SCHEDULE 14A
INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant x
Filed by Party other than Registrant ¨
Check the appropriate box:
¨ Preliminary proxy statement | ¨ Confidential, for Use of the Commission Only | |
x Definitive proxy statement | ||
¨ Definitive additional materials | ||
¨ Soliciting Materials pursuant to Rule 14a-11(c) or Rule 14a-12 |
FIRST ADVANTAGE CORPORATION
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
x No fee required
¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) | Title of each class of securities to which transaction applies: |
(2) | Aggregate number of securities to which transaction applies: |
(3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): |
(4) | Proposed maximum aggregate value of transaction: |
(5) | Total fee paid: |
¨ Fee paid previously with preliminary materials.
¨ | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. |
(1) | Amount previously paid: |
(2) | Form, Schedule or Registration Statement No.: |
(3) | Filing Party: |
(4) | Date Filed: |
Dear Stockholders:
I am very pleased to invite you to attend the third annual meeting of stockholders of First Advantage Corporation, a Delaware corporation, to be held at the Renaissance Vinoy Resort, located at 501 Fifth Avenue NE, St. Petersburg, Florida 33701, on September 13, 2005May 11, 2006 at 9:00 a.m. Eastern Time.
Details of the business to be conducted at the meeting are given in the attached notice of annual meeting and proxy statement.
At the annual meeting, we will ask you to vote to approve the amended and restated master transfer agreement, dated as of June 22, 2005, which we have entered into with our controlling stockholder, The First American Corporation, and certain of its subsidiaries and related agreements which we will enter into with First American and/or its subsidiaries in connection with the closing of the transactions contemplated by the master transfer agreement (which are described in the attached proxy statement), and the transactions contemplated by the master transfer agreement and related agreements, including the following:
If the transactions are approved, First American will control approximately 98% of the voting power of First Advantage, and approximately 85% of the total outstanding shares of First Advantage’s capital stock. As of the date of this proxy statement, First American controls approximately 95% of the voting power of First Advantage, and approximately 67% of the total outstanding shares of First Advantage’s capital stock.
Because First American is our controlling stockholder, our board of directors formed a special committee to evaluate the proposed transactions with First American. The special committee determined that the proposed transactions with First American are fair to, and in the best interests of, First Advantage and our stockholders
(other than First American and its affiliates, Donald Robert and our management), unanimously approved the proposed transactions with First American and unanimously recommended that our board of directors approve the proposed transactions. After receiving the special committee’s unanimous recommendation, our full board of directors approved the proposed transactions with First American. Our board of directors recommends that you vote “FOR” the proposal to approve the master transfer agreement and the related agreements and the transactions contemplated thereby, including the initial issuance of a total of 30,048,780 Class B common shares to a subsidiary of First American and the possible future issuance of additional shares to this subsidiary in connection with the DealerTrack earn-out. Our board of directors also recommends that you vote “FOR” the proposal to approve the amendment to our certificate of incorporation to increase our authorized shares.
At the annual meeting, you will also be asked to vote on the election of our board of directors and to approve an amendment to our incentive compensation plan to increase the number of shares available for grant under the plan and certain other amendments to the plan. Our board of directors recommends that you vote “FOR” election of the nominees for director named in the proxy statement and that you vote “FOR” approval of the amendments to the incentive compensation plan.
We hope that you are able to attend the annual meeting.It is important that you vote your shares whether or not you are able to attend in person.person. We urge you to read the accompanying proxy statement and vote on the matters presented by filling in the appropriate boxes on the enclosed proxy card and returning it promptly. If you attend the meeting and prefer to vote in person, you may do so even if you have returned your proxy card. You may also revoke a proxy at any time before it is exercised.
Thank you for your cooperation and your support and interest in First Advantage Corporation.
John Long
Chief Executive Officer and President
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FIRST ADVANTAGE CORPORATION
One Progress Plaza
Suite 2400100 Carillon Parkway
St. Petersburg, Florida 33701FL 33716
NOTICE OF ANNUAL MEETING
To be Held on September 13, 2005May 11, 2006
The annual meeting of stockholders of First Advantage Corporation, a Delaware corporation, will be held at the Renaissance Vinoy Resort, located at 501 Fifth Avenue NE, St. Petersburg, Florida 33701, on September 13, 2005May 11, 2006 at 9:00 a.m. Eastern Time, and at any adjournments thereof, for the following purposes:
1. | To |
To transact such other business as may properly come before the meeting. |
Our board of directors has fixed the close of business on August 9, 2005March 31, 2006 as the record date for determining the holders of our Class A and Class B common stock entitled to notice of the meeting, as well as for determining the holders of our Class A and Class B common stock entitled to vote at the meeting.
On or about August 11, 2005 we began sending this notice of annual meeting, the attached proxy statement, and the enclosed proxy card to all holders of record of our Class A and Class B common stock entitled to receive such materials and vote.
All stockholders are invited to attend the annual meeting in person. All stockholders also are respectfully urged to execute and return the enclosed proxy card as promptly as possible. Stockholders who execute a proxy card may nevertheless attend the annual meeting, revoke their proxy, and vote their shares in person. Please read the accompanying proxy statement and proxy card for information on the annual meeting and voting.
By Order Of The Board Of Directors |
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Julie A. Waters
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iiiApril 11, 2006
QUESTIONS AND ANSWERS ABOUT THE PROPOSALSFIRST ADVANTAGE CORPORATION
100 Carillon Parkway
St. Petersburg, FL 33716
PROXY STATEMENT
for
annual meeting of stockholders
May 11, 2006
The board of directors of First Advantage Corporation is soliciting proxies for use at the annual meeting of stockholders to be held at the Renaissance Vinoy Resort, located at 501 Fifth Avenue NE, St. Petersburg, Florida 33701, on May 11, 2006 at 9:00 a.m. Eastern Time, and at any adjournments thereof. On or about April 14, 2006, we began sending the attached notice of annual meeting, this proxy statement, the enclosed proxy card, and our annual report for 2005 (which is not part of the proxy soliciting materials) to all holders of record of our Class A and Class B common stock entitled to receive such materials and vote.
Please refer to the section entitled “Certain Terms and Phrases” under the “Summary” section of this proxy statement beginning on page S-2 for the definition of certain terms and phrases that we use in these questions and answers and in other portions of this proxy statement.Frequently Asked Questions About The Annual Meeting
Q: | What |
A: | The |
Proposal Number One. First Advantage stockholders are being asked to approve the amended and restated master transfer agreement, dated as of June 22, 2005, which we have entered into with First American and certain of its subsidiaries and related agreements which we will enter into with First American and/or its subsidiaries in connection with the closing of the transactions contemplated by the master transfer agreement (which are described in this proxy statement), and the transactions contemplated by the master transfer agreement and related agreements, including the following:
Proposal Number Two. First Advantage stockholders are being asked to approve an amendment to First Advantage’s certificate of incorporation to increase the number of authorized shares of Class A common stock to 125,000,000 and to increase the number of authorized shares of Class B common stock to 75,000,000. We refer to this proposal as the “certificate amendment proposal”.
Proposal Number Three. First Advantage stockholders will consider and elect our board of directors, to serve until the next annual meeting. We refer to this proposal as the “board election proposal”.
Proposal Number Four. First Advantage stockholders are being asked to approve an amendment to the First Advantage Corporation 2003 Incentive Compensation Plan to increase the number of shares of Class A common stock available for grant under the plan to 7,000,000, as well as other amendments to the plan. We refer to this proposal as the “incentive plan amendment proposal”.
Q: |
First American Transaction Proposal.The favorable vote of the holders of a majority of the shares of our Class A common stock (without giving effect to any shares held by First American or its affiliates, Donald Robert, or our management) represented at the annual meeting in person or by proxy and the favorable vote of the holders of a majority of the shares of our
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common stock (giving effect to all shareholdings) present in person or by proxy at the annual meeting is required for the approval of the First American Transaction proposal. Donald Robert is one of our directors and is the chief executive officer of Experian Group, an affiliate of Experian, which owns a 20% interest in FARES.
Certificate Amendment Proposal.Under the master transfer agreement, the favorable vote of the holders of a majority of the outstanding shares of our Class A common stock (without giving effect to any shares held by First American or its affiliates, Donald Robert, or our management) represented at the annual meeting in person or by proxy and the favorable vote of the holders of a majority of the outstanding shares of our common stock (giving effect to all shareholdings) present in person or by proxy is required for approval of the certificate amendment proposal. In addition, under Delaware law, the holders of each class of our common stock are required to vote separately on the proposal to amend our certificate of incorporation to increase the number of authorized shares of the Class A common stock and Class B common stock. Accordingly, under Delaware law, in order to approve this proposal, it must also be approved by the holders of a majority of the outstanding shares of each class. The certificate amendment will not be filed with the Delaware Secretary of State and become effective if the First American Transaction proposal is not approved by the stockholders.
Board Election Proposal.The holders of the shares of our Class A and Class B common stock will vote together as a single class on this proposal. You may vote “FOR” all of the nominees or your vote may be “WITHHELD” with respect to one or more of the director nominees. In the election of directors, the persons receiving the highest number of “FOR” votes will be elected.
Incentive Plan Amendment Proposal. The holders of the shares of our Class A and Class B common stock will vote together as a single class on this proposal. The favorable vote of the holders of a majority of the shares of common stock represented at the annual meeting inperson or by proxy is required for the adoption of the amendment to the incentive compensation plan.
A: | Yes. |
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The risks that the special committee considered (as further described in “Reasons of the Special Committee for the First American Transaction” beginning on page 22), include:
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Q: | What shares can I vote? |
A: | You may vote all shares owned by you as of the Record Date. This includes all shares you hold directly as the record holder and all shares you hold indirectly as the beneficial owner. |
Q: | How many votes will I have? |
A: | Holders of our Class A common stock will have one vote for each share held of record on the Record Date. The holder of our Class B common stock will have ten votes for each share held of record on the Record Date. Cumulative voting is not permitted. The First |
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Q: | What is the difference between record ownership and beneficial ownership? |
A: | Most stockholders own their shares through a stockbroker or other nominee rather |
You are the record owner of shares if those shares are registered directly in your name with our transfer agent. The transfer agent for our Class A common stock is Wells Fargo Shareowner Services. First Advantage acts as its own transfer agent for our Class B common stock. As the record holder of shares, you may vote such shares in person at the annual meeting or grant your voting proxy directly by completing the enclosed proxy card.
You are the beneficial owner of shares if you hold those shares in “street name” through a stockbroker, bank, trustee or other nominee, including shares held on your behalf in the First Advantage Corporation 401(k) Savings Plan. If you are a beneficial owner, these proxy materials are being sent to you through your stockbroker or other nominee together with a voting instruction card. In order to vote, you must complete the voting instruction card
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provided by your stockbroker or other nominee to direct the record holder how to vote your shares or obtain a valid proxy from the stockbroker or other nominee who is the record owner of your shares giving you authority to vote your shares in person at the meeting.
Q: | How do I vote? |
A: | You can vote on matters that come before the meeting in two ways: |
If you wish to vote at the annual meeting, and you are a beneficial owner of your shares, you must have a legal proxy in your favor executed by the stockbroker or other nominee who is the record owner.
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Whether or not you plan to attend the annual meeting in person, please fill in and sign the enclosed proxy card or instruction card and return it promptly.
Q: | Can I revoke my proxy? |
A: | Yes. |
Q: | What is the quorum |
A: | A quorum of stockholders is necessary to hold a valid meeting. A majority of the outstanding shares of Class A and Class B common stock on the Record Date taken as a whole, present in person or represented by proxy at the beginning of the annual meeting, constitutes a quorum. If you have returned a properly signed proxy card, you will be considered present at the meeting and counted in determining the presence of |
Q: | How will my proxy be voted? |
A: | Shares represented by a properly executed and returned proxy will be voted at the meeting in accordance with the directions noted thereon.If you sign and return the proxy card but do not make specific choices, the proxy holders named in the proxy card will vote your shares “FOR” the |
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The following is a brief summary of the terms of the First American Transaction and the other proposals to be voted on at the meeting. This summary is qualified in its entirety by the more detailed information appearing elsewhere in or incorporated by reference into this proxy statement. Initially capitalized terms not otherwise defined in this summary have the meanings assigned to them elsewhere in this proxy statement.
The Parties
First Advantage Corporation
One Progress Plaza, Suite 2400
St. Petersburg, Florida 33701
(727) 214-3411
First Advantage Corporation, a Delaware corporation (NASDAQ: FADV), provides best-in-class single-source solutions for global risk mitigation and enterprise and consumer screening needs. Incorporating state-of-the-art technology, proprietary systems and data resources, First Advantage is a leading provider of employment background screening, drug-free workplace programs and other occupational health testing, employee assistance programs, corporate tax and incentive services, resident screening, motor vehicle records services, transportation business credit services, investigative services, computer forensics and electronic discovery services, supply chain security and consumer location services. First Advantage ranks among the top three companies in all of its major business lines based on revenue. First Advantage is headquartered in St. Petersburg, Fla., and has more than 2,400 employees in offices throughout the United States and abroad.
The First American Corporation
1 First American Way
Santa Ana, California 92707
(714) 800-3000
The First American Corporation, a California corporation (NYSE: FAF), is a Fortune 500 company that traces its history to 1889. As the nation’s largest data provider, the company and its affiliates supply businesses and consumers with information resources in connection with major economic events of people’s lives, such as getting a job; renting an apartment; buying a car, house, boat or airplane; securing a mortgage; opening or buying a business; and planning for retirement. The First American family of companies, many of which command leading market share positions in their respective industries, operate within six primary business segments including: Title Insurance and Services, Specialty Insurance, Mortgage Information, Property Information, Credit Information and Screening Information (which is operated by First Advantage). With revenues of $6.72 billion in 2004, First American has 31,000 employees in approximately 2,000 offices throughout the United States and abroad.
First American Real Estate Information Services, Inc.
1 First American Way
Santa Ana, California 92707
(714) 800-3000
First American Real Estate Information Services, Inc., a California corporation (“FAREISI”), is a wholly owned subsidiary of First American.
First American Real Estate Solutions LLC
1 First American Way
Santa Ana, California 92707
(714) 800-3000
First American Real Estate Solutions LLC, a California limited liability company (“FARES”), is a joint venture between First American and Experian Information Solutions, Inc. (“Experian”), in which FAREISI owns an 80% equity interest and Experian owns a 20% equity interest.
FADV Holdings LLC
FADV Holdings LLC, a Delaware limited liability company, is a newly formed company owned by First American, FARES and FAREISI and is referred to in this proxy statement as Newco. Newco was formed in connection with the First American Transaction. Before the closing of the First American Transaction, First American, FARES and FARESI will contribute all of the companies and assets that comprise the CIG Business, as well as the DealerTrack Interest, Bar None and the XRES Business and the $20 million promissory note, to Newco.
Certain Terms and Phrases
We use the following terms in describing the First American Transaction.
Overview of First American Transaction
First Advantage has agreed to buy First American’s CIG Business and related businesses under the terms of the master transfer agreement. First Advantage has agreed to pay for the CIG Business and related businesses with shares of its Class B common stock. When First Advantage completes its acquisition of the CIG Business and related businesses, First Advantage and First American will also enter into related agreements as described below.
The CIG Business
The CIG Business consists of First American’s mortgage, automotive, consumer and sub-prime credit information business. This business provides reports derived from credit reports obtained from one or more of the three United States credit bureaus. As part of the First American Transaction, we will also obtain a minority ownership interest in DealerTrack, which provides software and services that connect credit originators with funding sources, all the stock of Bar None, which provides automobile dealerships with credit-based lead generation services, and the XRES Business, which offers merged credit reports and related services for mortgage and real estate transactions. See “Information About the CIG Business” beginning on page11.
The following diagram illustrates the companies and assets that currently comprise the CIG Business and the related businesses being contributed to First Advantage. As further described in “Master Transfer Agreement” beginning on page 33, prior to the closing of the First American Transaction, First American, FAREISI and FARES each will contribute to Newco all of the companies and assets that they own that comprise the CIG Business and the related businesses to Newco. At the closing of the First American Transaction, Newco will contribute all of the assets and companies that comprise the CIG Business and the related businesses to First Advantage or its wholly-owned subsidiary.
Structure of the First American Transaction
The First American Transaction consists of several related transactions in accordance with the terms of the master transfer agreement and related agreements. The following transactions will occur on or immediately prior to the closing date of the First American Transaction:
Pursuant to the terms of the contribution agreements, Newco will then contribute the CIG Business, the DealerTrack Interest, Bar None and the XRES Business to First Advantage or its wholly-owned subsidiary. In exchange, First Advantage will issue to Newco an aggregate of 29,073,170 shares of First Advantage Class B common stock, and First Advantage will assume substantially all of the liabilities associated with the CIG Business and related businesses. In particular, First Advantage will assume First American’s obligations under its agreement to purchase Bar None, which includes a possible maximum earn-out payment of $9 million to former stockholders of Bar None during the three year period following the completion of First American’s purchase of Bar None if Bar None achieves agreed
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Following the closing date of the First American Transaction, First Advantage will be required to issue additional shares of its Class B common stock to Newco if DealerTrack completes an initial public offering within two years and the value of the DealerTrack Interest exceeds $50 million.
For a description of these and the other related documents, see “Other Transaction Documents” beginning on page 44.
The following diagram illustrates the First American Transaction in general terms and is not comprehensive. For a more complete description of the First American Transaction, see “Master Transfer Agreement” beginning on page 33 and “Other Transaction Documents” beginning on page 44.
See “Structure of the First American Transaction” beginning on page 14.
DealerTrack Earn-Out PaymentQ:
First Advantage will be obligated to issue additional shares of Class B common stock to Newco if DealerTrack completes an initial public offering of its stock on or prior to the second anniversary of the closing of the First American Transaction and the value of the DealerTrack Interest exceeds $50 million. If DealerTrack completes an IPO within 180 days after the closing of the First American Transaction, the number of shares to be issued will be equal to the quotient of (x) 50% of the amount by which the value of the DealerTrack Interest exceeds $50 million (based on the average closing price per share of DealerTrack’s stock over the 60 business day period beginning on the fifth business day after its initial public offering),divided by (y) $20.50. If the DealerTrack IPO occurs after the 180-day period following the closing of the First American Transaction (but prior to the second anniversary thereof), the number of additional Class B common shares we must issue to Newco will be equal to the quotient of (x) 50% of the amount by which the DealerTrack Interest exceeds $50 million (based on the average closing price per share of DealerTrack’s stock over the 60 business day period beginning on the fifth business day after its initial public offering),divided by (y) the average closing price per share of First Advantage’s Class A common stock during the 30 trading day period ending on the third trading day prior to the date of DealerTrack’s IPO, except that the minimum price per share will be $20.50.
See “Other Transaction Documents—The First American Contribution Agreement” beginning on page 44.
First Advantage cannot determine the maximum number of Class B shares that may be issued to Newco in connection with the DealerTrack Earn-Out because the final number of shares to be issued to Newco will depend on a number of factors, which cannot be ascertained at this time, including:
We have included a table of examples to illustrate how the number of Class B shares to be issued to Newco in the DealerTrack Earn-Out will be calculated in the discussion of the “DealerTrack Earn-Out” beginning on page 15.
Appointment of Special Committee to Consider the First American Transaction
First American currently holds approximately 67% of First Advantage’s economic ownership and approximately 95% of the voting power of First Advantage. In order to avoid any potential conflicts of interest between First American and First Advantage, our board of directors appointed a special committee consisting of five directors who are not employed by or affiliated with First American or First Advantage, other than as directors of First Advantage or Class A stockholders, to evaluate the First American Transaction and make a recommendation to the full board of directors whether to proceed with the First American Transaction. The special committee independently selected and retained legal and financial advisors to assist it. We discuss the special committee in greater detail under the heading “Background of the First American Transaction” beginning on page 17.
Actions of Special Committee With Respect to the First American Transaction
The special committee has determined that the First American Transaction is fair to, and in the best interests of, First Advantage and its stockholders (other than First American and its affiliates, officers and directors, as to which the special committee made no determination) and has unanimously approved the First American Transaction. The special committee unanimously recommended to the full First Advantage board of directors that it recommend the First American Transaction. See “Actions of Special Committee With Respect to the First American Transaction” beginning on page 24.
Reasons of the Special Committee for the First American Transaction
In evaluating and approving the First American Transaction, the members of the special committee relied upon their knowledge of the business, financial condition and prospects of First Advantage, the knowledge of senior management of First Advantage regarding the business, financial condition and prospects of First Advantage and the CIG Business, and the advice of the special committee’s financial and legal advisors. In particular, the special committee considered the factors and risks described under “Reasons of the Special Committee for the First American Transaction” beginning on page 22.
Opinion of Special Committee’s Financial Advisor
Morgan Stanley, financial advisor to the special committee of our board of directors, delivered to the special committee its oral opinion, subsequently confirmed in writing on May 23, 2005, that, as of such date, and based
upon and subject to the assumptions, limitations and qualifications set forth in the opinion, the consideration to be paid by First Advantage pursuant to the master transfer agreement and related agreements was fair to First Advantage from a financial point of view. The full text of Morgan Stanley’s written opinion is attached as Annex H. We encourage you to read it carefully in its entirety. Morgan Stanley’s opinion is directed to the special committee of our board of directors and it does not address the prices at which our common stock may trade prior to or after the proposed contribution nor does the opinion constitute a recommendation to any stockholder as to how to vote or as to any other action that a stockholder should take relating to the First American Transaction. See “Fairness Opinion of Financial Advisor to First Advantage’s Special Committee” beginning on page 25.
Recommendation of First Advantage’s Full Board of Directors with Respect to the First American Transaction
Our board of directors, after receiving the unanimous recommendation of the special committee, determined that the First American Transaction is fair to, and in the best interests of, First Advantage and its stockholders (other than First American and its affiliates, Donald Robert and our management, as to which the board made no determination), unanimously approved the First American Transaction and recommends that you vote “FOR” approval of the First American Transaction. See “Recommendation of First Advantage’s Full Board of Directors with Respect to the First American Transaction” beginning on page 24.
First American Transaction Documents
The terms and conditions of the First American Transaction are set forth in the master transfer agreement, which was executed onMay 25, 2005 and amended and restated onJune 22, 2005, and related agreements, described below, which will be entered into at the time of the closing of the First American Transaction, if approved.
