental Benefit Plan.
*(10)(f) Management Supplemental Benefit Plan
dated July 20, 1988, incorporated by
reference herein from Exhibit (10) of
Quarterly Report on Form 10-Q for the
quarter ended June 30, 1992.
*(10)(g) Amendment No. 1, dated July 7, 1998, to
Management Supplemental Benefit Plan,
incorporated by reference herein from
Exhibit (10)(f) of Annual Report on
Form 10-K for the fiscal year ended
December 31, 1998.
*(10)(h) Amendment No. 2, dated March 22, 2000,
to Management Supplemental Benefit Plan.
*(10)(i) Pension Restoration Plan (effective as
of January 1, 1994), incorporated by
reference herein from Exhibit (10)(e) of
Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
*(10)(j) 1996 Stock Option Plan, incorporated by
reference herein from Exhibit 4 of
Registration Statement No. 333-19065 on
Form S-8 dated December 30, 1996.
*(10)(k) Amendment No. 1, dated February 26,
1998, to 1996 Stock Option Plan,
incorporated by reference herein from
Exhibit (10)(i) of Annual Report on Form
10-K for the fiscal year ended December
31, 1998.
*(10)(l) Amendment No. 2, dated June 22, 1998, to
1996 Stock Option Plan, incorporated by
reference herein from Exhibit (10)(j) of
Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
<PAGE>
*(10)(m) Amendment No. 3, dated July 7, 1998, to
1996 Stock Option Plan, incorporated by
reference herein from Exhibit (10)(k) of
Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
*(10)(n) Amendment No. 4, dated April 22, 1999,
to 1996 Stock Option Plan, incorporated
by reference herein from Exhibit (10)(a)
of Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999.
*(10)(o) Amendment No. 5, dated February 29,
2000, to 1996 Stock Option Plan.
*(10)(p) Change in Control Agreement (Executive
Form) dated November 12, 1999.
*(10)(q) Change in Control Agreement (Management
Form) dated November 12, 1999.
*(10)(r) 1997 Directors' Stock Plan, incorporated
by reference herein from Exhibit 4.1 of
Registration Statement No. 333-41993 on
Form S-8 dated December 11, 1997.
*(10)(s) Amendment No. 1 to 1997 Directors' Stock
Plan dated February 26, 1998,
incorporated by reference herein from
Exhibit (10)(m) of Annual Report on Form
10-K for the fiscal year ended December
31, 1998.
*(10)(t) Amendment No. 2 to 1997 Directors' Stock
Plan dated July 7, 1998, incorporated by
reference herein from Exhibit (10)(n) of
Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
(10)(u) Registration Rights Agreement, dated
April 22, 1997, incorporated by
reference herein from Exhibit (10.1) of
Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
*(10)(v) The First American Financial Corporation
Deferred Compensation Plan dated March
10, 2000.
(10)(w) The First American Financial Corporation
Deferred Compensation Plan Trust
Agreement dated as of March 10, 2000.
<PAGE>
(10)(x) Contribution and Joint Venture Agreement
By and Among The First American
Financial Corporation and Experian
Information Solutions, Inc., et al.,
dated November 30, 1997, incorporated by
reference herein from Exhibit (10)(a) of
the Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998.
(10)(y) Operating Agreement for First American
Real Estate Solutions LLC, a California
Limited Liability Company, By and Among
First American Real Estate Information
Services, Inc., and Experian Information
Solutions, Inc., et al., dated November
30, 1997, incorporated by reference
herein from Exhibit (10)(b) of the
Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
(10)(z) Data License Agreement dated November
30, 1997, incorporated by reference
herein from Exhibit (10)(d) of the
Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
(10)(aa) Reseller Services Agreement dated as of
November 30, 1997, incorporated by
reference herein from Exhibit (10)(g) of
the Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998.
(10)(bb) Amendment to Reseller Services Agreement
For Resales to Consumers dated as of
November 30, 1997, incorporated by
reference herein from Exhibit (10)(h) of
the Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998.
(10)(cc) Trademark License Agreement, dated as of
November 30, 1997, incorporated by
reference herein from Exhibit (10)(i) of
the Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998.
(10)(dd) Amended and Restated Credit Agreement
dated as of July 29, 1997, incorporated
by reference herein from Exhibit (4.4)
of Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
<PAGE>
(10)(ee) Amendment No. 1 dated as of November 10,
1997, to Amended and Restated Credit
Agreement dated as of July 29, 1997,
incorporated by reference herein from
Exhibit (4.1) of Quarterly Report on
Form 10-Q for the quarter ended
September 30, 1997.
(10)(ff) Credit Agreement dated as of July 2,
1999, incorporated by reference herein
from Exhibit (10)(b) of Quarterly Report
on Form 10-Q for the quarter ended June
30, 1999.
(21) Subsidiaries of the registrant.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule.
<PAGE>
EXHIBIT (3)(c)
BYLAWS
OF
THE FIRST AMERICAN FINANCIAL CORPORATION
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICES. The location of the principal executive
office of the corporation is 114 East Fifth Street, Santa Ana, California. The
board of directors may change the location of the principal executive office to
any place within or outside the State of California. If the principal executive
office is located outside this state, and the corporation has one or more
business offices in this state, the board of directors shall fix and designate a
principal business office in the State of California.
Section 2. OTHER OFFICES. The board of directors may at any time
establish branch or subordinate offices at any place or places where the
corporation is qualified to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at
any place within or outside the State of California designated by the board of
directors. In the absence of any such designation, shareholders' meetings shall
be held at the principal executive office of the corporation.
Section 2. ANNUAL MEETING. The annual meeting of shareholders shall be
held each year on a date and at a time designated by the board of directors. At
each annual meeting, directors shall be elected, and any other proper business
may be transacted.
Section 3. SPECIAL MEETING. A special meeting of the shareholders may be
called at any time by the board of directors, or by the chairman of the board,
or by the president, or by one or more shareholders holding shares in the
aggregate entitled to cast not less than 10% of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the chairman of the
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board, the president, any vice president, or the secretary of the corporation.
The officer receiving the request shall cause notice to be promptly given to the
shareholders entitled to vote, in accordance with the provisions of Sections 4
and 5 of this Article II, that a meeting will be held at the time requested by
the person or persons calling the meeting, not less than thirty-five (35) nor
more than sixty (60) days after the receipt of the request. If the notice is not
given within twenty (20) days after receipt of the request, the person or
persons requesting the meeting may give notice. Nothing contained in this
paragraph of this Section 3 shall be construed as limiting, fixing or affecting
the time when a meeting of shareholders called by action of the board of
directors may be held.
Section 4. NOTICE OF SHAREHOLDERS' MEETING. All notices of meetings of
shareholders shall be sent or otherwise given in accordance with Section 5 of
this Article II not less than ten (10) nor more than sixty (60) days before the
date of the meeting. The notice shall specify the place, date and hour of the
meeting and (i) in the case of a special meeting, the general nature of the
business to be transacted, or (ii) in the case of the annual meeting, those
matters which the board of directors, at the time of giving the notice, intends
to present for action by the shareholders. The notice of any meeting at which
directors are to be elected shall include the name of any nominee or nominees
whom, at the time of the notice, management intends to present for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Corporations Code of California, (ii)
an amendment of the articles of incorporation, pursuant to Section 902 of that
Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of
that Code, (iv) a voluntary dissolution of the corporation, pursuant to Section
1900 of that code, or (v) a distribution in dissolution other than in accordance
with the rights of outstanding preferred shares, pursuant to Section 2007 of
that Code, the notice shall also state the general nature of that proposal.
Section 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any
meeting of shareholders shall be given either personally or by first-class mail
or telegraphic or other written communication, charges prepaid, addressed to the
shareholder at the address of that shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice. If no such address appears on the corporation's books or is given,
notice shall be deemed to have been given if sent to that shareholder by first-
class mail or telegraphic or other written communication to the corporation's
principal executive office, or if published at least once in a newspaper of
general circulation in the county where that office is located. Notice shall be
deemed to have been given at the time when delivered personally or deposited in
the mail or sent by telegram or other means of written communication.
If any notice addressed to a shareholder at the address of that shareholder
appearing on the books of the corporation is returned to the corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice to the shareholder at that address, all
future notices or reports shall be deemed to have
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<PAGE>
been given without further mailing if these shall be available to the
shareholder on written demand of the shareholder at the principal executive
office of the corporation for a period of one year from the date of the giving
of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting shall be executed by the secretary, assistant secretary,
or any transfer agent of the corporation giving the notice, and shall be filed
and maintained in the minute book of the corporation.
Section 6. QUORUM. The presence in person or by proxy of the holders of a
majority of the shares entitled to vote at any meeting of shareholders shall
constitute a quorum for the transaction of business. The shareholders present
at a duly called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
Section 7. ADJOURNED MEETING NOTICE. Any shareholders' meeting, annual or
special, whether or not a quorum is present, may be adjourned from time to time
by the vote of the majority of the shares represented at that meeting, either in
person or by proxy, but in the absence of a quorum, no other business may be
transacted at that meeting, except as provided in Section 6 of this Article II.
When any meeting of shareholders, either annual or special, is adjourned to
another time or place; notice need not be given of the adjourned meeting if the
time and place are announced at a meeting at which the adjournment is taken,
unless a new record date for the adjourned meeting is fixed, or unless the
adjournment is for more than forty-five (45) days from the date set forth for
the original meeting, in which case the board of directors shall set a new
record date. Notice of any such adjourned meeting shall be given to each
shareholder of record entitled to vote at the adjourned meeting in accordance
with the provisions of Sections 4 and 5 of this Article II. At any adjourned
meeting the corporation may transact any business which might have been
transacted at the original meeting.
Section 8. VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of Section 11
of this Article II, subject to the provisions of Sections 702 to 704 inclusive,
of the Corporations Code of California (relating to voting shares held by a
fiduciary in the name of a corporation, or in joint ownership). The
shareholders' vote may be by voice vote or by ballot; provided however, that any
election for directors must be by ballot if demanded by any shareholder before
the voting has begun. On any matter other than elections of directors, any
shareholder may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or vote them against the proposal, but, if the
shareholder fails to specify the number of shares which the shareholder is
voting affirmatively, it will be conclusively presumed that the shareholder's
approving vote is with respect to all shares that the shareholder is entitled to
vote. If a quorum is present, the affirmative vote of the
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<PAGE>
majority of the shares represented at the meeting and entitled to vote on any
matter (other than the election of directors) shall be the act of the
shareholders, unless the vote of a greater number or voting by classes is
required by California General Corporation Law or by the articles of
incorporation.
At a shareholders' meeting at which directors are to be elected, no
shareholder shall be entitled to cumulate votes (i.e., cast for any one or more
candidates a number of votes greater than the number of the shareholder's
shares) unless the candidates' names have been placed in nomination prior to
commencement of the voting and a shareholder has given notice prior to
commencement of the voting of the shareholder's intention to cumulate votes. If
any shareholder has given such a notice, then every shareholder entitled to vote
may cumulate votes for candidates in nomination and give one candidate a number
of votes equal to the number of directors to be elected multiplied by the number
of votes to which that shareholder's shares are entitled, or distribute the
shareholder's votes on the same principle among any or all of the candidates, as
the shareholder thinks fit. The candidates receiving the highest number of
votes, up to the number of directors to be elected, shall be elected.
Section 9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The
transactions of any meeting of shareholders, either annual or special, however
called and noticed, and wherever held, shall be as valid as though had at a
meeting duly held after regular call and notice, if a quorum be present either
in person or by proxy, and if, either before or after the meeting, each person
entitled to vote, who was not present in person or by proxy, signs a written
waiver of notice or a consent to a holding of the meeting, or an approval of the
minutes. The waiver of notice or consent need not specify either the business
to be transacted or the purpose of any annual or special meeting of
shareholders, except that if action is taken or proposed to be taken for
approval of any of those matters specified in the second paragraph of Section 4
of this Article II, the waiver of notice or consent shall state the general
nature of the proposal. All such waivers, consents or approvals shall be filed
with the corporate records or made a part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened, and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if that objection is expressly made at the meeting.
Section 10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any
action which may be taken at any annual or special meeting of shareholders may
be taken without a meeting and without prior notice, if a consent in writing,
setting forth the action so taken, is signed by the holders of outstanding
shares having not less than the minimum number of votes that would be necessary
to authorize or take that action at a meeting at which all shares entitled to
vote on that action were present and voted. In the case of election of
directors, such a consent shall be effective only if
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<PAGE>
signed by the holders of all outstanding shares entitled to vote for the
election of directors; provided, however, that a director may be elected at any
time to fill a vacancy on the board of directors that has not been filled by the
directors, by the written consent of the holders of a majority of the
outstanding shares entitled to vote for the election of directors. All such
consents shall be filed with the secretary of the corporation and shall be
maintained in the corporate records. Any shareholder giving a written consent,
or the shareholder's proxy holders, or a transferee of the shares or a personal
representative of the shareholder or their respective proxy holders, may revoke
the consent by a writing received by the secretary of the corporation before
written consents of the number of shares required to authorize the proposed
action have been filed with the secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all such
shareholders shall not have been received, the secretary shall give prompt
notice of the corporate action approved by the shareholders without a meeting.
This notice shall be given in the manner specified in Section 5 of this Article
II. In the case of approval of (i) contracts or transactions in which a
director has a direct or indirect financial interest, pursuant to Section 310 of
the Corporations Code of California, (ii) indemnification of agents of the
corporation, pursuant to Section 317 of that Code, (iii) a reorganization of the
corporation, pursuant to Section 1201 of that Code, and (iv) a distribution in
dissolution other than in accordance with the rights of outstanding preferred
shares, pursuant to Section 2007 of that Code, the notice shall be given at
least ten (10) days before the consummation of any action authorized by that
approval.
Section 11. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING
CONSENTS. For purposes of determining the shareholders entitled to notice of
any meeting or to vote or entitled to give consent to corporate action without a
meeting, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) days nor less than ten (10) days before the date of
any such meeting nor more than sixty (60) days before any such action without a
meeting, and in this event only shareholders of record on the date so fixed are
entitled to notice and to vote or to give consents, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date, except as otherwise provided in the California General
Corporation Law.
If the board of directors does not so fix a record date:
(a) The record date for determining shareholders entitled to notice of
or to vote at a meeting of shareholders shall be at the close of business on the
business day next preceding the day on which notice is given or, if notice is
waived, at the close of business on the business day next preceding the day on
which the meeting is held.
(b) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the board has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action of the board has been taken, shall
be at the close of business on the day on which the board
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adopts the resolution relating to that action, or the sixtieth (60th) day before
the date of such other action, whichever is later.
Section 12. PROXIES. Every person entitled to vote for directors or on
any other matter shall have the right to do so either in person or by one or
more agents authorized by a written proxy signed by the person and filed with
the secretary of the corporation. A proxy shall be deemed signed if the
shareholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission, or otherwise) by the shareholder or the
shareholder's attorney in fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i)
revoked by the person executing it, before the vote pursuant to that proxy, by a
writing delivered to the corporation stating that the proxy is revoked, or by a
subsequent proxy executed by, or attendance at the meeting and voting in person
by, the person executing the proxy; or (ii) written notice of the death or
incapacity of the maker of that proxy is received by the corporation before the
vote pursuant to that proxy is counted; provided, however, that no proxy shall
be valid after the expiration of eleven (11) months from the date of the proxy,
unless otherwise provided in the proxy. The revocability of a proxy that states
on its face that it is irrevocable shall be governed by the provisions of
Sections 705(e) and 705(f) of the Corporations Code of California.
Section 13. INSPECTORS OF ELECTION. Before any meeting of shareholders,
the board of directors may appoint any persons other than nominees for office to
act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the chairman of the meeting may, and on
the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (1) or three (3). If inspectors are appointed at a meeting on the request
of one or more shareholders or proxies, the holders of a majority of shares or
their proxies present at the meeting shall determine whether one (1) or three
(3) inspectors are to be appointed. If any person appointed as inspector fails
to appear or fails or refuses to act, the chairman of the meeting may, and upon
the request of any shareholder or a shareholder's proxy shall, appoint a person
to fill that vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity, and effect of proxies;
(b) Receive votes, ballots, or consents;
(c) Hear and determine all challenges and questions in any way arising
in connection with the right to vote;
(d) Count and tabulate all votes or consents;
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(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
Section 1. POWERS. Subject to the provisions of the California General
Corporation Law and any limitations in the articles of incorporation and these
bylaws relating to action required to be approved by the shareholders or by the
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
board of directors.
Without prejudice to these general powers, and subject to the same
limitations, the directors shall have the power to:
(a) Select and remove all officers, agents, and employees of the
corporation; prescribe any powers and duties for them that are consistent with
law, with the articles of incorporation, and with these bylaws; fix their
compensation; and require from them security for faithful service.
(b) Change the principal executive office or the principal business
office in the State of California from one location to another; cause the
corporation to be qualified to do business in any other state, territory,
dependency, or country and to conduct business within or without the State of
California; and designate any place within or without the State of California
for the holding of any shareholders' meeting, or meetings, including annual
meetings.
(c) Adopt, make, and use a corporate seal; prescribe the forms of
certificates of stock; and alter the form of the seal and certificates.
(d) Authorize the issuance of shares of stock of the corporation on
any lawful terms, in consideration of money paid, labor done, services actually
rendered, debts or securities cancelled, or tangible or intangible property
actually received.
(e) Borrow money and incur indebtedness on behalf of the corporation,
and cause to be executed and delivered for the corporation's purposes, in the
corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages,
pledges, hypothecations, and other evidences of debt and securities.
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Section 2. NUMBER AND QUALIFICATION OF DIRECTORS. The number of directors
of the corporation shall be no less than 9 nor more than 17. The exact number
of directors shall be 13 until changed, within the limits specified above, by a
bylaw amending this Section 2, duly adopted by the board of directors or by the
shareholders. The indefinite number of directors may be changed, or a definite
number fixed without provision for an indefinite number, by a duly adopted
amendment to the articles of incorporation; provided, however, that an amendment
reducing the number or the minimum number of directors to a number less than
five cannot be adopted if the votes cast against its adoption at a meeting of
the shareholders, or the shares not consenting in the case of action by written
consent, are equal to more than 16 2/3% of the outstanding shares entitled to
vote. No amendment may change the stated maximum number of authorized directors
to a number greater than two times the stated minimum number of directors minus
one.
Section 3. ELECTION AND TERM OF OFFICE OF DIRECTORS.
Directors shall be elected at each annual meeting of the shareholders to hold
office until the next annual meeting. Each director, including a director
elected to fill a vacancy, shall hold office until the expiration of the term
for which elected and until a successor has been elected and qualified.
Section 4. VACANCIES. Vacancies in the board of directors may be filled
by a majority of the remaining directors, though less than a quorum, or by a
sole remaining director, except that a vacancy created by the removal of a
director by the vote or written consent of the shareholders or by court order
may be filled only by the vote of a majority of the shares entitled to vote
represented at a duly held meeting at which a quorum is present, or by the
written consent of holders of a majority of the outstanding shares entitled to
vote. Each director so elected shall hold office until the next annual meeting
of the shareholders and until a successor has been elected and qualified.
A vacancy or vacancies in the board of directors shall be deemed to exist
in the event of the death, resignation, or removal of any director, or if the
board of directors by resolution declares vacant the office of a director who
has been declared of unsound mind by an order of court or convicted of a felony,
or if the authorized number of directors is increased, or if the shareholders
fail, at any meeting of shareholders at which any director or directors are
elected, to elect the number of directors to be voted for at that meeting.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors, but any such election by
written consent shall require the consent of a majority of the outstanding
shares entitled to vote.
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary, or the board of directors, unless
the notice specifies a later time for that resignation to become effective. If
the resignation of a director is effective at a future time, the board of
directors may elect a successor to take office when the resignation becomes
effective.
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No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
Section 5. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. Regular meetings
of the board of directors may be held at any place within or outside the State
of California that has been designated from time to time by resolution of the
board. In the absence of such a designation, regular meetings shall be held at
the principal executive office of the corporation. Special meetings of the
board shall be held at any place within or outside the State of California that
has been designated in the notice of the meeting or, if not stated in the notice
or there is no notice, at the principal executive office of the corporation.
Any meeting, regular or special, may be held by conference telephone or similar
communication equipment, so long as all directors participating in the meeting
can hear one another, and all such directors shall be deemed to be present in
person at the meeting.
Section 6. ANNUAL MEETING. Immediately following each annual meeting of
shareholders, the board of directors shall hold a regular meeting for the
purpose of organization, any desired election of officers, and the transaction
of other business. Notice of this meeting shall not be required.
Section 7. OTHER REGULAR MEETINGS. Other regular meetings of the board of
directors shall be held without call at such time as shall from time to time be
fixed by the board of directors. Such regular meetings may be held without
notice.
Section 8. SPECIAL MEETINGS. Special meetings of the board of directors
for any purpose or purposes may be called at any time by the chairman of the
board or the president or the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. In case the notice is mailed,
it shall be deposited in the United States mail at least four (4) days before
the time of the holding of the meeting. In case the notice is delivered
personally, or by telephone or telegram, it shall be delivered personally or by
telephone or to the telegraph company at least forty-eight (48) hours before the
time of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated either to the director or to a person at the
office of the director who the person giving the notice has reason to believe
will promptly communicate it to the director. The notice need not specify the
purpose of the meeting nor the place if the meeting is to be held at the
principal executive office of the corporation.
Section 9. QUORUM. A majority of the authorized number of directors shall
constitute a quorum for the transaction of business, except to adjourn as
provided in Section ll of this Article III. Every act done or decision made by
a majority of the directors present at a meeting duly held at which a quorum is
present shall be regarded as the act of the board of directors, subject to the
provisions of Section 310 of the Corporations Code of California
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(as to approval of contracts or transactions in which a director has a direct or
indirect material financial interest), Section 311 of that Code (as to
appointment of committees), and Section 317(e) of that Code (as to
indemnification of directors). A meeting at which a quorum is initially present
may continue to transact business notwithstanding the withdrawal of directors,
if any action taken is approved by at least a majority of the required quorum
for that meeting.
Section 10. WAIVER OF NOTICE. The transactions of any meeting of the
board of directors, however called and noticed or wherever held, shall be as
valid as though had at a meeting duly held after regular call and notice if a
quorum is present and if, either before or after the meeting, each of the
directors not present signs a written waiver of notice, a consent to holding the
meeting or an approval of the minutes. The waiver of notice or consent need not
specify the purpose of the meeting. All such waivers, consents, and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting. Notice of a meeting shall also be deemed given to any director who
attends the meeting without protesting before or at its commencement, the lack
of notice to that director.
Section 11. ADJOURNMENT. A majority of the directors present, whether or
not constituting a quorum, may adjourn any meeting to another time and place.
Section 12. NOTICE OF ADJOURNMENT. Notice of the time and place of
holding an adjourned meeting need not be given, unless the meeting is adjourned
for more than twenty-four hours, in which case notice of the time and place
shall be given before the time of the adjourned meeting, in the manner specified
in Section 8 of this Article III, to the directors who were not present at the
time of the adjournment.
Section 13. ACTION WITHOUT MEETING. Any action required or permitted to
be taken by the board of directors may be taken without a meeting, if all
members of the board shall individually or collectively consent in writing to
that action. Such action by written consent shall have the same force and
effect as a unanimous vote of the board of directors. Such written consent or
consents shall be filed with the minutes of the proceedings of the board.