Master Transfer Agreement
First Advantage, First American, FAREISI, FARES and Newco have entered into an amended and restated master transfer agreement dated as ofJune 22, 2005, which sets forth the terms and conditions of the First American Transaction. Among other things, the master transfer agreement sets forth representations and warranties of the parties to the agreement as to enforceability of the agreement and related matters, restricts the operations of the CIG Business, Bar None and the XRES Business (but not DealerTrack or RELS) prior to closing, sets forth covenants and agreements relating to consummation of the transaction, contains conditions of closing and provides for termination of the agreement under certain circumstances. You are urged to read the section entitled “The Master Transfer Agreement” beginning on page33 and the copy of the master transfer agreement attached as Annex A.
First American Contribution Agreement
At the closing of the First American Transaction, First Advantage, First American, FAREISI and Newco will enter into a contribution agreement substantially in the form attached as Annex B (referred to as the “First American contribution agreement”), which sets forth additional terms and conditions on which Newco will transfer to First Advantage or its wholly-owned subsidiary the portion of the CIG Business contributed to Newco by First American and FAREISI as well as the DealerTrack Interest and Bar None. The First American contribution agreement sets forth the number of shares of our Class B common stock that will be issued to Newco in exchange for those assets and as payment in full of the principal amount of $20 million under the promissory note originally issued by First Advantage to First American in April 2004, which will be transferred to Newco prior to closing.
In addition, the First American contribution agreement sets forth the terms under which First Advantage will issue additional shares of Class B common stock to Newco if the payment of the DealerTrack Earn-Out is required by the contribution agreement.
The First American contribution agreement also sets forth representations and warranties of parties to the agreement, covenants and agreements relating to consummation of the transaction, and indemnification provisions. You are urged to read the section entitled “First American Contribution Agreement” beginning on page44 and the copy of the form of the First American contribution agreement attached hereto as Annex B.
FARES Contribution Agreement
At the closing of the First American Transaction, First Advantage, FARES and Newco will enter into a contribution agreement substantially in the form attached as Annex C (which is referred to as the “FARES contribution agreement”), which sets forth additional terms and conditions on which Newco will transfer to First Advantage or a wholly-owned subsidiary the portion of the CIG Business contributed to it by FARES, which consists of the CREDCO Division and the XRES Business. The FARES contribution agreement sets forth the number of shares of Class B common stock that will be issued to Newco in exchange for that portion of the CIG Business and the XRES Business and the assumption of certain liabilities associated with such assets by First Advantage. The FARES contribution agreement also sets forth representations and warranties of parties to the agreement, covenants and agreements relating to consummation of the transaction, and indemnification provisions. You are urged to read the section entitled “FARES Contribution Agreement” beginning on page56 and the copy of the form of the FARES contribution agreement attached hereto as Annex C.
Amended and Restated Services Agreement
At the closing of the First American Transaction, First Advantage and First American will enter into an amended and restated services agreement substantially in the form attached as Annex D (which is referred to as the “amended and restated services agreement”), which amends and restates the services agreement previously entered into and amended by the parties. Under the amended and restated services agreement, First American and First Advantage agree to continue to providebusiness services to each other and their respective affiliates on the same terms. First Advantage also appoints First American and its affiliates as the exclusive resellers of First Advantage’s credit information and related products to mortgage lenders and others in the mortgage industry. The amended and restated services agreement sets forth the rates that will be paid for the services, as well as provisions with respect to treatment of employees. The term of the amended and restated services agreement will commence on the date the agreement is executed (which is expected to be the closing date of the First American Transaction) and terminate with respect to the applicable services as follows: (i) as to the First American business services (which include benefits costs, human resources systems, payroll system, and other general business services), two years from the effective date; (ii) as to the First Advantage mortgage services (which include the appointment of First American and its affiliates as the exclusive resellers of First Advantage’s credit products in the mortgage industry), two years from the effective date and then for additional successive two-year terms unless First American terminates with 60 days prior written notice to First Advantage; and (iii) as to all other services, one year from the effective date and then for successive 180-day periods unless either First American or First Advantage advises the other in writing no later than 30 days prior to the end of the current term that such services will not be extended. First Advantage is dependent on First American for a number of key services provided under the amended and restated services agreement, including the sale by First American of certain services of the CIG Business and related businesses to mortgage customers. First American’s interests with respect to such sales may differ from First Advantage’s interests. You are urged to read the section entitled “Amended and Restated Services Agreement” beginning on page61 and the copy of the form of the amended and restated services agreement attached hereto as Annex D. See also the description of certain risks associated with the amended and restated services agreement under “Risk Factors” beginning on page 1 and the potential risks associated with the services agreement considered by the special committee under “Reasons of the Special Committee for the First American Transaction” beginning on page 22.
Subordinated Promissory Note
At the closing of the First American Transaction, First Advantage will execute a $45 million unsecured subordinated promissory note in favor of First American substantially in the form attached as Annex E (which is referred to as the “promissory note”). First Advantage may borrow, repay and reborrow under the promissory note for up to and including 90 days following the date of the promissory note is executed (referred to as the “draw period”). The promissory note matures on the 135th day from and after the date it is executed and bears interest at the rate payable under First Advantage’s line of credit with Bank of America, N.A. plus 0.5% per annum. Proceeds of the note may only be used for working capital of the CIG Business. The promissory note contains customary default provisions. The promissory note will be subject to a subordination agreement between First American and Bank of America, which will be entered into at the same time as the promissory note. You are urged to read the section entitled “Subordinated Promissory Note” beginning on page 65and the copy of the form of the promissory note attached hereto as Annex E.
Outsourcing Agreement
At the closing of the First American Transaction, FARES and First Advantage will enter into an outsourcing agreement substantially in the form attached as Annex F (which is referred to as the “outsourcing agreement”). Under the outsourcing agreement, First Advantage agrees, and agrees to cause its affiliates, to manage and provide credit reports and related products and services to customers of RELS as required under existing service agreements with RELS until these service agreements terminate, RELS dissolves or ceases to exist, or FARES or one of its affiliates is no longer a member of RELS, whichever occurs first. The outsourcing agreement provides that FARES will pay to First Advantage all amounts paid to FARES pursuant to the terms of the three existing service agreements for services provided under these agreements by First Advantage after the effective date of the outsourcing agreement. In addition, FARES will pay to First Advantage an amount equal to FARES’s percentage of the pre-tax income of RELS derived from the sale of credit reports and related products and services by RELS. First Advantage expects to receive a significant amount of revenue under the outsourcing agreement. These revenues are dependent on the performance of RELS, which will continue to be managed and controlled by First American after the closing of the First American Transaction. In addition, the commercial arrangements under which RELS provides services and derives revenues are based on agreements with RELS’ single customer, which is the other member of RELS, whose interests may be different from and/or adverse to First Advantage, and these underlying arrangements are terminable with little or no notice. You are urged to read the section entitled “Outsourcing Agreement” beginning on page 66 and the copy of the form of outsourcing agreement attached hereto as Annex F. See also the description of certain risks associated with the outsourcing agreement under “Risk Factors” beginning on page 1 and the potential risks associated with the outsourcing agreement considered by the special committee under “Reasons of the Special Committee for the First American Transaction” beginning on page 22.
Poway Lease Agreement
At the closing of the First American Transaction, First Advantage and First American will enter into a lease agreement substantially in the form attached as Annex G (which is referred to as the “Poway lease agreement”), pursuant to which First Advantage will lease from First American certain land, buildings and a parking structure in Poway, California, which is near San Diego. The Poway lease agreement has a five year term, with a one-time option to renew for five years, and monthly rent of approximately $169,000. You are urged to read the section entitled “Poway Lease Agreement” beginning on page68 and the copy of the form of the Poway lease agreement attached hereto as Annex G.
Other Related Transaction Agreements
At the closing of the First American Transaction, other related agreements will be entered into, including:
Interests of Certain Persons in the First American Transaction
Certain of our officers, directors and stockholders have interests in the First American Transaction that differ from the interests of our stockholders generally, including the following:
Because of these interests and for other reasons, First Advantage’s board of directors formed a special committee of five members to evaluate the First American Transaction. See “Interests of Certain Persons in the First American Transaction” beginning on page 31.
The Certificate Amendment Proposal
First Advantage must amend its current certificate of incorporation to increase the number of authorized shares of Class B common stock in order to have enough authorized shares to issue to Newco in connection with the First American Transaction. In addition, because each share of Class B common stock is convertible into one share of Class A common stock, First Advantage is also required to increase the authorized shares of Class A common stock in the event a conversion were to occur, and First Advantage also desires to have additional shares available after the First American Transaction for general corporate purposes. First Advantage will not file the amendment to the certificate with the Secretary of State of the State of Delaware unless and until the First
American Transaction proposal is approved by the required vote of the stockholders. First Advantage intends to file the amendment as soon as practicable following approval of the First American Transaction proposal and the certificate amendment proposal by the stockholders. See “Proposal Number Two—Approval of the Certificate Amendment Proposal” beginning on page 94. In the event that the number of shares required to be issued in connection with the DealerTrack Earn-Out exceeds the authorized Class B shares, First Advantage may be required to amend its certificate of incorporation to increase further its authorized common stock.
First American has indicated that it intends to vote all the shares of Class B common stock controlled by it in favor of the certificate amendment proposal.
Recommendation of First Advantage’s Special Committee and Full Board of Directors With Respect to the Certificate Amendment Proposal
The special committee unanimously approved the certificate amendment proposal and unanimously recommended to the full First Advantage board of directors that it recommend the certificate amendment proposal. Our board of directors, after receiving the unanimous recommendation of the special committee, unanimously approved the certificate amendment proposal and recommends that you vote“FOR” approval of the certificate amendment proposal.
Other Proposals for First Advantage Stockholders
First Advantage stockholders are also being asked to consider two other proposals:
First American has indicated that it intends to vote all of the shares of our Class B common stock controlled by it in favor of the nominees named in the board election proposal and the incentive plan amendment proposal.
We will also consider any other business that may properly come before the meeting.
Recommendations of First Advantage’s Board of Directors With Respect to Other Proposals to be Voted on By First Advantage Stockholders
First Advantage’s board of directors unanimously recommends that you vote“FOR” the nominees for director named in this proxy statement and“FOR” the proposal to approve the incentive compensation plan amendments.
SUMMARY HISTORICAL FINANCIAL INFORMATION OF THE CIG BUSINESS
This selected financial information has been derived from the audited combined financial statements and accompanying notes of the CIG Business for the three-year period ended December 31, 2004, the unaudited combined financial statements of the CIG Business for the two-year period ended December 31, 2001 and for the three months ended March 31, 2005 and 2004. This information is only a summary and should be read in conjunction with the audited and unaudited financial statements and accompanying notes included in this proxy statement.
Three months ended: March 31, | Twelve months ended: December 31, | |||||||||||||||||||||
2005 | 2004 | 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
Income Statement Data: | ||||||||||||||||||||||
Service revenue | $ | 66,345,000 | $ | 62,452,000 | $ | 242,812,000 | $ | 244,806,000 | $ | 208,521,000 | $ | 188,547,000 | $ | 144,858,000 | ||||||||
Other income | 1,612,000 | 2,143,000 | 7,392,000 | 9,060,000 | 9,654,000 | 5,192,000 | 1,533,000 | |||||||||||||||
Total revenue | 67,957,000 | 64,595,000 | 250,204,000 | 253,866,000 | 218,175,000 | 193,739,000 | 146,391,000 | |||||||||||||||
Cost of service revenue | 23,499,000 | 22,200,000 | 85,573,000 | 81,970,000 | 66,581,000 | 64,741,000 | 53,397,000 | |||||||||||||||
Gross margin | 44,458,000 | 42,395,000 | 164,631,000 | 171,896,000 | 151,594,000 | 128,998,000 | 92,994,000 | |||||||||||||||
Operating expenses | 26,142,000 | 27,032,000 | 111,818,000 | 118,471,000 | 106,871,000 | 98,367,000 | 74,784,000 | |||||||||||||||
Income from operations | 18,316,000 | 15,363,000 | 52,813,000 | 53,425,000 | 44,723,000 | 30,631,000 | 18,210,000 | |||||||||||||||
Other income (expense) | 458,000 | (121,000 | ) | 2,064,000 | 13,132,000 | 11,000 | 28,000 | 48,000 | ||||||||||||||
Income before income taxes | 18,774,000 | 15,242,000 | 54,877,000 | 66,557,000 | 44,734,000 | 30,659,000 | 18,258,000 | |||||||||||||||
Provision for income taxes | 7,815,000 | 6,266,000 | 22,477,000 | 31,023,000 | 18,340,000 | 13,712,000 | 7,668,000 | |||||||||||||||
Net income | $ | 10,959,000 | $ | 8,976,000 | $ | 32,400,000 | $ | 35,534,000 | $ | 26,394,000 | $ | 16,947,000 | $ | 10,590,000 | ||||||||
Balance Sheet Data: | ||||||||||||||||||||||
Total assets | $ | 195,699,000 | $ | 183,279,000 | $ | 171,912,000 | $ | 182,786,000 | $ | 167,093,000 | $ | 171,145,000 | $ | 91,913,000 | ||||||||
Long-term debt | $ | 456,000 | $ | 912,000 | $ | 570,000 | $ | 1,026,000 | $ | — | $ | — | $ | 17,000 | ||||||||
Stockholders’ equity | $ | 155,143,000 | $ | 135,437,000 | $ | 129,747,000 | $ | 129,660,000 | $ | 129,816,000 | $ | 138,947,000 | $ | 78,350,000 |
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited combined financial information has been prepared to give effect to the acquisition of the CIG Business by First Advantage. The acquisition of the CIG Business by First Advantage is a transaction between businesses under the common control of First American. In acquisitions of businesses under common control, the acquiring company generally records acquired assets and liabilities at historical cost. Historical income statements of the acquirer are restated to include operations of the acquired business at historical cost assuming the acquisition was completed at the beginning of the respective period. The unaudited combined financial information for the five years ended December 21, 2004 and the three months ended March 31, 2005 and 2004 include the historical results of operations for First Advantage and the historical operating results for the CIG Business.
The unaudited pro forma combined financial information is presented for illustrative purposes only and are not necessarily indicative of the consolidated financial position or consolidated results of operations of First Advantage that would have been reported had the First American Transaction occurred on the dates indicated, nor do they represent a forecast of the consolidated financial position of First Advantage at any future date or the consolidated results of operations for any future period. Furthermore, no effect has been given in the unaudited pro forma combined statements of operations for synergistic benefits or cost savings that may be realized through the combination of First Advantage and the CIG Business. The unaudited pro forma combined financial information should be read in conjunction with the historical financial statements and related notes and management’s discussion and analysis of financial condition and results of operations of the CIG Business included in this proxy statement and the historical financial condition and results of operations and related notes of First Advantage incorporated by reference in this proxy statement.
Three months ended: March 31, Twelve months ended: December 31, Income Statement Data: Service revenue Other income Reimbursed government fee revenue Total revenue Cost of service revenue Government fees paid Total cost of service Gross margin Operating expenses Impairment loss Income from operations Other (expense) income Income before income taxes Provision for income taxes Net income Per Share Information: Net income Basic Diluted Weighted average shares Basic Diluted Balance Sheet Data: Total assets Long-term debt Stockholders’ equity 2005 2004 2004 2003 2002 2001 2000 $ 126,493,000 $ 108,411,000 $ 464,750,000 $ 379,716,000 $ 281,561,000 $ 234,379,000 $ 180,088,000 1,612,000 2,143,000 7,392,000 9,060,000 9,654,000 5,192,000 1,533,000 12,216,000 11,474,000 44,599,000 31,585,000 27,885,000 3,350,000 3,352,000 140,321,000 122,028,000 516,741,000 420,361,000 319,100,000 242,921,000 184,973,000 37,833,000 36,181,000 146,457,000 120,124,000 84,115,000 76,021,000 61,173,000 12,216,000 11,474,000 44,599,000 31,585,000 27,885,000 3,335,000 3,352,000 50,049,000 47,655,000 191,056,000 151,709,000 112,000,000 79,356,000 64,525,000 90,272,000 74,373,000 325,685,000 268,652,000 207,100,000 163,565,000 120,448,000 65,351,000 57,688,000 252,192,000 208,526,000 157,876,000 133,375,000 101,640,000 — — — 1,739,000 — — — 24,921,000 16,685,000 73,493,000 58,387,000 49,224,000 30,190,000 18,808,000 (590,000 ) (341,000 ) (173,000 ) 13,019,000 (159,000 ) (154,000 ) (233,000 ) 24,331,000 16,344,000 73,320,000 71,406,000 49,065,000 30,036,000 18,575,000 10,145,000 6,729,000 30,239,000 33,069,000 19,969,000 13,653,000 7,934,000 $ 14,186,000 $ 9,615,000 $ 43,081,000 $ 38,337,000 $ 29,096,000 $ 16,383,000 $ 10,641,000 $ 0.28 $ 0.20 $ 0.87 $ 0.80 N/A N/A N/A $ 0.28 $ 0.20 $ 0.86 $ 0.80 N/A N/A N/A 51,098,973 48,960,100 49,711,384 48,065,731 N/A N/A N/A 51,379,983 49,151,010 50,035,519 48,202,464 N/A N/A N/A $ 636,297,000 $ 501,218,000 $ 603,265,000 $ 466,686,000 $ 332,348,000 $ 234,959,000 $ 120,358,000 $ 92,494,000 $ 27,460,000 $ 86,480,000 $ 14,499,000 $ 651,000 $ 1,159,000 $ 2,278,000 $ 446,391,000 $ 386,206,000 $ 416,515,000 $ 369,996,000 $ 275,718,000 $ 192,021,000 $ 96,842,000
The First American Transaction involves a number of risks. In addition to the other information included and incorporated by reference in this proxy statement, including the matters addressed in the “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 6, you should carefully consider the following risks before deciding how to cast your vote on the First American Transaction proposal and the certificate amendment proposal. In addition, you should read and consider the other risks associated with First Advantage, which can be found in First Advantage’s Annual Report on Form 10-K for the year ended December 31, 2004, which has been filed with the SEC and is incorporated by reference into this proxy statement. You should also read and consider the other information in this proxy statement and the documents incorporated by reference into this proxy statement. Additional risks and uncertainties not presently known to First Advantage or that are not currently believed to be important also may adversely affect the First American Transaction.
Risks Related to the First American Transaction
The integration of the CIG Business and related businesses following the First American Transaction will be difficult and may result in a failure to realize some or all of the anticipated potential benefits in a timely manner.
The integration of the CIG Business and related businesses into the operations of First Advantage and its subsidiaries involves the integration of several businesses that previously operated within First American. We cannot assure you that First Advantage will be able to integrate the operations of the CIG Business and related businesses without encountering difficulties. Any difficulty in integrating the operations of the CIG Business and related businesses successfully could have a material adverse effect on the business, financial condition, results of operations or prospects of First Advantage, and could lead to a failure to realize or delay in realizing the anticipated benefits of the First American Transaction. Moreover, First Advantage’s management will be required to dedicate substantial time and effort to the integration of the CIG Business and related businesses. During the integration process, these efforts could divert management’s focus and resources from other strategic opportunities and operational matters.
We may not realize the expected benefits from the First American Transaction.
We anticipate that First Advantage will realize certain benefits as a result of the First American Transaction, including allowing us to enter new vertical markets with cross-sell potential, raise additional capital, increase debt capacity, complete larger acquisitions and realize cost synergies. However, we cannot predict with certainty whether or when these benefits will occur or be achieved. Realization of any benefits could be affected by a number of factors beyond our control, including general economic conditions, increased operating costs due to unrelated factors, the response of our competitors to the First American Transaction, regulatory developments, inability to realize cost synergies and increase in competition.
We will incur significant costs relating to the First American Transaction that could have a material adverse effect on our operating results.
We anticipate that First Advantage will incur costs in excess of $3.5 million in connection with the First American Transaction and the integration of the CIG Business and related businesses into our existing operations. These expenses may have a material adverse effect on our operating results in the period in which they are recorded. We cannot assure you that any of the benefits that we expect to realize as a result of the First American Transaction will offset these expenses.
We will be entering into a new line of business with which our management may not be familiar and which may require substantial management resources.
After the First American Transaction, our range of products and services, scope of operations, competitors and suppliers will be significantly different from those in place before the First American Transaction.
Accordingly, after the First American Transaction, our results of operations and prospects, as well as the market price for our Class A common stock, may be affected by factors that are different from those that have historically affected us, including the impact of general economic conditions in the mortgage business, interest rates, and the fact that when the United States’ economy is weak, the demand for the products associated with the CIG Business and related businesses historically decreases. Our management may not be able to manage these differences and risks effectively. In addition, we will be succeeding to numerous contracts and arrangements in market segments and with counterparties with which we are not familiar. Effective management of these contracts and arrangements in new markets may require substantial time and resources. If we are not able to effectively manage these challenges, our results of operations and/or the market price of our Class A common stock may be materially adversely affected.
Failure to complete the First American Transaction could adversely impact the market price for our Class A common stock as well as our business and operating results.
If the First American Transaction is not completed for any reason, the market price of our Class A common stock may decline to the extent that the market price reflects positive market assumptions concerning the First American Transaction and the related benefits that could be realized. We could also be subject to additional risks if the First American Transaction is not completed, including the impact of costs associated with the transaction, such as legal, accounting, filing, financial advisory and printing costs which must be paid regardless of whether the First American Transaction is completed and potential disruption of our business and the distraction of our management and workforce.
The historical financial information of the CIG Business and the pro forma combined financial information may not reflect the results of the CIG Business if it had been operated independently of First American and, accordingly, may not be a reliable indicator of historical or future results.
The CIG Business is currently integrated within First American and its operations. Consequently, the financial information regarding the CIG Business included in this proxy statement has been derived from the consolidated financial statements and accounting records of First American and reflects assumptions and allocations made by management of First American and the CIG Business. The historical financial position, results of operations and cash flows of the CIG Business presented in this proxy statement, as well as the pro forma combined information for the CIG Business and First Advantage, may be different from those that would have resulted had the CIG Business been operated independently and the historical financial information for the CIG Business and on a pro forma combined basis may not be reliable indicators of future results.