Section 14. FEES AND COMPENSATION OF DIRECTORS. Directors and members of
committees may receive such compensation, if any, for their services, and such
reimbursement of expenses, as may be fixed or determined by resolution of the
board of directors. This Section 14 shall not be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation for those services.
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ARTICLE IV
COMMITTEES
Section 1. COMMITTEES OF DIRECTORS. The board of directors may, by
resolution adopted by a majority of the authorized number of directors,
designate one or more committees, each consisting of two or more directors, to
serve at the pleasure of the board. The board may designate one or more
directors as alternate members of any committee who may replace any absent
member at any meeting of the committee. Any committee, to the extent provided
in the resolution of the board, shall have all the authority of the board,
except with respect to:
(a) the approval of any action which, under the General Corporation Law of
California, also requires shareholders' approval or approval of the outstanding
shares;
(b) the filling of vacancies on the board of directors or in any committee;
(c) the fixing of compensation of the directors for serving on the board or
on any committee;
(d) the amendment or repeal of bylaws or the adoption of new bylaws;
(e) the amendment or repeal of any resolution of the board of directors
which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except at a rate
or in a periodic amount or within a price range determined by the board of
directors; or
(g) the appointment of any other committees of the board of directors or
the members of these committees.
Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of
committees shall be governed by, and held and taken in accordance with, the
provisions of Article III of these bylaws, Sections 5 (place of meetings), 7
(regular meetings), 8 (special meetings and notice), 9 (quorum), 10 (waiver of
notice), 11 (adjournment), 12 (notice of adjournment), and 13 (action without
meeting), with such changes in the context of those bylaws as are necessary to
substitute the committee and its members for the board of directors and its
members, except that the time of regular meetings of committees may be
determined either by resolution of the board of directors or by resolution of
the committee; special meetings of committees may also be called by resolution
of the board of directors; and notice of special meetings of committees shall
also be given to all alternate members, who shall have the right to attend all
meetings of the committee. The board of directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
bylaws.
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ARTICLE V
OFFICERS
Section 1. OFFICERS. The officers of the corporation shall be a
president, a secretary, and a chief financial officer. The corporation may also
have, at the discretion of the board of directors, a chairman of the board, one
or more vice presidents, one or more assistant secretaries, one or more
assistant treasurers, and such other officers as may be appointed in accordance
with the provisions of Section 3 of this Article V. Any number of offices may
be held by the same person.
Section 2. ELECTION OF OFFICERS. The officers of the corporation, except
such officers as may be appointed in accordance with the provisions of Section 3
or Section 5 of this Article V, shall be chosen by the board of directors, and
each shall serve at the pleasure of the board, subject to the rights, if any, of
any officer under any contract of employment.
Section 3. SUBORDINATE OFFICERS. The board of directors may appoint, and
may empower the president to appoint, such other officers as the business of the
corporation may require, each of whom shall hold office for such period, have
such authority and perform such duties as are provided in the bylaws or as the
board of directors may from time to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if
any, of any officer under any contract of employment, any officer may be
removed, either with or without cause, by the board of directors, at any regular
or special meeting of the board, or, except in the case of an officer chosen by
the board of directors, by an officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
Section 5. VACANCIES IN OFFICES. A vacancy in any office because of
death, resignation, removal, disqualification or any other cause shall be filled
in the manner prescribed in these bylaws for regular appointments to that
office.
Section 6. CHAIRMAN OF THE BOARD. The chairman of the board, if such an
officer be elected, shall, if present, preside at meetings of the board of
directors and exercise and perform such powers and duties as may be from time to
time assigned to him by the board of directors or prescribed by the bylaws. If
there is no president, the chairman of the
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board shall, in addition be the chief executive officer of the corporation and
shall have the powers and duties prescribed in Section 7 of this Article V.
Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may
be given by the board of directors to the chairman of the board, if there be
such an officer, the president shall be the chief executive officer of the
corporation and shall, subject to the control of the board of directors, have
general supervision, direction, and control of the business and the officers of
the corporation. He shall preside at all meetings of the shareholders and, in
the absence of the chairman of the board, or if there be none, at all meetings
of the board of directors. He shall have the general powers and duties of
management usually vested in the office of president of a corporation, and shall
have such other powers and duties as may be prescribed by the board of directors
or by the bylaws.
Section 8. VICE PRESIDENT. In the absence or disability of the president,
the vice presidents, if any, in order of their rank as fixed by the board of
directors or, if not ranked, a vice president designated by the board of
directors, shall perform all the duties of the president, and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform other
duties as from time to time may be prescribed for them respectively by the board
of directors or the bylaws, and the president, or the chairman of the board.
Section 9. SECRETARY. The secretary shall keep or cause to be kept, at
the principal executive office or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and shareholders, with the time and place of holding, whether
regular or special, and, if special, how authorized, the notice given, the names
of those present at directors' meetings or committee meetings, the number of
shares present or represented at shareholders' meetings, and the proceedings.
The secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the corporation's transfer agent or registrar, as
determined by resolution of the board of directors, a share register, or a
duplicate share register, showing the names of all shareholders and their
addresses, the number of classes of shares held by each, the number and date of
certificates issued for the same, and the number and date of cancellation of
every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the board of directors required by the bylaws or by law
to be given, and he shall keep the seal of the corporation if one be adopted, in
safe custody, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by the bylaws.
Section 10. CHIEF FINANCIAL OFFICER. The chief financial officer
shall keep and maintain, or cause to be kept and maintained, adequate and
correct books and records of accounts of the properties and business
transactions of the corporation, including
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accounts of its assets, liabilities, receipts, disbursements, gains, losses,
capital, retained earnings and shares. The books of the account shall at all
reasonable times be open to inspection by any director.
The chief financial officer shall deposit moneys and other valuables in the
name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have other powers and perform such other duties as may be
prescribed by the board of directors or the bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND OTHER AGENTS; INSURANCE OF DIRECTORS AND OFFICERS
Section 1. INDEMNIFICATION. (i) The corporation shall indemnify its
Officers and Directors to the fullest extent permitted by law, including those
circumstances in which indemnification would otherwise be discretionary; (ii)
the corporation is required to advance expenses to its Officers and Directors as
incurred, including expenses relating to obtaining a determination that such
Officers and Directors are entitled to indemnification, provided that they
undertake to repay the amount advanced if it is ultimately determined that they
are not entitled to indemnification; (iii) an Officer or Director may bring suit
against the corporation if a claim for indemnification is not timely paid; (iv)
the corporation may not retroactively amend this Section 1 in a way which is
adverse to its Officers and Directors; (v) the provisions of subsections (i)
through (iv) above shall apply to all past and present Officers and Directors of
the corporation.
Indemnification of Agents of the corporation who are not its Officers and
Directors shall be in accordance with the provisions of Section 317 of the
Corporations Code of California.
The corporation may enter into indemnification agreements with its
Directors, Officers and other Agents upon such terms and conditions as are
deemed to be in the best interests of the corporation by its board of directors.
The other provisions of this Section 1 to the contrary notwithstanding, the
corporation shall not be obligated:
(a) to indemnify or advance expenses to an Officer, Director or Agent with
respect to proceedings or claims initiated or brought voluntarily by such
Officer, Director or Agent and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under an
indemnification agreement or any statute or
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law or otherwise as required under Section 317 of the Corporations Code of
California, but such indemnification or advancement of expenses may be provided
by the corporation in specific cases if the board of directors has approved the
bringing of such suit;
(b) to indemnify an Officer, Director or Agent for any expenses incurred
with respect to any proceeding instituted by such Officer, Director or Agent to
enforce or interpret provisions of an indemnity agreement or this Section 1, if
a court of competent jurisdiction determines that each of the material
assertions made by the Officer, Director or Agent in such proceeding was not
made in good faith or was frivolous;
(c) to indemnify an Officer, Director or Agent for expenses or liabilities
of any type whatsoever (including, but not limited to, judgments, fines, ERISA
excise taxes or penalties, and amounts paid in settlement) which have been paid
or satisfied by an insurance carrier under a policy of officers' and directors'
liability insurance maintained by the corporation; provided that the corporation
shall be obligated to remit to the Officer, Director or Agent any insurance
proceeds received in respect of expenses or liabilities previously paid or
satisfied by such Officer, Director or Agent;
(d) to indemnify an Officer, Director or Agent for expenses, judgments,
fines or penalties sustained, or for an accounting of profits made from, the
purchase and sale by such Officer, Director or Agent of securities of the
corporation in violation of the provisions of Section 16(b) of the Securities
Exchange Act of 1934, as amended, the rules and regulations promulgated
thereunder, any amendments thereto or any similar provisions of any federal,
state or local statutory law; or
(e) in the event a court of competent jurisdiction finally determines that
such indemnification is unlawful.
The term "Officer" as used in this Section 1 shall mean each person who is,
or was, appointed to the office of Chairman of the Board, President, Vice
President, Secretary, Assistant Secretary, Chief Financial Officer, Treasurer,
Assistant Treasurer, and such other office of the corporation as the board shall
designate from time to time. The term "Director" as used in this Section 1
shall mean any person who is, or was, appointed to serve on the board of
directors either by the shareholders or the remaining board members. The term
"Agent" as used in this Section 1 shall have the same meaning as that set forth
in Section 317(a) of the Corporations Code of California, except that it shall
not include Officers and Directors.
Section 2. INSURANCE. The corporation may purchase and maintain insurance
on behalf of its Directors, Officers and Agents, against any liability asserted
against, or incurred by, any of them by reason of the fact that such person is,
or was, a Director, Officer or Agent of the corporation, whether or not the
corporation would have the power to indemnify such persons against such
liability under the General Corporation Law of California.
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ARTICLE VII
RECORDS AND REPORTS
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The corporation
shall keep at its principal executive office, or at the office of its transfer
agent or registrar, if either be appointed and as determined by resolution of
the board of directors, a record of its shareholders, giving the names and
addresses of all shareholders and the number and class of shares held by each
shareholder.
A shareholder or shareholders of the corporation holding at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation may (i) inspect and copy the records of shareholders' names and
addresses and shareholdings during usual business hours on five days prior
written demand on the corporation, and (ii) obtain from the transfer agent of
the corporation, on written demand and on the tender of such transfer agent's
usual charges for such list, a list of the shareholders' names and addresses,
who are entitled to vote for the election of directors, and their shareholdings,
as of the most recent record date for which that list has been compiled or as of
a date specified by the shareholder after the date of demand. This list shall
be made available to any such shareholder by the transfer agent on or before the
latter of five (5) days after the demand is received or the date specified in
the demand as the date as of which the list is to be compiled. The record of
shareholders shall be open to inspection on the written demand of any
shareholder or holder of a voting trust certificate, at any time during the
usual business hours, for a purpose reasonably related to the holder's interests
as a shareholder or as the holder of a voting trust certificate. Any inspection
and copying under this Section 1 may be made in person or by an agent or
attorney of the shareholder or holder of a voting trust certificate making the
demand.
Section 2. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall
keep at its principal executive office or, if its principal executive office is
not in the State of California, at its principal business office in this state,
the original or a copy of the bylaws as amended to date, which shall be open to
inspection by the shareholders at all reasonable times during office hours. If
the principal executive office of the corporation is outside the State of
California and the corporation has no principal business office in this state,
the Secretary shall, upon the written request of any shareholder, furnish to
that shareholder a copy of the bylaws as amended to date.
Section 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The
accounting books and records and minutes of proceedings of the shareholders and
the board of directors and any committee or committees of the board of directors
shall be kept at such place or places designated by the board of directors or,
in the absence of such designation, at the principal executive office of the
corporation. The minutes shall be kept in written form and the accounting books
and records shall be kept either in written form or in any other form capable of
being converted into written form. The minutes and accounting books and records
shall be open to inspection upon the written
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demand of any shareholder or holder of a voting trust certificate, at any
reasonable time during the usual business hours, for a purpose reasonably
related to the holder's interests as a shareholder or as the holder of a voting
trust certificate. The inspection may be made in person or by an agent or
attorney, and shall include the right to copy and make extracts. These rights of
inspection shall extend to the records of each subsidiary corporation of the
corporation.
Section 4. INSPECTION BY DIRECTORS. Every director shall have the
absolute right at any reasonable time to inspect all books, records, and
documents of every kind and the physical properties of the corporation and each
of its subsidiary corporations. This inspection by a director may be made in
person, or by an agent or attorney and the right of inspection includes the
right to copy and make extracts of documents.
Section 5. ANNUAL REPORT TO SHAREHOLDERS. The board of directors shall
cause an annual report to be sent to the shareholders not later than one hundred
twenty days (120) after the close of the fiscal year adopted by the corporation.
This report shall be sent at least fifteen (15) days before the annual meeting
of shareholders to be held during the next fiscal year and in the manner
specified in Section 5 of Article II of these bylaws for giving notice to
shareholders of the corporation. The annual report shall contain a balance
sheet as of the end of the fiscal year and an income statement and statement of
changes in financial position for the fiscal year, accompanied by any report of
independent accountants or, if there is no such report, the certificate of an
authorized officer of the corporation that the statements were prepared without
audit from the books and records of the corporation.
Section 6. FINANCIAL STATEMENTS. A copy of any annual financial statement
and any income statement of the corporation for each fiscal year, and any
accompanying balance sheet of the corporation as of the end of each such period
that has been prepared by the corporation, shall be kept on file in the
principal executive office of the corporation for twelve (12) months and each
such statement shall be exhibited at any reasonable time to any shareholder
demanding an examination of any such statement or a copy shall be mailed to any
such shareholder.
If a shareholder or shareholders holding at least five percent (5%) of the
outstanding shares of any class of stock of the corporation makes a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the then current fiscal year
ended more than thirty (30) days before the date of the request, and a balance
sheet of the corporation as of the end of that period, the chief financial
officer shall cause that statement to be prepared, if not already prepared, and
shall deliver personally or mail that statement or statements to the person
making the request within thirty (30) days after the receipt of the request. If
the corporation has not sent to the shareholders its annual report for the last
fiscal year, this report shall likewise be delivered or mailed to the
shareholder or shareholders within thirty (30) days after the request.
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The corporation shall also, on the written request of any shareholder, mail
to the shareholder a copy of the last annual, semi-annual or quarterly income
statement which it has prepared, and a balance sheet as of the end of that
period.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
Section 7. ANNUAL STATEMENT OF GENERAL INFORMATION. The corporation
shall, during the period commencing on April 1 and ending on September 30 in
each year, file with the Secretary of State of the State of California, on the
prescribed form, a statement setting forth the authorized number of directors,
the names and complete business or residence addresses of the chief executive
officer, secretary and chief financial officer, the street address of its
principal executive office or principal business office in this state and the
general type of business activity of the corporation, together with a
designation of the agent of the corporation for the purpose of service of
process, all in compliance with Section 1502 of the Corporations Code of
California.
ARTICLE VIII
GENERAL CORPORATE MATTERS
Section 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For
purposes of determining the shareholders entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action (other than action by
shareholders by written consent without a meeting), the board of directors may
fix, in advance, a record date, which shall not be more than sixty (60) days
before any such action, and in that case only shareholders of record on the date
so fixed are entitled to receive the dividend, distribution, or allotment of
rights or to exercise the rights, as the case may be, notwithstanding any
transfer of any shares on the books of the corporation after the record date so
fixed, except as otherwise provided in the California General Corporation Law.
If the board of directors does not so fix a record date, the record date
for determining shareholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.
Section 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks, drafts,
or other orders for payment of money, notes, or other evidences of indebtedness,
issued in the name of or payable to the corporation, shall be signed or endorsed
by such person or persons and in such manner as, from time to time, shall be
determined by resolution of the board of directors.
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Section 3. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The board
of directors, except as otherwise provided in these bylaws, may authorize any
officer or officers, agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the corporation, and this authority
may be general or confined to specific instances; and, unless so authorized or
ratified by the board of directors or within the agency power of an officer, no
officer, agent or employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or for any amount.
Section 4. CERTIFICATES FOR SHARES. A certificate or certificates for
shares of the capital stock of the corporation shall be issued to each
shareholder when any of these shares are fully paid, and the board of directors
may authorize the issuance of certificates or shares as partly paid provided
that these certificates shall state the amount of the consideration to be paid
for them and the amount paid. All certificates shall be signed in the name of
the corporation by the chairman of the board or vice chairman of the board or
president or vice president and by the chief financial officer or an assistant
treasurer or the secretary or an assistant secretary, certifying the number of
shares and the class or series of shares owned by the shareholder. Any or all
of the signatures on the certificates may be facsimile. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has
been placed on a certificate shall have ceased to be that officer, transfer
agent, or registrar before that certificate is issued, it may be issued by the
corporation with the same effect as if that person were an officer, transfer
agent, or registrar at the date of issue.
Section 5. LOST CERTIFICATES. Except as provided in this Section 5, no
new certificates for shares shall be issued to replace an old certificate unless
the latter is surrendered to the corporation and cancelled at the same time.
The board of directors may, in case any share certificate or certificate for any
other security is lost, stolen, or destroyed, authorize the issuance of a
replacement certificate on such terms and conditions as the board may require,
including provision for indemnification of the corporation secured by a bond or
other adequate security sufficient to protect the corporation against any claim
that may be made against it, including any expense or liability, on account of
the alleged loss, theft, or destruction of the certificate or the issuance of
the replacement certificate.
Section 6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The chairman
of the board, the president, or any vice president, or any other person
authorized by resolution of the board of directors or by any of the foregoing
designated officers, is authorized to vote on behalf of the corporation any and
all shares of any other corporation or corporations, foreign or domestic,
standing in the name of the corporation. The authority granted to these
officers to vote or represent on behalf of the corporation any and all shares
held by the corporation in any other corporation or corporations may be
exercised by any of these officers in person or by any person authorized to do
so by a proxy duly executed by these officers.
Section 7. CONSTRUCTION AND DEFINITIONS. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions in the
California
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General Corporation Law shall govern the construction of these bylaws. Without
limiting the generality of this provision, the singular number includes the
plural, the plural number includes the singular, and the term "person" includes
both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
Section 1. AMENDMENT BY SHAREHOLDERS. New bylaws may be adopted or these
bylaws may be amended or repealed by the vote or written consent of holders of a
majority of the outstanding shares entitled to vote; provided, however, that if
the articles of incorporation of the corporation set forth the number of
authorized directors of the corporation, the authorized number of directors may
be changed only by an amendment of the articles of incorporation.
Section 2. AMENDMENT BY DIRECTORS. Subject to the rights of the
shareholders as provided in Section 1 of this Article IX to adopt, amend or
repeal bylaws, bylaws may be adopted, amended or repealed by the board of
directors; provided, however, that the board of directors may adopt a bylaw or
amendment of a bylaw changing the authorized number of directors only for the
purpose of fixing the exact number of directors within the limits specified in
the articles of incorporation or in Section 2 of Article III of these bylaws.
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Exhibit (10)(e)
AMENDMENT NO. 4
TO
The First American Financial Corporation
EXECUTIVE SUPPLEMENTAL BENEFIT PLAN
This Amendment No. 4 to The First American Financial Corporation Executive
Supplemental Benefit Plan (hereinafter referred to as the "Plan") is effective
as of November 12, 1999, and modifies such Plan as set forth below:
A. Section 2(d) (iii) of the Plan is amended to read in full as follows:
(d) "Change in Control" means:
* * *
"(iii) Any other event constituting a change in control
required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A under the Securities Exchange Act of 1934, as amended."
B. Section 3(e) (ii) of the Plan is amended to read in full as follows:
(e) Change in Control
* * *
"(ii) Notwithstanding any other provision of the Plan,
an Executive who terminates employment after a Change in Control, but
prior to his Normal Retirement Date, shall be entitled to a Retirement
Income Benefit in the form of a Joint and Survivor Annuity commencing
on the first day of the month following termination of employment with
payments for the joint lives of the Participant and his spouse equal
to the Retirement Income Benefit that the Executive would have been
entitled to receive under subsection (b) if he had attained his Normal
Retirement Date on his date of termination."
Executed at Santa Ana, California, on March 22, 2000.
The First American Financial Corporation
By: /s/Parker S. Kennedy
------------------------------------
Parker S. Kennedy
Its: President
By: /s/Mark R Arnesen
-----------------------------------
Mark R Arnesen
Its: Secretary
<PAGE>
Exhibit (10) (h)
AMENDMENT NO. 2
TO
The First American Financial Corporation
MANAGEMENT SUPPLEMENTAL BENEFIT PLAN
This Amendment No. 2 to The First American Financial Corporation Management
Supplemental Benefit Plan (hereinafter referred to as the "Plan") is effective
as of November 12, 1999, and modifies such Plan as set forth below:
A. Section 2(d) (iii) of the Plan is amended to read in full as follows:
(d) "Change in Control" means:
* * *
"(iii) Any other event constituting a change in control
required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A under the Securities Exchange Act of 1934, as amended."
B. Section 3(e) (ii) of the Plan is amended to read in full as follows:
(e) Change in Control
* * *
"(ii) Notwithstanding any other provision of the Plan, an
Executive who terminates employment after a Change in Control, but
prior to his Normal Retirement Date, shall be entitled to a Retirement
Income Benefit in the form of a Joint and Survivor Annuity commencing
on the first day of the month following termination of employment with
payments for the joint lives of the Participant and his spouse equal to
the Retirement Income Benefit that the Executive would have been
entitled to receive under subsection (b) if he had attained his Normal
Retirement Date on his date of termination."
Executed at Santa Ana, California, on March 22, 2000.
The First American Financial Corporation
By: /s/ Parker S. Kennedy
------------------------------------
Parker S. Kennedy
Its: President
By: /s/ Mark R Arnesen
------------------------------------
Mark R Arnesen
Its: Secretary
<PAGE>
EXHIBIT (10)(o)
AMENDMENT NO. 5
TO
THE FIRST AMERICAN FINANCIAL CORPORATION
1996 STOCK OPTION PLAN
This Amendment No. 5 to The First American Financial Corporation 1996 Stock
Option Plan (the "Plan") was adopted by the board of directors of The First
American Financial Corporation (the "Company") on February 24, 2000, and is
effective as of that date.
Section 2.1(r) of the Plan is amended to read in full as follows:
"(r) 'Subsidiary' means any corporation, limited liability company,
partnership, association, joint venture or other entity in which the
Company owns, directly or indirectly, 50% or more of (i) the total
combined voting power of all classes of stock of such corporation; or
(ii) all classes of membership interests of such limited liability
company or association; or (iii) the capital interest or profits
interest of such partnership or joint venture; or (iv) the capital
interest or profits interest or voting power of any other entity."
IN WITNESS WHEREOF, the Company's duly authorized officers have executed
this amendment at Santa Ana, California, on February 29, 2000.
THE FIRST AMERICAN FINANCIAL CORPORATION
By: /s/Parker S. Kennedy
-------------------------------------
Parker S. Kennedy, President
By: /s/Mark R Arnesen
--------------------------------------
Mark R Arnesen, Secretary
<PAGE>
Exhibit (10)(p)
CHANGE IN CONTROL AGREEMENT
---------------------------
EXECUTIVE FORM
This CHANGE IN CONTROL AGREEMENT is entered into as of the 12/th/ day
of November, 1999 (this "Agreement"), by and between THE FIRST AMERICAN
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FINANCIAL CORPORATION, a California corporation (the "Company"), and __________
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(the "Executive").