As a result of the First American Transaction, the current holders of our Class A common stock will be diluted by the issuance of additional shares of Class B common stock to Newco.
As of the date of this proxy statement, the holders of our Class A common stock (other than First American) own approximately 33% of our outstanding common stock and approximately 5% of the voting power of First Advantage. Immediately following completion of the First American Transaction (but without taking into account the DealerTrack Earn-Out), the current holders of First Advantage’s Class A common stock will own, on a pro forma basis, approximately 15% of our outstanding common stock and approximately 2% of the voting power of First Advantage. The closing of the First American Transaction therefore will result in substantial additional dilution of the ownership percentage of the holders of our Class A common stock and will result in First American controlling, directly or indirectly, on a pro forma basis approximately 85% of our issued and outstanding capital stock and approximately 98% of the voting power of First Advantage.
The DealerTrack Earn-Out, if triggered, will result in further dilution of our Class A common stock.
If DealerTrack consummates an initial public offering within two years after the closing of the First American Transaction and the value of the DealerTrack Interest exceeds $50 million, the DealerTrack Earn-Out will be triggered and we will be required to issue additional shares of Class B common stock to Newco. This will
result in a further dilution of the percentage of our outstanding common stock owned by stockholders other than First American and its subsidiaries. We cannot ascertain at this time how many shares we will have to issue if the DealerTrack Earn-Out is triggered and there is no cap on the number of shares we may be required to issue.
The number of shares of Class B common stock to be issued in connection with the First American Transaction is not subject to adjustment if the per share price of our Class A common stock is greater than $20.50 per share, which could result in First Advantage paying a higher value for the CIG Business and related businesses than anticipated at the time the First American Transaction was first announced.
The First American and FARES contribution agreements require First Advantage to issue at closing a fixed number of shares of Class B common stock to Newco in exchange for the assets of the CIG Business, the DealerTrack Interest, Bar None and the XRES Business. The number of shares to be issued was negotiated on an arms length basis and is based on a fixed price per share of $20.50. The number of shares of our Class B common stock to be issued to Newco will not be adjusted upwards or downwards based upon changes in the market price for our Class A common stock or other factors. Because each share of Class B common stock is convertible into one share of Class A common stock, if the price of our Class A common stock increases, then we could be issuing to Newco shares of Class B common stock with a value that is greater than the aggregate value that was used at the time the First American Transaction was first announced. (On the other hand, if the price of our Class A common stock decreases, then we could be issuing to Newco shares of Class B common stock with a value that is less than the aggregate value that was used at the time the First American Transaction was first announced.) Neither First Advantage nor First American and its subsidiaries have the right to terminate the master transfer agreement solely because of changes in the market price of our Class A common stock. As a result, we cannot assure you of the actual aggregate value of shares of Class B common stock we will issue to Newco at the closing of the First American Transaction or whether the aggregate value will be greater or less than the valuation assumed at the time the First American Transaction was first announced.
Some of the directors and officers of First Advantage may have interests in the First American Transaction that are different from, and in addition to, the interests of the holders of our Class A common stock (other than First American and its affiliates)
In considering the recommendation of First Advantage’s board of directors to vote to approve the First American Transaction and the amendment to First Advantage’s certificate of incorporation, First Advantage stockholders should be aware of potential conflicts of interest of, and of the benefits available to, some of First Advantage’s stockholders, directors and officers. These stockholders, directors and officers may have interests in the First American Transaction that are different from, or in addition to, the interests of First Advantage stockholders as a result of the First American Transaction. You should read “Interests of Certain Persons in the First American Transaction” beginning on page 31 for a more complete description of these potential interests and benefits.
After the consummation of the First American Transaction, First Advantage will be dependent on First American for additional key services.
Currently, First Advantage is dependent upon First American for a number of key services, described in “Certain Relationships and Related Transactions” beginning on page 117. After the consummation of the First American Transaction, First Advantage will be dependent on First American for additional key services, including First American and its affiliates being the exclusive resellers of credit reports and related services compiled by the CIG Business to the mortgage market. First American has agreed to provide these services for only a limited period of time, and there is no guarantee that First American will continue to provide these services to First Advantage following the expiration of the term of the applicable service under the amended and restated services agreement, or continue the price or other terms on which First American might be willing to do so. In addition, since the sale of CIG Business reports and services in the mortgage industry will be made exclusively by First American, the sale of these reports and services will be in accordance with the terms of the
amended and restated services agreement, and there can be no assurances as to the future amount of such sales or level of services beyond the term or in excess of the levels required under the amended and restated services agreement.
After the consummation of the First American Transaction, First Advantage expects to receive a significant amount of revenue under an outsourcing agreement with First American.
The revenues that may in the future be received under the outsourcing agreement with First American described under “Other Transaction Documents—Outsourcing Agreement” beginning on page 66 are dependent upon the performance of RELS, an entity that after the transaction will continue to be managed and controlled by First American, and thus are beyond the control of First Advantage. The commercial arrangements under which RELS provides services and it derives revenues are based on agreements with RELS’ single customer, which is the other member of RELS, whose interests may be different from and/or adverse to First Advantage. These underlying arrangements are terminable with little or no notice. Accordingly, there can be no assurances as to revenues, if any, that may in the future be received by First Advantage under the outsourcing agreement. The loss of such revenues could be material to First Advantage.
Risks Related to the CIG Business
The CIG Business and First Advantage, respectively, may be adversely effected by recent high-profile events involving data theft at a number of information services companies.
Several information services companies that are competitors of the CIG Business and First Advantage have recently been involved in high-profile events involving data theft. These incidents or similar data theft incidents in the future could impact the CIG Business and First Advantage. Given the differences between First Advantage and the CIG Business, the nature and magnitude of this impact could be materially different on First Advantage and the CIG Business and the risk of these events to First Advantage may be increased after completion of the First American Transaction because of its ownership of the CIG Business. In particular, these events could result in increased legal and regulatory scrutiny of the industry in general and specific information services companies in particular and changes in federal, state and local laws and regulations in the United States designed to protect the public from the misuse of personal information in the marketplace. Changes in the laws and adverse publicity or potential litigation concerning the commercial use of such information may affect the CIG Business’ and First Advantage’s operations and could result in substantial regulatory compliance expense, litigation expense and a loss of revenue.
A substantial portion of the CIG Business is related to the level of borrowing activity in the United States, and the levels of these activities have historically been sensitive to changes in interest rates.
Demand for a substantial portion of the CIG Business’ products generally decreases as the number of lending transactions in which the CIG Business’ products are purchased decreases. Management of the CIG Business has found that the number of lending transactions in which the CIG Business’ products are purchased decreases when:
First Advantage believes that this trend could continue when these factors occur.
Key employees of the CIG Business and/or First Advantage might not remain with First Advantage following completion of the First American Transaction.
First Advantage is entering into the First American Transaction for a number of reasons, including the addition of the CIG Business’ management team to First Advantage. In particular, Mr. Anand Nallathambi will
become First Advantage’s president following the closing of the transaction. First Advantage, however, is not entering into employment or other retention agreements with any of the members of the CIG Business’ management. Accordingly, we cannot assure you that Mr. Nallathambi or other key employees of the CIG Business will remain with First Advantage after completion of the transaction or for a significant period of time following completion of the transaction. If key CIG Business employees are not retained by First Advantage, we may experience substantial disruption in the CIG Business and the loss of key management personnel or other key employees may adversely affect our ability to manage our overall operations and successfully implement our business strategy.
Essential suppliers to the CIG Business also compete with certain operations of the CIG Business; this competition may put the CIG Business at a competitive disadvantage.
A substantial proportion of the revenue of the CIG Business is derived from the resale to end users of credit reports provided exclusively by the three repositories of credit information in the United States. In certain transactions, such as those involving the resale of residential property, end users require the CIG Business to provide a credit report derived from merged information supplied by all three repositories. These repositories also sell credit reports directly to end users. There can be no assurance that a credit repository will not attempt to gain a competitive advantage over the CIG Business by increasing the price it charges the CIG Business for credit reports or by selling credit reports to end users at a lower price than the CIG Business can offer. Such practices may make the credit report products of the CIG Business less profitable or less attractive to end-users and, thus, may have a material adverse effect on the results of operations or financial condition of the CIG Business.
We may be subject to increased regulation regarding the use of personal information.
The CIG Business is highly regulated, as described in “Information about the CIG Business - Governmental Regulation” beginning on page 13. Although we have been informed that compliance with existing federal, state and local laws and regulations has not had a material adverse effect on the CIG Business’ results of operations or financial condition to date, compliance with federal, state and local laws and regulations in the United States that relate to the operation of the CIG Business may affect First Advantage’s operations and could result in substantial regulatory compliance expense, litigation expense and a loss of revenue.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement contains “forward-looking statements.” These forward-looking statements are based on estimates and assumptions made by management of First Advantage, and take into account only the information available at the time the forward-looking statements are made. Although we believe our estimates and assumptions are and will be reasonable, forward-looking statements involve risks, uncertainties and other factors that could cause our actual results to differ materially from those suggested in the forward-looking statements. Forward-looking statements include the information concerning future financial performance, anticipated benefits of the First American Transaction, business strategy, projected plans and objectives of First Advantage, prospective products, sales and marketing efforts, costs and expenses, liquidity, cost savings and the other forward-looking statements contained in this proxy statement, including:
Forward-looking statements are subject to numerous risks and uncertainties. The following are some important factors that could cause First Advantage’s actual results to differ materially from those in forward-looking statements:
First Advantage’s actual results, performance or achievement could differ materially from those expressed in, or implied by, forward-looking statements and, 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 so, what impact they will have on the results of operations and financial condition of First Advantage. The forward-looking statements speak only as of the date they are made. First Advantage does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.
ANNUAL MEETING OF FIRST ADVANTAGE STOCKHOLDERS
We are furnishing this proxy statement to First Advantage stockholders as part of the solicitation of proxies by our board of directors for use at the annual meeting of stockholders. On or about August 11, 2005 we began sending the attached notice of annual meeting, this proxy statement, and the enclosed proxy card to all holders of record of our Class A and Class B common stock entitled to receive such materials and vote.
The annual meeting will be held at the Renaissance Vinoy Resort, located at 501 Fifth Avenue, St. Petersburg, Florida 33701, on September 13, 2005 at 9:00 a.m. Eastern Time, and at any adjournments thereof.
At the annual meeting, you will be asked to consider and vote upon the following proposals:
1. To consider and vote on approval of the amended and restated master transfer agreement, dated as of June 22, 2005, among The First American Corporation, First American Real Estate Information Services, Inc., First American Real Estate Solutions, LLC, FADV Holdings LLC and First Advantage Corporation and related agreements which First Advantage will enter into with The First American Corporation and/or its subsidiaries in connection with the closing of the transactions contemplated by the master transfer agreement, and the transactions contemplated by the master transfer agreement and related agreements, including the following:
2. To consider and vote on the approval of the adoption of an amendment to our certificate of incorporation to increase the number of authorized shares of Class A common stock from 75,000,000 to 125,000,000 and to increase the number of authorized shares of Class B common stock from 25,000,000 to 75,000,000;
3. To elect our board of directors to serve until our annual meeting of stockholders to be held in 2006, or such later time as their successors may be elected and are qualified;
4. To consider and vote on the approval of the adoption of an amendment to the First Advantage Corporation 2003 Incentive Compensation Plan to increase the number of shares available for grant by 4,000,000 shares to a total of 7,000,000 shares, as well as other amendments to the plan described in this proxy statement; and
5. To transact such other business as may properly come before the meeting.
Record Date and Stock Entitled to Vote
Our board of directors has fixed the close of business on August 9, 2005 as the record date for determining the holders of our Class A and Class B common stock entitled to notice of the meeting, as well as for determining the holders of our Class A and Class B common stock entitled to vote at the meeting.
A quorum of stockholders is necessary to hold a valid meeting. A majority of the outstanding shares of Class A and Class B common stock on the Record Date taken as a whole, present in person or represented by proxy at the beginning of the annual meeting, constitutes a quorum. If you have returned a properly signed proxy card, you will be considered present at the meeting and counted in determining the presence of a quorum. Shares represented by proxies that withhold authority to vote for a nominee for election as a director or that reflect abstentions or “broker non-votes” (i.e., shares represented at the meeting held by brokers or nominees and to which (i) instructions have not been received from the beneficial owners or persons entitled to vote and (ii) the broker or nominee does not have the discretionary voting power on a particular matter)will be treated as shares that are present for purposes of determining the presence of a quorum. Abstentions and broker non-votes will not otherwise affect the voting, except with respect to the certificate amendment proposal, which requires a majority of the outstanding shares of Class A common stock and Class B common stock (such that an abstention or broken non-vote will have the same effect as a vote against the proposal). Shares held by First American and its affiliates, officers and directors and our management and interested directors will be counted in determining the presence of a quorum.
Because First American owns more than half of our outstanding common stock and is expected to be present or represented by proxy at the annual meeting, we anticipate that a quorum will be present. If a quorum is not present at the annual meeting, we expect that the annual meeting will be adjourned or postponed to solicit additional proxies.
The voting requirement is different for each proposal.
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Q: | Who counts the votes cast at the annual |
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Voting, Revocation and Solicitation of Proxies
You can vote on matters that come before the meeting in two ways:
All shares of First Advantage’s common stock represented by properly executed proxies received in time for the annual meeting will be voted at the annual meeting in the manner specified by First Advantage’s stockholders giving those proxies. Properly executed proxies that do not contain voting instructions will be voted for the First American Transaction proposal, the certificate amendment proposal and the incentive plan amendment proposal and for the director nominees named in this proxy statement.
If you plan to attend the annual meeting and wish to vote in person, you will be given a ballot at the annual meeting. Please note, however, that if your shares are held in “street name,” which means your shares are held of record by a broker, bank or other nominee, and you wish to vote at the annual meeting, you must bring to the annual meeting a proxy from the record holder of the shares authorizing you to vote at the annual meeting.
Any person giving a proxy pursuant to this solicitation has the power to revoke it at any time before it is voted. It may be revoked by filing with the Secretary of First Advantage at our principal executive office, One Progress Plaza, Suite 2400, St. Petersburg, Florida, 33701, a written notice of revocation or a duly executed proxy bearing a later date, or it may be revoked by attending the meeting and voting in person. Attendance at the annual meeting will not, by itself, revoke a proxy. Revoking a proxy and failing to subsequently vote in person or by a later proxy will result in a non-vote.
First Advantage will bear the entire cost of solicitation of proxies, including preparation, assembly, printing and mailing of this proxy statement, the proxy card and any additional information furnished to stockholders. Copies of solicitation materials will be furnished to banks, brokerage houses, fiduciaries and custodians holding in their names shares of common stock beneficially owned by others to forward to such beneficial owners. First Advantage may reimburse persons representing beneficial owners of common stock for their costs of forwarding solicitation materials to such beneficial owners. Original solicitation of proxies by mail may be supplemented by contact in person, by telephone, via e-mail or by facsimile by directors, officers or other regular employees of First Advantage. No additional compensation will be paid to directors, officers or other regular employees for such services.
Whether or not you plan to attend the annual meeting in person, we urge you to fill in and sign the enclosed proxy card or instruction card and return it promptly.
Abstentions and Broker Non-Votes
Shares of First Advantage common stock held by persons attending the annual meeting but not voting, and shares of First Advantage common stock for which First Advantage has received proxies but with respect to which holders of those shares have abstained from voting, will be counted as present at the annual meeting for purposes ofelection’s duties include determining the presence or absence of a quorum for the transaction of business at the annual meeting.
Shares represented by proxies that reflect a broker “non-vote” will be counted for purposes of determining whether a quorum exists. A broker “non-vote” occurs when a nominee holding shares for a beneficial owner has not received instructions from the beneficial owner and does not have discretionary authority to vote the shares.
First Advantage does not expect that any matter other than the proposals presented in this proxy statement will be brought before the annual meeting. However, if other matters are properly presented at the annual meeting or any adjournment or postponement of the annual meeting, but we did not receive notice of the proposala reasonable time before we mail this proxy statement, we will exercise discretionary authority (granted under SEC rules) to vote proxies we receive with respect to such proposals. Under the laws of the State of Delaware, no business may be raised at the annual meeting unless proper notice to the First Advantage stockholders has been given. For further information, see “General Information—Stockholder Proposals” beginning on page 133.
Adjournments may be made for the purpose of reconvening the stockholders meeting to permit a vote to be taken to approve the proposals described in this proxy statement, but not for the purpose of soliciting additional proxies. An adjournment may be made from time to time by approval of the holders of shares representing a majority of the votes present in person or by proxy at the annual meeting, whether or not a quorum exists, without further notice other than by an announcement made at the annual meeting. If the adjournment is for more than 30 days, a notice of the adjourned meeting will be given to each stockholder entitled to vote at the meeting.
PROPOSAL NUMBER ONE
APPROVAL OF THE FIRST AMERICAN TRANSACTION, INCLUDING
ISSUANCE OF SHARES IN CONNECTION THEREWITH
The board of directors of First Advantage, based on the recommendation of the special committee and the opinion of the financial advisor to the special committee described below, has unanimously approved the First American Transaction, including the issuance of shares of Class B common stock of First Advantage to Newco in connection therewith and the master transfer agreement and related agreements.
First Advantage is submitting the First American Transaction for approval of the stockholders in accordance with First Advantage’s listing agreement with Nasdaq National Market System, which, among other things, generally requires stockholder approval of a transaction or series of transactions which involve the acquisition of assets or stock of another company in which any First Advantage director, officer or substantial stockholder directly or indirectly has a 5% or greater interest in the stock or assets to be acquired or in which the consideration to be paid in the transaction and the present or potential issuance of shares could result in an increase in outstanding common shares of voting power of 5% of more. In addition, approval of the First American Transaction, including the issuance of our Class B common shares and approval of the master transfer and related agreements, by our stockholders is a condition to closing under the master transfer agreement.
The affirmative vote of the holders of a majority of the shares of our Class A common stock (without giving effect to any shares of common stock held by First American and its affiliates, Donald Robert or our management) and the affirmative vote of the holders of a majority of our shares of common stock (giving effect to all shareholdings) present in person or by proxy is necessary to approve the First American Transaction.
Pequot Private Equity Fund II, L.P., the largest Class A common stockholder, which owns approximately 28% of our Class A common stock, has indicated that it will vote all of the shares of Class A common stock that it owns in favor of approval of the First American Transaction. Mr. Lawrence D. Lenihan, Jr., a member of the special committee, is the managing general partner and co-head of this company.
THE BOARD RECOMMENDS THAT YOU VOTE “FOR” APPROVAL OF THE FIRST AMERICAN TRANSACTION.
INFORMATION ABOUT THE CIG BUSINESS
The CIG Business, which comprises the credit information segment of First American, operates through four primary businesses: First American CREDCO, currently a division of FARES (“First American CREDCO”), First American Membership Services(“Membership Services”), Teletrack and First American Credit Management Solutions (“CMSI”).
First American CREDCO helps thousands of mortgage lenders, automotive dealers and other companies in the United States assess the credit risk of individuals through the provision of credit reports and related products and services. First American CREDCO resells credit information purchased from the three United States repositories of credit information, Equifax, Experian and Trans Union. This credit information is packaged by First American CREDCO into single bureau reports and merged credit reports. Single bureau reports involve the receipt, formatting and delivery of credit information from the databases of one of the repositories. First American CREDCO’s merged credit reports require additional steps, in particular the receipt of credit information from at least two of the three repositories and the merging and duplication elimination of the
information received. First American CREDCO’s reports also may include other information, such as fraud and OFAC alerts as well as FICO credit scores. First American CREDCO is the largest reseller of credit reports in the United States and the largest provider of merged credit reports to the mortgage and automotive finance industries. First American CREDCO accounted for approximately 78% of the CIG Business’s revenue in 2004.
Membership Services provides credit reports and credit monitoring services directly to consumers through its retail and other marketing partners. In addition, Membership Services provides and manages third party products and administrative services to these partners, which include major financial institutions and retail websites. Membership Services accounted for approximately 9% of the CIG Business’s revenue in 2004.
We believe that Teletrack is the largest provider of credit information on sub-prime consumers in the United States based upon the number of reports issued. Drawing on its proprietary databases of credit and other information culled from merchants which cater to sub-prime consumers and the public record, Teletrack assembles and delivers credit reports to a variety of businesses, including pay-day loan and check-advance stores, sub-prime consumer finance companies, rent-to-own retailers, sub-prime credit card issuers and similar types of creditors. Teletrack accounted for approximately 8% of the CIG Business’s revenue in 2004.
CMSI provides software and services which allow customers to automate the credit decision process, including data entry, credit report retrieval, application of credit scoring models, application of lending policies, booking of loans and related administrative functions. CMSI’s products also permit lenders to monitor their lending practices to ensure compliance with internal and regulatory requirements. CMSI’s customers include major financial institutions, student loan lenders and other lending institutions. CMSI accounted for approximately 5% of the CIG Business’s revenue in 2004.
The demand for First American CREDCO’s products is sensitive to changes in interest rates. Generally when interest rates increase consumer borrowing decreases, resulting in reduced demand for credit reports and related products. In addition, demand for mortgage and automotive credit reports tends to decline slightly toward year-end, when historically mortgage and automotive financing transactions have decreased. CMSI and Membership Services have historically experienced little seasonal variance in their businesses.
The CIG Business grew out of First American’s acquisition in 1994 of California Credit Data, Inc. and Prime Credit Reports, Inc., which it combined with its Metropolitan Credit Reporting Services, Inc. and Metropolitan Property Reporting Services, Inc. subsidiaries. The following year, First American significantly expanded its credit operations with the acquisition of CREDCO, Inc. In 1998, First American contributed the companies then constituting its credit information business to FARES, a joint venture with Experian. These companies were later merged with FARES, with the credit operations continuing to function as a division of the joint venture.
In 1999, First American acquired Teletrack and in 2001 purchased Credit Management Solutions, Inc., a publicly traded corporation which was subsequently renamed First American Credit Management Solutions, Inc. In that transaction, First American also acquired a subsidiary corporation, Credit Online, Inc., a provider of software and services which connects credit originators, such as automobile dealers, with funding sources. In early 2003, First American sold Credit Online to DealerTrack in a stock for stock transaction. In 2000, First American formed Membership Services.
In March 2005, the CIG Business purchased the XRES Business. Two months later, the CIG Business increased the services it offers to the automobile industry through the acquisition of Bar None, which provides automobile dealerships with credit-based lead generation services, with an emphasis on identifying credit impaired consumers in need of automobile financing. These two businesses are also being contributed to First Advantage as part of the First American Transaction.
Generally, the products and services offered by the CIG Business do not require governmental approvals; however, the CIG Business’s (including XRES Business’s and Bar None’s) credit report related products and services are subject to various federal and state regulations. For example, the Fair Credit Reporting Act, the Fair and Accurate Credit Transactions Act, the Graham-Leach-Bliley Act and similar federal and state laws regulate the disclosure and use of the personal information that may be included in these products and services.
The CIG Business employs approximately 800 people.
Organizational Structure of the CIG Business and Related Businesses Prior to the First American Transaction
The following diagram illustrates the companies and assets that currently comprise the CIG Business and the related businesses being contributed to First Advantage. As further described in “Master Transfer Agreement” beginning on page 33, prior to the closing of the First American Transaction, First American, FAREISI and FARES each will contribute to Newco all of the companies and assets that they own that comprise the CIG Business and the related businesses (together with associated liabilities). At the closing of the First American Transaction, Newco will contribute all of the assets and companies that it owns that comprise the CIG Business and the related businesses (together with associated liabilities) to First Advantage or its wholly-owned subsidiary.
STRUCTURE OF THE FIRST AMERICAN TRANSACTION
The master transfer agreement and related agreements provide for the following actions to occur at the closing of the First American Transaction:
As a result of the contributions, the CIG Business, the DealerTrack Interest, Bar None and the XRES Business will become part of the business and operations of First Advantage or its wholly-owned subsidiary. At the time of the closing, the companies comprising the CIG Business (other than the CREDCO Division) and their respective subsidiaries are required to have cash and cash equivalents of $1.95 million or more and the CREDCO Division is required to have cash or cash equivalents of $3.05 million or more.
The following diagram illustrates the First American Transaction in general terms and is not comprehensive. For a more complete description of the First American Transaction, see “Master Transfer Agreement” beginning on page 33 and “Other Transaction Documents” beginning on page 44.
In connection with the closing of the First American Transaction, First Advantage and First American will enter into several agreements that relate to the transfer of the CIG Business and the related businesses to First Advantage, including:
First Advantage will be obligated to issue additional shares of Class B common stock to Newco in the future if DealerTrack consummates an initial public offering of its stock on or prior to the second anniversary of the closing of the First American Transaction and the value of the DealerTrack Interest exceeds $50 million. If DealerTrack completes an IPO within 180 days of the closing of the First American Transaction, the number of shares to be issued will be equal to the quotient of (x) 50% of the amount by which the value of the DealerTrack Interest exceeds $50 million (based on the average closing price per share of DealerTrack’s stock over the 60 business day period beginning on the fifth business day after the completion of its initial public offering),divided by (y) $20.50. If the DealerTrack IPO occurs after the 180-day period following the closing of the First American Transaction (but prior to the second anniversary thereof), the number of additional Class B common shares we must issue to Newco will be equal to the quotient of (x) 50% of the amount by which the DealerTrack Interest exceeds $50 million (based on the average closing price per share of DealerTrack’s stock over the 60 business day period beginning on the fifth business day after its initial public offering),divided by (y) the average closing price per share of First Advantage’s Class A common stock during the 30 trading day period ending on the third trading day prior to the date of DealerTrack’s IPO, except that the minimum price per share will be $20.50.
See “Other Transaction Documents—First American Contribution Agreement” beginning on page 44.
First Advantage cannot determine the maximum number of Class B shares that may be issued to Newco in connection with the DealerTrack Earn-Out because the final number of shares to be issued to Newco will depend on a number of factors, which cannot be ascertained at this time including:
The following table includes examples of the calculation of the number of Class B common shares that may be issued in connection with the DealerTrack Earn-Out assuming that DealerTrack completes an IPO after the 180-day period following the closing of the First American Transaction but prior to the second anniversary thereof. If DealerTrack completes an IPO during the initial 180 day period, the first line of the table below illustrates the number of shares that would be issued, because in that case the denominator in the formula is always $20.50.
Example of Number of First Advantage Shares Issued Pursuant to DealerTrack Earn-Out
(IPO After Initial 180-Day Period)
Value of DealerTrack Interest (in millions) | ||||||||||||||
50.0 | 70.0 | 90.0 | 110.0 | 130.0 | 150.0 | |||||||||
20.50* | 0.00 | 487,805 | 975,610 | 1,463,415 | 1,951,220 | 2,439,024 | ||||||||
20.75 | 0.00 | 481,928 | 963,855 | 1,445,783 | 1,927,711 | 2,409,639 | ||||||||
21.00 | 0.00 | 476,190 | 952,381 | 1,428,571 | 1,904,762 | 2,380,952 | ||||||||
21.25 | 0.00 | 470,588 | 941,176 | 1,411,765 | 1,882,353 | 2,352,941 | ||||||||
21.50 | 0.00 | 465,116 | 930,233 | 1,395,349 | 1,860,465 | 2,325,581 | ||||||||
21.75 | 0.00 | 459,770 | 919,540 | 1,379,310 | 1,839,080 | 2,298,851 | ||||||||
22.00 | 0.00 | 454,545 | 909,091 | 1,363,636 | 1,818,182 | 2,272,727 | ||||||||
22.25 | 0.00 | 449,438 | 898,876 | 1,348,315 | 1,797,753 | 2,247,191 | ||||||||
22.50 | 0.00 | 444,444 | 888,889 | 1,333,333 | 1,777,778 | 2,222,222 | ||||||||
22.75 | 0.00 | 439,560 | 879,121 | 1,318,681 | 1,758,242 | 2,197,802 | ||||||||
23.00 | 0.00 | 434,783 | 869,565 | 1,304,348 | 1,739,130 | 2,173,913 | ||||||||
23.25 | 0.00 | 430,108 | 860,215 | 1,290,323 | 1,720,430 | 2,150,538 | ||||||||
23.50 | 0.00 | 425,532 | 851,064 | 1,276,596 | 1,702,128 | 2,127,660 | ||||||||
23.75 | 0.00 | 421,053 | 842,105 | 1,263,158 | 1,684,211 | 2,105,263 | ||||||||
24.00 | 0.00 | 416,667 | 833,333 | 1,250,000 | 1,666,667 | 2,083,333 | ||||||||
24.25 | 0.00 | 412,371 | 824,742 | 1,237,113 | 1,649,485 | 2,061,856 | ||||||||
24.50 | 0.00 | 408,163 | 816,327 | 1,224,490 | 1,632,653 | 2,040,816 | ||||||||
24.75 | 0.00 | 404,040 | 808,081 | 1,212,121 | 1,616,162 | 2,020,202 | ||||||||
25.00 | 0.00 | 400,000 | 800,000 | 1,200,000 | 1,600,000 | 2,000,000 |
There is no limit on the maximum number of Class B common shares that may be issued to First American in connection with the DealerTrack Earn-Out. Accordingly, First Advantage may be required to seek additional
Value of First Advantage Stockii
stockholder approval to amend the certificate of incorporation in the event that First Advantage does not have a sufficient number of authorized shares under its certificate of incorporation.
Background of the First American Transaction
In November 2004, Parker S. Kennedy, the Chairman and Chief Executive Officer of First American and the Chairman of First Advantage, and John Long, the Chief Executive Officer of First Advantage, discussed strategic alternatives for First Advantage, including the possible contribution to First Advantage of certain credit information businesses owned by First American. In late December 2004, these discussions narrowed, focusing in particular on the contribution of the CIG Business to First Advantage.
On January 7, 2005, Mr. Kennedy, Mr. Long, Anand Nallathambi, the president of the CIG Business, and representatives from Lehman Brothers discussed in a telephone conference near term strategic goals of First American and First Advantage and in particular the potential transfer of First American’s credit information businesses to First Advantage. Following this call, First American retained Lehman Brothers to assist it in determining the value of the CIG Business and in structuring a potential transaction. In the weeks that followed, Mr. Kennedy discussed the proposed transaction with Lawrence D. Lenihan, Jr., a member of First Advantage’s board of directors and a representative of Pequot Private Equity Fund II, L.P., a large stockholder of First Advantage. During this time Mr. Kennedy also discussed the transaction with Donald Robert, a member of First Advantage’s board of directors and chief executive officer of Experian Group, an affiliate of Experian. Mr. Kennedy discussed with Mr. Robert the necessity of obtaining Experian’s consent to the proposed transaction. This consent is required under Experian’s and First American’s joint venture agreement relating to FARES, the owner of a portion of the assets of the CIG Business.
On January 20, 2005, Mr. Nallathambi, Mr. Long and representatives of Lehman Brothers met at First American’s offices to discuss the potential transaction and to begin determining a range of values for the CIG Business.
On January 25, 2005, the board of directors of First American held a special meeting at which Mr. Kennedy advised the members of a possible transaction involving the contribution of the CIG Business to First Advantage.
On January 26, 2005, First Advantage’s board gathered informally, and John Long, the Chief Executive Officer of First Advantage, described First American’s interest in contributing the CIG Business to First Advantage. At a regularly scheduled board meeting the following day, Mr. Long and other members of management, including Mr. Kennedy, the chairman of First Advantage’s board and chief executive officer of First American, described the potential transaction in additional detail. After a discussion concerning the potential benefits and risks that the potential transaction could entail, First Advantage’s board designated a special committee consisting of Barry Connelly, Lawrence D. Lenihan, Jr., Donald Nickelson, Adelaide Sink and David Walker to evaluate the proposed contribution of the CIG Business by First American and to make a recommendation to First Advantage’s full board as to whether to approve the transactions with First American.
The special committee met later in the day on January 27, 2005. At this meeting, the members of the special committee discussed the appropriate process to follow and appointed Donald Nickelson and David Walker as co-chairmen. The special committee met four times over the next twelve days to further define its review process and select legal and financial advisors. The special committee engaged Davis Polk & Wardwell as its outside legal advisor on February 4, 2005, and promptly thereafter engaged Morgan Stanley & Co. Incorporated as its outside financial advisor. At these meetings, counsel to the special committee discussed with the members of the special committee their fiduciary duties, the role of the special committee and other legal matters, and the special committee instructed its counsel to reach agreement with management of First Advantage and First American on a mutually acceptable process. In addition, at the direction of the special committee, Morgan Stanley commenced its due diligence process.
On January 31, 2005, Mr. Kennedy, Mr. Nallathambi, Thomas Klemens and Kenneth DeGiorgio, chief financial officer and general counsel, respectively, of First American, and representatives of Lehman Brothers met to discuss Lehman Brothers’ recommendations with respect to the value of the CIG Business and the structure of the transaction.
On several occasions between January 31, 2005 and February 7, 2005, Mr. Kennedy and Mr. Long discussed possible terms for a potential transaction, including the value of the individual businesses comprising the CIG Business and the value of the First Advantage stock to be issued in consideration for the contribution of the CIG Business. Mr. Kennedy and Mr. Long also discussed the future management of the combined operations of First Advantage and the CIG Business and its strategic direction.
On February 2, 2005, Mr. Nickelson and Mr. Walker conducted due diligence on behalf of the special committee at the Poway, CA headquarters of the CIG Business, including presentations by and discussions with senior management of CIG Business. This was followed by a due diligence investigation by Mr. Lenihan at the same facility on February 3, 2005.
On February 4, 2005, First American and First Advantage entered into a confidentiality agreement.
On February 7, 2005, the board of directors of First American met again. At the February 7 meeting, representatives from Lehman Brothers made a presentation in which they discussed proposed terms and the strategic rationale for the transaction. The First American board of directors authorized management to pursue the transaction and formed a committee of three of its members for the purpose of advising First American management.
Following several conversations between the parties, on February 9, 2005, Julie Waters, First Advantage’s general counsel, representatives of Reed Smith LLP, outside counsel to First Advantage, Mr. DeGiorgio, representatives of White & Case LLP, First American’s outside counsel, and representatives of Davis Polk & Wardwell, counsel to the special committee, discussed the respective roles of First Advantage, First American and the special committee with regard to the proposed transaction. They agreed that in addition to closing conditions, any transaction would be subject to approval by the special committee and to approval by the holders of a majority of First Advantage’s Class A common stock, excluding shares held by First American and its affiliates, officers and directors or by management and interested directors of First Advantage. They also agreed on a due diligence review process that would include, among other things, business, financial, accounting and legal matters. Ms. Waters and representatives of Davis Polk subsequently agreed that management of First Advantage, under the oversight of the special committee, would take the lead role in negotiating the transaction with First American.
Between February 7, 2005 and February 10, 2005, Mr. Kennedy and Mr. Long continued to discuss different methods to value the CIG Business and the First Advantage Class B common stock. In addition, First American delivered to First Advantage a draft letter of intent setting forth the terms discussed between Mr. Long and Mr. Kennedy and First American’s proposal with respect to outstanding matters. In particular, the letter of intent provided that First American and certain of its affiliates would contribute to First Advantage the CIG Business, including certain businesses related thereto which were in the process of being acquired by First American, and would convert $20 million of outstanding indebtedness to equity. In exchange, the letter of intent provided that First Advantage would issue to First American and its affiliates 29,513,035 shares of its Class B common stock for the CIG Business, Class B common stock valued at $20.33 per share to satisfy the outstanding indebtedness and in payment for the companies pending acquisition and one half of the contingent value of the DealerTrack Interest, a minority equity investment in an unaffiliated third party held by the CIG Business.
After a series of discussions with First American, on February 11, 2005, Mr. Long called Mr. Nickelson, co-chairman of the special committee, and indicated that the economic terms reflected in the letter of intent were inadequate for First Advantage. Following this conversation, Mr. Long informed First American that the terms outlined in the letter of intent were unacceptable, and the parties agreed to re-evaluate their interest in pursuing a
transaction. Later that day the special committee met with its legal advisor to discuss the letter of intent and these developments, and the special committee instructed its financial and legal advisors to cease working on the transaction.
Discussions between Mr. Long and Mr. Kennedy continued between February 11, 2005 and February 24, 2005, at which time the First American board of directors met and discussed the progress being made on the transaction, the benefits of the transaction to First Advantage and First American, in its capacity as First Advantage’s largest stockholder, and the value that Mr. Nallathambi would bring to First Advantage’s management team.
At a regularly scheduled meeting of First Advantage’s board on February 17, 2005, Mr. Long informed the members of the special committee that he believed discussions regarding the acquisition should be reopened. The members of the special committee consented under the standstill agreement between First American and First Advantage to further discussions between First Advantage and First American regarding the transaction in order to allow management to present a proposed transaction to the special committee. Over the course of the next week, management of First Advantage and First American discussed revised terms for a potential transaction. Also during this period, as part of its due diligence review, the special committee’s financial advisor met several times with management of First Advantage and with management of the CIG Business, including a due diligence visit to the Poway, CA headquarters of the CIG Business.
On February 24, 2005, the special committee discussed with its financial and legal advisors the status of the ongoing negotiations regarding the proposed transaction and the ongoing due diligence reviews being conducted by management, the special committee, and Morgan Stanley with respect to certain diligence, including financial and business diligence. The special committee met again on March 3, 2005 with its financial and legal advisors and discussed the ongoing due diligence.
On March 7, 2005, counsel to First American delivered draft documentation for the proposed transaction to First Advantage and First Advantage delivered a due diligence request list to First American. On March 8 and 9, Mr. Connelly and Ms. Sink of the special committee conducted a due diligence visit to the headquarters of the CIG Business in Poway, CA. During this visit, Mr. Connelly and Ms. Sink attended management presentations and interviewed the senior management of the CIG Business. On March 9, counsel to the special committee described to management of First Advantage the scope of the due diligence review that the special committee expected management to undertake and report on to the special committee prior to any special committee decision regarding the proposed transaction. On March 10, 2005, First Advantage provided drafts of the transaction documents to the special committee and over the next several days counsel to the special committee discussed the drafts with First Advantage’s general counsel and on March 15, 2004 First Advantage delivered revised drafts to First American.
On March 16, 2005, the special committee met with its financial and legal advisors and with management of First Advantage. Management of First Advantage described the proposed terms of the transaction, the financial, operational and strategic rationale for the transaction, and the status of the ongoing negotiations with First American. After management of First Advantage left the meeting, representatives of Morgan Stanley, the financial advisor to the special committee, discussed their ongoing review of certain diligence, which included financial and business diligence and then discussed various financial and business issues including valuation. Mr. Connelly and Ms. Sink then reported on their due diligence visit to Poway. The representatives of Morgan Stanley then left the meeting and the special committee’s counsel discussed with the members of the special committee their fiduciary duties and other legal matters. Following this meeting, Mr. Nickelson telephoned Mr. Donald Robert and requested that Mr. Robert ensure that arrangements would be put in place to retain certain senior managers in the event a transaction were consummated.
Commencing on March 18, 2005, representatives of First Advantage conducted due diligence at the CIG Business headquarters in Poway. Management’s due diligence continued until the initial signing of the agreements for the transaction in May.
During this period, discussions between Mr. Kennedy and Mr. Long continued with respect to the value of the CIG Business and First Advantage’s Class B common shares to be issued in the proposed transaction. After several discussions between Mr. Kennedy and Mr. Long, the companies agreed to value the CIG Business (without including the XRES Business or Bar None or the DealerTrack Interest) at $550 million and to value each share of Class B common stock to be issued to First American in connection with the proposed transactions at $20.50.
On March 21 and 22, 2005, First American and First Advantage, with the input of the special committee, negotiated the final terms of the non-binding letter of intent, including that the transaction would be subject to approval by the special committee and to approval by the holders of a majority of the shares of Class A common stock of First Advantage, other than First American and its affiliates, officers and directors and other than management and interested directors of First Advantage. The special committee met with its legal advisor in the morning on March 22 to review and discuss the draft letter of intent and related press release and directed management of First Advantage to make certain changes. On March 25, 2005, First American and First Advantage signed a non-binding letter of intent. The executed letter of intent provided that First American would contribute the CIG Business and the DealerTrack Interest to First Advantage in exchange for 26,829,268 shares of its Class B common stock plus an additional number of shares, valued at $20.50 per share, equal to half of the contingent value of the DealerTrack Interest. First Advantage would also issue 975,610 shares to First American in satisfaction of $20 million of outstanding indebtedness to First American and approximately 2,243,900 shares for companies pending acquisition by First American that would be contributed in the transaction. Following the execution of the non-binding letter of intent, in the afternoon of March 22, First American and First Advantage jointly announced the execution of the non-binding letter of intent and held a conference call with investors and the financial community to discuss the proposed transactions.
Following the announcement of the non-binding letter of intent, the special committee, its financial advisor and management of First Advantage continued their due diligence review of the CIG Business. On March 31, 2005, First American completed its acquisition of the assets of the XRES Business. On April 1, 2005, the special committee met with its legal advisor and discussed, among other things, the status of due diligence and negotiations regarding definitive agreements for the transactions. Counsel to First American delivered revised draft agreements for the transaction on April 4, 2005, and the special committee met with its legal and financial advisors on April 11, 2005, and discussed the proposed transaction, the ongoing due diligence review and the revised documentation. The special committee directed its counsel to advise management of First Advantage that the current draft agreements were not acceptable and to discuss with management various improvements to the economic and other terms.
Following these discussions, on April 22, 2005, First Advantage delivered revised drafts of the transaction documents to First American. Over the course of the next several weeks, Ms. Waters, First Advantage’s general counsel, had numerous conversations with counsel to the special committee concerning the draft documentation, and management of First Advantage continued to negotiate the documentation with First American and its counsel.
On April 29, 2005, management of First Advantage began providing due diligence reports to the special committee and its financial and legal advisors. Management discussed these reports with the special committee’s financial and legal advisors and reported on follow-up inquiries.
On May 6, 2005, representatives of First Advantage’s management, the management of the CIG Business, the special committee’s financial and legal advisors, and First American’s financial advisor held a conference call during which the participants discussed, among other things, the status of the definitive documentation for the transaction and due diligence matters, including the preliminary April results for each of First Advantage and the CIG Business. Following this call, the special committee’s legal advisor and First Advantage’s general counsel discussed in detail the preliminary results of First Advantage’s ongoing due diligence review and agreed upon additional matters to be reviewed. Later that day, First American delivered revised drafts of the transaction agreements to First Advantage and to counsel to the special committee.
On May 12, the special committee held a telephonic meeting with its financial and legal advisors. At this meeting, the special committee and its advisors reviewed the ongoing due diligence and the draft transaction documents. After discussion, the special committee directed its counsel to advise management of First Advantage and management of First American that the draft agreements were not acceptable and to request further changes. Over the course of the next several days, Ms. Waters, Mr. DeGiorgio, First American’s outside counsel and counsel to the special committee negotiated the documents for the transaction. Throughout these negotiations, counsel to the special committee consulted with and took direction from the co-chairmen of the special committee.
In the morning on May 17, 2005, the special committee met with its counsel at the St. Petersburg, FL offices of First Advantage and discussed the draft transaction agreements and the status of the negotiations. After this discussion, a meeting of the full board of directors of First Advantage was convened with certain directors who were not members of the special committee participating by telephone. Also in attendance were representatives of management of First Advantage and of the CIG Business, as well as counsel to the special committee. Management of First Advantage discussed the business and prospects of the CIG Business and presented the results of its due diligence review, including with respect to accounting, benefits, tax, regulatory, real estate, environmental, intellectual property, litigation, insurance and contracting matters. Management of the CIG Business then offered its view as to the business and prospects of the CIG Business. In addition, terms of the proposed transaction, including with respect to the RELS joint venture outsourcing arrangement, were discussed. Throughout the meeting, the members of the special committee and their counsel asked questions of management of each of First Advantage and the CIG Business. A general discussion followed, including a discussion of the potential benefits and risks involved in the proposed transaction.