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W I T N E S S E T H:
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WHEREAS, the Compensation Committee (the "Committee") of the Board of
---------
Directors (the "Board") of the Company has determined that it is in the best
interests of the Company, its subsidiaries and the Company's shareholders to
assure that the Company and its subsidiaries will have the continued dedication
of the Executive, notwithstanding the possibility, threat or occurrence of a
Change in Control (as defined below) of the Company;
WHEREAS, the Committee believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change in Control and to encourage the
Executive's full attention and dedication to the Company and its subsidiaries
currently and in the event of any threatened or pending Change in Control, and
to provide the Executive with compensation and benefits arrangements upon a
Change in Control which ensure that the compensation and benefits expectations
of the Executive will be satisfied and which are competitive with those of other
corporations; and
WHEREAS, the Company and the Executive accordingly desire to enter into
this Agreement on the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein, it is hereby agreed by and between the parties as follows:
1. Term of Agreement. This Agreement shall commence on the date
-----------------
hereof and shall continue through December 31, 2002 (the "Original Term");
-------------
provided, however, that on such date and on each December 31 thereafter, the
- -------- -------
Original Term of this Agreement shall automatically be extended for one
additional year (each, an "Extended Term") unless, not later than the preceding
-------------
January 1 either party shall have given notice that such party does not wish to
extend the term of this Agreement beyond the Original Term and any Extended
Term; and provided, further, that if a Change in Control (as defined in
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paragraph 3 below) shall have occurred during the Original Term or any Extended
Term of this Agreement, the term of this Agreement shall continue for a period
of thirty-six calendar months beyond the calendar month in which such Change in
Control occurs (the Original Term, each Extended Term, if any, and such thirty-
six month period, collectively, the "Term").
----
2. Employment After a Change in Control. If the Executive is in the
------------------------------------
employ of the Company (which for this purpose shall also include any subsidiary
of the Company) on the date of a Change in Control, the Company hereby agrees to
continue the Executive in its employ (and/or, in the case of any subsidiary of
the Company, the employ of such subsidiary) for the period commencing on the
date of the Change in Control and ending on the last day of the Term
<PAGE>
of this Agreement. During the period of employment described in the foregoing
provision of this paragraph 2 (the "Employment Period"), the Executive shall
-----------------
hold such position with the Company (which for this purpose shall also include
any subsidiary of the Company) and exercise such authority and perform such
executive duties as are commensurate with the Executive's position, authority
and duties immediately prior to the Change in Control. The Executive agrees that
during the Employment Period the Executive shall devote full business time
exclusively to the executive duties described herein and perform such duties
faithfully and efficiently; provided, however, that nothing in this Agreement
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shall prevent the Executive from voluntarily resigning from employment upon 60
days' written notice to the Company under circumstances which do not constitute
a Termination (as defined below in paragraph 5).
3. Change in Control. For purposes of this Agreement, a "Change in
----------------- ---------
Control" means the happening of any of the following:
- -------
(a) The consummation of a merger or consolidation of the Company with
or into another entity or any other corporate reorganization, if 50% or
more of the combined voting power of the continuing or surviving entity's
securities outstanding immediately after such merger, consolidation or
other reorganization is owned by persons who were not shareholders of the
Company immediately prior to such merger, consolidation or other
reorganization.
(b) The sale, transfer or other disposition of all or substantially
all of the Company's assets or the complete liquidation or dissolution of
the Company.
(c) A change in the composition of the Board occurring within a two-
year period, as a result of which fewer than a majority of the directors
are Incumbent Directors. "Incumbent Directors" shall mean directors who
-------------------
either (i) are directors of the Company as of the date of this Agreement,
or (ii) are elected, or nominated for election, to the Board with the
affirmative votes of at least a majority of the Incumbent Directors at the
time of such election or nomination (but shall not include an individual
not otherwise an Incumbent Director whose election or nomination is in
connection with an actual or threatened proxy contest relating to the
election of directors to the Company).
(d) Any transaction as a result of which any person or group is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the
----------------
Securities Exchange Act of 1934), directly or indirectly, of securities of
the Company representing at least 25% of the total voting power of the
Company's then outstanding voting securities. For purposes of this
paragraph, the term "person" shall have the same meaning as when used in
------
sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but shall
exclude (i) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or of a subsidiary of the Company;
(ii) so long as a person does not thereafter increase such person's
beneficial ownership of the total voting power represented by the Company's
then outstanding voting securities, a person whose beneficial ownership of
the total voting power represented by the Company's then outstanding voting
securities increases to 25% or more as a result of the acquisition of
voting securities of the Company by the Company which reduces the number of
such voting securities then outstanding; or (iii) so
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<PAGE>
long as a person does not thereafter increase such person's beneficial
ownership of the total voting power represented by the Company's then
outstanding voting securities, a person that acquires directly from the
Company securities of the Company representing at least 25% of the total
voting power represented by the Company's then outstanding voting
securities.
A transaction shall not constitute a Change in Control if its sole purpose is to
change the state of the Company's incorporation or to create a holding company
that will be owned in substantially the same proportions by the persons who held
the Company's securities immediately before such transaction.
4. Compensation During the Employment Period. During the Employment
-----------------------------------------
Period, the Executive shall be compensated as follows:
(a) the Executive shall receive an annual salary which is not less
than his or her annual salary immediately prior to the Employment Period
and shall be eligible to receive an increase in annual salary which is not
materially less favorable to the Executive than increases in salary granted
by the Company for executives with comparable duties;
(b) the Executive shall be eligible to participate in short-term and
long-term cash-based incentive compensation plans which, in the aggregate,
provide bonus opportunities which are not materially less favorable to the
Executive than the greater of (i) the opportunities provided by the Company
for executives with comparable duties; and (ii) the opportunities provided
to the Executive under all such plans in which the Executive was
participating prior to the Employment Period;
(c) the Executive shall be eligible to participate in stock option,
performance awards, restricted stock and other equity-based incentive
compensation plans on a basis not materially less favorable to the
Executive than that applicable (i) to the Executive immediately prior to
the Employment Period or (ii) to other executives of the Company with
comparable duties; and
(d) the Executive shall be eligible to receive employee benefits
(including, but not limited to, tax-qualified and nonqualified savings plan
benefits, medical insurance, disability income protection, life insurance
coverage and death benefits) and perquisites (including, without
limitation, a Company vehicle and Company paid or assisted membership dues)
which are not materially less favorable to the Executive than (i) the
employee benefits and perquisites provided by the Company to executives
with comparable duties or (ii) the employee benefits and perquisites to
which the Executive would be entitled under the Company's employee benefit
plans and perquisites as in effect immediately prior to the Employment
Period.
5. Termination. For purposes of this Agreement, the term
-----------
"Termination" shall mean: (a) termination of the employment of the Executive
- ------------
during the Employment Period by the Company for any reason other than death,
Disability (as defined below) or Cause (as defined
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<PAGE>
below); (b) termination of the employment of the Executive during the Window
Period by the Executive for any reason whatsoever; or (c) termination of the
employment of the Executive during the Employment Period (other than during the
Window Period) by the Executive for Good Reason (as defined below).
Notwithstanding anything in this Agreement to the contrary, if (i) the
Executive's employment is terminated prior to the actual occurrence of a Change
in Control for reasons that would constitute a Termination if they had occurred
following a Change in Control; (ii) the Executive reasonably demonstrates that
such termination (or Good Reason event) was at the request of a third party who
had indicated an intention or had taken steps reasonably calculated to effect a
Change in Control; and (iii) a Change in Control involving such third party (or
a party competing with such third party to effectuate a Change in Control) does
occur, then for purposes of this Agreement, the date immediately prior to the
date of such termination of employment or event constituting Good Reason shall
be treated as a Change in Control and such termination shall be treated as a
Termination. For purposes of determining the timing of payments and benefits to
the Executive under this Agreement as a result of this paragraph, the date of
the actual Change in Control shall be treated as the Executive's date of
Termination.
Except as provided in the last sentence of the immediately preceding
paragraph, the date of the Executive's Termination under this paragraph 5 shall
be the date specified by the Executive or the Company, as the case may be, in a
written notice to the other party complying with the requirements of paragraph
11 below.
For purposes of this Agreement, "Disability" means such physical or
----------
mental disability or infirmity of the Executive which, in the opinion of a
competent physician, renders the Executive unable to perform properly his or her
duties set forth in paragraph 2 of this Agreement, and as a result of which, the
Executive is unable to perform such duties for 6 consecutive calendar months or
for shorter periods aggregating 180 business days in any 12 month period. For
purposes of this paragraph a competent physician shall be a physician mutually
agreed upon by the Executive and the Board. If a mutual agreement cannot be
reached, the Executive shall designate a physician and the Board shall designate
a physician and these two physicians shall select a third physician who shall be
the "competent physician."
For purposes of this Agreement, the term "Cause" means (i) the willful
-----
and continued failure by the Executive to substantially perform the Executive's
duties with the Company (which for purposes of this paragraph shall also include
subsidiaries of the Company) after written notification by the Board, (ii) the
willful engaging by the Executive in conduct which is demonstrably injurious to
the Company, monetarily or otherwise, or (iii) the engaging by the Executive in
egregious misconduct involving serious moral turpitude. For purposes of this
Agreement, no act, or failure to act, on the Executive's part shall be deemed
"willful" unless done, or omitted to be done, by the Executive not in good faith
and without reasonable belief that such action was in the best interest of the
Company.
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<PAGE>
For purposes of this Agreement, the term "Window Period" means the
-------------
period commencing on the first anniversary of the Change in Control and ending
at 5:00 p.m., Los Angeles time, on the thirtieth day thereafter.
For purposes of this Agreement, the term "Good Reason" means, without
-----------
the Executive's express written consent, the occurrence after a Change in
Control of any of the following circumstances:
(i) the assignment to the Executive by the Company of duties which,
in the reasonable determination of the Executive, are a significant adverse
alteration in the nature or status of the Executive's position,
responsibilities, duties or conditions of employment from those in effect
immediately prior to the occurrence of the Change in Control; or any other
action by the Company that, in the reasonable determination of the
Executive, results in a material diminution in the Executive's position,
authority, duties or responsibilities from those in effect immediately
prior to the occurrence of the Change in Control;
(ii) a reduction in the Executive's annual base compensation as in
effect on the occurrence of the Change in Control;
(iii) the relocation of the Company's offices at which the Executive
is principally employed immediately prior to the Change in Control (the
"Principal Location") to a location more than 50 miles from such location
-------------------
or the Company's requiring the Executive to be based anywhere other than
the Principal Location, except for required travel on the Company's
business to an extent substantially consistent with the Executive's
business travel obligations prior to the Change in Control;
(iv) the Company's failure to pay to the Executive any portion of
the Executive's compensation or to pay to the Executive any portion of an
installment of deferred compensation under any deferred compensation
program of the Company within ten days of the date such compensation is
due; or
(v) the Company's failure to continue in effect any material
compensation or benefit plan or practice in which the Executive is eligible
to participate on the occurrence of the Change in Control, unless an
equitable arrangement (embodied in an ongoing substitute or alternative
plan) has been made with respect to such plan or practice, or the Company's
failure to continue the Executive's participation therein (or in such
substitute or alternative plan) on a basis not materially less favorable,
both in terms of the amount of benefits provided and the level of the
Executive's participation relative to other participants, as existed at the
time of the Change in Control.
6. Severance Payments and Benefits. Subject to the provisions of
-------------------------------
paragraph 8 below, in the event of a Termination, in lieu of the amount
otherwise payable under paragraph 4 above, the Company shall:
-5-
<PAGE>
(a) pay the Executive a lump sum payment in cash no later than ten
business days after the date of Termination equal to the sum of:
(i) the sum of (A) the Executive's base salary through and
including the date of Termination and any bonus amounts which have
become payable, to the extent not theretofore paid, (B) a pro rata
portion of the Executive's annual bonus for the fiscal year in which
the date of Termination occurs in an amount equal to (1) the
Executive's Bonus Amount (as defined below), multiplied by (2) a
fraction, the numerator of which is the number of days in the fiscal
year in which the date of Termination occurs through and including the
date of Termination, and the denominator of which is 365, (C) any
compensation previously deferred by the Executive other than pursuant
to a tax-qualified plan (together with any interest and earnings
thereon), (D) accrued and unpaid vacation pay through and including
the date of Termination and (E) unreimbursed business expenses through
and including the date of Termination;
(ii) an amount equal to the product of the Applicable
Multiple (as defined below) and the Executive's annual salary in
effect immediately prior to the date of Termination; and
(iii) an amount equal to the product of the Applicable
Multiple and the Executive's Bonus Amount; and
(b) continue to provide the Executive (and, if applicable, the
Executive's dependent's), for a 24 month period following the date of
Termination, with the same level of benefits described in paragraph 4(d) of
this Agreement upon substantially the same terms and conditions (including
contributions required by the Executive for such benefits) as existed
immediately prior to the date of Termination (or, if more favorable to the
Executive, as such benefits and terms and conditions existed immediately
prior to the Change of Control), provided, that, if the Executive cannot
--------
continue to participate in the Company plans providing such benefits, the
Company shall otherwise provide such benefits on the same after-tax basis
as if continued participation had been permitted. Notwithstanding the
foregoing provisions of this paragraph, in the event the Executive becomes
reemployed with another employer and becomes eligible to receive welfare
benefits from such employer, the welfare benefits described in this
Agreement shall be secondary to such benefits during the period of the
Executive's eligibility, but only to the extent that the Company reimburses
the Executive for any increased cost and provides any additional benefits
necessary to give the Executive the benefits provided hereunder.
For purposes of this Agreement, the term "Applicable Multiple" means
-------------------
(i) in the case of termination of the employment of the Executive during the
Window Period by the Executive for any reason whatsoever, two or (ii) in the
case of (x) termination of the employment of the Executive during the Employment
Period by the Company for any reason other than death, Disability or Cause and
(y) termination of the employment of the Executive during the
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<PAGE>
Employment Period (other than during the Window Period) by the Executive for
Good Reason, three.
For purposes of this Agreement, the term "Bonus Amount" means the
------------
greater of (x) the highest annual discretionary incentive bonus (including cash
bonuses and stock bonuses) earned by the Executive from the Company and its
subsidiaries during the last 4 completed fiscal years of the Company immediately
preceding the date of Termination (annualized in the event the Executive was not
employed by the Company and/or any of its subsidiaries for the whole of any such
fiscal year) and (y) the Executive's anticipated bonus for the fiscal year of
the Company which includes the date of Termination.
7. Make-Whole Payments.
-------------------
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payments and/or benefits to or for the
benefit of the Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or any other plan,
arrangement or agreement with (i) the Company, (ii) any person whose actions
result in a change in ownership or effective control, or in the ownership of a
substantial portion of the assets, of the Company, covered by Section 280G(b)(2)
of the Code or (iii) any person affiliated with the Company or any such person)
as a result of such a change (collectively, the "Payments") would be subject to
--------
the excise tax imposed by Section 4999 of the Code and/or any similar tax that
may hereafter be imposed under any successor provision or by any taxing
authority (collectively, the "Excise Tax"), the Company shall pay the Executive
----------
an additional amount (a "Gross-Up Payment") such that after payment by the
----------------
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including, without limitation, any income taxes (and any
interest and penalties imposed with respect thereto) and Excise Tax imposed upon
the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
(b) For purposes of determining whether any of the Payments and the
Gross-Up Payment (collectively the "Total Payments") will be subject to the
--------------
Excise Tax and the amount of such Excise Tax, (i) the Total Payments shall be
treated as "parachute payments" within the meaning of Section 280G(b)(2) of the
Code, and all "parachute payments" in excess of the "base amount" (as defined
under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise
Tax, unless and except to the extent that, in the opinion of tax counsel
selected by the Executive and approved by the Company (which approval shall not
be unreasonably withheld) ("Tax Counsel") such Total Payments (in whole or in
-----------
part) either do not constitute "parachute payments," represent reasonable
compensation for services actually rendered before the change referred to in
subparagraph (a) of this paragraph 7, within the meaning of Section 280G(b)(4)
of the Code, in excess of the "base amount," or are otherwise not subject to the
Excise Tax, and (ii) the value of any non-cash benefits or any deferred payment
or benefit shall be determined by an internationally-recognized firm of
independent public accountants selected by the Executive and approved by the
Company (which approval shall not be unreasonably withheld) (the "Accountants")
-----------
in accordance with the principles of Section 280G of the Code. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be deemed to
pay U.S. Federal income taxes at the highest marginal rate of U.S. Federal
income taxation in the calendar
-7-
<PAGE>
year in which the Gross-Up Payment is to be made and state and local income
taxes at the highest marginal rate of taxation in the state and locality of the
Executive's residence for the calendar year in which the Payments are to be
made, net of the maximum reduction in U.S. Federal income taxes which could be
obtained from deduction of such state and local taxes if paid in such year. All
determinations required to be made under this paragraph 7 shall be made by Tax
Counsel and, if determined by Tax Counsel, the Accountants, which shall provide
detailed supporting calculations both to the Company and the Executive within 15
business days of the receipt by the Company of notice from the Executive that
there has been a Payment, or such earlier time as is requested by the Company.
All fees and expenses of Tax Counsel and the Accountants shall be borne solely
by the Company. Any Gross-Up Payment, as determined pursuant to this paragraph
7, shall be paid by the Company to the Executive within 5 days of the receipt of
Tax Counsel's determination; provided, however, that if the amount of such
Gross-Up Payment or portion thereof cannot be finally determined on or before
such day, the Company shall pay to the Executive on such day an estimate, as
determined in good faith by Tax Counsel or the Accountant, of the minimum amount
of such payments and shall pay the remainder of such payments (together with
interest at the rate provided in Section 1274(b)(2)(B) of the Code), subject to
further payments pursuant to subparagraph (d) of this paragraph 7, promptly
following such time as the amount thereof can be determined. In the event that
the amount of the estimated payments exceeds the amount subsequently determined
to have been due, such excess shall constitute a loan by the Company to the
Executive, payable on the fifth day after demand by the Company (together with
interest at the rate provided in Section 1274(b)(2)(B) of the Code). Any
determination hereunder by Tax Counsel or the Accountants shall be binding upon
the Company and the Executive.
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than 10 business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with respect
to such claim by an attorney reasonably selected by the Company, which may
be Tax Counsel,
(iii) cooperate with the Company in good faith in order effectively
to contest such claim, and
-8-
<PAGE>
(iv) permit the Company to participate in any proceedings relating
to such claim;
provided, however, that the Company shall bear and pay directly all costs and
- -------- -------
expenses (including additional interest and penalties), incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses.
Without limitation on the foregoing provisions of this paragraph 7(c),
the Company shall control all proceedings taken in connection with such contest
and, at its sole option, may pursue or forgo any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect of
such claim and may, at its sole option, either direct the Executive to pay the
tax claimed and sue for a refund or contest the claim in any permissible manner,
and the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided, however, that if the
-------- -------
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and further provided
that any extension of the statute of limitations relating to payment of taxes
for the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.
(d) In the event that the Excise Tax is subsequently determined by the
Accountants or Tax Counsel to be less than the amount taken into account
hereunder at the time the Gross-Up Payment is made, the Executive shall repay to
the Company, at the time that the amount of such reduction in Excise Tax is
finally determined, the portion of the prior Gross-Up Payment attributable to
such reduction (plus the portion of the Gross-Up Payment attributable to the
Excise Tax and the U.S. Federal, state and local income tax imposed on the
portion of the Gross-Up Payment being repaid by the Executive if such repayment
results in a reduction in Excise Tax or a U.S. Federal, state and local income
tax deduction), plus interest on the amount of such repayment at the rate
provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing,
in the event any portion of the Gross-Up Payment to be refunded to the Company
has been paid to any U.S. Federal, state or local tax authority, repayment
thereof (and related amounts) shall not be required until actual refund or
credit of such portion has been made to the Executive, and interest payable to
the Company shall not exceed the interest received or credited to the Executive
by such tax authority for the period it held such portion. The Executive and
the Company shall mutually agree upon the course of action to be pursued (and
the method of allocating the expense thereof) if the Executive's claim for
refund or credit is denied. In the event that the Excise Tax is later
determined by the Accountants or Tax Counsel or the Internal Revenue Service to
exceed the amount taken into account hereunder at the time the Gross-Up
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<PAGE>
Payment is made (including by reason of any payment the existence or amount of
which cannot be determined at the time of the Gross-Up Payment), the Company
shall make an additional Gross-Up Payment in respect of such excess (plus any
interest or penalties payable with respect to such excess) at the time that the
amount of such excess is finally determined.
8. Withholding. All payments to the Executive under this Agreement
-----------
will be subject to all applicable withholding of state and federal taxes.
9. Arbitration of All Disputes. Any controversy or claim arising
---------------------------
out of or relating to this Agreement or the breach thereof shall be settled by
arbitration in Santa Ana, California, in accordance with the laws of the State
of California, by three arbitrators appointed by the parties. If the parties
cannot agree on the appointment of the arbitrators, one shall be appointed by
the Company and one by the Executive and the third shall be appointed by the
first two arbitrators. The arbitration shall be conducted in accordance with the
rules of the American Arbitration Association, except with respect to the
selection of arbitrators which shall be as provided in this paragraph 9.
Judgment upon the award rendered by the arbitrators may be entered in any court
having jurisdiction thereof. In the event that it shall be necessary or
desirable, as determined by the Executive in his or her sole discretion, for the
Executive to retain legal counsel or incur other costs and expenses in
connection with interpretation or enforcement of his or her rights under this
Agreement, the Company shall pay (or the Executive shall be entitled to recover
from the Company, as the case may be) his or her reasonable attorneys' fees and
costs and expenses in connection with interpretation or enforcement of his or
her rights (including the enforcement of any arbitration award in court).
Payments shall be made to the Executive at the time such fees, costs and
expenses are incurred. If, however, the arbitrators shall determine that, under
the circumstances, payment by the Company of all or a part of any such fees and
costs and expenses would be unjust, the Executive shall repay such amounts to
the Company in accordance with the order of the arbitrators. Any award of the
arbitrators shall include interest at a rate or rates considered just under the
circumstances by the arbitrators.
10. Mitigation and Set-Off. The Executive shall not be required to
----------------------
mitigate the amount of any payment provided for in this Agreement by seeking
other employment or otherwise. The Company shall not be entitled to set off
against the amounts payable to the Executive under this Agreement any amounts
owed to the Company by the Executive, any amounts earned by the Executive in
other employment after termination of his employment with the Company, or any
amounts which might have been earned by the Executive in other employment had he
or she sought such other employment.
11. Notices. Any notice of Termination of the Executive's employment
-------
by the Company or the Executive for any reason shall be upon no less than 10
days' and no greater than 30 days' advance written notice to the other party.
Any notices, requests, demands and other communications provided for by this
Agreement shall be sufficient if in writing and if sent by registered or
certified mail to the Executive at the last address he has filed in writing with
the Company or, in the case of the Company, to the attention of the Secretary of
the Company, at its principal executive offices.
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<PAGE>
12. Non-Alienation. The Executive shall not have any right to
--------------
pledge, hypothecate, anticipate or in any way create a lien upon any amounts
provided under this Agreement; and no benefits payable hereunder shall be
assignable in anticipation of payment either by voluntary or involuntary acts,
or by operation of law. Nothing in this paragraph shall limit the Executive's
rights or powers to dispose of his property by will or limit any rights or
powers which his or her executor or administrator would otherwise have.
13. Governing Law. THE PROVISIONS OF THIS AGREEMENT SHALL BE
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT
APPLICATION OF CONFLICT OF LAWS PROVISIONS THEREUNDER.
14. Amendment. This Agreement may not be amended, modified, waived
---------
or terminated except by mutual agreement of the parties in writing.
15. Heirs of the Executive. This Agreement shall inure to the benefit of
----------------------
and be enforceable by the Executive's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Executive should die while any amounts are still payable to the
Executive hereunder, all such amounts, unless otherwise provided herein, shall
be paid in accordance with the terms of this Agreement to the Executive's
devisee, legatee, or other designee or, if there be no such designee, to the
Executive's estate.
16. Successors to the Company. This Agreement shall be binding upon and
-------------------------
inure to the benefit of the Company and any successor of the Company. The
Company shall require (a) any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place and (b) the
parent entity of any successor in such business combination to guarantee the
performance of such successor hereunder. Failure of the Company to obtain such
assumption and agreement (and, if applicable, such guarantee) prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle the Executive to receive compensation from the Company in the same
amount and on the same terms to which the Executive would be entitled hereunder
if the Executive terminated the Executive's employment for Good Reason following
a Change in Control, except that for purposes of implementing the foregoing, the
date on which any such succession becomes effective shall be deemed the date of
Termination. Unless expressly provided otherwise, the term "Company" as used
-------
herein shall mean the Company as defined in this Agreement and any successor to
its business and/or assets as aforesaid.
17. Employment Status. Nothing herein contained shall be deemed to create
-----------------
an employment agreement between the Company and the Executive, providing for the
employment of the Executive by the Company for any fixed period of time. The
Executive's employment with the Company is terminable at will by the Company or
the Executive and each shall have the right to terminate the Executive's
employment with the Company at any time, with or without Cause, subject to (i)
the notice provisions of paragraphs 2, 5 and 11, and (ii) the Company's
obligation to provide severance payments as required by paragraph 6. Except as
otherwise provided in
-11-
<PAGE>
paragraph 5 of this Agreement, upon a termination of the Executive's employment
prior to the date of a Change in Control, there shall be no further rights under
this Agreement.
18. Severability. In the event that any provision or portion of this
------------
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect.
19. Counterparts. This Agreement may be executed in two or more
------------
counterparts, any one of which shall be deemed the original without reference to
the other.
-12-
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set his or her hand and,
pursuant to the authorization from the Committee, the Company has caused these
presents to be executed in its name and on its behalf, all as of the day and
year first above written.
"Executive"
_________________________________
THE FIRST AMERICAN FINANCIAL CORPORATION
/s/Parker S. Kennedy
PARKER S. KENNEDY
PRESIDENT
-13-
<PAGE>
EXHIBIT (10)(q)
CHANGE IN CONTROl AGREEMENT
---------------------------
MANAGEMENT FORM
This CHANGE IN CONTROL AGREEMENT is entered into as of the 12/th/ day
of November, 1999 (this "Agreement"), by and between THE FIRST AMERICAN
---------
FINANCIAL CORPORATION, a California corporation (the "Company"), and __________
-------
(the "Executive").
---------
W I T N E S S E T H:
-------------------
WHEREAS, the Compensation Committee (the "Committee") of the Board of
---------
Directors (the "Board") of the Company has determined that it is in the best
interests of the Company, its subsidiaries and the Company's shareholders to
assure that the Company and its subsidiaries will have the continued dedication
of the Executive, notwithstanding the possibility, threat or occurrence of a
Change in Control (as defined below) of the Company;
WHEREAS, the Committee believes it is imperative to diminish the
inevitable distraction of the Executive by virtue of the personal uncertainties
and risks created by a pending or threatened Change in Control and to encourage
the Executive's full attention and dedication to the Company and its
subsidiaries currently and in the event of any threatened or pending Change in
Control, and to provide the Executive with compensation and benefits
arrangements upon a Change in Control which ensure that the compensation and
benefits expectations of the Executive will be satisfied and which are
competitive with those of other corporations; and
WHEREAS, the Company and the Executive accordingly desire to enter into
this Agreement on the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein, it is hereby agreed by and between the parties as follows:
1. Term of Agreement. This Agreement shall commence on the date
-----------------
hereof and shall continue through December 31, 2002 (the "Original Term");
-------------
provided, however, that on such date and on each December 31 thereafter, the
- -------- -------
Original Term of this Agreement shall automatically be extended for one
additional year (each, an "Extended Term") unless, not later than the preceding
-------------
January 1 either party shall have given notice that such party does not wish to
extend the term of this Agreement beyond the Original Term and any Extended
Term; and provided, further, that if a Change in Control (as defined in
-------- -------
paragraph 3 below) shall have occurred during the Original Term or any Extended
Term of this Agreement, the term of this Agreement shall continue for a period
of thirty-six calendar months beyond the calendar month in which such Change in
Control occurs (the Original Term, each Extended Term, if any, and such thirty-
six month period, collectively, the "Term").
----
2. Employment After a Change in Control. If the Executive is in the
------------------------------------
employ of the Company (which for this purpose shall also include any subsidiary
of the Company) on the date of a Change in Control, the Company hereby agrees to
continue the Executive in its employ (and/or, in the case of any subsidiary of
the Company, the employ of such subsidiary) for the period commencing on the
date of the Change in Control and ending on the last day of the Term
<PAGE>
of this Agreement. During the period of employment described in the foregoing
provision of this paragraph 2 (the "Employment Period"), the Executive shall
-----------------
hold such position with the Company (which for this purpose shall also include
any subsidiary of the Company) and exercise such authority and perform such
executive duties as are commensurate with the Executive's position, authority
and duties immediately prior to the Change in Control. The Executive agrees that
during the Employment Period the Executive shall devote full business time
exclusively to the executive duties described herein and perform such duties
faithfully and efficiently; provided, however, that nothing in this Agreement
-------- -------
shall prevent the Executive from voluntarily resigning from employment upon 60
days' written notice to the Company under circumstances which do not constitute
a Termination (as defined below in paragraph 5).
3. Change in Control. For purposes of this Agreement, a "Change in
----------------- ---------
Control" means the happening of any of the following:
- -------
(a) The consummation of a merger or consolidation of the Company
with or into another entity or any other corporate reorganization, if
50% or more of the combined voting power of the continuing or
surviving entity's securities outstanding immediately after such
merger, consolidation or other reorganization is owned by persons who
were not shareholders of the Company immediately prior to such merger,
consolidation or other reorganization.
(b) The sale, transfer or other disposition of all or
substantially all of the Company's assets or the complete liquidation
or dissolution of the Company.
(c) A change in the composition of the Board occurring within a
two-year period, as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" shall mean
-------------------
directors who either (i) are directors of the Company as of the date
of this Agreement, or (ii) are elected, or nominated for election, to
the Board with the affirmative votes of at least a majority of the
Incumbent Directors at the time of such election or nomination (but
shall not include an individual not otherwise an Incumbent Director
whose election or nomination is in connection with an actual or
threatened proxy contest relating to the election of directors to the
Company).
(d) Any transaction as a result of which any person or group is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the
----------------
Securities Exchange Act of 1934), directly or indirectly, of securities of
the Company representing at least 25% of the total voting power of the
Company's then outstanding voting securities. For purposes of this
paragraph, the term "person" shall have the same meaning as when used in
------
sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but shall
exclude (i) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or of a subsidiary of the Company;
(ii) so long as a person does not thereafter increase such person's
beneficial ownership of the total voting power represented by the Company's
then outstanding voting securities, a person whose beneficial ownership of
the total voting power represented by the Company's then outstanding voting
securities increases to 25% or more as a result of the acquisition of
voting securities of the Company by the Company which reduces the number of
such voting securities then outstanding; or (iii) so
-2-
<PAGE>
long as a person does not thereafter increase such person's beneficial
ownership of the total voting power represented by the Company's then
outstanding voting securities, a person that acquires directly from the
Company securities of the Company representing at least 25% of the total
voting power represented by the Company's then outstanding voting
securities.
A transaction shall not constitute a Change in Control if its sole purpose is to
change the state of the Company's incorporation or to create a holding company
that will be owned in substantially the same proportions by the persons who held
the Company's securities immediately before such transaction.
4. Compensation During the Employment Period. During the Employment
-----------------------------------------
Period, the Executive shall be compensated as follows:
(a) the Executive shall receive an annual salary which is not less
than his or her annual salary immediately prior to the Employment
Period and shall be eligible to receive an increase in annual salary
which is not materially less favorable to the Executive than increases
in salary granted by the Company for executives with comparable
duties;
(b) the Executive shall be eligible to participate in short-term
and long-term cash-based incentive compensation plans which, in the
aggregate, provide bonus opportunities which are not materially less
favorable to the Executive than the greater of (i) the opportunities
provided by the Company for executives with comparable duties; and
(ii) the opportunities provided to the Executive under all such plans
in which the Executive was participating prior to the Employment
Period;
(c) the Executive shall be eligible to participate in stock
option, performance awards, restricted stock and other equity-based
incentive compensation plans on a basis not materially less favorable
to the Executive than that applicable (i) to the Executive immediately
prior to the Employment Period or (ii) to other executives of the
Company with comparable duties; and
(d) the Executive shall be eligible to receive employee benefits
(including, but not limited to, tax-qualified and nonqualified savings
plan benefits, medical insurance, disability income protection, life
insurance coverage and death benefits) and perquisites (including,
without limitation, a Company vehicle and Company paid or assisted
membership dues) which are not materially less favorable to the
Executive than (i) the employee benefits and perquisites provided by
the Company to executives with comparable duties or (ii) the employee
benefits and perquisites to which the Executive would be entitled
under the Company's employee benefit plans and perquisites as in
effect immediately prior to the Employment Period.
5. Termination. For purposes of this Agreement, the term
-----------
"Termination" shall mean: (a) termination of the employment of the Executive
-----------
during the Employment Period by the Company for any reason other than death,
Disability (as defined below) or Cause (as defined
-3-
<PAGE>
below); (b) termination of the employment of the Executive during the Window
Period by the Executive for any reason whatsoever; or (c) termination of the
employment of the Executive during the Employment Period (other than during the
Window Period) by the Executive for Good Reason (as defined below).
Notwithstanding anything in this Agreement to the contrary, if (i) the
Executive's employment is terminated prior to the actual occurrence of a Change
in Control for reasons that would constitute a Termination if they had occurred
following a Change in Control; (ii) the Executive reasonably demonstrates that
such termination (or Good Reason event) was at the request of a third party who
had indicated an intention or had taken steps reasonably calculated to effect a
Change in Control; and (iii) a Change in Control involving such third party (or
a party competing with such third party to effectuate a Change in Control) does
occur, then for purposes of this Agreement, the date immediately prior to the
date of such termination of employment or event constituting Good Reason shall
be treated as a Change in Control and such termination shall be treated as a
Termination. For purposes of determining the timing of payments and benefits to
the Executive under this Agreement as a result of this paragraph, the date of
the actual Change in Control shall be treated as the Executive's date of
Termination.
Except as provided in the last sentence of the immediately preceding
paragraph, the date of the Executive's Termination under this paragraph 5 shall
be the date specified by the Executive or the Company, as the case may be, in a
written notice to the other party complying with the requirements of paragraph
11 below.
For purposes of this Agreement, "Disability" means such physical or
----------
mental disability or infirmity of the Executive which, in the opinion of a
competent physician, renders the Executive unable to perform properly his or her
duties set forth in paragraph 2 of this Agreement, and as a result of which, the
Executive is unable to perform such duties for 6 consecutive calendar months or
for shorter periods aggregating 180 business days in any 12 month period. For
purposes of this paragraph a competent physician shall be a physician mutually
agreed upon by the Executive and the Board. If a mutual agreement cannot be
reached, the Executive shall designate a physician and the Board shall designate
a physician and these two physicians shall select a third physician who shall be
the "competent physician."
For purposes of this Agreement, the term "Cause" means (i) the willful and
-----
continued failure by the Executive to substantially perform the Executive's
duties with the Company (which for purposes of this paragraph shall also include
subsidiaries of the Company) after written notification by the Board, (ii) the
willful engaging by the Executive in conduct which is demonstrably injurious to
the Company, monetarily or otherwise, or (iii) the engaging by the Executive in
egregious misconduct involving serious moral turpitude. For purposes of this
Agreement, no act, or failure to act, on the Executive's part shall be deemed
"willful" unless done, or omitted to be done, by the Executive not in good faith
and without reasonable belief that such action was in the best interest of the
Company.
-4-
<PAGE>
For purposes of this Agreement, the term "Window Period" means the period
-------------
commencing on the first anniversary of the Change in Control and ending at 5:00
p.m., Los Angeles time, on the thirtieth day thereafter.
For purposes of this Agreement, the term "Good Reason" means, without the
-----------
Executive's express written consent, the occurrence after a Change in Control of
any of the following circumstances:
(i) the assignment to the Executive by the Company of duties
which, in the reasonable determination of the Executive, are a
significant adverse alteration in the nature or status of the
Executive's position, responsibilities, duties or conditions of
employment from those in effect immediately prior to the occurrence of
the Change in Control; or any other action by the Company that, in the
reasonable determination of the Executive, results in a material
diminution in the Executive's position, authority, duties or
responsibilities from those in effect immediately prior to the
occurrence of the Change in Control;
(ii) a reduction in the Executive's annual base compensation as
in effect on the occurrence of the Change in Control;
(iii) the relocation of the Company's offices at which the
Executive is principally employed immediately prior to the Change in
Control (the "Principal Location") to a location more than 50 miles
-------------------
from such location or the Company's requiring the Executive to be
based anywhere other than the Principal Location, except for required
travel on the Company's business to an extent substantially consistent
with the Executive's business travel obligations prior to the Change
in Control;
(iv) the Company's failure to pay to the Executive any portion of
the Executive's compensation or to pay to the Executive any portion of
an installment of deferred compensation under any deferred
compensation program of the Company within ten days of the date such
compensation is due; or
(v) the Company's failure to continue in effect any material
compensation or benefit plan or practice in which the Executive is
eligible to participate on the occurrence of the Change in Control,
unless an equitable arrangement (embodied in an ongoing substitute or
alternative plan) has been made with respect to such plan or practice,
or the Company's failure to continue the Executive's participation
therein (or in such substitute or alternative plan) on a basis not
materially less favorable, both in terms of the amount of benefits
provided and the level of the Executive's participation relative to
other participants, as existed at the time of the Change in Control.
6. Severance Payments and Benefits. Subject to the provisions of
-------------------------------
paragraph 8 below, in the event of a Termination, in lieu of the amount
otherwise payable under paragraph 4 above, the Company shall:
-5-
<PAGE>
(a) pay the Executive a lump sum payment in cash no later than ten
business days after the date of Termination equal to the sum of:
(i) the sum of (A) the Executive's base salary through and
including the date of Termination and any bonus amounts which have
become payable, to the extent not theretofore paid, (B) a pro rata
portion of the Executive's annual bonus for the fiscal year in which
the date of Termination occurs in an amount equal to (1) the
Executive's Bonus Amount (as defined below), multiplied by (2) a
fraction, the numerator of which is the number of days in the fiscal
year in which the date of Termination occurs through and including the
date of Termination, and the denominator of which is 365, (C) any
compensation previously deferred by the Executive other than pursuant
to a tax-qualified plan (together with any interest and earnings
thereon), (D) accrued and unpaid vacation pay through and including
the date of Termination and (E) unreimbursed business expenses through
and including the date of Termination;
(ii) an amount equal to the product of the Applicable Multiple
(as defined below) and the Executive's annual salary in effect
immediately prior to the date of Termination; and
(iii) an amount equal to the product of the Applicable Multiple
and the Executive's Bonus Amount; and
(b) continue to provide the Executive (and, if applicable, the
Executive's dependent's), for a 24 month period following the date of
Termination, with the same level of benefits described in paragraph 4(d) of
this Agreement upon substantially the same terms and conditions (including
contributions required by the Executive for such benefits) as existed
immediately prior to the date of Termination (or, if more favorable to the
Executive, as such benefits and terms and conditions existed immediately
prior to the Change of Control), provided, that, if the Executive cannot
--------
continue to participate in the Company plans providing such benefits, the
Company shall otherwise provide such benefits on the same after-tax basis
as if continued participation had been permitted. Notwithstanding the
foregoing provisions of this paragraph, in the event the Executive becomes
reemployed with another employer and becomes eligible to receive welfare
benefits from such employer, the welfare benefits described in this
Agreement shall be secondary to such benefits during the period of the
Executive's eligibility, but only to the extent that the Company reimburses
the Executive for any increased cost and provides any additional benefits
necessary to give the Executive the benefits provided hereunder.
For purposes of this Agreement, the term "Applicable Multiple" means
-------------------
(i) in the case of termination of the employment of the Executive during the
Window Period by the Executive for any reason whatsoever, one or (ii) in the
case of (x) termination of the employment of the Executive during the Employment
Period by the Company for any reason other than death, Disability or Cause and
(y) termination of the employment of the Executive during the
-6-
<PAGE>
Employment Period (other than during the Window Period) by the Executive for
Good Reason, two.
For purposes of this Agreement, the term "Bonus Amount" means the
------------
greater of (x) the highest annual discretionary incentive bonus (including cash
bonuses and stock bonuses) earned by the Executive from the Company and its
subsidiaries during the last 4 completed fiscal years of the Company immediately
preceding the date of Termination (annualized in the event the Executive was not
employed by the Company and/or any of its subsidiaries for the whole of any such
fiscal year) and (y) the Executive's anticipated bonus for the fiscal year of
the Company which includes the date of Termination.
7. Make-Whole Payments.
-------------------
(a) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payments and/or benefits to or for the
benefit of the Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or any other plan,
arrangement or agreement with (i) the Company, (ii) any person whose actions
result in a change in ownership or effective control, or in the ownership of a
substantial portion of the assets, of the Company, covered by Section 280G(b)(2)
of the Code or (iii) any person affiliated with the Company or any such person)
as a result of such change (collectively, the "Payments") would be subject to
--------
the excise tax imposed by Section 4999 of the Code and/or any similar tax that
may hereafter be imposed under any successor provision or by any taxing
authority (collectively, the "Excise Tax"), the Company shall pay the Executive
----------
an additional amount (a "Gross-Up Payment") such that after payment by the
----------------
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including, without limitation, any income taxes (and any
interest and penalties imposed with respect thereto) and Excise Tax imposed upon
the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
(b) For purposes of determining whether any of the Payments and the
Gross-Up Payment (collectively the "Total Payments") will be subject to the
--------------
Excise Tax and the amount of such Excise Tax, (i) the Total Payments shall be
treated as "parachute payments" within the meaning of Section 280G(b)(2) of the
Code, and all "parachute payments" in excess of the "base amount" (as defined
under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise
Tax, unless and except to the extent that, in the opinion of tax counsel
selected by the Executive and approved by the Company (which approval shall not
be unreasonably withheld) ("Tax Counsel") such Total Payments (in whole or in
-----------
part) either do not constitute "parachute payments," represent reasonable
compensation for services actually rendered before the change referred to in
subparagraph (a) of this paragraph 7, within the meaning of Section 280G(b)(4)
of the Code, in excess of the "base amount," or are otherwise not subject to the
Excise Tax, and (ii) the value of any non-cash benefits or any deferred payment
or benefit shall be determined by an internationally-recognized firm of
independent public accountants selected by the Executive and approved by the
Company (which approval shall not be unreasonably withheld) (the "Accountants")
-----------
in accordance with the principles of Section 280G of the Code. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be deemed to
pay U.S. Federal income taxes at the highest marginal rate of U.S. Federal
income taxation in the calendar
-7-
<PAGE>
year in which the Gross-Up Payment is to be made and state and local income
taxes at the highest marginal rate of taxation in the state and locality of the
Executive's residence for the calendar year in which the Payments are to be
made, net of the maximum reduction in U.S. Federal income taxes which could be
obtained from deduction of such state and local taxes if paid in such year. All
determinations required to be made under this paragraph 7 shall be made by Tax
Counsel and, if determined by Tax Counsel, the Accountants, which shall provide
detailed supporting calculations both to the Company and the Executive within 15
business days of the receipt by the Company of notice from the Executive that
there has been a Payment, or such earlier time as is requested by the Company.
All fees and expenses of Tax Counsel and the Accountants shall be borne solely
by the Company. Any Gross-Up Payment, as determined pursuant to this paragraph
7, shall be paid by the Company to the Executive within 5 days of the receipt of
Tax Counsel's determination; provided, however, that if the amount of such Gross
Up Payment or portion thereof cannot be finally determined on or before such
day, the Company shall pay to the Executive on such day an estimate, as
determined in good faith by Tax Counsel or the Accountant, of the minimum amount
of such payments and shall pay the remainder of such payments (together with
interest at the rate provided in Section 1274(b)(2)(B) of the Code), subject to
further payments pursuant to subparagraph (d) of this paragraph 7, promptly
following such time as the amount thereof can be determined. In the event that
the amount of the estimated payments exceeds the amount subsequently determined
to have been due, such excess shall constitute a loan by the Company to the
Executive, payable on the fifth day after demand by the Company (together with
interest at the rate provided in Section 1274(b)(2)(B) of the Code). Any
determination hereunder by Tax Counsel or the Accountants shall be binding upon
the Company and the Executive .
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than 10 business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which it gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by
the Company relating to such claim,
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company, which may be Tax Counsel,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
-8-
<PAGE>
(iv) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all costs and
- -------- -------
expenses (including additional interest and penalties), incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses.
Without limitation on the foregoing provisions of this paragraph 7(c),
the Company shall control all proceedings taken in connection with such contest
and, at its sole option, may pursue or forgo any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect of
such claim and may, at its sole option, either direct the Executive to pay the
tax claimed and sue for a refund or contest the claim in any permissible manner,
and the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided, however, that if the
-------- -------
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and further provided
that any extension of the statute of limitations relating to payment of taxes
for the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.
(d) In the event that the Excise Tax is subsequently determined by the
Accountants or Tax Counsel to be less than the amount taken into account
hereunder at the time the Gross-Up Payment is made, the Executive shall repay to
the Company, at the time that the amount of such reduction in Excise Tax is
finally determined, the portion of the prior Gross-Up Payment attributable to
such reduction (plus the portion of the Gross-Up Payment attributable to the
Excise Tax and the U.S. Federal, state and local income tax imposed on the
portion of the Gross-Up Payment being repaid by the Executive if such repayment
results in a reduction in Excise Tax or a U.S. Federal, state and local income
tax deduction), plus interest on the amount of such repayment at the rate
provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing,
in the event any portion of the Gross-Up Payment to be refunded to the Company
has been paid to any U.S. Federal, state or local tax authority, repayment
thereof (and related amounts) shall not be required until actual refund or
credit of such portion has been made to the Executive, and interest payable to
the Company shall not exceed the interest received or credited to the Executive
by such tax authority for the period it held such portion. The Executive and
the Company shall mutually agree upon the course of action to be pursued (and
the method of allocating the expense thereof) if the Executive's claim for
refund or credit is denied. In the event that the Excise Tax is later
determined by the Accountants or Tax Counsel or the Internal Revenue Service to
exceed the amount taken into account hereunder at the time the Gross-Up
-9-
<PAGE>
Payment is made (including by reason of any payment the existence or amount of
which cannot be determined at the time of the Gross-Up Payment), the Company
shall make an additional Gross-Up Payment in respect of such excess (plus any
interest or penalties payable with respect to such excess) at the time that the
amount of such excess is finally determined.
8. Withholding. All payments to the Executive under this Agreement
-----------
will be subject to all applicable withholding of state and federal taxes.