The meeting of the First Advantage board was adjourned, the management teams were excused, and a meeting of the special committee was reconvened with the legal and financial advisors to the special committee present. After discussion, the special committee invited Mr. John Lamson, First Advantage’s chief financial officer, to further discuss the proposed services agreement between First American and First Advantage and the proposed outsourcing agreement relating to the RELS joint venture. After a discussion of these arrangements, Mr. Lamson was excused. After further discussion, the special committee invited Messrs. Long and Lamson and Ms. Waters to join the meeting. The special committee discussed the terms of the transaction agreements with Messrs. Long and Lamson and Ms. Waters, and directed management and counsel to the special committee to seek certain changes. Management and counsel to the special committee then left the meeting to continue negotiations on the transaction documents, and the special committee’s financial advisor began to discuss with the special committee its review of certain diligence, which included financial and business diligence and certain financial and business issues, including valuation regarding the proposed transaction. Counsel to the special committee rejoined the meeting and, after further discussion, Morgan Stanley rendered an oral opinion as to the fairness to First Advantage from a financial point of view of the consideration to be paid in the transaction. Following further discussion, Morgan Stanley was excused from the meeting.
After more discussion, counsel to the special committee was excused from the meeting to confer with management of First Advantage, and later returned and updated the committee on the results of the most recent negotiations concerning the transaction documents. After further discussion, the members of the special committee unanimously determined, in consultation with its independent legal and financial advisors, that it is advisable and in the best interests of First Advantage and its stockholders (other than First American, its affiliates, officers and directors) to effect the First American Transaction pursuant to the terms of the master transfer agreement and the related agreements and resolved to recommend them to the full board of First Advantage, subject in each case, to the finalization of the definitive agreements in form satisfactory to the special committee.
The meeting of the First Advantage board was reconvened and, after discussion and subject to the finalization of the definitive agreements, the special committee recommended the transaction to the board. After further discussion, the board unanimously approved the contribution of the CIG Business and related transactions and determined that such transactions were fair to, and in the best interests of, First Advantage and its
stockholders (other than First American and its affiliates, Donald Robert or First Advantage’s management, as to which the board did not make a determination), subject in each case to finalization of the definitive agreements.
On May 18, 2005, the First American board of directors met. Representatives of Lehman Brothers made a presentation regarding the transaction and advised that in their opinion the transaction was fair from a financial point of view to First American. After discussion, the First American board of directors unanimously approved the transaction.
Over the next week, management of and counsel to First American, management of First Advantage, and counsel to the special committee finalized the definitive documentation for the transaction, with counsel to the special committee regularly updating and consulting with the co-chairmen of the special committee. On May 23, 2005, Morgan Stanley delivered its written opinion to the special committee of the board of directors of First Advantage with respect to the First American Transaction that as of such date and, based on and subject to the assumptions, limitations and qualifications stated therein, the consideration to be paid by First Advantage pursuant to the master transfer agreement and the related agreements was fair from a financial point of view to First Advantage. The full board of directors of First Advantage unanimously approved the First American Transaction and determined that the First American Transaction is fair to, and in the best interests of, First Advantage and its stockholders (other than First American and its affiliates, Donald Robert or First Advantage’s management, as to which the board did not make a determination). On May 25, 2005, First Advantage and First American executed the master transfer agreement and publicly announced the execution of the definitive agreements.
On June 22, 2005, the special committee met to consider the revisions to and impact of the terms of the amended and restated master transfer agreement and related agreements. After discussions, the special committee approved these revised documents and resolved to recommend them to the full board of First Advantage.The master transfer agreement was amended and restated based on the advice of First American’s tax advisors to make certain structural changes to the First American Transaction for tax planning purposes and to account for the acquisition by First American of all of the shares of common stock of Bar None.
The special committee met again on June 28, 2005 and unanimously re-affirmed its prior approval of the master transfer agreement and related agreements and unanimously approved the certificate amendment proposal.
Reasons of the Special Committee for the First American Transaction
The special committee has determined that the terms of the First American Transaction are fair to, and in the best interests of, First Advantage and its stockholders (other than First American and its affiliates, Donald Robert or First Advantage’s management, as to which the special committee did not make a determination). In approving the First American Transaction, the members of the special committee relied upon their knowledge of the business, financial condition and prospects of First Advantage, the knowledge of senior management of First Advantage regarding the business, financial condition and prospects of First Advantage and the CIG Business and related businesses, and the advice of the special committee’s financial and legal advisors. In particular, the special committee considered a number of factors, including the following:
The special committee also considered potential risks associated with the First American Transaction, including:
that after the consummation of the First American Transaction, First Advantage expects to receive a significant amount of revenue under the outsourcing agreement with First American, and that (i) the
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In addition, the special committee considered the interests of certain of First Advantage’s directors and executive officers described under “Interests of Certain Persons in the First American Transaction” beginning on page31.
Due to the variety of factors and the quality and amount of information considered, the special committee did not find it practicable to and did not make specific assessments of, quantify or assign relative weights to the specific factors considered in reaching its determination to approve the First American Transaction. Instead, the special committee made its determinations after consideration of all factors taken together. In addition, individual members of the special committee may have given different weight to different factors.
Actions of Special Committee With Respect to the First American Transaction
The special committee determined that the First American Transaction is fair to, and in the best interests of, First Advantage and its stockholders (other than First American and its affiliates, officers and directors, as to which the special committee made no determination) and unanimously approved the First American Transaction. The special committee recommended to the full First Advantage board of directors that it approve the First American Transaction and recommend the First American Transaction to the stockholders.
Recommendation of First Advantage’s Full Board of Directors with Respect to the First American Transaction
First Advantage’s board of directors, after receiving the unanimous recommendation of the special committee, determined that the First American Transaction is fair to, and in the best interests of, First Advantage and its stockholders (other than First American and its affiliates, Donald Robert or First Advantage’s
management, as to which the board made no determination), unanimously approved the First American Transaction, and recommends that you vote “FOR” approval of the First American Transaction proposal.
Fairness Opinion of Financial Advisor to First Advantage’s Special Committee
Pursuant to an engagement letter, on February 17, 2005, the special committee of the board of directors of First Advantage engaged Morgan Stanley to act as its financial advisor in connection with the First American Transaction. Morgan Stanley is a global financial services firm engaged in the securities, investment management and credit services businesses, and regularly provides financial advisory services in connection with mergers and acquisitions. The special committee selected Morgan Stanley to act as its financial advisor and to render an opinion to the special committee regarding the fairness of the First American Transaction because of Morgan Stanley’s expertise, reputation and familiarity with First Advantage and its businesses. On May17, 2005, Morgan Stanley rendered to the special committee of the board of directors of First Advantage its oral opinion, which was subsequently confirmed in writing on, May 23, 2005, that as of such date and based on and subject to the assumptions, limitations and qualifications stated therein, the consideration to be paid by First Advantage pursuant to the master transfer agreement and the related agreements was fair from a financial point of view to First Advantage.
This summary of the Morgan Stanley opinion set forth in this proxy statement is qualified in its entirety by reference to the full text of the opinion attached as Annex H to this proxy statement. You are encouraged to read the opinion for a discussion of the assumptions made, procedures followed, factors considered and limitations of the review undertaken by Morgan Stanley in rendering its opinion, including the fact that Morgan Stanley relied upon the accuracy and completeness of certain information provided to it for the purposes of its evaluation.
Morgan Stanley’s advisory services and opinion were provided for the information and assistance of the special committee of the board of directors of First Advantage in connection with its consideration of the First American Transaction. Morgan Stanley’s opinion is not intended to be and does not constitute a recommendation to any stockholder of First Advantage as to how such stockholder should vote in connection with the First American Transaction proposal. Morgan Stanley was not involved in structuring, planning or negotiating the First American Transaction. Morgan Stanley did not express an opinion as to the likelihood that First Advantage’s Class A common stock will trade at or above certain levels or the prices at which First American’s common stock and the First Advantage Class A common stock will actually trade at any time, or the future value of the First Advantage Class B common stock. The opinion did not address whether an initial public offering of DealerTrack Interest will be consummated at any time, the terms of such offering or the value of such stock or whether a market for such securities will exist.
In arriving at its opinion, Morgan Stanley did the following:
In arriving at its opinion, Morgan Stanley assumed and relied upon without independent verification the accuracy and completeness of the information supplied or otherwise made available to it by First American, the companies comprising the CIG Business and DealerTrack Interest and First Advantage for the purposes of its opinion. With respect to the financial projections and First Advantage’s 2005 business plan, including information relating to certain strategic and the financial and operational benefits anticipated from the First American Transaction, Morgan Stanley assumed that they had been reasonably prepared on bases reflecting the best currently available estimates and judgments of the future financial performance of the managements of First Advantage and the companies comprising the CIG Business and the DealerTrack Interest. Neither First Advantage nor the special committee imposed any limitations on the scope of Morgan Stanley’s investigation.
With the special committee’s consent, Morgan Stanley assumed for purposes of its analysis that First Advantage may be required to make the DealerTrack Earn-Out payment and an earnout payment relating to Bar None, which was one of the businesses that First American had agreed to acquire at the time the Morgan Stanley opinion was delivered. Morgan Stanley expressed no opinion as to the likelihood that the DealerTrack Interest or Bar None will achieve any of the milestones upon which the earnout payments are conditioned. Morgan Stanley also assumed for the purpose of its analysis and with the special committee’s consent that Bar None will be among the businesses that will be transferred to First Advantage pursuant to the First American Transaction as of closing and therefore, the consideration to be paid by First Advantage pursuant to the master transfer agreement and related agreements includes First Advantage’s Class B common stock to be issued by First Advantage for the transfer of Bar None.
In addition, Morgan Stanley assumed that the First American Transaction will be consummated in accordance with the terms set forth in the master transfer agreement and related agreements without any waiver, amendment or delay of any terms or conditions. Morgan Stanley also assumed that the terms and provisions of the standstill agreement, dated as of June 5, 2003, between First American and First Advantage, will remain in full force and effect in accordance with their terms, without modification, after consummation of the First American Transaction. Upon advice of management of First Advantage, Morgan Stanley also assumed that the financial terms of the amended and restated services agreement and the outsourcing agreement relating to, among other things, the agreement with respect to RELS will be consistent with those reflected in the historic and projected financial information described in Morgan Stanley’s opinion.
Because audited financial statements for the companies comprising the CIG Business and the DealerTrack Interest on a consolidated basis were not available at the time Morgan Stanley issued its opinion, for the purpose of its analysis, Morgan Stanley assumed that the unaudited financial statements used in preparing the opinion will not differ materially from audited consolidated financial statements of the companies comprising the CIG Business and the DealerTrack Interest.
Morgan Stanley is not a legal, tax or regulatory expert and relied upon, without independent verification, the assessment of First Advantage and its legal, tax and regulatory advisors with respect to legal, tax and regulatory matters. Morgan Stanley did not make any independent valuation or appraisal of the assets or liabilities of the companies comprising the CIG Business and the DealerTrack Interest, nor was Morgan Stanley furnished with any such appraisals. Morgan Stanley has also relied without independent investigation on the assessment by the executives of First Advantage regarding the strategic rationale for the acquisition of the companies comprising the CIG Business and the DealerTrack Interest. Morgan Stanley expressed no opinion as to the relative fairness of any portion of the consideration to be paid by First Advantage pursuant to the master transfer agreement and related agreements with respect to any of the individual companies comprising the CIG Business and the DealerTrack Interest or any of the assets to be transferred to First Advantage pursuant to the First American Transaction. Morgan Stanley also did not express an opinion as to the relative fairness of the allocation or structure of the DealerTrack Earn-Out payment or earnout payment associated with the acquisition of Bar None. Morgan Stanley’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to it as of, the date of the opinion. Events occurring after the date of the opinion, may affect Morgan Stanley’s opinion and the assumptions used in preparing it, and Morgan Stanley did not assume any obligation to update, revise or reaffirm its opinion.
The following is a summary of the material financial analyses performed by Morgan Stanley in connection with its oral opinion and the preparation of its written opinion for the special committee of the board of directors of First Advantage. These summaries of financial analyses include information presented in tabular format. In order to fully understand the financial analyses used by Morgan Stanley, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses.
For the purposes of the following analyses, Morgan Stanley assumed that First Advantage may be required to make a DealerTrack Earnout (as defined in the Transaction Documents) payment relating to the DealerTrack Preferred Stock to be transferred to First Advantage pursuant to the transaction and an earnout payment relating to Bar None as described in the Transaction Documents, however, Morgan Stanley did not make any specific assumptions about the likelihood that the DealerTrack Interest or Bar None will achieve any of the other milestones upon which these earn out payments are conditioned.
Comparable Company Analysis
Morgan Stanley compared certain financial information of the CIG Business and First Advantage, respectively, with publicly available consensus earnings estimates for other companies that shared similar business characteristics with the CIG Business and First Advantage, respectively. The companies used in this comparison included the following companies:
For purposes of this analysis, Morgan Stanley analyzed the ratio of price to estimated earnings for calendar year 2006 (based on publicly available estimates) for each of these companies for comparison purposes. Based on this analysis, Morgan Stanley selected a representative range of multiples of 14x - 16x for the comparable companies and applied this range to the relevant statistics for the CIG Business and First Advantage, which were provided by the respective management. From this analysis and based on the CIG Business’ price to estimated 2006 earnings of $34.9 million, Morgan Stanley estimated the implied equity value range for the CIG Business (excluding the DealerTrack Interest) as of May 15, 2005 to be $488 million to $558 million. From this analysis and based on First Advantage’s price to estimated 2006 earnings per share of $1.14, Morgan Stanley estimated the implied per share value range for First Advantage as of May 15, 2005 to be $18.25 to $22.82. Morgan Stanley noted that the total and per share consideration for the CIG Business (excluding the DealerTrack Interest) were $500 million and $20.50, respectively.
No company utilized in the comparable company analysis is identical to the CIG Business or First Advantage. In evaluating comparable companies, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of the CIG Business and First Advantage, such as the impact of competition on the CIG Business, the businesses of First Advantage and the industry generally, industry growth and the absence of any adverse material change in the financial condition and prospects of the CIG Business or First Advantage or the industry or in the financial markets in general. Mathematical analysis (such as determining the average or median) is not in itself a meaningful method of using comparable company data.
Sum-of-the-Parts Analysis
Morgan Stanley computed a range of equity values for the CIG Business based on a pre-tax sum-of-the-parts analysis. Each of the businesses that comprise the CIG Business (CREDCO, Teletrack, CMSI and Membership Services) and DealerTrack Interest were valued using the discounted cash flow methodology in order to arrive at a range of equity values for the sum-of-the-parts analysis. Morgan Stanley relied on the financial projections for each of the businesses that comprise the CIG Business and the DealerTrack Interest provided by the managements of the CIG Business and DealerTrack. In arriving at the estimated aggregate value, defined as market capitalization plus total debt less cash and cash equivalents, for each of the businesses that comprise the CIG Business and the DealerTrack Interest, Morgan Stanley calculated a terminal value as of December 31, 2010, by applying a range of aggregate value divided by EBITDA (defined as earnings before interest, taxes, depreciation and amortization) terminal multiples. The unlevered free cash flows from calendar year 2005 through 2010 and the terminal value were then discounted to present values. The range of aggregate values for CREDCO, Teletrack, CMSI, Membership Services and the DealerTrack Interest (assuming a 20.9% ownership interest) were combined to produce a range of aggregate values for the CIG Business. Morgan Stanley assumed the net debt balance for the CIG Business and the DealerTrack Interest was zero in order to arrive at a range of equity values for the sum-of-the-parts analysis.
The following table summarizes Morgan Stanley’s analysis:
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Morgan Stanley noted that the consideration was $500 million for the CIG Business (excluding the XRES Business, Bar None and the DealerTrack Interest), $550 million for the CIG Business (excluding the XRES Business and Bar None) and the DealerTrack Interest, and $596 million for the CIG Business (including the XRES Business) and DealerTrack Interest, and the then pending Bar None acquisition.
Discounted Cash Flow Analysis
Morgan Stanley computed a range of equity values for the CIG Business and for First Advantage based on discounted cash flow analyses. Morgan Stanley relied on financial projections for the CIG Business and for First Advantage provided by the management of the CIG Business and First Advantage. In arriving at estimated aggregate values for the CIG Business and First Advantage, Morgan Stanley calculated a terminal value as of December 31, 2010, by applying a range of aggregate value divided by EBITDA terminal multiples ranging from 7.0x to 9.0x for the CIG Business and 8.0x to 10.0x for First Advantage. The unlevered free cash flows from calendar year 2005 through 2010 and the terminal value were then discounted to present values using a range of discount rates of 10% to 12%. Morgan Stanley assumed the net debt balance for the CIG Business to be zero in order to arrive at a range of equity values for the CIG Business.
The following table summarizes Morgan Stanley’s analysis:
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Morgan Stanley noted that the consideration was $500 million for the CIG Business and $550 million for the CIG Business and the DealerTrack Interest.
Morgan Stanley assumed the net debt balance and total shares outstanding for First Advantage to be $103.3 million and 23.9 million shares, respectively, in order to arrive at an implied range of per share values of $16.89 to $23.06 per share for First Advantage. Morgan Stanley noted that the per share consideration was $20.50.
First Advantage Historical Class A Common Stock Performance
Morgan Stanley performed an historical share price analysis to provide the special committee to the board of directors with background information and perspective with respect to the historical share prices of First Advantage Class A common stock. Morgan Stanley reviewed the historical 52-week low and 52-week high intraday prices of First Advantage’s Class A common stock. The tables below show Morgan Stanley’s findings:
Share Price(1) ($) | |||
52-week Low | $ | 14.30 | |
52-week High | $ | 22.75 | |
May 13, 2005 | $ | 20.70 |
Morgan Stanley noted that the per share consideration was $20.50.
Present Value of Analyst Targets for First Advantage
Morgan Stanley performed a discounted price target analysis to arrive at a range of present values per share for First Advantage. Specifically, Morgan Stanley considered the range of publicly available equity research analysts’ price targets for First Advantage and calculated the present value of such targets based on a 12-month period and assuming a 10% estimated cost of equity. This analysis resulted in a range of implied values of $20.00 to $20.91 per share for First Advantage Class A common stock. Morgan Stanley noted that the per share consideration was $20.50.
Relative Contribution Analysis
Morgan Stanley compared the CIG Business’ (including the DealerTrack Interest) and First Advantage’s respective percentage ownership of the combined company to the CIG Business’ (including the DealerTrack Interest) and First Advantage’s respective percentage contribution (and the implied ownership based on such contribution) to the combined company using revenues, EBITDA, earnings before interest and taxes (“EBIT”), and net income based on the respective managements’ estimates.
Morgan Stanley noted that the implied pro forma ownership of the combined company represented by the shares of First Advantage being issued in exchange for the CIG Business and the DealerTrack Interest (based on each of the operating metrics noted above) ranged from 38% to 59%. Based on the value of the shares being issued in exchange for the CIG Business and the DealerTrack Interest, Morgan Stanley noted that the implied ownership of the combined company represented by such shares was approximately 47%.
The public market trading price targets published by the equity research analysts do not necessarily reflect current market trading prices for First Advantage Class A common stock and these estimates are subject to uncertainties, including the future financial performance of First Advantage and future financial market conditions.
Pro Forma Analysis
Morgan Stanley reviewed the pro forma impact of the First American Transaction on First Advantage’s projected earnings per share for the calendar years 2005 and 2006. Morgan Stanley relied on financial projections for the CIG Business (including the DealerTrack Interest) and for First Advantage provided by the management of the CIG Business and First Advantage, respectively. For the analyses that included the XRES Business and the then pending Bar None acquisition, Morgan Stanley relied on projections provided by First American and reviewed by the management of First Advantage. Morgan Stanley performed full year pro forma analyses both including and excluding the $46 million consideration for XRES Business and the then pending Bar None acquisition as well as the amortization expenses associated with each of these acquisitions and the synergies for Bar None. For both analyses, Morgan Stanley included the $20 million debt-for-equity exchange consideration as well as the amortization expenses associated with the acquisition of the CIG Business and the DealerTrack Interest. For the purpose of these analyses, Morgan Stanley assumed the transaction was completed as of January 1, 2005, and therefore the pro forma earnings utilized for these analyses included a full year of earnings for the CIG Business for both 2005 and 2006. Morgan Stanley observed that the transaction, excluding XRES Business and the then pending Bar None acquisition, would result in an accretion in earnings per share for 2005 and 2006 of 19.9% and 4.6%, respectively, and, including XRES Business and the then pending Bar None acquisition, would result in an accretion in earnings per share for 2005 and 2006 of 17.1% and 3.5%, respectively.
In connection with the review of the First American Transaction by the special committee, Morgan Stanley performed a variety of financial and comparative analyses for purposes of rendering its opinion. In arriving at its opinion, Morgan Stanley considered the results of all of its analyses as a whole and did not attribute any particular weight to any analysis or factor it considered. Morgan Stanley believes that selecting any portion of its analyses, without considering all analyses as a whole, would create an incomplete view of the process underlying its analyses and opinion. In addition, Morgan Stanley may have given various analyses and factors more or less weight than other analyses and factors, and may have deemed various assumptions more or less probable than other assumptions. In performing its analyses, Morgan Stanley made numerous assumptions with respect to industry performance, general business and economic conditions and other matters. Many of these assumptions are beyond the control of First Advantage.
Morgan Stanley’s opinion and its presentation to the special committee was one of many factors taken into consideration by the special committee in deciding to approve the First American Transaction. Consequently, Morgan Stanley’s opinion as described above should not be viewed as solely determinative of the opinion of the special committee with respect to the consideration or of whether the special committee would have been willing to agree to a different consideration for the First American Transaction.
As compensation for its services in connection with the First American Transaction, First Advantage paid a fee of $1.75 million to Morgan Stanley when it delivered its opinion to the special committee. In addition, First Advantage has agreed to pay Morgan Stanley for reasonable out-of-pocket expenses incurred in connection with the First American Transaction and to indemnify Morgan Stanley for certain liabilities, including certain liabilities under the federal securities laws, related to and arising out of Morgan Stanley’s engagement. The special committee has the authority, if it determines in its sole discretion that Morgan Stanley’s efforts on the First American Transaction warrant additional compensation, to pay Morgan Stanley an additional fee of up to $500,000 at closing.
In the ordinary course of its trading, brokerage, investment management and financing activities, Morgan Stanley or its affiliates may trade in any currency or commodity that may be involved in this transaction, and may actively trade the debt and equity securities of First American and First Advantage for its own account and for the accounts of its customers, and accordingly, may at any time hold a long or short position in such securities.