9. Arbitration of All Disputes. Any controversy or claim arising
---------------------------
out of or relating to this Agreement or the breach thereof shall be settled by
arbitration in Santa Ana, California, in accordance with the laws of the State
of California, by three arbitrators appointed by the parties. If the parties
cannot agree on the appointment of the arbitrators, one shall be appointed by
the Company and one by the Executive and the third shall be appointed by the
first two arbitrators. The arbitration shall be conducted in accordance with the
rules of the American Arbitration Association, except with respect to the
selection of arbitrators which shall be as provided in this paragraph 9.
Judgment upon the award rendered by the arbitrators may be entered in any court
having jurisdiction thereof. In the event that it shall be necessary or
desirable, as determined by the Executive in his or her sole discretion, for the
Executive to retain legal counsel or incur other costs and expenses in
connection with interpretation or enforcement of his or her rights under this
Agreement, the Company shall pay (or the Executive shall be entitled to recover
from the Company, as the case may be) his or her reasonable attorneys' fees and
costs and expenses in connection with interpretation or enforcement of his or
her rights (including the enforcement of any arbitration award in court).
Payments shall be made to the Executive at the time such fees, costs and
expenses are incurred. If, however, the arbitrators shall determine that, under
the circumstances, payment by the Company of all or a part of any such fees and
costs and expenses would be unjust, the Executive shall repay such amounts to
the Company in accordance with the order of the arbitrators. Any award of the
arbitrators shall include interest at a rate or rates considered just under the
circumstances by the arbitrators.
10. Mitigation and Set-Off. The Executive shall not be required to
----------------------
mitigate the amount of any payment provided for in this Agreement by seeking
other employment or otherwise. The Company shall not be entitled to set off
against the amounts payable to the Executive under this Agreement any amounts
owed to the Company by the Executive, any amounts earned by the Executive in
other employment after termination of his employment with the Company, or any
amounts which might have been earned by the Executive in other employment had he
or she sought such other employment.
11. Notices. Any notice of Termination of the Executive's employment
-------
by the Company or the Executive for any reason shall be upon no less than 10
days' and no greater than 30 days' advance written notice to the other party.
Any notices, requests, demands and other communications provided for by this
Agreement shall be sufficient if in writing and if sent by registered or
certified mail to the Executive at the last address he has filed in writing with
the Company or, in the case of the Company, to the attention of the Secretary of
the Company, at its principal executive offices.
-10-
<PAGE>
12. Non-Alienation. The Executive shall not have any right to
--------------
pledge, hypothecate, anticipate or in any way create a lien upon any amounts
provided under this Agreement; and no benefits payable hereunder shall be
assignable in anticipation of payment either by voluntary or involuntary acts,
or by operation of law. Nothing in this paragraph shall limit the Executive's
rights or powers to dispose of his property by will or limit any rights or
powers which his or her executor or administrator would otherwise have.
13. Governing Law. THE PROVISIONS OF THIS AGREEMENT SHALL BE
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT
APPLICATION OF CONFLICT OF LAWS PROVISIONS THEREUNDER.
14. Amendment. This Agreement may not be amended, modified, waived
---------
or terminated except by mutual agreement of the parties in writing.
15. Heirs of the Executive. This Agreement shall inure to the
----------------------
benefit of and be enforceable by the Executive's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive should die while any amounts are still
payable to the Executive hereunder, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to the
Executive's devisee, legatee, or other designee or, if there be no such
designee, to the Executive's estate.
16. Successors to the Company. This Agreement shall be binding upon
-------------------------
and inure to the benefit of the Company and any successor of the Company. The
Company shall require (a) any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place and (b) the
parent entity of any successor in such business combination to guarantee the
performance of such successor hereunder. Failure of the Company to obtain such
assumption and agreement (and, if applicable, such guarantee) prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle the Executive to receive compensation from the Company in the same
amount and on the same terms to which the Executive would be entitled hereunder
if the Executive terminated the Executive's employment for Good Reason following
a Change in Control, except that for purposes of implementing the foregoing, the
date on which any such succession becomes effective shall be deemed the date of
Termination. Unless expressly provided otherwise, the term "Company" as used
-------
herein shall mean the Company as defined in this Agreement and any successor to
its business and/or assets as aforesaid.
17. Employment Status. Nothing herein contained shall be deemed to
-----------------
create an employment agreement between the Company and the Executive, providing
for the employment of the Executive by the Company for any fixed period of time.
The Executive's employment with the Company is terminable at will by the Company
or the Executive and each shall have the right to terminate the Executive's
employment with the Company at any time, with or without Cause, subject to (i)
the notice provisions of paragraphs 2, 5 and 11, and (ii) the Company's
obligation to provide severance payments as required by paragraph 6. Except as
otherwise provided in
-11-
<PAGE>
paragraph 5 of this Agreement, upon a termination of the Executive's employment
prior to the date of a Change in Control, there shall be no further rights under
this Agreement.
18. Severability. In the event that any provision or portion of this
------------
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect.
19. Counterparts. This Agreement may be executed in two or more
------------
counterparts, any one of which shall be deemed the original without reference to
the others.
-12-
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set his or her hand
and, pursuant to the authorization from the Committee, the Company has caused
these presents to be executed in its name and on its behalf, all as of the day
and year first above written.
"Executive"
____________________________________
THE FIRST AMERICAN FINANCIAL CORPORATION
/s/ Parker S. Kennedy
PARKER S. KENNEDY
PRESIDENT
-13-
<PAGE>
Exhibit (10)(v)
THE FIRST AMERICAN FINANCIAL CORPORATION
DEFERRED COMPENSATION PLAN
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I TITLE AND DEFINITIONS........................................................ 1
1.1 Title............................................................................... 1
1.2 Definitions......................................................................... 1
ARTICLE II PARTICIPATION................................................................ 4
ARTICLE III DEFERRAL ELECTIONS........................................................... 4
3.1 Elections to Defer Compensation..................................................... 4
3.2 Investment Elections................................................................ 5
ARTICLE IV DEFERRAL ACCOUNTS AND TRUST FUNDING.......................................... 6
4.1 Deferral Accounts................................................................... 6
4.2 Trust Funding....................................................................... 7
ARTICLE V VESTING...................................................................... 7
ARTICLE VI DISTRIBUTIONS................................................................ 7
6.1 Distribution of Deferred Compensation and Discretionary Company Contributions....... 7
6.2 Early Distributions................................................................. 10
6.3 Inability to Locate Participant..................................................... 11
6.4 Payment of Policy Premiums.......................................................... 11
ARTICLE VII ADMINISTRATION............................................................... 11
7.1 Committee........................................................................... 11
7.2 Committee Action.................................................................... 11
7.3 Powers and Duties of the Committee.................................................. 12
7.4 Construction and Interpretation..................................................... 12
7.5 Information......................................................................... 13
7.6 Compensation, Expenses and Indemnity................................................ 13
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
7.7 Quarterly Statements................................................................. 13
7.8 Disputes............................................................................. 13
ARTICLE VIII PROCEDURE FOR ADOPTION AND WITHDRAWAL BY PARTICIPATING EMPLOYERS.............. 14
8.1 Adoption of the Plan................................................................. 14
8.2 Withdrawal From the Plan............................................................. 15
8.3 Cessation of Guture Contributions.................................................... 15
ARTICLE IX MISCELLANEOUS................................................................. 15
9.1 Unsecured General Creditor........................................................... 15
9.2 Restriction Against Assignment....................................................... 15
9.3 Withholding.......................................................................... 16
9.4 Amendment, Modification, Suspension or Termination................................... 16
9.5 Governing Law........................................................................ 16
9.6 Receipt or Release................................................................... 16
9.7 Payments on Behalf of Persons Under Incapacity....................................... 16
9.8 Limitation of Rights and Employment Relationship..................................... 16
9.9 Headings............................................................................. 17
</TABLE>
(ii)
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
DEFERRED COMPENSATION PLAN
WHEREAS, The First American Financial Corporation (the "Company") has
previously desires to established The First American Financial Corporation
Deferred Compensation Plan (the "Plan") to provide supplemental retirement
income benefits for a select group of management and or highly compensated
employees through deferrals of salary, commissions and bonuses effective as of
January 1, 1998; and
WHEREAS, Company desires to amend and restate in its entirety the Plan to
provide for the participation of a select group of management and highly
compensated employees of entities of which Company has a greater than fifty
percent (50%) but less than eighty percent (80%) ownership interest.
NOW, THEREFORE, effective as of January 11, 2000, the Plan is hereby
amended adopted to read as follows:
ARTICLE I
TITLE AND DEFINITIONS
---------------------
1.1 Title.
-----
This Plan shall be known as The First American Financial Corporation
Deferred Compensation Plan.
1.2 Definitions.
-----------
Whenever the following words and phrases are used in this Plan, with the
first letter capitalized, they shall have the meanings specified below.
(a) "Account" or "Accounts" shall mean a Participant's Deferral Ac
count.
(b) "Base Salary" shall mean a Participant's annual base salary,
excluding bonus, incentive and all other remuneration for services rendered to
Participating Company and prior to reduction for any salary contributions to a
plan established pursuant to Section 125 of the Code or qualified pursuant to
Section 401(k) of the Code.
(c) "Beneficiary" or "Beneficiaries" shall mean the person or
persons, including a trustee, personal representative or other fiduciary, last
designated in writing by a Participant in accordance with procedures established
by the Committee to receive the benefits specified hereunder in the event of the
Participant's death (other than the death benefits described in Section
6.1(b)(1) unless such person is designated as a beneficiary under the Policy
described therein). No beneficiary designation shall become effective until it
is filed with the Committee. Any designation shall be revocable at any time
through a written instrument filed by the Participant with the Committee with or
without the consent of the previous Beneficiary. If there is no Beneficiary
designation in effect, then the person designated to receive the death benefit
<PAGE>
specified in Section 6.1(c)(1) shall be the Beneficiary. However, no designation
of a Beneficiary other than the Participant's spouse shall be valid unless
consented to in writing by such spouse. If there is no such designation or if
there is no surviving designated Beneficiary, then the Participant's surviving
spouse shall be the Beneficiary. If there is no surviving spouse to receive any
benefits payable in accordance with the preceding sentence, the duly appointed
and currently acting personal representative of the Participant's estate (which
shall include either the Participant's probate estate or living trust) shall be
the Beneficiary. In any case where there is no such personal representative of
the Participant's estate duly appointed and acting in that capacity within 90
days after the Participant's death (or such extended period as the Committee
determines is reasonably necessary to allow such personal representative to be
appointed, but not to exceed 180 days after the Participant's death), then
Beneficiary shall mean the person or persons who can verify by affidavit or
court order to the satisfaction of the Committee that they are legally entitled
to receive the benefits specified hereunder. In the event any amount is payable
under the Plan to a minor, payment shall not be made to the minor, but instead
be paid (a) to that person's living parent(s) to act as custodian, (b) if that
person's parents are then divorced, and one parent is the sole custodial parent,
to such custodial parent, or (c) if no parent of that person is then living, to
a custodian selected by the Committee to hold the funds for the minor under the
Uniform Transfers or Gifts to Minors Act in effect in the jurisdiction in which
the minor resides. If no parent is living and the Committee decides not to
select another custodian to hold the funds for the minor, then payment shall be
made to the duly appointed and currently acting guardian of the estate for the
minor or, if no guardian of the estate for the minor is duly appointed and
currently acting within 60 days after the date the amount becomes payable,
payment shall be deposited with the court having jurisdiction over the estate of
the minor. Payment by Company pursuant to any unrevoked Beneficiary designation,
or to the Participant's estate if no such designation exists, of all benefits
owed hereunder shall terminate any and all liability of Company.
(d) "Board of Directors" or "Board" shall mean the Board of
Directors of The First American Financial Corporation.
(e) "Bonuses" shall mean such additional amounts of income as
Participating Company may determine to pay to an employee, as determined in the
sole and absolute discretion of Participating Company.
(f) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(g) "Commitee" shall mean the Committee appointed by the Board to
administer the Plan in accordance with Article VII.
(h) "Commissions" shall mean a Participant's remuneration earned
from Participating Company which is dependent on sales activity and is not
related to Base Salary or Bonuses.
(i) "Company" shall mean The First American Financial Corporation
and any successor corporations.
-2-
<PAGE>
(j) "Compensation" shall mean Base Salary, Commissions and Bonuses
that the Participant is entitled to receive for services rendered to the
Participating Company.
(k) "Deferral Account" shall mean the bookkeeping account
maintained by the Committee for each Participant that is credited with amounts
equal to (1) the portion of the Participant's Compensation that he or she elects
to defer, and (2) interest pursuant to Section 4.1.
(l) "Distributable Amount" shall mean the balance in the
Participant's Deferral Account.
(m) "Early Distribution" shall mean an election by a Participant in
accordance with Section 6.2 to receive a withdrawal of amounts from his or her
Deferral Account prior to the time in which such Participant would otherwise be
entitled to such amounts.
(n) "Effective Date" and "Amended Effective Date" shall mean
January 1, 1998 and January 1, 1999.
(o) "Eligible Employee" shall mean such management and highly
compensated employees as are designated by the Participating Company for
participation in this Plan.
(p) "Fund" or "Funds" shall mean one or more of the investment
funds selected by the Committee pursuant to Section 3.2(b).
(q) "Initial Election Period" for an Eligible Employee shall mean
the 30-day period immediately prior to November 14, 1997 or the 30-day period
following the time an employee shall be designated by the Company as an Eligible
Employee.
(r) "Interest Rate" shall mean, for each Fund, an amount equal to
the net rate of gain or loss on the assets of such Fund during each month.
(s) "Participant" shall mean any Eligible Employee who becomes a
Participant in accordance with Section 2.1.
(t) "Participating Company" shall mean Company and (i) each
corporation or other entity which is a member of a controlled group of
corporations or other entities (within the meaning of Sections 414(b) and 414(c)
of the Code of which Company is a component member and (ii) such other entities
which are not part of a controlled group of corporations or other entities,
where Company has a fifty percent (50%) or more, but less than eighty percent
(80%) ownership interest, provided that the Board of Directors of Company or its
designee authorizes such entity's participation in this Plan and such entity's
governing body requests participation in this Plan.
(u) "Payment Date" shall mean the time as soon as practicable after
the earlier of (1) the first day of the month following the end of the calendar
quarter in which the Participant's employment terminates for any reason, or (2)
the Scheduled Withdrawal Date.
-3-
<PAGE>
(v) "Plan" shall mean The First American Financial Corporation
Deferred Compensation Plan set forth herein, now in effect, or as amended from
time to time.
(w) "Plan Year" shall mean the 12 consecutive month period
beginning on each January 1 and ending on December 31.
(x) "Policy" shall mean an insurance policy purchased in accordance
with the terms of this Plan.
(y) "Scheduled Withdrawal Date" shall mean the distribution date
elected by the Participant for an in-service withdrawal of all amounts of
Compensation deferred in a given Plan Year, and earnings and losses attributable
thereto, as set forth on the election form for such Plan Year.
(z) "Sponsoring Company" shall mean Company.
(aa) "Trust" shall mean The First American Financial Corporation
Deferred Compensation Plan Trust.
ARTICLE II
PARTICIPATION
-------------
An Eligible Employee shall become a Participant in the Plan by (1) electing
to defer a portion of his or her Compensation in accordance with Section 3.1,
(2) filing a life insurance application form along with his or her deferral
election form, and (3) complying with such medical underwriting requirements as
determined by the life insurance carrier selected by the Company. An Eligible
Employee who completes the requirements of the preceding sentence shall commence
participation in this Plan as of the first day of the month in which
Compensation is deferred. In the event it is determined by the Committee, that
the proposed life insurance policy cannot be obtained in a cost efficient manner
after medical underwriting requirements have been met, the Participant shall not
be eligible to receive death benefits in accordance with Section 6.1(c) of the
Plan. Notwithstanding any provision to the contrary, if it is determined or
reasonably believed, based on a judicial or administrative determination or an
opinion of Company's legal counsel that a Plan Participant is not a management
or highly compensated employee, such individual shall cease to be a Participant
and his Distributable Amount shall be paid to him in a lump sum as soon as
practicable after the determination is made that he is not a management or
highly compensated employee.
ARTICLE III
DEFERRAL ELECTIONS
------------------
3.1 Elections to Defer Compensation. A Participant who has elected to
-------------------------------
suspend his deferrals of or Base Salary or Commissions may make deferrals in
future Plan Years in accordance with this Section 3.1.
-4-
<PAGE>
(a) Initial Election Period. Subject to the provisions of Article
-----------------------
II, each Eligible Employee may elect to defer Base Salary, Bonuses and/or
Commissions by filing with the Committee an election that conforms to the
requirements of this Section 3.1, on a form provided by the Committee, no later
than the last day of his or her Initial Election Period.
(b) General Rule. The amount of Compensation which an Eligible
------------
Employee may elect to defer is such Compensation earned on or after the time at
which the Eligible Employee elects to defer in accordance with Sections 1.2(q)
and 3.1(a) and shall be a flat dollar amount or percentage which shall not
exceed 100% of the Eligible Employee's Base Salary, Bonuses and Commissions,
provided that the total amount deferred by a Participant shall be limited in any
calendar year, if necessary, to satisfy Social Security tax (including
Medicare), income tax and employee benefit plan withholding requirements as
determined in the sole and absolute discretion of the Committee. The minimum
contribution which may be made in any Plan Year by an Eligible Employee shall
not be less than $5,000, provided such minimum contribution can be satisfied
from either Base Salary and/or Bonus and/or Commission deferrals.
(c) Duration of Compensation Deferral Election. An Eligible
------------------------------------------
Employee's initial election to defer Base Salary, Bonuses and Commissions must
be filed on or before each November 1, 14, 1997 and is to be effective on the
first day of the next following Plan Year.January 1, 1998. A Participant may
elect to suspend his election to defer Base Salary or Commissions once during
any Plan Year with respect to amounts of Base Salary or Commissions which have
not been paid, provided said Participant gives the Company 20 days prior written
notice of his election. A Participant may increase, decrease or terminate a
deferral election with respect to Base Salary or Commissions for any subsequent
Plan Year by filing a new election on or before November 1, which election shall
be effective on the first day of the next following Plan Year. An Eligible
Employee may make an An Eligible Employee's Initial Election to defer Bonuses
must be filed by November 14, 1997. Any subsequent election with respect to
Bonuses which must be filed by November 1 of the year prior to the year that the
Bonus is earned. Bonuses are deemed earned at such time as Company communicates
its determination of Bonuses to the affected Eligible Employee. All elections
with respect to Bonuses are for one Plan Year. In the case of an employee who
becomes an Eligible Employee after any November 1, 1997, such Eligible Employee
shall have 30 days from the date he or she has become an Eligible Employee to
make an Initial Election with respect to Base Salary, Bonuses and/or
Commissions. Such election shall be for the remainder of the Plan Year, in the
event the Plan Year has commenced.
(d) Elections other than Elections during the Initial Election
----------------------------------------------------------
Period. Subject to the limitations of Section 3.1(b) above, any Eligible
- ------
Employee who fails to elect to defer Compensation during his or her Initial
Election Period may subsequently become a Participant, and any Eligible Employee
who has terminated a prior Compensation deferral election may elect to again
defer Compensation, by filing an election, on a form provided by the Committee,
to defer Compensation as described in Sections 3.1(b) and 3.1(c) above. An
election to defer Compensation must be filed in a timely manner in accordance
with Section 3.1(c).
3.2 Investment Elections.
--------------------
(a) At the time of making the deferral elections described in
Section 3.1, the Participant shall designate, on a form provided by the
Committee, the types of investment funds the Participant's Account will be
deemed to be invested in for purposes of determining the
-5-
<PAGE>
amount of earnings to be credited to that Account. In making the designation
pursuant to this Section 3.2, the Participant may specify that all or any
multiple of his Deferral Account (equal to or greater than 10% in whole
percentage increments) be deemed to be invested in one or more of the types of
investment funds provided under the Plan as communicated from time to time by
the Committee. Effective as of the end of any calendar month, a Participant may
change the designation made under this Section 3.2 by filing an election, on a
form provided by the Committee, at least 30 days prior to the end of such month.
quarter. If a Participant fails to elect a type of fund under this Section 3.2,
he or she shall be deemed to have elected the Money Market type of investment
fund.
(b) Although the Participant may designate the type of
investments, , the Committee shall not be bound by such designation. The
Committee shall select from time to time, in its sole discretion, commercially
available investments of each of the types communicated by the Committee to the
Participant pursuant to Section 3.2(a) above to be the Funds. The Interest Rate
of each such commercially available investment fund shall be used to determine
the amount of earnings or losses to be credited to Participant's Account under
Article IV.
ARTICLE IV
DEFERRAL ACCOUNTS AND TRUST FUNDING
-----------------------------------
4.1 Deferral Accounts.
-----------------
The Committee shall establish and maintain a Deferral Account for each
Participant under the Plan. Each Participant's Deferral Account shall be
further divided into separate subaccounts ("investment fund subaccounts"), each
of which corresponds to an investment fund elected by the Participant pursuant
to Section 3.2(a). A Participant's Deferral Account shall be credited as
follows:
(a) As of the last day of each month, the Committee shall credit
the investment fund subaccounts of the Participant's Deferral Account with an
amount equal to Compensation deferred by the Participant during each pay period
ending in that month in accordance with the Participant's election under Section
3.2(a); that is, the portion of the Participant's deferred Compensation that the
Participant has elected to be deemed to be invested in a certain type of
investment fund shall be credited to the investment fund subaccount
corresponding to that investment fund;
(b) As of the last day of each month, each investment fund
subaccount of a Participant's Deferral Account shall be credited with earnings
or losses in an amount equal to that determined by multiplying the balance
credited to such investment fund subaccount as of the last day of the preceding
month by the Interest Rate for the corresponding fund selected by the Company
pursuant to Section 3.2(b).
(c) In the event that a Participant elects for a given Plan Year's
deferral of Compensation to have a Scheduled Withdrawal Date, all amounts
attributed to the deferral of Compensation for such Plan Year shall be accounted
for in a manner which allows separate
-6-
<PAGE>
accounting for the deferral of Compensation and investment gains and losses
associated with such Plan Year's deferral of Compensation.
4.2 Trust Funding.
-------------
Company has created a Trust with First American Trust Company serving as
initial trustee. The Company shall cause the Trust to be funded each year. Each
Participating The Company shall contribute to the Trust an amount equal to the
amount deferred by each Participant for the Plan Year. Each Participating The
Company may also contribute such additional amounts as it shall deem necessary
or appropriate.
Although the principal of the Trust and any earnings thereon shall be held
separate and apart from other funds of Participating Company and shall be used
exclusively for the uses and purposes of Plan Participants and Beneficiaries as
set forth therein, neither the Participants nor their Beneficiaries shall have
any preferred claim on, or any beneficial ownership in, any assets of the Trust
prior to the time such assets are paid to the Participants or Beneficiaries as
benefits and all rights created under this Plan shall be unsecured contractual
rights of Plan Participants and Beneficiaries against the Participating Company.
Any assets held in the Trust will be subject to the claims of Participating
Company's general creditors under federal and state law in the event of
insolvency as defined in Section 4.2(a) of the Trust.
The assets of the Plan and Trust shall never inure to the benefit of the
Participating Company and the same shall be held for the exclusive purpose of
providing benefits to Participants and their beneficiaries, deferring reasonable
expenses of administering the Plan and Trust.
ARTICLE V
VESTING
-------
A Participant's Deferral Account shall be 100% vested at all times.