Interests of Certain Persons in the First American Transaction
First American and its affiliates, officers, directors and some of our management have interests in the First American Transaction that differ from the interests of our stockholders generally and which may present them with potential or actual conflicts of interests in the First American Transaction.
First Advantage began operations in June 2003, when it acquired First American’s screening technology division and a company called US Search. As consideration for the acquisition of First American’s screening technology division, First Advantage issued 100% of its outstanding Class B common stock to First American. This resulted in First American holding approximately 80% of the outstanding capital stock of First Advantage and approximately 97% of the voting power of First Advantage.
First American currently holds approximately 67% of the outstanding capital stock of First Advantage and approximately 95% of its voting power. Consequently, First American has the right to control the outcome of any matter submitted for the vote or consent of First Advantage’s stockholders, unless a separate class vote is required under Delaware law or, as is the case with the First American Transaction, First American’s shares will not be counted pursuant to an agreement with First American. First American has the voting power to control the election of our board of directors and is able to approve certain amendments of our certificate of incorporation or bylaws. First American also may be able to cause changes in the business of First Advantage without seeking the approval of any other party. These changes may not be beneficial to us or in the best interest of our other stockholders. For example, First American has the power to prevent, delay or cause a change in control and could take other actions that might be favorable to First American, but not necessarily to other stockholders. Similarly, subject to restrictions contained in the standstill agreement (described in further detail in “Description of First Advantage Common Stock—Standstill Agreement” beginning on page 91), First American has the voting power to exercise a controlling influence over our business and affairs and has the ability to make decisions concerning such things as:
First Advantage and First American are also parties to a services agreement, which will be amended and restated in connection with the First American Transaction. See “Other Transaction Documents—Amended and Restated Services Agreement” beginning on page 61.
First American is also First Advantage’s primary subordinated lender. Currently, First Advantage owes an aggregate principal amount of $45 million to First American under several promissory notes. Twenty million dollars of this debt will be converted into 975,610 shares of Class B shares in connection with the First American Transaction. First American has also guaranteed First Advantage’s repayment obligation under a $45 million unsecured credit facility.
Parker S. Kennedy and J. David Chatham, who are members of First Advantage’s board of directors, are also directors or officers of First American. In addition, several members of First Advantage’s management were formerly employed by First American (including John Long, our Chief Executive Officer, John Lamson, our Chief Financial Officer, and Akshaya Mehta, our Chief Operating Officer) and own First American common stock. From time to time, Mr. Long receives compensation from First American. Mr. Long also serves as a director of First American Title Insurance Company, First American’s title insurance subsidiary and lessor under the Poway lease agreement.
Experian owns a 20% equity interest in FARES. As part of the First American Transaction, FARES will be contributing the portion of the CIG Business that it owns to Newco in exchange for an ownership interest in Newco. Newco will receivea total of 30,048,780 shares of Class B common stock in consideration of the First American Transaction and repayment of the principal amount of the $20 million promissory note (without taking into account the DealerTrack Earn-Out). As a result of the First American Transaction, Experian will indirectly own approximately 6.5% of our capital stock (without taking into account the DealerTrack Earn-Out) by virtue of its ownership interest in FARES and FARES’s ownership interest in Newco. Mr. Donald Robert, a member of First Advantage’s board of directors, is the chief executive officer of Experian Group, an affiliate of Experian. First Advantage will enter into an agreement with Experian at the completion of the First American Transaction which will require First Advantage to register under certain circumstances any shares of First Advantage common stock that Experian may in the future acquire by virtue of its minority ownership of FARES.
Pursuant to the terms of First Advantage’s certificate of incorporation, upon the transfer of any share of Class B common stock to a “person” (as defined in the certificate of incorporation) that at the time of such transfer is neither First American nor an “affiliate” (as defined in the certificate of incorporation) of First American, the share will automatically be converted into one fully paid and nonassessable share of Class A common stock. Experian does not meet the definition of affiliate. Accordingly, if Experian were to receive any shares of Class B common stock by virtue of its indirect ownership interest in Newco, the shares would automatically be converted in shares of Class A common stock. Experian required as a condition to its approval of the transaction as an equityholder of FARES, that as a condition to the closing of the First American Transaction, First Advantage execute and deliver to Experian a registration rights agreement for resale of any shares of Class A common stock it may receive upon a distribution by FARES of the shares of Class B common stock it receives from Newco. It is contemplated that First Advantage will enter into a registration rights agreement with Experian relating to these shares.
In addition, in connection with the First American Transaction, First American and First Advantage propose to enter into several agreements relating to the operation of the CIG Business after the completion of the transaction or in general, each as described in “Other Transaction Documents” beginning on page 44. The ongoing agreements between First American and First Advantage include:
In order to avoid any potential conflict of interest between First American, its officers, directors and our management, on one hand, and First Advantage, on the other hand, the First Advantage board formed a special committee to represent the interests of our stockholders other than First American and its affiliates, Donald Robert and our management. The members of the special committee discussed with counsel to the special committee the factors bearing on independence of the special committee members, including that Mr. Lenihan is a senior managing director of Pequot Capital Management, Inc. and managing general partner and co-head of the Pequot venture funds and the Pequot Private Equity Funds, and has been recommended as a director nominee by Pequot Private Equity Fund II, L.P., which owns approximately 28% of First Advantage’s Class A common stock and that affiliates of Pequot have business relationships with First Advantage (as further described in “Certain Relationships and Related Transactions” beginning on page117), and determined that each member of the special committee was independent for the purposes of evaluating the transaction. In this regard, the special committee noted that Mr. Lenihan is considered an independent director under applicable NASDAQ corporate governance rules and that Mr. Lenihan consulted with Pequot’s counsel regarding his status.
The members of the special committee will be compensated for their service on the special committee, with each individual receiving a committee fee of $10,000 (or, in the case of each of Messrs. Nickelson and Walker, as co-chairmen, $15,000) plus a $1,000 meeting fee for each committee meeting, as well as reimbursement of out-of-pocket expenses. In addition, the Company’s by-laws provide each director of the Company (including each member of the special committee) with certain indemnification rights and the Company has entered into an indemnity agreement with each member of the Company’s board of directors, including each member of the special committee.
Use of Proceeds of the First American Transaction
The proceeds from the First American Transaction are the assets and companies that comprise the CIG Business, as well as the DealerTrack Interest, Bar None and the XRES Business. A portion of these assets include a minimum of $5 million of cash. First Advantage currently intends to use this cash and any amounts drawn under the unsecured subordinated promissory note for working capital for the CIG Business and other general corporate purposes related to the CIG Business following the closing.
Neither First American nor First Advantage is required to comply with any federal or state regulatory requirements, and no federal or state approval must be obtained, in connection with the completion of the First American Transaction.
Neither First Advantage nor any stockholder will recognize any gain or loss as a result of the First American Transaction or the issuance of the shares of Class B common stock to Newco in accordance with the master transfer agreement and related agreements. First Advantage’s tax basis in the CIG Business, the DealerTrack Interest, Bar None and XRES Business will be equal to Newco’s tax basis in these assets immediately prior to the transfer of these assets to First Advantage.
First Advantage stockholders do not have and will not be entitled to exercise appraisal rights under the General Corporation Law of the State of Delaware in connection with the First American Transaction or issuance of shares of Class B common stock to Newco in connection therewith.
The following summary describes certain provisions of the master transfer agreement among First American, FAREISI, FARES, Newco and First Advantage, as it was amended and restated on June 22, 2005,
which is included as Annex A to this proxy statement. The provisions of the master transfer agreement are extensive and not easily summarized. This summary may not contain all of the information about the master transfer agreement that is important to you. We encourage you to read the master transfer agreement carefully in its entirety.
The master transfer agreement has been included to provide you with information regarding its terms. It is not intended to provide any other factual information about First Advantage. This information may be found elsewhere in this proxy statement and in the other public filings that First Advantage makes with the SEC. The master transfer agreement contains representations and warranties the parties thereto made to and solely for the benefit of each other. The assertions embodied in those representations and warranties are qualified by information in confidential disclosure schedules that the parties have exchanged in connection with signing the master transfer agreement. Accordingly, investors and security holders should not rely on the representations and warranties as characterizations of the actual state of facts, since they are modified in important part by the underlying disclosure schedules. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the master transfer agreement, which subsequent information may or may not be fully reflected in First Advantage’s public disclosures.
Terms of Transfer of the CIG Business.The master transfer agreement outlines the general terms of the First American Transaction, includes general representations, warranties and covenants by the parties, includes each party’s obligations prior to the closing of the First American Transaction, sets forth each party’s conditions to closing and provides for each party’s right to terminate the agreement prior to the closing. For purposes of the master transfer agreement, First American, FAREISI, FARES and Newco are referred to as “contributors”.
Representations of First American, Other Contributors and First Advantage.The master transfer agreement contains representations and warranties by the parties relating to, among other things:
First Advantage also makes additional representations and warranties relating to, among other things:
First American, FAREISI, FARES and Newco also make additional representations and warranties relating to:
The representations and warranties contained in the master transfer agreement are made as of the closing (unless made as of a specified date) of the First American Transaction.
Conduct of CIG Business Prior to Closing.Until the completion of the First American Transaction, First American, FAREISI, FARES and Newco have agreed to cause the CIG Business to be conducted only in the ordinary course. Except as expressly contemplated by the master transfer agreement or the related agreements, during the period from the date of the master transfer agreement to the closing date, First American, FAREISI, FARES and Newco each agree to use commercially reasonably efforts to preserve its business organizations, to keep available the services of its key officers, and to substantially maintain current relationships with material
licensors, suppliers, distributors, customers and other third party business relationships (subject to the limitations set forth below).
In addition, except as approved in writing by the chief executive officer, chief operating officer or chief financial officer of First Advantage or expressly permitted by the terms of the master transfer agreement or related agreements, until the completion of the First American Transaction, First American, FAREISI, FARES and Newco have each agreed not to do the following with respect to the CIG Business nor to allow the CIG Business to do the following:
Further, First American, FAREISI, FARES and Newco each agreed except as contemplated by the master transfer agreement or the related agreements to cause Bar None and the XRES Business to be conducted only according to the ordinary course.
First American, FAREISI, FARES and Newco or their affiliates are not required to:
Certain Other Covenants.Prior to closing, First Advantage has access to the books and recordsof the CIG Business and Bar None, and First American has access to the books and recordsof First Advantage. The master
transfer agreement also contains provisions relating to confidentiality following termination of the master transfer agreement. The parties agreed to cooperate and use their respective commercially reasonable efforts to make all filings necessary under applicable laws and regulations to consummate the First American Transaction, including commercially reasonable efforts to obtain, prior to the closing date, all licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental entities that are necessary for consummation of the First American Transaction.
First Advantage agreed to prepare and file with the SEC a preliminary proxy statement and proxy and a final proxy statement and proxy and to use commercially reasonable efforts to cause the final proxy statement to be mailed to its stockholders as promptly as reasonably practicable.
First Advantage agreed that it has, or before the closing date will have, authorized the issuance and sale pursuant to the contribution agreements of 29,073,170 shares of Class B common stock, plus an additional number of shares of its Class B common stock sufficient to (i) pay the DealerTrack Earn-Out (as described under “Other Transaction Documents—First American Contribution Agreement” beginning on page 44) in full, (ii) repay in full the amounts owing under the $20 million promissory note, dated as of April 27, 2004, made by First Advantage in favor of First American, which will be assigned to Newco prior to closing. First Advantage also agreed that it has, or before the closing date will have, taken all action required under applicable federal and state laws in connection with the issuance of shares of Class B common stock in connection with the transaction.
Prior to closing, First Advantage agreed to, in accordance with applicable law:
Each party also agreed:
Notwithstanding the requirements described above, unless a party has the right to terminate the master transfer agreement pursuant to the termination provisions described below, if notice of a material breach of a representation or warranty is given, the notice will be deemed to have amended the disclosure schedules delivered by the party, to have qualified its representations and warranties in the relevant sections of the applicable agreement and to have cured any misrepresentation or breach of warranty that otherwise might have existed under that agreement by reason of the development disclosed in the amended disclosure schedule.
Each of First American, FAREISI, FARES and Newco agreed that it will, and it will cause its affiliates to, use commercially reasonable efforts, subject to certain exceptions, to obtain the written consent of any other party necessary to the assignment of any contract or undertaking constituting a part of the CIG Business and Bar None. To the extent that any such contract or undertaking requiring consent is transferred or assigned pursuant to the terms of the related agreements without consent, First American, FAREISI, FARES and Newco will, and will cause their subsidiaries and Bar None to, cooperate with First Advantage in any lawful arrangement designed to provide First Advantage the benefits of the contract or undertaking, with certain specified exceptions.
First Advantage will as promptly as practicable, but in any event within 180 calendar days following the date of delivery of a written request by First American, cause any of its subsidiaries to change its corporate name or the name under which it does business to remove “First American”. First Advantage also agreed that it will, and will cause its subsidiaries to, as promptly as practicable, but in any event within 180 calendar days following the date of delivery of a written request by First American, discontinue the use of “First American” and all logos, names, trademarks, service marks, trade names or any derivatives thereof, and to remove or obliterate them from all signs, packaging stock, letterhead, labels, websites and other materials used or produced by First Advantage or its subsidiaries and affiliates, except as otherwise permitted by First American, FAREISI, FARES and Newco.
Following the closing date, First Advantage will perform the obligations of First American, FAREISI, FARES and their respective affiliates (including the CREDCO Division) with respect to providing credit reports and related products and services. These services will be performed through the following agreements as they exist on the date of the master transfer agreement, which are referred to as “portal agreements”:
First Advantage agreed to fulfill the obligations under the portal agreements in the same or better manner and with the same or better quality as First American, FAREISI, FARES and their respective affiliates (including the CREDCO Division) were fulfilling their respective obligations prior to the closing date. First Advantage’s obligations with respect to each portal agreement pursuant to master transfer agreement will expire upon the expiration of the term of the relevant portal agreement. To the extent First American, FAREISI, FARES or one of their respective affiliates receives payment for services rendered by First Advantage, First American, FAREISI or FARES will, or will cause their affiliates to, pay the amount over to First Advantage within five business days of receiving the payment.
First American agreed to contribute $1.5 million of cash to Bar None by no later than July 21, 2005 (which contribution has been made). First American agreed not to permit Bar None to pay any cash dividends or other distributions to stockholders prior to closing. On or prior to closing, First American will assume the obligations of Bar None under the promissory note, dated May 25, 2005, in the original principal amount of $1 million made by Bar None in favor of Francis A. Tarkenton.
Conditions Precedent to Closing.The obligations of each of the parties to consummate the First American Transaction is subject to the satisfaction or waiver by each party (including, in the case of First Advantage, the special committee) on or before the closing of the following conditions:
No statute, rule, regulation, executive order, decree or order of any kind shall have been enacted, entered, promulgated or enforced by any court or other governmental entity which prohibits the consummation of the First American Transaction; all governmental and other consents and approvals
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In addition, the obligations of First Advantage to consummate the transaction are subject to the satisfaction or waiver by First Advantage (including the special committee) on or before the closing of the following conditions:
The obligations of each of First American, FAREISI, FARES and Newco to consummate the First American Transaction are subject to the satisfaction or waiver on or before the closing of the following conditions:
Termination.The master transfer agreement may be terminated in whole, but not in part, as follows:
In the event that the master transfer agreement is terminated, all further obligations of the parties under the master transfer agreement (other than certain confidentiality and expense provisions, which will continue in full force and effect) will terminate without further liability or obligation of any party to any other party under the master transfer agreement; however, no party will be released from liability under the master transfer agreement if the master transfer agreement is terminated and the First American Transaction is abandoned by reason of
willful failure of such party to have performed its obligations under the master transfer agreement, and any knowing misrepresentation made by such party of any matter set forth in the master transfer agreement.
Expenses, Amendments, Waiver and Other Miscellaneous Provisions.Each party will bear its own costs incurred as a result of the First American Transaction, including payments to third parties, if any, to obtain their consent to the transfer contemplated by the First American Transaction and professional fees and related costs and expenses (including fees, costs and expenses of accountants, attorneys, benefits specialists, investment banks, financial advisors, tax advisors and appraisers) incurred by it in connection with the preparation, execution and delivery of the master transfer agreement and the related agreements and the First American Transaction.
The master transfer agreement may only be amended by a written agreement signed by the parties and consented to by the special committee, provided that non-substantive changes to exhibits to the master transfer agreement may be made without the consent of the special committee.
At any time prior to the closing, the parties may extend the time for performance of any of the obligations or other acts of the other parties, waive any inaccuracies in the representations and warranties of the other parties contained in the master transfer agreement or in any document delivered pursuant to it, and waive compliance with any of the agreements or conditions of the other parties contained in the master transfer agreement; provided that, except as otherwise permitted in the master transfer agreement, any extension or waiver will require the consent of the special committee to be effective. No extension or waiver will be valid unless and to the extent set forth in a written instrument signed by such party.
In addition, First Advantage gave its consent to First American’s contribution to Newco of the promissory note dated as of April 27, 2004, made by First Advantage in favor of First American.
First American Contribution Agreement
The following summary describes certain provisions of the First American contribution agreement, the form of which is included as Annex B to this proxy statement. The provisions of the First American contribution agreement are extensive and not easily summarized. This summary may not contain all of the information about the First American contribution agreement that is important to you. We encourage you to read the First American contribution agreement carefully in its entirety.
The First American contribution agreement has been included to provide you with information regarding its terms. It is not intended to provide any other factual information about First Advantage. This information may be found elsewhere in this proxy statement and in the other public filings that First American makes with the SEC. The First American contribution agreement contains representations and warranties the parties thereto made to and solely for the benefit of each other. The assertions embodied in those representations and warranties are qualified by information in confidential disclosure schedules that the parties have exchanged in connection with signing the First American contribution agreement. Accordingly, investors and security holders should not rely on the representations and warranties as characterizations of the actual state of facts, since they are modified in important part by the underlying disclosure schedules. Moreover, the information concerning the subject matter of the representations and warranties may change after the date of the First American contribution agreement, which subsequent information may or may not be fully reflected in First Advantage’s public disclosures.
Transactions Under the First American Contribution Agreement.Under the First American contribution agreement, Newco will, and First American and FAREISI agree to cause Newco to, contribute to First Advantage or its wholly-owned subsidiary all of the issued and outstanding shares of common stock or membership interests
of the companies that it will acquire from First American and FAREISI and that comprise a portion of the CIG Business, as well as the DealerTrack Interest and Bar None. In consideration for this contribution, on the closing date, First Advantage will deliver an aggregate of 11,756,097 shares of its Class B common stock to Newco and deliver a certificate in its name representing such shares of Class B common stock of First Advantage. For purposes of the First American contribution agreement, First American, FAREISI and Newco are referred to as “contributors”.
The First American contribution agreement also provides that, as repayment in full of the principal amount of $20 million owed pursuant to the terms of the promissory note, dated as of April 27, 2004, made by First Advantage in favor of First American and assigned to Newco, First Advantage will deliver to Newco 975,610 shares of its Class B common stock.
In addition, First Advantage will deliver to Newco an additional number of shares of Class B common stock if DealerTrack or its successor consummates an initial public offering of its capital stock on or prior to the second anniversary of the closing of the First American Transaction equal to one half of the value of the DealerTrack Interest in excess of $50 million. The actual number of our Class B shares to be issued in respect of the DealerTrack Earn-Out, if any, is determined as follows:
The additional shares must be delivered by First Advantage to Newco within 180 days of the triggering event. The DealerTrack Excess Value means the amount, if any, by which the value of the DealerTrack Interest exceeds $50 million, calculated using the average closing price per share of the publicly listed DealerTrack capital stock, rounded to the fourth decimal place, as reported on the exchange or quotation system then listing such shares, for the 60 business day period beginning on the fifth business day from and after the closing of the initial public offering by DealerTrack or its successor.
As of the closing, the aggregate amount of cash and cash equivalents of the CIG Business of the companies being conveyed to First Advantage under the First American contribution agreement and their respective subsidiaries must be $1.95 million or more.
Representations and Warranties.The First American contribution agreement contains representations and warranties by First American and FAREISI relating to, among other things:
In addition, the First American contribution agreement contains representations and warranties made jointly and severally by First American and FAREISI regarding the companies that comprise the portion of the CIG Business and their subsidiaries contributed by First American and FAREISI to Newco and then to First Advantage relating to, among other things:
assuming the receipt of third party consents in connection with the transactions contemplated by the First American contribution agreement, the absence of defaults, or events that would become defaults if
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First American and FAREISI also jointly and severally make representations and warranties relating to ownership of the DealerTrack Interest that the record owner of the DealerTrack Interest owns the interest free and clear of all encumbrances and has not entered into any agreements or commitments for the sale of any part of the DealerTrack Interest or otherwise conveyed or encumbered its interest. The representations and warranties with respect to the companies that comprise the CIG Business described elsewhere in the First American contribution agreement do not relate to the DealerTrack Interest. Other than the representations and warranties that specifically relate to Bar None, the representations and warranties with respect to the companies that comprise the CIG Business described elsewhere in the First American contribution agreement do not relate to Bar None.
First Advantage also makes certain representations and warranties relating to, among other things:
to the actual knowledge of First Advantage, the information disclosed in the First American contribution agreement with respect to First Advantage does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained in that agreement, in
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The representations and warranties in the First American contribution agreement are made as of the closing (unless made as of a specified date) of the First American Transaction.
Covenants.The First American contribution agreement contains certain covenants, including the following:
Indemnification.The representations and warranties of the First American contribution agreement are made as of closing unless another date is specified and survive for eighteen months following the closing date.However, certain representations by First American and FAREISI relating to binding effect, the business and operations of Newco, capitalization, broker’s and finder’s fees and ownership of the DealerTrack Interest, and certain representations by First Advantage relating to binding effect, capitalization and broker’s and finder’s fees will survive for five years after the closing date. In addition, the representations and warranties by the contributors relating to taxes will survive until 30 days after the expiration of the applicable statute of limitations.