ARTICLE VI
DISTRIBUTIONS
-------------
6.1 Distribution of Deferred Compensation and Discretionary Company
---------------------------------------------------------------
Contributions.
- -------------
(a) Distribution Without Scheduled Withdrawal Date. In the case of
----------------------------------------------
a Participant who terminates employment with a Participating Company and has an
Account balance of $25,000 or more, the Distributable Amount shall be paid to
the Participant (and after his or her death to his or her Beneficiary) from
among the following optional forms of benefit as elected by the Participant on
the form provided by Participating Company during his or her Initial Election
Period:
(1) A lump sum distribution beginning on the Participant's
Payment Date.
-7-
<PAGE>
(2) Substantially equal quarterly installments over five (5) years
beginning on the Participant's Payment Date.
(3) Substantially equal quarterly installments over ten (10) years
beginning on the Participant's Payment Date.
(4) Substantially equal quarterly installments over fifteen (15) years
beginning on the Participant's Payment Date.
A Participant may modify the optional form of benefit that he or she has
previously elected, provided such modification occurs at least one (1) year
before the Participant terminates employment with Participating Company.
In the event a Participant fails to elect an optional form of benefit
during his or her Initial Election Period, the Participant's Distributable
Amount will be distributed in a lump sum beginning on his or her Payment Date.
In the case of a Participant who terminates with Participating Company and
has an Account balance of less than $25,000, the Distributable Amount shall be
paid to the Participant (and after his or her death to his or her Beneficiary)
in a lump sum distribution on the Participant's Payment Date.
The Participant's Account shall continue to be credited with earnings
pursuant to Section 4.1 of the Plan until all amounts credited to his or her
Account under the Plan have been distributed.
(b) Distribution With Scheduled Withdrawal Date. In the case of a
-------------------------------------------
Participant who has elected a Scheduled Withdrawal Date for a distribution while
still in the employ of the Participating Company, such Participant shall receive
his or her Distributable Amount, but only with respect to those deferrals of
Compensation and earnings on such deferrals of Compensation as shall have been
elected by the Participant to be subject to the Scheduled Withdrawal Date in
accordance with Section 1.2(yx) of the Plan. A Participant's Scheduled
Withdrawal Date with respect to amounts of Compensation deferred in a given Plan
Year can be no earlier than two years from the last day of the Plan Year for
which the deferrals of Compensation are made. A Participant may extend the
Scheduled Withdrawal Date for the deferral of Compensation for any Plan Year,
provided such extension occurs at least one year before the Scheduled Withdrawal
Date and is for a period of not less than two years from the Scheduled
Withdrawal Date. The Participant shall have the right to twice modify any
Scheduled Withdrawal Date, provided the second such modification shall only be
effective if consented to by Company. In the event a Participant terminates
employment with Participating Company prior to a Scheduled Withdrawal Date,
other than by reason of death, the portion of the Participant's Account
associated with Scheduled Withdrawal Dates which have not occurred prior to such
termination shall be distributed in a lump sum.
(c) Death Benefit. In the case of a Participant who dies while employed by
------
a Participating the Company, the following benefits shall be provided:
-8-
<PAGE>
(1) that portion of the death benefit of any life insurance policy
purchased by the Trust Company to insure the life of the Participant and which
is subject to a "Split-Dollar Life Insurance Agreement" (as described therein)
(the "Policy") which is equal to the following amounts:
(i) If a Participant elects during his first twelve months of Plan
Participation (whether or not such election occurs during more than one Plan
Year) to defer Base Salary only, such Participant's death benefit shall equal
his Base Salary deferrals annualized over the first twelve months of Plan
Participation multiplied by fifteen. This amount shall constitute the
Participant's death benefit for the remainder of his participation in the Plan.
(ii) If a Participant elects during his first twelve months of Plan
Participation (whether or not such election occurs during more than one Plan
Year) to defer Bonuses and/or Commissions only, such Participant's death benefit
during the first twelve months of Plan Participation shall be $0. At the end of
the initial twelve month period (which may or may not span more than one Plan
Year) the amount of the Participant's deferral of Bonuses and/or Commissions
shall be aggregated and multiplied by fifteen, which amount shall constitute the
Participant's death benefit for the remainder of his or her participation in
this Plan.
(iii) If a Participant elects during his first twelve months
of Plan Participation (whether or not such election occurs during more than one
Plan Year) to defer Base Salary and Bonuses and/or Commissions, then the
Participant's death benefit during his first twelve months of Plan Participation
shall equal his Base Salary deferrals annualized over twelve months multiplied
by fifteen. At the end of the initial twelve month period (which may or may not
span more than one Plan Year) the Participant's death benefit shall equal the
amount of Base Salary deferrals annualized during the first twelve months
multiplied by fifteen plus the aggregate amount of all deferrals of Bonuses
and/or Commissions which occurred during the first twelve months multiplied by
fifteen. This amount shall constitute the Participant's death benefit for the
remainder of his participation in the Plan.
Any such Policy shall be subject to certain conditions set forth in a
"split-dollar life insurance agreement" between the Participant, Trustee and the
Participating Company, pursuant to which the Participant may designate a
beneficiary with respect to the portion of the Policy proceeds described in this
Section 6.1(c)(1) in the event the Participant dies prior to terminating
employment with the Participating Company. The Participant shall have the right
to designate and change such beneficiary (which need not be his or her
Beneficiary) at any time on a form provided by and filed with the insurance
company. If no such form is on file with the insurance company, the insurance
proceeds designated in this paragraph (1) shall be paid to the Beneficiary. The
benefit payable pursuant to this paragraph (1) shall only be paid if the
insurance company agrees that the Participant is insurable and shall be subject
to all conditions and exceptions set forth in the applicable insurance policy.
Notwithstanding the provision of this Plan or any other document to the
contrary, the Participating Company shall not have any obligation to pay the
Participant or his or her beneficiary any amounts described in Section
6.1(c)(1); all such amounts due pursuant to Section 6.1(c)(1) shall be payable
solely from the proceeds of the Policy, if any. Furthermore, the Participating
Company is not obligated to maintain the Policy; no death benefit shall be
payable hereunder if the Company has
-9-
<PAGE>
discontinued the Policy for the Participant. In addition, no Policy shall be
allocated to any Participating Account.
(2) The Account Balance in a lump sum or installments as
previously elected by the Participant.
(d) Death After Benefit Commencement. In the event a Participant dies
--------------------------------
after he has retired from the employ of the Company and still has a balance in
his or her Account, the balance shall continue to be paid in quarterly
installments for the remainder of the period as elected by the Participant.
(e) Death Benefit Reduction. In the event a Participant elects an
-----------------------
Early Distribution from his or her Deferral Account, the Participant's death
benefit as computed in accordance with Section 6.1(c)(1) of the Plan shall be
reduced by multiplying said death benefit by a fraction the numerator of which
shall be the sum of the Participant's Early Distributions and the denominator of
which shall be the Participant's Deferral Account, after plus Early
Distributions, plus Early Distributions. For purposes of calculating the
denominator of the fraction set forth above, a Participant's Early Distributions
shall be credited with earnings in accordance with Section 4.1 of the Plan.
In the event a Participant suspends contributions of Base Salary during the
first twelve (12) months of Plan participation, then the Participant's death
benefit calculated in accordance with Sections 6.1(c)(1)(i) and (iii) shall be
determined by multiplying the actual amount of Base Salary deferred during the
initial twelve (12) month period multiplied by fifteen (15).
6.2 Early Distributions.
-------------------
A Participant shall be permitted to elect an Early Distribution from his or
her Deferral Account prior to the Payment Date, subject to the following
restrictions:
(a) The election to take an Early Distribution shall be made by filing
a form provided by and filed with the Committee prior to the end of any calendar
month.
(b) The amount of the Early Distribution shall in all cases be an
amount not less than the greater of 50% of the Deferral Account as of the end of
the calendar month as of which the distribution is to be made, or $25,000.
(c) The amount described in subsection (b) above shall be paid in a
single cash lump sum as soon as practicable after the end of the calendar month
in which the Early Distribution election is made.
(d) If a Participant receives an Early Distribution of his entire
Deferral Account, the remaining balance of his or her Deferral Account (10% of
the Deferral Account) shall be permanently forfeited and the Company shall have
no obligation to the Participant or his Beneficiary with respect to such
forfeited amount. If a Participant receives an Early Distribution of 50% or more
of his Deferral Account, such Participant shall forfeit 10% of the gross amount
to be distributed from the Participant's Deferral Account.
-10-
<PAGE>
(e) If a Participant receives an Early Distribution of either all or a
part of his Deferral Account, the following rules will apply for the balance of
the Plan Year and for the following Plan Year: (i) the Participant will be
ineligible to participate in the Plan, and (ii) neither the Participant (nor his
Beneficiary or beneficiaries) shall be entitled to death benefits under Section
6.1(c)(1) or (2).
6.3 Inability to Locate Participant.
-------------------------------
In the event that the Committee is unable to locate a Participant or
Beneficiary within three two years following the required Payment Date, the
amount allocated to the Participant's Deferral Account, shall be forfeited. If,
after such forfeiture, the Participant or Beneficiary later claims, within three
years of the forfeiture, such benefit, such benefit shall be reinstated without
interest or earnings.
6.4 Payment of Policy Premiums.
--------------------------
So long as the Participating Company Trust maintains a Policy for a
Participant, the Participating Company shall pay to the Trustee amounts
necessary to pay premiums on the Policy insuring the Participant's life from as
soon as practical after the end of each Plan Year, or such earlier time as the
Participating Company shall determine (but no later than the tax return due date
for the Participating Company for such year), in amounts equal to the amount
deferred by the Participant for the Plan Year.
ARTICLE VII
ADMINISTRATION
--------------
7.1 Committee.
---------
A committee shall be appointed by, and serve at the pleasure of, the Board
of Directors. The number of members comprising the Committee shall be
determined by the Board which may from time to time vary the number of members.
A member of the Committee may resign by delivering a written notice of
resignation to the Board. The Board may remove any member by delivering a
certified copy of its resolution of removal to such member. Vacancies in the
membership of the Committee shall be filled promptly by the Board.
7.2 Committee Action.
----------------
The Committee shall act at meetings by affirmative vote of a majority of
the members of the Committee. Any action permitted to be taken at a meeting may
be taken without a meeting if, prior to such action, a written consent to the
action is signed by all members of the Committee and such written consent is
filed with the minutes of the proceedings of the Committee. A member of the
Committee shall not vote or act upon any matter which relates solely to himself
or herself as a Participant. The Chairman or any other member or members of the
Committee designated by the Chairman may execute any certificate or other
written direction on behalf of the Committee.
-11-
<PAGE>
7.3 Powers and Duties of the Committee.
----------------------------------
(a) The Committee, on behalf of the Participants and their
Beneficiaries, shall enforce the Plan in accordance with its terms, shall be
charged with the general administration of the Plan, and shall have all powers
necessary to accomplish its purposes, including, but not by way of limitation,
the following:
(1) To select the Funds in accordance with Section 3.2(b) hereof;
(2) To construe and interpret the terms and provisions of this
Plan;
(3) To compute and certify to the amount and kind of benefits
payable to Participants and their Beneficiaries;
(4) To maintain all records that may be necessary for the
administration of the Plan;
(5) To provide for the disclosure of all information and the
filing or provision of all reports and statements to Participants, Beneficiaries
or governmental agencies as shall be required by law;
(6) To make and publish such rules for the regulation of the Plan
and procedures for the administration of the Plan as are not inconsistent with
the terms hereof;
(7) To appoint a plan administrator or any other agent, and to
delegate to them such powers and duties in connection with the administration of
the Plan as the Committee may from time to time prescribe;
(8) To take all actions necessary for the administration of the
Plan, including determining whether to hold or discontinue the Policies; and
(9) If a Policy is discontinued or a Participant has terminated
employment with the Company for a reason other than death, (A) to notify the
insurance company that no death benefits are payable to the beneficiaries of the
applicable Participant under the Policy (and that neither the Participant nor
his or her beneficiary has any rights under the Policy or to any benefits under
the Policy) and (B) to file a new beneficiary designation with the insurance
company naming the Participating Company as beneficiary or to cash in the
Policy.
7.4 Construction and Interpretation.
-------------------------------
The Committee shall have full discretion to construe and interpret the
terms and provisions of this Plan, which interpretations or construction shall
be final and binding on all parties, including but not limited to the
Participating Company and any Participant or Beneficiary. The Committee shall
administer such terms and provisions in a uniform and nondiscriminatory manner
and in full accordance with any and all laws applicable to the Plan.
-12-
<PAGE>
7.5 Information.
-----------
To enable the Committee to perform its functions, the Company shall supply
full and timely information to the Committee on all matters relating to the
Compensation of all Participants, their death or other events which cause
termination of their participation in this Plan, and such other pertinent facts
as the Committee may require.
7.6 Compensation, Expenses and Indemnity.
------------------------------------
(a) The members of the Committee shall serve without compensation for
their services hereunder.
(b) The Committee is authorized at the expense of the Company to
employ such legal counsel as it may deem advisable to assist in the performance
of its duties hereunder. Expenses and fees in connection with the administration
of the Plan shall be paid by the Company. Company may allocate such expenses and
fees amongst Participating Companies.
(c) To the extent permitted by applicable state law, the Company shall
indemnify and save harmless the Committee and each member thereof, the Board of
Directors and any delegate of the Committee who is an employee of the Company
against any and all expenses, liabilities and claims, including legal fees to
defend against such liabilities and claims arising out of their discharge in
good faith of responsibilities under or incident to the Plan, other than
expenses and liabilities arising out of willful misconduct. This indemnity
shall not preclude such further indemnities as may be available under insurance
purchased by the Company or provided by the Company under any bylaw, agreement
or otherwise, as such indemnities are permitted under state law.
7.7 Quarterly Statements.
--------------------
Under procedures established by the Committee, a Participant shall receive
a statement with respect to such Participant's Accounts on a quarterly basis as
of each March 31, June 30, September 30 and December 31.
7.8 Disputes.
--------
(a) Claim.
-----
A person who believes that he or she is being denied a benefit to
which he or she is entitled under this Agreement (hereinafter referred to as
"Claimant") must file a written request for such benefit with the Company,
setting forth his or her claim. The request must be addressed to the President
of the Company at its then principal place of business.
(b) Claim Decision.
--------------
Upon receipt of a claim, the Company shall advise the Claimant that a
reply will be forthcoming within ninety (90) days and shall, in fact, deliver
such reply within such period. The Company may, however, extend the reply
period for an additional ninety (90) days for special circumstances.
-13-
<PAGE>
If the claim is denied in whole or in part, the Company shall inform
the Claimant in writing, using language calculated to be understood by the
Claimant, setting forth: (A) the specified reason or reasons for such denial;
(B) the specific reference to pertinent provisions of this Agreement on which
such denial is based; (C) a description of any additional material or
information necessary for the Claimant to perfect his or her claim and an
explanation of why such material or such information is necessary; (D)
appropriate information as to the steps to be taken if the Claimant wishes to
submit the claim for review; and (E) the time limits for requesting a review
under subsection (c).
(c) Request For Review.
------------------
Within sixty (60) days after the receipt by the Claimant of the
written opinion described above, the Claimant may request in writing that the
Committee review the determination of the Company. Such request must be
addressed to the Secretary of the Company, at its then principal place of
business. The Claimant or his or her duly authorized representative may, but
need not, review the pertinent documents and submit issues and comments in
writing for consideration by the Committee. If the Claimant does not request a
review within such sixty (60) day period, he or she shall be barred and estopped
from challenging the Company's determination.
(d) Review of Decision.
------------------
Within sixty (60) days after the Committee's receipt of a request for
review, after considering all materials presented by the Claimant, the Committee
will inform the Participant in writing, in a manner calculated to be understood
by the Claimant, the decision setting forth the specific reasons for the
decision containing specific references to the pertinent provisions of this
Agreement on which the decision is based. If special circumstances require that
the sixty (60) day time period be extended, the Committee will so notify the
Claimant and will render the decision as soon as possible, but no later than one
hundred twenty (120) days after receipt of the request for review.
ARTICLE VIII
PROCEDURE FOR ADOPTION AND WITHDRAWAL BY PARTICIPATING EMPLOYERS
----------------------------------------------------------------
8.1 Adoption of the Plan.
--------------------
Any entity which is a subsidiary for which more than fifty percent (50%) of
the value of the stock or other interest of such entity is owned by the
Sponsoring Company may, with the consent and approval of the Sponsoring Company,
adopt this Plan as a Participating Company for a select group of management and
highly compensated employees. The adoption of this Plan by a Participating
Company shall be effected by resolution of its board of directors or equivalent
governing body. It shall not be necessary for any adopting Participating
Company to formally execute the Plan as then in effect. As to the Participating
Company, the effective date of the Plan shall be stated in its resolutions, and
it shall assume all the rights, obligations and liabilities of a Participating
Company under the Plan.
-14-
<PAGE>
8.2 Withdrawal From the Plan.
------------------------
A Participating Employer may by resolution of its board of directors or
equivalent governing body and approval by the Sponsoring Employer, withdraw from
participation under the Plan. A Withdrawing Participating Employer may arrange
for the continuation by itself or its successor of this Plan in a separate form
for its own employees. The Withdrawing Participating Employer may arrange for
continuation of the Plan by merger with an existing plan and request, subject to
the Sponsoring Employer's consent the transfer to such plan of all Plan Assets
representing the benefits of its employees.
8.3 Cessation of Future Contributions.
---------------------------------
A Participating Employer may by resolution of its board of directors or
equivalent governing body cease to allow Participants in its employ to continue
to make deferrals pursuant to Section 3.1 of the Plan. In the event a
Participating Company makes the determination to cease Participant deferrals the
remaining provisions of this Plan shall continue to apply.
ARTICLE IX
MISCELLANEOUS
-------------
9.1 Unsecured General Creditor.
--------------------------
Participants and their Beneficiaries, heirs, successors, and assigns shall
have no legal or equitable rights, claims, or interest in any specific property
or assets of the Participating Company. No assets of the Participating Company
shall be held in any way as collateral security for the fulfilling of the
obligations of the Participating Company under this Plan. Any and all of the
Participating Company's assets shall be, and remain, the general unpledged,
unrestricted assets of the Participating Company. The Participating Company's
obligation under the Plan shall be merely that of an unfunded and unsecured
promise of the Participating Company to pay money in the future, and the rights
of the Participants and Beneficiaries shall be no greater than those of
unsecured general creditors. It is the intention of the Participating Company
that this Plan be unfunded for purposes of the Code and for purposes of Title 1
of ERISA.
9.2 Restriction Against Assignment.
------------------------------
The Participating Company shall pay all amounts payable hereunder only to
the person or persons designated by the Plan and not to any other person or
corporation. No part of a Participant's Accounts shall be liable for the debts,
contracts, or engagements of any Participant, his or her Beneficiary, or
successors in interest, nor shall a Participant's Accounts be subject to
execution by levy, attachment, or garnishment or by any other legal or equitable
proceeding, nor shall any such person have any right to alienate, anticipate,
sell, transfer, commute, pledge, encumber, or assign any benefits or payments
hereunder in any manner whatsoever. If any Participant, Beneficiary or
successor in interest is adjudicated bankrupt or purports to anticipate,
alienate, sell, transfer, commute, assign, pledge, encumber or charge any
distribution or payment from the Plan, voluntarily or involuntarily, the
Committee, in its discretion, may cancel such distribution or payment (or any
part thereof) to or for the benefit of such Participant, Beneficiary or
successor in interest in such manner as the Committee shall direct.
-15-
<PAGE>
9.3 Withholding.
-----------
There shall be deducted from each payment made under the Plan or any other
Compensation payable to the Participant (or Beneficiary) all taxes which are
required to be withheld by the Participating Company in respect to such payment
or this Plan. The Participating Company shall have the right to reduce any
payment (or compensation) by the amount of cash sufficient to provide the amount
of said taxes.
9.4 Amendment, Modification, Suspension or Termination.
--------------------------------------------------
The Committee may amend, modify, suspend or terminate the Plan in whole or
in part, except that no amendment, modification, suspension or termination shall
have any retroactive effect to reduce any amounts allocated to a Participant's
Accounts (neither the Policies themselves, nor the death benefit described in
Section 6.1(c)(1) shall be treated as allocated to Accounts). In addition, the
Committee has the right to amend or terminate Section 6.1(c)(1). In the event
that this Plan is terminated, the amounts allocated to a Participant's Accounts
shall be distributed to the Participant or, in the event of his or her death,
his or her Beneficiary in a lump sum within thirty (30) days following the date
of termination.
9.5 Governing Law.
-------------
This Plan shall be construed, governed and administered in accordance with
the laws of the State of California.
9.6 Receipt or Release.
------------------
Any payment to a Participant or the Participant's Beneficiary in accordance
with the provisions of the Plan shall, to the extent thereof, be in full
satisfaction of all claims against the Committee and the Company. The Committee
may require such Participant or Beneficiary, as a condition precedent to such
payment, to execute a receipt and release to such effect.
9.7 Payments on Behalf of Persons Under Incapacity.
----------------------------------------------
In the event that any amount becomes payable under the Plan to a person
who, in the sole judgment of the Committee, is considered by reason of physical
or mental condition to be unable to give a valid receipt therefore, the
Committee may direct that such payment be made to any person found by the
Committee, in its sole judgment, to have assumed the care of such person. Any
payment made pursuant to such determination shall constitute a full release and
discharge of the Committee and the Company.
9.8 Limitation of Rights and Employment Relationship.
------------------------------------------------
Neither the establishment of the Plan and Trust nor any modification
thereof, nor the creating of any fund or account, nor the payment of any
benefits shall be construed as giving to any Participant or other person any
legal or equitable right against the Company or the trustee of the Trust except
as provided in the Plan and Trust; and in no event shall the terms of employment
of any Employee or Participant be modified or in any way be affected by the
provisions of the Plan and Trust.
-16-
<PAGE>
9.9 Headings.
--------
Headings and subheadings in this Plan are inserted for convenience of
reference only and are not to be considered in the construction of the
provisions hereof.
IN WITNESS WHEREOF, the Company has caused this document to be executed by
its duly authorized officer on this 10th day of March, 2000.
THE FIRST AMERICAN FINANCIAL
CORPORATION
By /s/ Drew Cree
Its: Vice President Human Resources
-17-
<PAGE>
EXHIBIT (10) (w)
THE FIRST AMERICAN FINANCIAL CORPORATION
DEFERRED COMPENSATION PLAN TRUST AGREEMENT
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I. TITLE AND DEFINITIONS......................................................................... 1
Section 1.1 Title......................................................................................... 1
Section 1.2 Definitions................................................................................... 1
ARTICLE II. ADMINISTRATION................................................................................ 2
Section 2.1 Trustee Responsibility........................................................................ 2
Section 2.2 Maintenance of Records........................................................................ 2
ARTICLE III. FUNDING....................................................................................... 2
Section 3.1 Contributions................................................................................. 3
Section 3.2 Participating Company Trust................................................................... 3
Section 3.3 Subtrusts..................................................................................... 4
ARTICLE IV. PAYMENTS FROM TRUST FUND...................................................................... 4
Section 4.1 Payments to Trust Beneficiaries............................................................... 4
Section 4.2 Trustee Responsibility Regarding Payments to Trust
Beneficiaries When the Company Is Insolvent................................................... 5
Section 4.3 Payments to the Company....................................................................... 6
Section 4.4 Trustee Compensation and Expenses; Other Fees and Expenses.................................... 6
Section 4.5 Taxes......................................................................................... 7
Section 4.6 Alienation.................................................................................... 7
Section 4.7 Disputes...................................................................................... 7
ARTICLE V. INVESTMENT OF TRUST ASSETS.................................................................... 7
Section 5.1 Investment of Subtrust Assets................................................................. 7
Section 5.2 Disposition of Income and Losses.............................................................. 7
Section 5.3 Excess Assets................................................................................. 8
ARTICLE VI. TRUSTEE....................................................................................... 8
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 6.1 General Powers and Duties..................................................................... 8
Section 6.2 Records....................................................................................... 9
Section 6.3 Third Persons................................................................................. 9
Section 6.4 Limitation on Obligation of Trustee........................................................... 9
ARTICLE VII. RESIGNATION AND REMOVAL OF TRUSTEE............................................................ 10
Section 7.1 Method and Procedure.......................................................................... 10
ARTICLE VIII. AMENDMENT AND TERMINATION..................................................................... 10
Section 8.1 Amendments.................................................................................... 10
Section 8.2 Duration and Termination...................................................................... 11
Section 8.3 Distribution upon Termination................................................................. 11
ARTICLE IX. MISCELLANEOUS................................................................................. 11
Section 9.1 Limitation on Participants' Rights............................................................ 11
Section 9.2 Receipt or Release............................................................................ 12
Section 9.3 Governing Law................................................................................. 12
Section 9.4 Headings, etc, No Part of Agreement........................................................... 12
Section 9.5 Instrument in Counterparts.................................................................... 12
Section 9.6 Successors and Assigns........................................................................ 12
Section 9.7 Indemnity..................................................................................... 12
</TABLE>
(ii)
<PAGE>
DEFERRED COMPENSATION PLAN TRUST AGREEMENT
This Trust Agreement is amended and restated in its entirety as of this 1st
day of January, 2000, by and between The First American Financial Corporation
(hereinafter called the "Company") and FIRST AMERICAN TRUST, F.S.B. (hereinafter
called "Trustee"), evidences the terms of a trust for the benefit of certain
employees, former employees and their designated beneficiaries (hereinafter
collectively called "Trust Beneficiaries") who will be entitled to receive
benefits under The First American Financial Corporation Deferred Compensation
Plan ("Plan").
This Trust is intended to be a grantor trust, of which the Company is the
grantor, within the meaning of subpart E, part I, subchapter J, Chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company has previously established this irrevocable trust
(hereinafter called the "Trust") and transferred to the Trust assets which shall
be held therein together with future contributions, subject to the claims of the
Company's creditors in the event of the Company's insolvency, until paid to the
Trust Beneficiaries as benefits in such manner and at such times as required
hereunder; and
WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the Plan
as an unfunded plan maintained for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
for purposes of Title I of the Employee Retirement Income Security Act of 1994,
as amended ("ERISA");
NOW, THEREFORE, it is mutually understood and agreed as follows:
ARTICLE I.
TITLE AND DEFINITIONS
Section 1.1 Title.
-----
This Trust Agreement shall be known as The First American Financial
Corporation Deferred Compensation Plan Trust Agreement.
Section 1.2 Definitions.
-----------
The following words, when used in this Trust Agreement with initial letter
capitalized, shall have the meanings set forth below:
"Company" shall mean The First American Financial Corporation, and any
successor corporations.
<PAGE>
"General Fund" shall mean that portion of the Trust fund which is not
allocated to a Subtrust.
"Participating Company" shall mean Company and each corporation or other
entity which is a member of a controlled group of corporations or other entities
(within the meaning of Sections 414(b) and 414(c) of the Code) of which Company
is a component member, and (ii) such other entities which are not part of a
controlled group of corporations or other entities where Company has a fifty
percent (50%) or more, but less than eighty percent (80%) ownership interest,
provided that the Board of Directors of Company authorizes such entity's
participation in this Plan and such entity's governing body requests
participation in this Plan.
"Participating Company Trust" shall mean a separate component trust
established for each entity which is not a member of a controlled group of
corporations or other entities (within the meaning of Sections 414(b) and 414(c)
of the Code) of which Company is a component member, that is participating in
this Plan established for a Participating Company pursuant to Section 3.2 of
this Trust.
"Plan" shall mean The First American Financial Corporation Deferred
Compensation Plan.
"Policy" shall mean an insurance policy purchased in accordance with the
terms of the Plan.
"Subtrust" shall mean a separate subtrust established for a Participant
pursuant to Section 3.3.
Capitalized terms not defined above shall be defined in accordance with the
Plan.
ARTICLE II.
ADMINISTRATION
Section 2.1 Trustee Responsibility.
----------------------
By its acceptance of this Trust, Trustee agrees to make payments under this
Trust to Trust Beneficiaries in accordance with the provisions of this Trust
Agreement.
Section 2.2 Maintenance of Records.
----------------------
The Committee shall have the duty and responsibility to maintain all
individual Trust Beneficiary records and to prepare and file all reports and
other information required by any federal or state law or regulation relating to
the Trust and the Trust assets.
ARTICLE III.
FUNDING
-2-
<PAGE>
Section 3.1 Contributions.
(a) The Company shall contribute to the Trust an amount equal to
the amount deferred by each Participant for the Plan Year; in no event shall
these contributions be made after the Company's tax return due date for that
Plan Year. Each Participating Company may also contribute cash to the Trust in
an amount approximately equal to the "cost of insurance" (as defined in the
Policies) needed to fund the death benefits described in Section 6.1(c) (1) of
the Plan; provided that such obligation shall not apply with respect to a Policy
if (1) the Committee has directed the Trustee to discontinue the Policy, (2) the
applicable Participant is no longer employed by the Participating Company, or
(3) the applicable Participant is not entitled to a death benefit under the
Policy because he has taken an early distribution (as described in Section 6.2
of the Plan). The Committee may direct the Trustee to discontinue the Policy for
any reason, without regard to whether Section 6.1(c)(1) of the Plan is in
effect, whether the Participant is employed or otherwise.
(b) Except as provided otherwise herein, all contributions
received pursuant to (a) above, together with the income therefrom and any
increment thereon, shall be held, managed and administered by Trustee as a
single Trust pursuant to the terms of this Trust Agreement without distinction
between principal and income.
(c) The principal of the Trust, and any earnings thereon shall be
held separate and apart from other funds of Participating Company and shall be
used exclusively for the uses and purposes of Plan Participants and general
creditors as herein set forth. Trust Beneficiaries shall not have any preferred
claim on, or any beneficial ownership interest in, any assets of the Trust prior
to the time such assets are paid to Trust Beneficiaries as benefits as provided
in Section 4.1, and all rights created under this Trust Agreement shall be mere
unsecured contractual rights of Trust Beneficiaries against the Participating
Company or Participating Company Trust. Any assets held by the Trust will be
subject to the claims of Participating Company's general creditors under federal
and state law in the event of Insolvency, as defined in Section 4:2(a) herein,
provided, however, that only Trust Assets subject to the claims of a
Participating Company's general creditors shall be those assets allocated to the
Participating Company Trust maintained for such Participating Company.
Section 3.2 Participating Company Trust.
---------------------------
(a) The Trustee shall established a separate Participating Company
Trust for each Participating Company and credit the amount of contributions made
by each Participating Company to that Participating Company's Trust. Each
Participating Company Trust shall reflect a Participating Company's interest in
the assets of the Trust Fund and shall not require any segregation of particular
assets.
(b) Following the allocation of assets to the Participating
Company Trust pursuant to Section 3.2(a), the Trustee shall allocate investment
earnings and losses of the Trust Fund among the Participating Company Trusts in
accordance with Section 5.2 and as directed by Company. Payments to general
creditors pursuant to Section 4.2 hereof shall be charged against the particular
Participating Company Trust and not the Trust as a whole.
-3-
<PAGE>
Section 3.3 Subtrusts.
---------
(a) If directed by the Committee, the Trustee shall establish a
separate Subtrust for that Participant and credit the amount of such
contribution to that Participant's Subtrust. Each Subtrust shall reflect an
individual interest in the assets of the Trust fund and shall not require any
segregation of particular assets.
(b) Following the allocation of assets to Subtrusts pursuant to
Section 3.3(a), the Trustee shall allocate investment earnings and losses of the
Trust fund among the Subtrusts in accordance with Section 5.2 and as directed by
Company. Payments to general creditors pursuant to Section 4.2 hereof shall be
charged against the Subtrusts in proportion to their account balances, except
that the payment of benefits to a Trust Beneficiary shall be charged against the
Subtrust established or maintained for such Trust Beneficiary.
(c) Amounts allocated to a Participant's Subtrust may not be
utilized to pay benefits to another Participant or Beneficiary of another
Participant. Following payment of a Participant's entire benefit under the Plan,
including payment of an early distribution under Section 6.2 of the Plan
(whether by the Trustee pursuant to the terms of this Trust Agreement or by the
Participating Company or by a combination thereof), any amounts remaining
allocated to that Participant's Subtrust shall be transferred by the Trustee to
the Participating Company. In lieu of transferring such amounts, the Committee
may direct the Trustee to retain such amounts in Trust allocated in accordance
with Section 5.3. If following payment of a Participant's entire benefit under
the Plan, including payment of an early distribution under Section 6.2 of the
Plan (whether by the Trustee pursuant to the terms of this Trust Agreement or by
the Participating Company or by a combination thereof) any Policy held with
respect to such Participant shall be transferred by the Trustee to the
Participating Company. In lieu of transferring the Policy, the Committee may
direct the Trustee to designate a new beneficiary (which may be the
Participating Company) under the Policy or cash in the applicable Policy and
cause such proceeds to be retained in Trust and allocated in accordance with
Section 5.3.
ARTICLE IV.
PAYMENTS FROM TRUST FUND
Section 4.1 Payments to Trust Beneficiaries.
-------------------------------
(a) The Committee may direct the Trustee to pay (or to commence to
pay) to a Participant (or, in the case of the Participant's death, to the
Participant's Beneficiary) the benefit, excluding amounts described in Section
6.1(c)(1) of the Plan, payable to such Participant under the Plan (the "Benefit
Amount") as soon as practicable following the Participant's Payment Eligibility
Date (as defined in the Plan). In the event, the Trustee is not directed to make
payment, pursuant to the previous sentence, the Participating Company shall make
the appropriate payments as soon as practicable following the Participant's
Payment Date. If the Participating Company makes payments directly to the
Participant, the Participating Company may request that the Trustee reimburse it
for such payments from the Participating Company Trust. If Subtrusts are
established, the Trustee shall make such payment only from funds allocated to
the Participant's Subtrust plus the General Fund, if any.
-4-
<PAGE>
(b) The Committee shall have full authority and responsibility to
determine the correct time and amount of payment of the Benefit Amount. In
making such determination, the Committee shall be governed by the terms of the
Plan and this Trust Agreement.
(c) Any obligation to a Trust Beneficiary under this Trust
Agreement is also an obligation of the Company to the extent not paid from the
Trust. Accordingly, to the extent payments to a Trust Beneficiary are
discontinued pursuant to Section 4.2, the Participating Company shall be
obligated to pay the Trust Beneficiary the same amount (plus applicable interest
from its general assets). If the amount credited to the Trust (or a Subtrust if
applicable) is not sufficient to make the payment of the Benefit Amount to a
Trust Beneficiary in accordance with the determination by the Committee, the
Participating Company agrees that it shall make the balance of such payment.
Notwithstanding the foregoing, neither the Trustee, the Company nor any
Participating Company shall have any obligation to pay any amounts described in
Section 6.1(c)(1) of the Plan; all such amounts shall be payable solely from the
proceeds of the Policy, if any.
(d) Unless a Trust Beneficiary furnishes documentation in form and
substance satisfactory to Trustee that no withholding is required with respect
to a payment of benefits from the Trust, Trustee shall deduct from any such
Benefit Payment any federal, state or local taxes required by law to be withheld
by Trustee and shall be responsible for payment and reporting of such withheld
taxes to the appropriate taxing authorities. The Trustee shall inform the
Participating Company of the amounts so remitted.
(e) Trustee shall provide the Participating Company and the
Committee with written confirmation of the fact and time of any payment
hereunder within ten business days after making any payment to a Trust
Beneficiary.
(f) Following payment of a Participant's entire benefit under the
Plan, including payment of an early distribution under Section 6.2 of the Plan
(whether by the Trustee pursuant to the terms of this Trust Agreement or by a
Participating Company or by a combination thereof), the Trustee shall, at the
direction of the Committee, either (1) transfer ownership of the applicable
Policy to the Participating Company, (2) designate a new beneficiary named by
the Committee (which may include the Participating Company), or (3) cash in the
applicable Policy and retain such amounts in the Trust to be allocated in
accordance with Section 5.3. In addition, any cash previously received with
respect to such Policy not used to pay benefits to the Participant shall be
retained in trust and allocated in accordance with Section 5.3.
(g) In the event a forfeiture occurs as a result of Section 6.3 of
the Plan, such forfeited amount shall be paid to the Participating Company.
Section 4.2 Trustee Responsibility Regarding Payments to Trust
--------------------------------------------------
Beneficiaries When the Company Is Insolvent.
- -------------------------------------------
(a) A Participating Company shall be considered "Insolvent" for
purposes of this Trust Agreement if (i) the Participating Company is unable to
pay its debts as they become
-5-
<PAGE>
due, or (ii) is subject to a pending proceeding as a debtor under the United
States Bankruptcy Code.
(b) At all times during the continuance of the Trust, the
principal and income of a Participating Company Trust shall be subject to claims
of general creditors of the Participating Company as hereinafter set forth, and
at any time Trustee has actual knowledge, or has determined, that the
Participating Company is Insolvent, Trustee shall deliver any undistributed
principal and income in the Trust to satisfy such claims as a court of competent
jurisdiction may direct. The Participating Company, through its Board of
Directors or any of its executive officers, shall advise Trustee promptly in
writing of the Participating Company's Insolvency. If Trustee receives such
notice, or otherwise receives written notice from a third party which Trustee,
in its sole discretion, deems reliable and responsible, Trustee shall
discontinue payments to Trust Beneficiaries, shall hold the Trust assets for the
benefit of the Participating Company's general creditors, and shall resume
payments to Trust Beneficiaries in accordance with Section 4.1 of this Trust
Agreement only after Trustee has determined that the Participating Company is
not Insolvent or is no longer Insolvent. Unless Trustee has actual knowledge of
the Participating Company's Insolvency or has received notice from the
Participating Company or a third party alleging the Company is Insolvent,
Trustee shall have no duty to inquire whether the Participating Company is
Insolvent. Trustee may in all events rely on such evidence concerning the
solvency of the Participating Company as may be furnished to Trustee which will
give Trustee a reasonable basis for making a determination concerning the
Participating Company's solvency. Nothing in this Trust Agreement shall in any
way diminish any rights of Trust Beneficiaries to pursue their rights as general
creditors of the Participating Company with respect to benefits payable
hereunder or otherwise.
(c) If Trustee discontinues payments of benefits from the Trust
pursuant to Section 4.2(b) and subsequently resumes such payments, the first
payment following such discontinuance shall include the aggregate amount of all
payments which would have been made to Trust Beneficiaries together with
interest at the Pension Benefit Guaranty Corporation rate applicable to
immediate annuities on the amount delayed during the period of such
discontinuance, less the aggregate amount of payments made to Trust
Beneficiaries by the Participating Company in lieu of the payments provided for
hereunder during any such period of discontinuance.
Section 4.3 Payments to the Company.
-----------------------
Except as provided in Sections 3.3(c), 4.1(a), 4.1(f), 4.1(g) or 4.2, a
Participating Company shall have no right or power to direct Trustee to return
to the Participating Company or to divert to others any of the Trust assets
before the Trust is terminated pursuant to Section 8.2.
Section 4.4 Trustee Compensation and Expenses; Other Fees and Expenses.
----------------------------------------------------------
The Company shall pay the Trustee such reasonable compensation for its
services as shall be agreed upon from time to time by the Company and Trustee,
and Trustee shall be reimbursed by the Company for its expenses that are
reasonably necessary and incident to its administration of the Trust.
-6-
<PAGE>
Following reasonable consultation with the Company such expenses shall
include fees of counsel and other advisors, if any, incurred by Trustee for the
purpose of determining its responsibilities under the Trust. Such compensation,
expenses or fees, as well as all other administrative fees and expenses, shall
be paid from Trust assets unless paid directly by the Company.
Each Participating Company agrees to bear its pro rata portion of the
expenses of the Trust. The expenses of the Trust shall be allocated amongst
Participating Companies based on the balance of each Participating Company Trust
over the balance of all Participating Company Trusts.
Section 4.5 Taxes.
-----
Trustee shall not be personally liable for any real and personal property
taxes, income taxes and other taxes of any kind levied or assessed under the
existing or future laws against the Trust assets. Such taxes shall be paid
directly from the Trust assets unless paid by the Participating Company, in the
discretion of the Committee.
Section 4.6 Alienation.
----------
The benefits, proceeds, payments or claims of Trust Beneficiaries payable
from the Trust assets shall not be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, charge,
garnishment, execution or levy of any kind, either voluntary or involuntary. Any
attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber,
garnish, levy or otherwise dispose of or execute upon any right or benefits
payable hereunder shall be void. The Trust assets shall not in any manner be
liable for or subject to the debts, contracts, liabilities, engagements or torts
of any Trust Beneficiary entitled to benefits hereunder and such benefits shall
not be considered an asset of Trust Beneficiary in the event of his insolvency
or bankruptcy.
Section 4.7 Disputes.
--------
All disputes, other than disputes between the Trustee and the Committee or
Company, shall be resolved in accordance with Section 7.8 of the Plan.
ARTICLE V.
INVESTMENT OF TRUST ASSETS
Section 5.1 Investment of Subtrust Assets.
-----------------------------
The Trustee shall invest and manage the assets of the Trust (and each
Subtrust, if any) in accordance with written directions from the Committee.
Section 5.2 Disposition of Income and Losses.
--------------------------------
Subject to Section 5.3, all income received by the Trust shall be
reinvested. Any income or loss that is attributable to the amount credited to a
Participating Company Trust in accordance
-7-
<PAGE>
with Section 3.2, and any income or loss thereon, shall be credited to such
Participating Company Trust and reinvested. Any income or loss that is
attributable to the amount credited to a Subtrust in accordance with Section
3.3, and income or loss thereon, shall be credited to such Subtrust and
reinvested.
Section 5.3 Excess Assets.
-------------
In the event that excess assets remain after death benefits are paid to a
Beneficiary in accordance with Section 6.1(c)(1) of the Plan, such excess assets
which remain in the Trust shall be allocated to the Participating Company Trust
in accordance with Section 4.4 of this Trust.
ARTICLE VI.
TRUSTEE
Section 6.1 General Powers and Duties.
-------------------------
Subject to written directions from the Committee regarding the investment
of Trust assets, Trustee, on behalf of Trust Beneficiaries, shall have all
powers necessary to administer the Trust, including, but not by way of
limitation, the following powers in addition to other powers as are set forth
herein or conferred by law:
(a) To hold, invest and reinvest the principal or income of the
Trust in bonds, common or preferred stock, other securities, or other personal,
real or mixed tangible or intangible property (including investment in deposits
with Trustee which bear a reasonable interest rate, including without limitation
investments in trust savings accounts, certificates of deposit, time
certificates or similar investments or deposits maintained by the Trustee);
(b) To hold, invest and reinvest the principal or income of the
Trust in the Policies, direct investments under the Policies and take any other
action regarding the Policies, as specifically directed by the Committee
(including those specified by Sections 3.1(b), 3.3(c) or 4.1(f)) and to enter
into split dollar life insurance agreements with Participants pursuant to which
each Participant designates the beneficiary to receive the portion of the death
benefits described in Section 6.1(c)(1) of the Plan;
(c) If (i) directed by the Company or Committee to discontinue a
Policy or (ii) notified by the Committee or Company that a Participant has
terminated employment for a reason other than death, to immediately notify the
insurance company that no death benefits are payable to the beneficiaries of the
applicable Participant under the Policy (and that neither the Participant nor
his beneficiary has any rights under the Policy or the benefits under the
Policy) and to file a new beneficiary designation with the Insurance Company
naming the Trust as beneficiary, unless directed by the Committee to take such
other action as deemed necessary by the Committee in accordance with this Trust;
(d) To pay and provide for the payment of all reasonable and
necessary expenses of administering the affairs of the Trust, subject to
reimbursement of such expenses within 30 days by the Company in accordance with
Section 4.4;
-8-
<PAGE>
(e) To pay and provide for the payment of all benefits to Trust
Beneficiaries in accordance with the provisions of this Trust Agreement;
(f) To retain noninterest bearing deposits or a cash balance with
Trustee of so much of the funds as may be determined to be temporarily held
awaiting investment or payment of benefits or expenses;
(g) To compromise, arbitrate or otherwise adjust claims in favor
of or against the Trust and to institute, compromise and defend actions and
proceedings;
(h) To vote any stock, bonds or other securities of any
corporation or other issuer at any time held in the Trust; to otherwise consent
to or request any action on the part of any such corporation or other issuer; to
give general or special proxies or powers of attorney, with or without power of
substitution; to participate in any reorganization, recapitalization,
consolidation, merger or similar transaction with respect to such stocks, bonds
or other securities and to deposit such stocks, bonds or other securities in any
voting trust, or with any protective or like committee, or with a trustee, or
with the depositories designated thereby; to exercise any subscription rights
and conversion privileges; and to generally exercise any of the powers of an
owner with respect to the stocks, bonds or other securities or properties in the
Trust; and
(i) Generally, to do all such acts, execute all such instruments,
take all such proceedings, and exercise all such rights and privileges with
relation to the property constituting the Trust as if Trustee were the absolute
owner thereof.
Section 6.2 Records.
-------
Trustee shall keep a full, accurate and detailed record of all transactions
of the Trust which the Company shall have the right to examine at any time
during Trustee's regular business hours. Within 90 days after the close of each
calendar year and within 15 days after the removal or resignation of Trustee,
Trustee shall furnish the Company with a statement of account with respect to
the Trust. This account shall set forth all receipts, disbursements and other
transactions (including sales and purchases) effected by Trustee during said
year (or until its removal or resignation), shall show the investments at the
end of the year (or date of removal or resignation), including the cost and fair
market value of each item, and the amounts allocated to each Subtrust.
Section 6.3 Third Persons.
-------------
A third person dealing with Trustee shall not be required to make any
inquiry as to whether the Company or the Committee has instructed Trustee, or
Trustee is otherwise authorized, to take or omit any action, and shall not be
required to follow the application by Trustee of any money or property which may
be paid or delivered to Trustee.
Section 6.4 Limitation on Obligation of Trustee.
-----------------------------------
Trustee shall have no responsibility for the validity of the Plan or of the
Trust and does not guarantee the payment of any amount which may become payable
to any Trust Beneficiary under the terms hereof.
-9-
<PAGE>
ARTICLE VII.
RESIGNATION AND REMOVAL OF TRUSTEE
Section 7.1 Method and Procedure.
--------------------
(a) Trustee may resign at any time by delivering to the Company a
written notice of resignation, to take effect on a date specified therein, which
shall be not less than 30 days after the delivery thereof, unless such notice
shall be waived.
(b) The Company may remove Trustee at any time by delivering to
Trustee a written notice of removal, to take effect on a date specified therein,
which shall be not less than 30 days after the delivery thereof, unless such
notice shall be waived.