First American and FAREISI will, jointly and severally, indemnify and hold First Advantage and its subsidiaries and affiliates (including, after the closing, each company and its subsidiaries that comprise part of the CIG Business contributed to First Advantage under the First American contribution agreement) and each of
their respective directors, officers, members, managers, stockholders, employees and agents and any successors thereto harmless from and against any and all losses suffered, incurred or paid, directly or indirectly, as a result of or arising out of:
The sole recourse and remedy of each indemnified party for any inaccuracy in any representation or warranty or alleged representation or warranty by or on behalf of the contributors contained in or made pursuant to the First American contribution agreement will be under the provisions of and to the extent provided for in the indemnification provisions.
First American and FAREISI are not required to indemnify and hold the indemnified parties harmless for losses relating to breaches of representations and warranties by First American and FAREISI as of closing until the aggregate amount due in respect of such losses exceeds $1.95 million, and then First American and FAREISI are required to indemnify and hold harmless for losses in excess of this amount. The maximum aggregate amount of losses payable by First American and FAREISI relating to such breaches of representations and warranties is capped at $39 million. However, the foregoing limitations will not apply to losses that arise from (i) a breach of any of the representations and warranties relating to binding effect, the business and operations of Newco, capitalization, broker’s and finder’s fees and ownership of the DealerTrack Interest, or (ii) the intentional breach or misrepresentation of any of the representations or warranties by First American or FAREISI where First Advantage can prove it was caused by the actions or inactions of certain individuals, with respect to which the maximum aggregate limitation for the losses in (i) and (ii) is $214.5 million.
First Advantage will indemnify and hold First American and FAREISI and its affiliates and each of their respective directors, officers, members, managers, stockholders, employees and agents and any successors thereto harmless from any and all losses suffered, incurred or paid, directly or indirectly, as a result of or arising out of:
The sole recourse and remedy of each indemnified party for any inaccuracy in any representation or warranty or alleged representation or warranty by or on behalf of First Advantage contained in or made pursuant to the First American contribution agreement will be under the provisions of and to the extent provided for in the indemnification provisions.
First Advantage is not required to indemnify and hold the indemnified parties harmless for losses relating to breaches of representations and warranties by First Advantage as of closing until the aggregate amount due in respect of such losses exceeds $1.95 million, and thereafter First Advantage is required to indemnify and hold harmless for losses in excess of this amount. The maximum aggregate amount of losses payable by First Advantage relating to such breaches of representations and warranties is capped at $39 million. However, the foregoing limitations will not apply to losses that arise from (i) a breach of any of the representations and warranties relating to the binding effect, capitalization and broker’s and finder’s fees, or (ii) the intentional
breach or misrepresentation of any of the representations or warranties by First Advantage where the contributors can prove it was caused by the actions or inactions of certain individuals, with respect to which the maximum aggregate limitation for the losses in (i) and (ii) is $214.5 million.
The respective obligations of each parties to indemnify and hold harmless pursuant to the indemnification provisions will survive the consummation of the transactions contemplated by the First American contribution agreement for the time periods described above, except for claims for indemnification asserted prior to the end of such periods, which claims will survive until final resolution thereof.
The First American contribution agreement also contains certain procedures with respect to indemnification, which include submission of a certificate containing certain specific information, objections to the indemnification that is being sought, notice and submitting claims with insurance carriers. No indemnifying party will be required to indemnify for any special, consequential, punitive or indirect damages.
Miscellaneous.Provisions relating to expenses, amendments, extensions and waivers are the same as those contained in the master transfer agreement described above. Except as provided in the First American contribution agreement, First American and FAREISI do not make any representation or warranty with respect to Bar None or the effect of First American’s acquisition of Bar None on the companies comprising the CIG Business and Bar None will be transferred to First Advantage on an “as is where is” basis.
The following summary describes certain provisions of the FARES contribution agreement, the form of which is included as Annex C to this proxy statement. The provisions of the FARES contribution agreement are extensive and not easily summarized. This summary may not contain all of the information about the FARES contribution agreement that is important to you. We encourage you to read the FARES contribution agreement carefully in its entirety.
The FARES contribution agreement has been included to provide you with information regarding its terms. It is not intended to provide any other factual information about First Advantage. This information may be found elsewhere in this proxy statement and in the other public filings that First Advantage makes with the SEC. The FARES contribution agreement contains representations and warranties the parties thereto made to and solely for the benefit of each other. The assertions embodied in those representations and warranties are qualified by information in confidential disclosure schedules that the parties have exchanged in connection with signing the FARES contribution agreement. Accordingly, investors and security holders should not rely on the representations and warranties as characterizations of the actual state of facts, since they are modified in important part by the underlying disclosure schedules. Moreover, the information concerning the subject matter of the representations and warranties may change after the date of the FARES contribution agreement, which subsequent information may or may not be fully reflected in First Advantage’s public disclosures.
Transactions under the FARES Contribution Agreement.Under the FARES contribution agreement, Newco will, and FARES will cause Newco to, contribute to First Advantage or its wholly-owned subsidiary all of FARES’s, Newco’s and their affiliates’ right title and interest in and to the assets (personal, tangible and intangible) used exclusively in, or which relate exclusively to, the CREDCO Division, including without limitation those assets set forth below, free and clear of any encumbrances (other than permitted liens and assumed liabilities), which are refered to as the “contributed assets”. For purposes of the FARES contribution agreement, FARES and Newco are referred to as “contributors”.
All assets of FARES and Newco other than the contributed assets listed above are excluded assets and will not be sold, assigned, conveyed, transferred or contributed to First Advantage, including:
In consideration for the contribution of the contributed assets to First Advantage or its wholly-owned subsidiary, in addition to assuming the assumed liabilities, First Advantage will deliver to Newco on the closing date, a certificate in its name representing 17,317,073 shares of its Class B common stock.
In addition to the payment to Newco of the consideration described above, and as additional consideration for the contributed assets, from and after the closing, First Advantage will assume and become responsible for, or will cause its wholly-owned subsidiary to assume and become responsible for, the assumed liabilities, which will include all liabilities and obligations of FARES, Newco and their affiliates relating to the CREDCO Division, and all liabilities and obligations of FARES, Newco and their affiliates arising out of or related to the contributed assets, and the assumed liabilities under the XRES asset purchase agreement.
Except for assumed liabilities and subject to the terms and conditions of the FARES contribution agreement, neither First Advantage nor any of its Subsidiaries will assume any liabilities, obligations or commitments of FARES and Newco, including the following, which will be retained by FARES or Newco, as applicable:
Representations and Warranties.FARES makes representations and warranties relating to FARES, Newco and the CREDCO Division of substantially the same nature as those made by each of the contributors in the First American contribution agreement and also makes representations and warranties relating to the XRES Business and the amount of rent paid by FARES pursuant to the lease agreement between First American Title Insurance Company and First Advantage relating to buildings located in Poway, California. In addition, First Advantage
makes the same representations and warranties to FARES as those made to the contributors in the First American contribution agreement. The representations and warranties contained in the FARES contribution agreement are made as of the closing (unless made as of a specified date) of the First American Transaction.
Covenants.The FARES contribution agreement contains certain covenants, including the following:
Indemnification.The representations and warranties of the FARES contribution agreement are made as of closing unless another date is specified and survive for eighteen months following the closing date. However, certain representations by FARES relating to binding effect, broker’s and finder’s fees and the business and operations of Newco, and by First Advantage relating to binding effect, capitalization and broker’s and finder’s fees will survive for five years after the closing date. In addition, the representations and warranties by FARES relating to taxes will survive until 30 days after the expiration of the applicable statute of limitations.
FARES will indemnify and hold First Advantage and its subsidiaries and affiliates (including, after the closing, PR CREDCO) and each of their respective directors, officers, members, managers, stockholders, employees and agents and any successors thereto harmless from and against any and all losses suffered, incurred or paid, directly or indirectly, as a result of or arising out of:
The sole recourse and remedy of each indemnified party for any inaccuracy in any representation or warranty or alleged representation or warranty by or on behalf of FARES contained in or made pursuant to the FARES contribution agreement will be under the provisions of and to the extent provided for in the indemnification provisions.
FARES is not required to indemnify and hold the indemnified parties harmless for losses relating to breaches of representations and warranties made by FARES as of the closing date until the aggregate amount due in respect of such losses exceeds $3.05 million, and thereafter FARES is required to indemnify and hold harmless for losses in excess of this amount. The maximum aggregate amount of losses payable by FARES relating to such breaches of representations and warranties is capped at $61 million. However, the foregoing limitations will not apply to losses that arise from (i) a breach of any of the representations and warranties relating to binding effect, broker’s and finder’s fees and the business and operations of Newco, or (ii) any intentional breach or misrepresentation of any of the representations or warranties of the FARES contribution agreement by FARES where First Advantage can prove an intentional breach or misrepresentation was actually caused by the actions or inactions of certain individuals, with respect to which the maximum aggregate limitation for the losses in (i) and (ii) is $335.5 million.
First Advantage will indemnify and hold FARES, Newco and their affiliates and each of their respective directors, officers, members, managers, stockholders, employees and agents and any successors thereto from or against any and all losses suffered, incurred or paid, directly or indirectly, as a result of or arising out of:
The sole recourse and remedy of each indemnified party for any inaccuracy in any representation or warranty or alleged representation or warranty by or on behalf of First Advantage contained in or made pursuant to the FARES contribution agreement will be under the provisions of and to the extent provided for in the indemnification provisions.
First Advantage is not required to indemnify and hold the indemnified parties harmless for losses relating to breaches of representations and warranties made by First Advantage as of closing until the aggregate amount due
in respect of such losses exceeds $3.05 million, and thereafter First Advantage is required to indemnify and hold harmless for losses in excess of this amount. The maximum aggregate amount of losses payable by First Advantage relating to such breaches of representations and warranties is capped at $61 million. However, the foregoing limitations will not apply to losses that arise from (i) a breach of any of the representations and warranties relating to the binding effect, capitalization and broker’s and finder’s fees, or (ii) intentional breach or misrepresentation of any of the representations or warranties of the FARES contribution agreement by First Advantage where FARES can prove intentional breach or misrepresentation of any representations or warranties was actually caused by the actions or inactions of certain individuals, with respect to which the maximum aggregate limitation for the losses is $335.5 million.
The obligations to indemnify and hold harmless pursuant to the indemnification provisions will survive the consummation of the transactions contemplated by the FARES contribution agreement for the time periods set forth above, except for claims for indemnification asserted prior to the end of such periods, which claims will survive until final resolution thereof.
The FARES contribution agreement also contains similar procedures with respect to indemnification as those contained in the First American contribution agreement described above. No indemnifying party will be required to indemnify for any special, consequential, punitive or indirect damages.
Miscellaneous.Provisions relating to expenses, amendments, extensions and waivers are the same as those contained in the master transfer agreement described above. In addition, FARES does not make any representations or warranties with regard to the assets purchased or liabilities assumed under the XRES asset purchase agreement, except as provided in the FARES contribution agreement or the effect of the assets of business purchased or liabilities assumed under the XRES asset purchase agreement on the CREDCO Division or the CIG Business. The business, assets and liabilities under the XRES asset purchase agreement are being transferred and assumed under the FARES contribution agreement on an “as is, where is basis” subject only to provisions of the FARES contribution agreement pertaining to certain benefits relating to acquisition agreements.
Amended and Restated Services Agreement
The following summary describes certain provisions of the amended and restated services agreement, the form of which is included as Annex D to this proxy statement. The provisions of the amended and restated services agreement are extensive and not easily summarized. This summary may not contain all of the information about the amended and restated services agreement that is important to you. We encourage you to read the amended and restated services agreement carefully in its entirety.
The amended and restated services agreement has been included to provide you with information regarding its terms. It is not intended to provide any other factual information about First Advantage. This information may be found elsewhere in this proxy statement and in the other public filings that First Advantage makes with the SEC.
First Advantage and First American are parties to an amended and restated services agreement dated as of January 1, 2004, which amended and restated the terms of a services agreement between them dated as of June 5, 2003. In connection with the closing of the First American Transaction, First Advantage and First American will enter into a new amended and restated services agreement pursuant to which First Advantage or its affiliates, on the one hand, and First American or its affiliates, on the other hand, will provide the other with certain business services, services relating to operations in India and mortgage services.
First Advantage is dependent on First American for a number of key services provided under the services agreement. Specifically, First American will act as the exclusive reseller of credit information and related products of the CIG Business and related businesses to customers in the mortgage industry as part of a bundled package of services provided by First American and otherwise. First American’s interests with respect to such sales may differ
from First Advantage’s interests. See the description of certain risks associated with the services agreement under “Risk Factors” beginning on page 1 and the potential risks associated with the services agreement considered by the special committee under “Reasons of the Special Committee for the First American Transaction” beginning on page 22.
First American Business Services.The following business services will be provided by First American to First Advantage and/or its affiliates at the rates set forth below. In addition, First American will and will cause its affiliates to allocate resources with regard to the business services in a manner that is consistent with the allocation of resources by First American and its affiliates prior to the CREDCO Division being transferred to First Advantage.
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First Advantage Services, Including Services in India.First Advantage and/or its affiliate will provide First American and/or its affiliates with products and services offered by or through First Advantage or its affiliates from time to time (excluding the additional services with respect to operations in India and the mortgage services discussed below) at rates and on terms no less favorable than those generally offered by First Advantage and its affiliates to third parties.
The following additional services with respect to operations in India will be provided by First Advantage or its affiliates to First American and its affiliates at cost plus such fees as may be negotiated from time to time:
In addition, First Advantage will and will cause its affiliates to allocate resources with regard to these services in a manner that is consistent with the allocation of resources by First Advantage and its affiliates prior to the CREDCO Division being transferred to First Advantage.
First American will cause FARES to provide First Advantage with reasonable access to its voice communications hub for the purpose of routing customer service calls to and monitoring personnel at the operations in India. In exchange for use of the communications hub, First Advantage will pay FARES its pro rata share of the total actual cost to FARES.
First Advantage Mortgage Services.First Advantage shall and shall cause its affiliates to provide First American and/or its affiliates with credit reports for resale to mortgage customers. First Advantage also designates First American and its affiliates as the exclusive resellers of credit reports to mortgage customers. Credit reports include merged, multiple-source or single-source credit reports created by accessing one or more of the national credit database repositories and other information sources, which credit reports will include basic, partial and fully verified Instant Merge Reports (including Merge Plus Reports and Residential Mortgage Credit Reports). Credit reports also include other credit reports incorporating credit scores, fraud check products, products which list creditor addresses and phone numbers, and other related information and enhancements that First Advantage and/or its affiliates may offer from time to time. Mortgage customers are mortgage lenders, mortgage servicers, mortgage brokers, underwriters, and other users of information in the mortgage lending process and their respective customers.
First American will pay First Advantage a fee of $12.60 for each of the merged reports provided to First American or its affiliates that is bundled with other products or services. Fees for all other credit reports not bundled with other First American products or services, will be negotiated between the parties on a case-by-case basis. The parties agree to renegotiate the bundled credit report fee in good faith every two years during the term.
The CIG Business as operated by First Advantage must satisfy requisite service levels, and if First Advantage does not meet these service levels, and has received notice of the deficiency and failed to cure the deficiency during the applicable cure period, First American will have the right (but not the obligation) to assume control of the remedial action to cure the deficiency and First Advantage will reimburse First American for any fees, costs and expenses in connection with the remediation. First Advantage also must promptly reimburse First American or its affiliates for any amounts they are required to pay as a result of First Advantage’s or its affiliate’s failure to meet the standard of care required by the agreements pursuant to which the mortgage credit reports are provided to mortgage customers.
During the term of the amended and restated services agreement, First Advantage will appoint and cause its affiliates to appoint First American and its affiliates as the exclusive resellers of credit reports to mortgage customers. Except as otherwise provided in the amended and restated services agreement, First Advantage will not, and will not permit any of its affiliates to, directly or indirectly market, sell or provide mortgage credit reports to mortgage customers.
First American will be solely responsible for all sales, marketing, delivery, pricing and collections with regard to the sale of credit reports to mortgage customers and will control marketing services, which include sales, marketing, delivery, pricing and collections strategies with regard to the sale of credit reports to mortgage customers. First Advantage will, and will cause its affiliates to, cooperate with First American and its affiliates in the marketing and sale of credit reports to mortgage customers and to provide reasonable technical assistance to First American and its affiliates for such purpose.
First Advantage and First American will collectively appoint four individuals to serve on a committee which will be responsible for managing the provision of the mortgage services, except where the management thereof has been allocated to one of the parties by the terms of the amended and restated services agreement. First American and First Advantage will each appoint two members to the committee.
First Advantage and its affiliates will allocate information technology and project resources with regard to mortgage services in a manner that is consistent with the allocation of such resources by First American’s CREDCO Division prior to the transfer of that division to First Advantage or its affiliate, and that equals or
exceeds the allocation of such resources to other businesses of First Advantage and its affiliates. First Advantage will not, and will prevent its affiliates from discriminating against the provision of mortgage services. In addition, First American will identify certain key mortgage customers and First Advantage and its affiliates will dedicate the appropriate resources necessary to meet those superior service levels.
Treatment of Employees Under Services Agreement.First American or the other First American entities will continue to employ all personnel performing the business services directly and will be solely responsible for and pay all of their salary, benefits, workers’ compensation premiums, unemployment insurance premiums, and all other compensation, insurance and benefits, including participation in employee benefit plans, if applicable. First American and the other First American entities will be solely responsible for timely payment, withholding and reporting of all applicable Federal, state, foreign and local withholding, employment and payroll taxes with respect to the personnel that perform the First American business services. First American or the other First American entities will maintain workers’ compensation and employers’ liability insurance, in accordance with applicable law, covering the personnel that perform the First American business services.
First Advantage and its affiliates will continue to employ all personnel performing the First Advantage services, the additional services with respect to operations in India and the mortgage services directly and will be solely responsible for and pay all of their salary, benefits, workers’ compensation premiums, unemployment insurance premiums and all other compensation, insurance and benefits, including participation in employee benefit plans, if applicable. First Advantage and its affiliates will be solely responsible for timely payment, withholding and reporting of all applicable federal, state, foreign and local withholding, employment and payroll taxes with respect to the personnel that perform the First Advantage services, the additional services with respect to operations in India and the mortgage services. First Advantage and its affiliates will maintain workers’ compensation and employers’ liability insurance, in accordance with applicable law, covering the personnel that perform the First Advantage services, the additional services with respect to Indian operations and the mortgage services.
In providing the business services, First American and its affiliates will not be liable to First Advantage and its affiliates for errors or omissions other than those resulting from the gross negligence or willful misconduct of First American or its affiliates. First American and its affiliates will not be liable to First Advantage, its affiliates, or third parties for damages such as lost profits or injury to goodwill arising from First American’s or its affiliates’ performance of services.
In providing services with respect to operations in India, First Advantage and its affiliates will not be liable to First American and its affiliates for errors or omissions other than those resulting from the gross negligence or willful misconduct of First Advantage or its affiliates. First Advantage and its affiliates will not be liable to First American, its affiliates or third parties for damages such as lost profits or injury to goodwill arising from First Advantage’s or its affiliate’s performance of services.
In providing the mortgage services, if First Advantage or its affiliates fail to meet the standard of care required by the agreements that govern the credit reports provided to mortgage customers, First Advantage and its affiliates will reimburse First American and its affiliates for any penalties First American and its affiliates must pay as a result.
Term.The services agreement will commence on the date the agreement is executed (which is expected to be the closing date of the First American Transaction) and terminate with respect to the applicable services as set forth below:
The following summary describes certain provisions of the subordinated promissory note, the form of which is included as Annex E to this proxy statement. The provisions of the subordinated promissory note are extensive and not easily summarized. This summary may not contain all of the information about the promissory note that is important to you. We encourage you to read the promissory note carefully in its entirety.
The subordinated promissory note has been included to provide you with information regarding its terms. It is not intended to provide any other factual information about First Advantage. This information may be found elsewhere in this proxy statement and in the other public filings that First Advantage makes with the SEC.
In connection with the closing of the First American Transaction, First Advantage will execute and deliver to First American a subordinated promissory note in the original principal amount of $45 million. Pursuant to the terms of the promissory note, First Advantage may borrow, repay and reborrow up to $45 million at any one time during the ninety calendar days following the date of the subordinated promissory note (which is expected to be the closing date of the First American Transaction) (the “draw period”). The subordinated promissory note matures 135 days after the date it is executed and bears interest at a rate equal to the rate payable under a loan agreement and other documents delivered in connection with a loan from Bank of America, N.A. to First Advantage dated July 31, 2003, as amended, plus 0.5% per annum. If an event of default occurs under the promissory note, (i) the draw period will immediately and automatically terminate, (ii) First American may declare all principal and accrued interest immediately due and payable, and (iii) the interest rate will increase by an additional 4.5% per annum. The obligations of First Advantage under the promissory note are not secured.
The following occurrences are events of default under the promissory note:
The subordinated promissory note is subject to a subordination agreement between First American and Bank of America, N.A. to be entered into on the same date as the promissory note.
The following summary describes certain provisions of the outsourcing agreement, the form of which is included as Annex F to this proxy statement. The provisions of the outsourcing agreement are extensive and not easily summarized. This summary may not contain all of the information about the outsourcing agreement that is important to you. We encourage you to read the outsourcing agreement carefully in its entirety.
The outsourcing agreement has been included to provide you with information regarding its terms. It is not intended to provide any other factual information about First Advantage. This information may be found elsewhere in this proxy statement and in the other public filings that First Advantage makes with the SEC.
In connection with the closing of the First American Transaction, FARES and First Advantage will enter into an outsourcing agreement. Pursuant to the outsourcing agreement, First Advantage will, and will cause its affiliates to fully perform all obligations, covenants and agreements of FARES under the following service agreements (which we refer to as the “Service Agreements”):
First Advantage expects to receive a significant amount of revenue under the outsourcing agreement. These revenues are dependent on the performance of RELS, which will continue to be managed and controlled by First American after the closing of the First American Transaction. In addition, the commercial arrangements under which RELS provides services and derives revenues are based on agreements with RELS’ single customer, which is the other member of RELS, whose interests may be different from and/or adverse to First Advantage, and these underlying arrangements are terminable with little or no notice. See the description of certain risks associated with the outsourcing agreement under “Risk Factors” beginning on page 1 and the potential risks associated with the outsourcing agreement considered by the special committee under “Reasons of the Special Committee for the First American Transaction” beginning on page 22.