(c) In case of the resignation or removal of Trustee, Trustee
shall have a right to a settlement of its accounts, which may be made, at the
option of Trustee, either (1) by a judicial settlement in an action instituted
by Trustee in a court of competent jurisdiction, or (2) by an agreement of
settlement between Trustee and the Company.
(d) Upon such settlement, all right, title and interest of such
Trustee in the assets of the Trust, and all rights and privileges under the
Trust theretofore vested in such Trustee shall vest in the successor Trustee,
and thereupon all liabilities of such Trustee shall terminate; provided,
however, that Trustee shall execute, acknowledge and deliver all documents and
written instruments which are necessary to transfer and convey all the right,
title and interest in the assets of the Trust, and all rights and privileges in
the Trust to the successor Trustee.
(e) The Company, upon receipt of or giving notice of the
resignation or removal of Trustee, shall promptly appoint a successor Trustee.
The successor Trustee shall be a bank or trust company qualified and authorized
to do trust business in the State of California and having on the date of
appointment total assets of at least $10,000,000 and a credit rating from
Moody's of A or better. In the event of the failure or refusal of the Company to
appoint such a successor Trustee within 30 days after the notice of resignation
or removal, Trustee may secure, at the expense of the Company, the appointment
of such successor Trustee by an appropriate action in a court of competent
jurisdiction. Any successor Trustee so appointed may qualify by executing and
delivering to the Company an instrument accepting such appointment and, upon
delivery, such successor, without further act, shall become vested with all the
right, title and interest, and all rights and privileges of the predecessor
Trustee with like effect as if originally named as Trustee herein.
ARTICLE VIII.
AMENDMENT AND TERMINATION
Section 8.1 Amendments.
----------
The Company shall have the right to amend (but not terminate) the Trust
from time to time and to amend further or cancel any such amendment. Any
amendment shall be stated in an instrument in writing executed by the Company
and Trustee, and this Trust Agreement shall be
-10-
<PAGE>
amended in the manner and at the time therein set forth, and the Company and
Trustee shall be bound thereby; provided, however:
(a) No amendment shall have any retroactive effect so as to
deprive any Trust Beneficiary of any benefits already vested under the Plan, or
create a reversion of Trust assets to the Company except as already provided in
this Trust Agreement, other than such changes, if any, as may be required in
order for the Trust to be considered a component of a plan described in Section
9.3;
(b) No amendment shall make the Trust revocable; and
(c) No amendment shall increase the duties or liabilities of
Trustee without its written consent.
Section 8.2 Duration and Termination.
------------------------
This Trust shall not be revocable and shall continue until the earliest of
(a) the accomplishment of the purpose for which it was created, (b) the
exhaustion of all appeals of a final determination of a court of competent
jurisdiction that the interest in the Trust of Trust Beneficiaries is includable
for federal income tax purposes in the gross income of such Trust Beneficiaries,
without such determination having been reversed (or the earlier expiration of
the time to appeal), (c) if required to comply with California rules regulating
the maximum length for which trusts may be established, the expiration of twenty
years and six months after the death of the last surviving Trust Beneficiary who
is living and is a Trust Beneficiary on the date this Trust is established, (d)
a determination of the Company to terminate the Trust because applicable law
requires it to be amended in a way that could make it taxable and failure to so
amend the Trust would subject the Company to material penalties, or (e) the
dissolution or liquidation of the Company.
Section 8.3 Distribution upon Termination.
-----------------------------
Upon termination of this Trust, Trustee shall liquidate the Trust fund and
provide a final account to the Company and the Committee. To the extent Trust
assets are sufficient, the Trustee shall pay to each Participant the appropriate
Benefit Amount. After its final account has been settled as provided in Section
7.1(c), Trustee shall return to the Company any assets remaining after the
distributions described in this Section 8.3. Upon making such distributions,
Trustee shall be relieved from all further liability. The powers of Trustee
hereunder shall continue so long as any assets of the Trust fund remain in its
hands.
ARTICLE IX.
MISCELLANEOUS
Section 9.1 Limitation on Participants' Rights.
----------------------------------
Participation in the Trust shall not give Participants the right to be
retained in the Participating Company's employ or any right or interest in the
Trust other than as herein provided. Each Participating Company reserves the
right to dismiss Participants without any
-11-
<PAGE>
liability for any claim either against the Trust, except to the extent provided
herein, or against the Participating Company. All benefits payable hereunder
shall be provided solely from the assets of the Trust, except as otherwise
provided in the Plan.
Section 9.2 Receipt or Release.
------------------
Any payment to a Trust Beneficiary in accordance with the provisions of the
Trust shall, to the extent thereof, be in full satisfaction of all claims
against Trustee and the Company, and Trustee may require such Trust Beneficiary,
as a condition precedent to such payment, to execute a receipt and release to
such effect.
Section 9.3 Governing Law.
-------------
This Trust Agreement and the Trust hereby created shall be construed,
administered and governed in all respects under applicable federal law, and to
the extent that federal law is inapplicable, under the laws of the State of
California; provided, however, that if any provision is susceptible to more than
one interpretation, such interpretation shall be given thereto as is consistent
with the Trust being (a) classified as a grantor trust as defined in Sections
671 et seq. of the Code, and (b) classified as a component of an unfunded plan
------
maintained primarily to provide deferred compensation for a select group of
management or highly compensated employees, as described in Section 201(2) of
the Employee Retirement Income Security Act of 1974, as amended. If any
provision of this instrument shall be held by a court of competent jurisdiction
to be invalid or unenforceable, the remaining provisions hereof shall continue
to be fully effective.
Section 9.4 Headings, etc., No Part of Agreement.
------------------------------------
Headings and subheadings in this Trust Agreement are inserted for
convenience of reference only and are not to be considered in the construction
of the provisions hereof.
Section 9.5 Instrument in Counterparts.
--------------------------
This Trust Agreement may be executed in several counterparts, each of which
shall be deemed an original, and said counterparts shall constitute but one and
the same instruments, which may be sufficiently evidenced by any one
counterpart.
Section 9.6 Successors and Assigns.
----------------------
This Trust Agreement shall inure to the benefit of, and be binding upon,
the parties hereto and their successors and assigns.
Section 9.7 Indemnity.
---------
(a) Except in the case of liabilities and claims arising out of
Trustee's willful misconduct or gross negligence, Company shall indemnify and
hold Trustee harmless from and against all liabilities and claims (including
reasonable attorney's fees and expenses in defense thereof) arising out of or in
any way connected with the Plan or the Trust fund or the management, operation,
administration or control thereof and based in whole or in part on:
-12-
<PAGE>
(1) Any act or inaction of Company or Committee (which
term includes, in this paragraph, any actual or ostensible agent of Company) or
(2) Any act or inaction of Trustee resulting from the
absence of proper directions hereunder, or in accordance with any directions,
purported or real, from Company or Committee, whether or not proper hereunder,
if relied upon in good faith by Trustee.
(b) The Trustee does not warrant and shall not be liable for any
tax consequences associated with the Trust or the Plans.
(c) The Trustee shall not be liable for the inadequacy of the
Trust to pay all amounts due under the Plans.
IN WITNESS WHEREOF the undersigned have executed this Trust Agreement as of
the 10th day of March, 2000.
THE FIRST AMERICAN FINANCIAL CORPORATION
By: /s/ Drew Cree
-------------
Its:Vice President Human Resources
----------------------------------
FIRST AMERICAN TRUST, F.S.B.
By: /s/ Horace B. Benjamin
----------------------
Its: Senior Vice President
----------------------
-13-
<PAGE>
Exhibit (21)
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
Name of Subsidiary
- ----------------------------
<S> <C> <C>
Consolidated subsidiaries of:
Registrant:
Ace Information Services, Inc. Florida 100.00
C.I.C., Inc. Florida 100.00
Contour Software, Inc. California 100.00
First American Capital Management, Inc. (CA) California 100.00
First American Capital Management, Inc. (DE) Delaware 100.00
First American Loan Servicing Corporation Texas 100.00
First American Management Company Washington 100.00
First American Property Data Services, Inc. California 100.00
First American Real Estate Information Services, Inc. California 100.00
First American Registry, Inc. Nevada 100.00
First American Title Insurance Company California 100.00
First American Trust, F.S.B. California 100.00
Market Data Center, LLC Georgia 100.00
National Information Group, Inc. California 100.00
Newport Exchange Properties, LLC Delaware 100.00
SMS Settlement Services, Inc. California 100.00
Spring Mountain Escrow Corporation California 100.00
Strategic Mortgage Services, Inc. (OH) Ohio 100.00
Tele-Track, Inc. Georgia 100.00
GPIC Holdings, Inc. California 52.39
CreditNet Communications, Inc. Oregon 75.00
Augusta Financial, LLC California 50.00
The Heritage Escrow Company, Inc. California 50.00
First American Title Insurance Company:
Alachua County Abstract Florida 100.00
Albany County Title, Inc. Wyoming 100.00
American Title Corporation Wisconsin 100.00
Atlantic Title Company, Inc. Maine 100.00
Attorneys Abstract, Inc. New York 100.00
Attorneys Title Corporation Washington, DC 100.00
Barton County Abstract & Title Company Kansas 100.00
Bienville Properties, Inc. Louisiana 100.00
Burton Abstract & Title Company (Inactive) Michigan 100.00
Celtic Title Agency, Inc Ohio 100.00
Consolidated Title & Abstract Company Minnesota 100.00
Crystal River Title Co. Florida 100.00
Eaton County Abstract & Title Company (Inactive) Michigan 100.00
EHG, Incorporated Illinois 100.00
Eureka Title Company (Inactive) California 100.00
Fidelity Title and Guaranty Company Florida 100.00
First American Abstract Company (Louisiana) Louisiana 100.00
First American Abstract Company (Mississippi) Mississippi 100.00
First American Abstract Company of South Carolina, Inc. South Carolina 100.00
First American Affiliates, Inc. Florida 100.00
First American Equity Loan Services, Inc. (OH) Ohio 100.00
First American Exchange Corporation (CA) California 100.00
First American Exchange Corporation (FL) Florida 100.00
First American Exchange Corporation of California California 100.00
First American Exchange Corporation of Indiana Indiana 100.00
First American Exchange Corporation of Michigan Michigan 100.00
First American Exchange Corporation
of New England, Inc. Massachusetts 100.00
First American Exchange Corporation of
the North Atlantic, Inc. Pennsylvania 100.00
First American Exchange Corporation of the Southeast Louisiana 100.00
First American Holdings CBA, Inc. (Inactive) Minnesota 100.00
First American Title Agency, Inc. Virginia 100.00
First American Title Company California 100.00
First American Title Company of Clark County Washington 100.00
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
First American Title Company of Colorado (Inactive) Colorado 100.00
First American Title Company of Dallas Texas 100.00
First American Title Company of Florida, Inc. Florida 100.00
First American Title Company of Idaho, Inc. Idaho 100.00
First American Title Company of Los Angeles California 100.00
First American Title Company of Mendocino County California 100.00
First American Title Company of Nevada (Reno) Nevada 100.00
First American Title Company of New Mexico New Mexico 100.00
First American Title Company of St. Lucie County, Inc. Florida 100.00
First American Title Company of Thurston County Washington 100.00
First American Title Company of Utah Utah 100.00
First American Title Guaranty Holding Company California 100.00
First American Title Insurance Agency of Coconino, Inc. Arizona 100.00
First American Title Insurance Agency of Gila, Inc. Arizona 100.00
First American Title Insurance Company (Mason County) Washington 100.00
First American Title Insurance Company
of Australia Pty Limited Australia 100.00
First American Title Insurance Company of Kansas, Inc. Missouri 100.00
First American Title Insurance Company of New York New York 100.00
First American Title Insurance Company
of North Carolina North Carolina 100.00
First American Title Insurance Company of Texas Texas 100.00
First American Title of Alaska Alaska 100.00
First American Title of Kansas City, Inc. Missouri 100.00
First American Title of St. Louis, Inc. Missouri 100.00
First American Transportation Title Insurance Company Louisiana 100.00
First Canadian Title Company Limited Canada 100.00
First Exchange Corporation Arizona 100.00
First States, Inc. Pennsylvania 100.00
First UK Financial Corporation plc United Kingdom 100.00
Ford County Title Company, Inc. Kansas 100.00
Fremont County Title Company Wyoming 100.00
Gadsden Abstract and Appraisal Company Florida 100.00
Greater Louisiana Title Insurance Company Louisiana 100.00
Guarantee Land Title of Leavenworth, Inc. Kansas 100.00
Guarantee Title of Johnson County, Inc. Kansas 100.00
Guarantee Title of Wyandotte County, Inc. Kansas 100.00
Guardian Title Company of Maryland Maryland 100.00
Illini Title Services, Inc. Illinois 100.00
Land Title Associates, Inc. Oklahoma 100.00
Land Title Company of St. Louis, Inc. Missouri 100.00
Land Title Insurance Company of St. Louis Missouri 100.00
Latin Title, Inc. Florida 100.00
LoneStar Mortgagee Services, L.L.C. Texas 100.00
Massachusetts Abstract Company, Inc. Massachusetts 100.00
Memphis Title Company (Inactive) Tennessee 100.00
Midland Title Security, Inc. Ohio 100.00
Midwest Title Insurance Agency, Inc. Missouri 100.00
Miller Abstract Company, Inc. Missouri 100.00
Mineral Point Title Company, Ltd. Wisconsin 100.00
Monroe Title Company Florida 100.00
Mortgage Guarantee & Title Company Rhode Island 100.00
National Lender's Title Guaranty Co., Inc. Illinois 100.00
New York Abstract Company, Inc. New York 100.00
Northern Michigan Title Company of Emmet Michigan 100.00
Ohio Bar Title Insurance Company Ohio 100.00
Ohio Title Corporation (Inactive) Ohio 100.00
Omni Title of Pasco, Inc. Florida 100.00
Orange County Title Company (Inactive) California 100.00
Pekin Abstract & Title Company Illinois 100.00
Peoples Abstract Company Iowa 100.00
Pioneer Agency Acquisition Company Pennsylvania 100.00
Pioneer of Philadelphia, Ltd., Inc. (Inactive) Pennsylvania 100.00
Port Lawrence National Agency, Inc. Ohio 100.00
Port Lawrence Title and Trust Company Ohio 100.00
Potter Title Company Michigan 100.00
Republic Title of Texas, Inc. Texas 100.00
San Mateo County Title Company (Inactive) California 100.00
Security Land Title Company Kansas 100.00
Service Standard Title and Trust, Ltd. Virgin Islands 100.00
Settlers Abstract Company, L.P. Pennsylvania 100.00
Settlers Title Agency, Inc. New Jersey 100.00
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Standard Title Insurance Company, Inc. (Inactive) Oklahoma 100.00
Sterling Title Company of Sandoval County New Mexico 100.00
The Inland Empire Service Corporation California 100.00
The Port Lawrence Agency, Inc. (Inactive) Ohio 100.00
The Security Abstract & Title Company, Inc. Kansas 100.00
Ticore, Inc. Oregon 100.00
Title Security of Brevard, Inc. Florida 100.00
Tuscola Title & Escrow, Inc. Michigan 100.00
Universal Title Company Minnesota 100.00
Warren County Abstract Iowa 100.00
Washakie Abstract Company Wyoming 100.00
Woodford County Abstract & Title Company, Inc. Illinois 100.00
First American Title Company of Bellingham Washington 99.98
First American Title Insurance Agency of Yuma, Inc. Arizona 99.90
First American Title and Trust Company Oklahoma 99.88
First American Auto Title Transfer, L.L.C. Louisiana 99.00
First American Title Insurance Agency of Pinal Arizona 98.00
First American Title Company of Laramie County Wyoming 92.50
First American Home Buyers Protection
Corporation (California) California 92.12
First American Title Insurance Agency of Mohave, Inc. Arizona 88.47
First American Title Insurance Agency, Inc. (Navajo) Arizona 85.30
First American Abstract & Title Services, Inc. South Carolina 85.00
First Australian Title Company Pty Limited Australia 85.00
First American Title Insurance Agency of Yavapai, Inc. Arizona 84.20
First American Title Company of Spokane Washington 82.20
First American Long & Melone Title Company, Ltd. Hawaii 80.00
Territorial Abstract & Title Company, Inc. New Mexico 80.00
First American Title Company of Hot Springs County Wyoming 79.90
Converse Land Title Company Wyoming 79.57
First American Title Company of Sublette County Wyoming 79.20
First American Title Company of Carbon County Wyoming 78.90
First American Title Company of Crook County Wyoming 78.20
Teton Land Title Company Wyoming 76.72
Muni-Law, Inc. Massachusetts 75.00
Goshen County Abstract & Title Company Wyoming 73.10
Allied Trustee Services, Inc. California 70.00
Big Horn Land Title Company Wyoming 61.47
Mid-Valley Title and Escrow Company California 58.50
Campbell County Abstract Company Wyoming 57.63
Wyoming Land Title Company Wyoming 55.49
Shoshone Title Insurance and Abstract Company Wyoming 52.04
Johnson County Title Company, Inc. Wyoming 51.00
RELS Title Services, LLC Delaware 50.00
First American Real Estate
Information Services, Inc.:
DataTree Corporation California 100.00
Excelis, Inc. Florida 100.00
Realty Tax & Service Company (Inactive) California 100.00
First American Real Estate Solutions LLC California 80.00
National Information Group, Inc.:
Fastrac Systems, Inc. California 100.00
New Arts Acquisition, Inc. Delaware 100.00
Pinnacle Data Corporation California 100.00
GPIC Holdings, Inc. California 32.61
GPIC Holdings, Inc.:
Five Star Holdings, Inc. California 100.00
Great Pacific Insurance Company California 100.00
Pinnacle Management Solutions Insurance Services California 100.00
First American Title Company of Utah:
Utah First Exchange, Inc. Utah 100.00
Midland Title Security, Inc.:
Colonial Title Agency, Inc. Ohio 100.00
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Commerce Title Agency, Inc. (Inactive) Ohio 100.00
Lawyers Mortgage and Title Company, Inc. (Inactive) Ohio 100.00
MCM Title Services, Inc. Ohio 100.00
Midland Exchange Services, Inc. Ohio 100.00
National Survey Service, Inc. Delaware 100.00
R.E. Services, Inc. Ohio 100.00
Environmental Title Services, Inc. Ohio 50.00
First American Title Company of Nevada (Reno):
First American Partners, Inc. Nevada 100.00
First American Title Company of Nevada (Zephyr Cove) Nevada 100.00
First American Title Insurance
Company of New York:
First American Exchange Corporation (NY) New York 100.00
L&H Abstract Corporation New York 100.00
First American Title Insurance
Company of Texas:
Corpus Christi Title Company (Inactive) Texas 100.00
First American Title Company of Company of Waco dba
First Title Company of Waco Texas 100.00
Fort Bend Title Company Texas 100.00
The Donegan Abstract Company Texas 100.00
Land Title Associates, Inc.:
First American Title & Abstract Co. Oklahoma 100.00
Massachusetts Abstract Company, Inc.:
Massachusetts Title Insurance Company Massachusetts 91.90
Mortgage Guarantee & Title Company:
GR Title Services, Inc. (Inactive) Rhode Island 100.00
Republic Title of Texas, Inc.:
American Escrow Company Texas 100.00
Texas Escrow Company Texas 100.00
Title Software Corporation Texas 100.00
Ticore, Inc.:
First American Exchange Corporation of Oregon Oregon 100.00
Title Insurance Company of Oregon dba FAT Insurance
Company of Oregon Oregon 100.00
Universal Title Company:
Universal Partnerships, Inc. Minnesota 100.00
Land Title Insurance Company of St. Louis:
Property Data, Inc. Missouri 100.00
The Trust Company of St. Louis County Missouri 99.80
First Canadian Title Company
Limited:
Services de Titres FCT du Quebec Inc., aka Quebec FCT
Title Services Inc. Canada 100.00
First American Title Guaranty Holding Company:
First Escrow Accounting Services Company California 100.00
First Guaranty Bancorp California 100.00
First Guaranty Exchange Company California 100.00
Superior Trustee's Services Co., Inc. California 100.00
First American Title Guaranty Company California 99.70
Harrison-Webster Investment Group (a partnership) California 75.00
Stanley Building Associates (a Partnership) California 75.00
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Territorial Abstract & Title Company, Inc.:
Territorial Escrow Services, Inc. New Mexico 80.00
Titles de Santa Fe New Mexico 80.00
Mid-Valley Title and Escrow Company:
Mt. Shasta Title & Escrow Company California 65.00
First American Records Management, Inc.:
First American Record Storage Company California 100.00
First American Information Management Company, Inc. California 95.56
First American Records Management Company, Inc. California 80.00
First American Equity Loan Services, Inc. (OH):
Docu-Search, Inc. Kentucky 100.00
First American Equity Loan Services, Inc. (DE) Delaware 100.00
First American Title and Trust Company:
Southwest Title Land Company Oklahoma 100.00
First American Long & Melone Title Company, Ltd.:
First American Long & Melone Exchange, Ltd. Hawaii 80.00
EHG, Incorporated:
Midwest Title Insurance Company Illinois 100.00
First American Real Estate Solutions LLC:
Daisy Software Texas 100.00
First American Real Estate Flood & Tax Solutions LLC Delaware 100.00
NDTS Software Texas 100.00
Smart Title Solutions LLC Data Tree LLC Delaware 100.00
JV Mortgage Solutions, LLC Delaware 50.00
RELS, LLC Delaware 50.00
Pioneer Agency Acquisition Company:
Pioneer Agency II, Corp. Pennsylvania 100.00
First UK Financial Corporation plc:
First American Title Insurance Company (UK) plc United Kingdom 100.00
First Title Services Limited United Kingdom 100.00
First UK Home Warranty United Kingdom 100.00
First UK Information Services United Kingdom 100.00
First UK Management Services (Shell) United Kingdom 100.00
First UK Services United Kingdom 100.00
First UK SureMove United Kingdom 100.00
First American Title Insurance Company (Ireland) Ltd United Kingdom 50.00
</TABLE>
<PAGE>
EXHIBIT (23)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Forms S-8 (Nos. 333-19065, 333-32871, 333-41993, 333-67451,
333-80179, 333-78537 and 333-76701), S-3 (Nos. 333-56521, 333-58865, 333-67633
and 333-74073) and S-4 (Nos. 333-45459, 333-49687, 333-52031, 333-53681,
333-66431 and 333-74913) of The First American Financial Corporation of our
report dated February 15, 2000 relating to the financial statements and
financial statement schedules, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
Newport Beach, CA
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 226,369,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 39,266,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 384,546,000
<CASH> 350,010,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 2,116,414,000
<POLICY-LOSSES> 273,724,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 196,815,000
65,068,000
0
<COMMON> 0
<OTHER-SE> 750,923,000
<TOTAL-LIABILITY-AND-EQUITY> 2,116,414,000
2,936,196,000
<INVESTMENT-INCOME> 49,784,000
<INVESTMENT-GAINS> 2,189,000
<OTHER-INCOME> 0
<BENEFITS> 116,218,000
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 150,943,000
<INCOME-TAX> 62,300,000
<INCOME-CONTINUING> 33,003,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,003,000
<EPS-BASIC> 0.51
<EPS-DILUTED> 0.50
<RESERVE-OPEN> 272,921,000
<PROVISION-CURRENT> 122,311,000
<PROVISION-PRIOR> (6,093,000)
<PAYMENTS-CURRENT> 58,915,000
<PAYMENTS-PRIOR> 54,029,000
<RESERVE-CLOSE> 273,724,00
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