In providing the RESdirect Services, the RELS Services and the RRS Services (which we collectively refer to as the “Services” for purpose of the description of the outsourcing agreement), First Advantage will and will cause its affiliates to comply with applicable laws and regulations and the terms of the Service Agreements, and act in a good faith commercially reasonable manner and at least in accordance with the standards for the Services used by FARES in the performance of the Services prior to the effective date of the outsourcing agreement. In addition, First Advantage will perform all obligations, covenants and agreements of FARES under the Service Agreements so long as these agreements remain in effect.
In consideration for First Advantage providing the Services pursuant to the outsourcing agreement, FARES will pay to First Advantage:
The term of the outsourcing agreement will begin on the effective date (which is expected to be the closing date of the First American Transaction) and terminate:
FARES will use reasonable efforts to provide First Advantage with the rights and benefits under the Service Agreements, including enforcement for the benefit of First Advantage, which will be at First Advantage’s sole expense of any and all rights of FARES against RESdirect, RELS and RRS, respectively, arising out of any breach of the Services Agreements by RESdirect, RELS and/or RRS, respectively, if requested by First Advantage, acting as an agent on behalf of First Advantage, or as First Advantage otherwise reasonably requires. First Advantage will bear FARES’s reasonable out-of-pocket expenses and costs as agent and will indemnify FARES for actions taken or not taken as agent. FARES will not agree to amend or modify, or agree to any waiver of any provision of the Service Agreements without the prior written consent of First Advantage.
In addition, First Advantage will indemnify and hold FARES and its subsidiaries, each of their affiliates, and each of their respective officers, managers, employees, agents and any assignees and successors thereto, harmless, from and against any and all claims, losses, liabilities, damages, costs, disbursements, interest, and reasonable out-of-pocket expenses (including reasonable attorney fees) suffered, incurred or paid, directly or indirectly, as a result of or arising out of First Advantage’s or its affiliates’ performance of First Advantage’s obligations under the outsourcing agreement. FARES will indemnify and hold First Advantage and its subsidiaries and each of their affiliates, and each of their respective officers, managers, employees, agents, any assignees and successors thereto, harmless, from and against any and all claims, losses, liabilities, damages, costs, disbursements, interest, and reasonable out-of-pocket expenses (including reasonable attorney fees) suffered, incurred or paid, directly or indirectly, as a result of or arising out of FARES’s or its affiliates’ performance of FARES’s obligations under the outsourcing agreement.
FARES and First Advantage will cooperate in good faith to carry out the purposes of the outsourcing agreement. If FARES exercises its right to terminate any of the Service Agreements, FARES must provide First Advantage with at least five days notice of its desire to terminate the applicable Services Agreement, and First Advantage has the option to delay the termination for a period of 45 calendar days, during which FARES will use commercially reasonable best efforts (which efforts shall not require FARES to make any payment or forego any rights) to obtain the consent of the other parties to such agreement and other necessary consents to the assignment of the applicable Services Agreement to First Advantage. If the necessary consents are obtained, FARES will assign the Services Agreement to First Advantage, or its designee, and will cooperate in the execution of any reasonably necessary documentation to effect the assignment. FARES and First Advantage will assist and furnish the other party with such information and documentation as the other party may reasonably request.
The following summary describes certain provisions of the Poway lease agreement, the form of which is included as Annex G to this proxy statement. The provisions of the Poway lease agreement are extensive and not easily summarized. This summary may not contain all of the information about the lease agreement that is important to you. We encourage you to read the Poway lease agreement carefully in its entirety.
The Poway lease agreement has been included to provide you with information regarding its terms. It is not intended to provide any other factual information about First Advantage. This information may be found elsewhere in this proxy statement and in the other public filings that First Advantage makes with the SEC.
In connection with the closing of the First American Transaction, First Advantage and First American will enter into a lease for office space in Poway, California. Pursuant to the terms of the Poway lease, First Advantage will lease from First American certain land, buildings and parking structure located at 12385 and 12395 First American Way in Poway. The Poway lease is for an initial lease term of five years to commence on the closing date with a one-time option to renew the term for an additional five years.
The rent payable under the Poway lease will be approximately $169,000 per month. First Advantage will also be obligated to pay all costs and expenses related to the property, including any operating expenses, real estate property taxes and assessments, personal property taxes, maintenance, repair to the structure and parking lot and other management costs associated with the property. First Advantage will also be obligated to pay all utilities, services and janitorial costs.
Other Related Transaction Agreements
At the closing of the First American Transaction, other related agreements will be entered into, including:
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes the First American Transaction will be treated as a tax-free reorganization in accordance with Section 351 of the Internal Revenue Code.
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
First Advantage management’s discussion and analysis of financial condition and results of operations included in its annual report on Form 10-K, as amended, for the year ended December 31, 2004 and its quarterly report on Form 10-Q, as amended, for the quarter ended March 31, 2005 are incorporated by reference into this proxy statement. This proxy statement should be read in conjunction with First Advantage’s audited consolidated financial statements for the fiscal year ended December 31, 2004 included in its annual report on Form 10-K, as amended, for the year ended December 31, 2004, and its unaudited consolidated financial statements for the quarter ended March 31, 2005 included in its quarterly report on Form 10-Q, as amended, for the quarter ended March 31, 2005, which are incorporated by reference into this proxy statement.
SELECTED HISTORICAL FINANCIAL INFORMATION OF THE CIG BUSINESS
This selected financial information has been derived from the audited combined financial statements and accompanying notes of the CIG Business for the three-year period ended December 31, 2004 and the unaudited combined financial statements of the CIG Business for the two-year period ended December 31, 2001 and the three months ended March 31, 2005 and 2004. This information is only a summary and should be read in conjunction with the audited financial statements and accompanying notes included in this proxy statement.
Three months ended: March 31, | Twelve months ended: December 31, | |||||||||||||||||||||
2005 | 2004 | 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
Income Statement Data: | ||||||||||||||||||||||
Service revenue | $ | 66,345,000 | $ | 62,452,000 | $ | 242,812,000 | $ | 244,806,000 | $ | 208,521,000 | $ | 188,547,000 | $ | 144,858,000 | ||||||||
Other income | 1,612,000 | 2,143,000 | 7,392,000 | 9,060,000 | 9,654,000 | 5,192,000 | 1,533,000 | |||||||||||||||
Total revenue | 67,957,000 | 64,595,000 | 250,204,000 | 253,866,000 | 218,175,000 | 193,739,000 | 146,391,000 | |||||||||||||||
Cost of service revenue | 23,499,000 | 22,200,000 | 85,573,000 | 81,970,000 | 66,581,000 | 64,741,000 | 53,397,000 | |||||||||||||||
Gross margin | 44,458,000 | 42,395,000 | 164,631,000 | 171,896,000 | 151,594,000 | 128,998,000 | 92,994,000 | |||||||||||||||
Operating expenses | 26,142,000 | 27,032,000 | 111,818,000 | 118,471,000 | 106,871,000 | 98,367,000 | 74,784,000 | |||||||||||||||
Income from operations | 18,316,000 | 15,363,000 | 52,813,000 | 53,425,000 | 44,723,000 | 30,631,000 | 18,210,000 | |||||||||||||||
Other income (expense) | 458,000 | (121,000 | ) | 2,064,000 | 13,132,000 | 11,000 | 28,000 | 48,000 | ||||||||||||||
Income before income taxes | 18,774,000 | 15,242,000 | 54,877,000 | 66,557,000 | 44,734,000 | 30,659,000 | 18,258,000 | |||||||||||||||
Provision for income taxes | 7,815,000 | 6,266,000 | 22,477,000 | 31,023,000 | 18,340,000 | 13,712,000 | 7,668,000 | |||||||||||||||
Net income | $ | 10,959,000 | $ | 8,976,000 | $ | 32,400,000 | $ | 35,534,000 | $ | 26,394,000 | $ | 16,947,000 | $ | 10,590,000 | ||||||||
Balance Sheet Data: | ||||||||||||||||||||||
Total assets | $ | 195,699,000 | $ | 183,279,000 | $ | 171,912,000 | $ | 182,786,000 | $ | 167,093,000 | $ | 171,145,000 | $ | 91,913,000 | ||||||||
Long-term debt | $ | 456,000 | $ | 912,000 | $ | 570,000 | $ | 1,026,000 | $ | — | $ | — | $ | 17,000 | ||||||||
Stockholders’ equity | $ | 155,143,000 | $ | 135,437,000 | $ | 129,747,000 | $ | 129,660,000 | $ | 129,816,000 | $ | 138,947,000 | $ | 78,350,000 |
CIG BUSINESS MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of results of operations and financial condition should be read in conjunction with the CIG Business audited combined financial statements and the unaudited combined interim financial statements and the related notes. Management’s discussion and analysis was drafted from information provided by the CIG Business management.
Overview
The CIG Business provides business information and related products and services. The CIG Business principal businesses include mortgage and consumer credit reporting with respect to conventional and sub-prime borrowers and consumer lending software.
The CIG Business earns revenue in the form of fees from the credit reports delivered to its customers and from inquiries into its sub-prime database, from the membership fees collected on its credit monitoring membership products, from fees collected for services rendered to third party issuers of membership based consumer products and from the sale of software licenses, software maintenance, custom programming and professional consulting services related to its consumer lending software. The CIG Business generally enters into agreements with customers under which they pay a fixed fee per report generated or for services provided. The CIG Business recognizes revenue when reports have been prepared and delivered or when services have been provided.
The CIG Business expenses consist primarily of compensation and benefits costs for employees, credit data and other data acquisition costs, commissions, occupancy and related costs, selling, general and administrative expenses associated with operating its business and income taxes. The CIG Business’s expenses are likely to increase with increasing revenue levels.
Critical Accounting Policies and Estimates
The CIG Business management’s discussion and analysis of financial condition and results of operations are based upon its combined financial statements, which have been prepared in accordance with generally accepted accounting principles. The CIG Business management believes the following are the more critical accounting policies that impact its financial statements, some of which are based on management’s best estimates available at the time of preparation. Other accounting policies also have a significant effect on the CIG Business combined financial statements, and some of these policies also require the use of estimates and assumptions. Although the CIG Business management believes that its estimates and assumptions are reasonable, actual results may differ.
Revenue Recognition
Revenue from the sale of credit reports is recognized at the time of delivery, as the CIG Business has no significant ongoing obligation after delivery. Membership fees, billed monthly to member’s accounts, are recognized in the month the fee is earned. A portion of the membership revenue received is paid in the form of a commission to clients and is reflected in other operating expenses. Revenue earned from providing services to third party issuers of membership based consumer products is recognized at the time the service is provided, generally on a monthly basis. Software maintenance revenues are recognized ratably over the term of the maintenance period. Custom programming and professional consulting service revenue is recognized using the percentage-of-completion method pursuant to Accounting Research Bulletin (“ARB”) No. 45 “Long-Term Construction-Type Contracts.” To the extent that interim amounts billed to clients exceed revenue earned, deferred income is recorded. Other revenue is recognized upon completion of the contractual obligation, which is typically evidenced by delivery of the product or performance of the service.
Allowance for Uncollectible Receivables
The allowance for all probable uncollectible receivables is based on a combination of historical data, cash payment trends, specific customer issues, write-off trends, general economic conditions and other factors. These factors are continuously monitored by management to arrive at an estimate for the amount of accounts receivable that may ultimately be uncollectible. In circumstances where the CIG Business is aware of a specific customer’s inability to meet its financial obligations, the CIG Business records a specific allowance for doubtful accounts against amounts due in order to reduce the net recognized receivable to the amount it reasonably believes will be collected.
Capitalized Software Development Costs
The CIG Business capitalizes costs associated with developing software, both for internal use and for sale to customers, which costs primarily include salaries of developers. Direct costs incurred in the development of software for internal use are capitalized once the preliminary project stage is completed, management has committed to funding the project, and completion and use of the software for its intended purpose are probable. The CIG Business ceases capitalization of development costs for internal use software once the software has been substantially completed and is ready for its intended use. Once the technological feasibility of software developed for sale has been established, direct costs incurred in the development of the software are capitalized. The CIG Business ceases capitalization of development costs for software to be sold once the software has been substantially completed and is ready for sale.
Impairment of Intangible and Long-Lived Assets
The CIG Business carries intangible and long-lived assets at cost less accumulated amortization (where applicable). Accounting standards require that assets be written down if they become impaired. Intangible and long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset is not recoverable. At such time that an impairment in value of an intangible or long-lived asset is identified; the impairment will be measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Fair value is determined by employing an expected present value technique, which utilizes multiple cash flow scenarios that reflect the range of possible outcomes and an appropriate discount rate. In accordance with the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” the CIG Business, through First American, completed the goodwill impairment test for all reporting units for the years ended December 31, 2004 and 2003 and determined that each reporting unit had a fair value in excess of carrying value, therefore, no goodwill was recorded.
Results of Operations
The following is a summary of the operating results for the CIG Business for the three months ended March 31, 2005 and March 31, 2004.
2005 | 2004 | |||||||
Service revenue | $ | 66,345,000 | $ | 62,452,000 | ||||
Other income | 1,612,000 | 2,143,000 | ||||||
Total revenue | 67,957,000 | 64,595,000 | ||||||
Cost of service revenue | 23,499,000 | 22,200,000 | ||||||
Gross margin | 44,458,000 | 42,395,000 | ||||||
Salaries and benefits | 15,848,000 | 15,057,000 | ||||||
Facilities and telecommunications | 1,813,000 | 2,257,000 | ||||||
Other operating expenses | 6,134,000 | 6,918,000 | ||||||
Depreciation and amortization | 2,347,000 | 2,800,000 | ||||||
Total operating expenses | 26,142,000 | 27,032,000 | ||||||
Income from operations | 18,316,000 | 15,363,000 | ||||||
Interest (expense) income: | ||||||||
Interest expense | (11,000 | ) | (127,000 | ) | ||||
Interest income | 2,000 | 238,000 | ||||||
Total interest (expense) income, net | (9,000 | ) | 111,000 | |||||
Equity in earnings (losses) of investee | 467,000 | (232,000 | ) | |||||
Income before income taxes | 18,774,000 | 15,242,000 | ||||||
Provision for income taxes | 7,815,000 | 6,266,000 | ||||||
Net income | $ | 10,959,000 | $ | 8,976,000 | ||||
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
Service Revenue
Total service revenue was $66.3 million as of March 31, 2005, an increase of $3.8 million compared to service revenue of $62.5 million in the same period of 2004. The increase in service revenue is due to an increase in credit reports delivered as a result of an increase in market share and mortgage volume.
Cost of Revenue
Cost of revenue was $23.5 million as of March 31, 2005, an increase of $1.3 million, compared to cost of revenue of $22.2 million in the same period of 2004. The increase was primarily due to the growth in service revenue. Cost of revenue, as a percentage of service revenue, decreased to 35.4% in the first quarter of 2005 from 35.5% in the first quarter of 2004.
Salaries and Benefits
Salaries and benefits expense were $15.9 million as of March 31, 2005, an increase of $0.8 million compared to $15.1 million in the same period of 2004. Salaries and benefits were 23.9% of service revenue during the first quarter of 2005 compared to 24.1% of service revenue during the same period in 2004.
Facilities and Telecommunications
Facilities and telecommunications expense were $1.8 million as of March 31, 2005, a decrease of $0.5 million compared to $2.3 million in the same period of 2004. Facilities and telecommunications were 2.7% of
service revenue during the first quarter of 2005 compared to 3.6% of service revenue during the same period 2004. The decrease was due to a reduction of lease expense at certain facilities and re-negotiated telecommunications contracts.
Other Operating Expenses
Other operating expenses decreased $0.8 million and were 9.3% of service revenue in the first quarter of 2005 compared to 11.1% of service revenue in the same period of 2004. This decrease is a result of operational efficiencies and a reduction in advertising costs related to the direct to consumer operations.
Depreciation and Amortization
Depreciation and amortization expense decreased $0.5 million to $2.3 million in the first quarter of 2005 from $2.8 million in the same period of 2004. The decrease was primarily due to the decision to lease rather than purchase most equipment since the third quarter of 2001.
Liquidity and Capital Resources
The CIG Business primary source of liquidity is cash flow from operations and contributions from its parent, First American. As of March 31, 2005, cash and cash equivalents have increased to $3.8 million from $1.0 million as of March 31, 2004.
Cash provided by operations was $7.3 million and $2.1 million for the three months ended March 31, 2005 and 2004, respectively.
Cash provided by investing activities was $3.8 million and $0.3 million for the three months ended March 31, 2005, and 2004, respectively. Cash was provided primarily by the repayment of the note receivable offset by the purchase of computer hardware, software and to fund capitalized software and database development costs.
Cash used in financing activities was $9.7 million and $4.3 million for the three months ended March 31, 2005 and 2004, respectively. The cash used is primarily attributable to distributions to First American and the repayment of term notes.
First American contributed operations of approximately $20 million related to an acquisition during the three months ended March 31, 2005.
The CIG Business also 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 CIG Business will pay insurance and taxes.
At the closing of the First American transaction, First Advantage and First American will amend and restate their existing services agreement pursuant to which First American provides certain financial, administrative and managerial support services to First Advantage. Mortgage marketing services and support, human resources systems and support, payroll systems and Oracle financial systems support with respect to the CIG Business will be provided at an aggregate annual cost of $4.5 million plus reasonable out of pocket expenses. In addition, certain other services including pension and 401(k) expenses, corporate and medical insurance, personal property leasing and company car programs will be provided at actual cost. The amended and restated services agreement will commence on the closing date of the First American Transaction and the portion of the agreement relating to the CIG Business will continue initially for two years and thereafter, for successive two year terms until terminated by First American on 60 days prior written notice.
The following is a schedule of long-term contractual commitments as of March 31, 2005 over the periods in which they are expected to be paid.
Quantitative and Qualitative Disclosures about Market Risk
The CIG Business considered the provisions of Financial Reporting Release No. 48, “Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent In Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments.” The CIG Business had no holdings of derivative financial instruments at March 31, 2005 and its total liabilities as of March 31, 2005 consist primarily of notes payable and accounts payable that are not subject to any significant risk.
The CIG Business variable rate debt consists primarily of uncollateralized term notes based on the prime rate. A 1% increase in interest rates due to increased rates nationwide would not result in a significant amount of additional interest payments by the CIG Business.
Results of Operations
The following is a summary of the CIG Business operating results for the three years ended December 31, 2004.
2004 | 2003 | 2002 | ||||||||||
Service revenue | $ | 242,812,000 | $ | 244,806,000 | $ | 208,521,000 | ||||||
Other income | 7,392,000 | 9,060,000 | 9,654,000 | |||||||||
Total revenue | 250,204,000 | 253,866,000 | 218,175,000 | |||||||||
Cost of service revenue | 85,573,000 | 81,970,000 | 66,581,000 | |||||||||
Gross margin | 164,631,000 | 171,896,000 | 151,594,000 | |||||||||
Salaries and benefits | 60,107,000 | 60,564,000 | 59,374,000 | |||||||||
Facilities and telecommunications | 8,708,000 | 10,654,000 | 11,172,000 | |||||||||
Other operating expenses | 32,361,000 | 34,962,000 | 24,654,000 | |||||||||
Depreciation and amortization | 10,642,000 | 12,291,000 | 11,671,000 | |||||||||
Total operating expenses | 111,818,000 | 118,471,000 | 106,871,000 | |||||||||
Income from operations | 52,813,000 | 53,425,000 | 44,723,000 | |||||||||
Interest (expense) income: | ||||||||||||
Interest expense | (457,000 | ) | (386,000 | ) | (3,000 | ) | ||||||
Interest income | 739,000 | 816,000 | 14,000 | |||||||||
Total interest income, net | 282,000 | 430,000 | 11,000 | |||||||||
Equity in earnings (losses) of investee | 1,782,000 | (326,000 | ) | — | ||||||||
Gain on sale of investment | — | 13,028,000 | — | |||||||||
Income before income taxes | 54,877,000 | 66,557,000 | 44,734,000 | |||||||||
Provision for income taxes | 22,477,000 | 31,023,000 | 18,340,000 | |||||||||
Net income | $ | 32,400,000 | $ | 35,534,000 | $ | 26,394,000 | ||||||
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Service Revenue
Total service revenue was $242.8 million in 2004, a decrease of $2.0 million compared to 2003 service revenue of $244.8 million. The disposition of CMSI’s Credit Online subsidiary during March 2003 decreased service revenue in 2004 by $2.4 million when compared to the twelve month period ended December 31, 2003. This was offset, in part, by an increase in service revenue at existing operations of $0.4 million.
Other Income
Other income was $7.4 million, representing a $1.7 million decrease from $9.1 million in 2003. The decrease was primarily derived from reduced income from a joint venture with a nationwide mortgage lender.
Cost of Revenue
Total cost of revenue was $85.6 million in 2004, an increase of $3.6 million compared to 2003 cost of revenue of $82.0 million. Cost of revenue, as a percentage of service revenue, increased to 35.2% in 2004 from 33.5% in 2003. These increases are due primarily to the change in product mix in 2004 as compared to 2003. Service revenue in the membership-based consumer products and services business has increased in 2004, which has a lower gross margin than the average margin of other businesses. These increases can also be attributed to an increase in certain components of credit data charges imposed by three credit bureaus.
Salaries and Benefits
Salaries and benefits expense decreased $0.5 million in 2004 to $60.1 million when compared to salaries and benefits expense of $60.6 million in 2003. An increase in benefit costs of $0.4 million was offset by a decrease in salary expense of $0.9 million.
Facilities and Telecommunications
Facilities and telecommunications expense decreased $2.0 million in 2004 to $8.7 million when compared to facilities and telecommunications expense of $10.7 million in 2003. The decrease was due to a reduction of lease expense at certain facilities and re-negotiated telecommunications contracts.
Other Operating Expenses
Other operating expenses for 2004 were $32.4 million, a decrease of $2.6 million compared to other operating expenses of $35.0 million in 2003. Several factors resulted in this net decrease, including labor efficiencies, reduction of advertising costs related to the direct to consumer operations, reduction of bad debt expense and cost reductions attributable to operational efficiencies. These cost savings were offset by a payment of $3.0 million charge to settle a lawsuit and a $2.1 million write off of the carrying value of the related limited liability company’s stock.
Depreciation and Amortization
Depreciation and amortization expense decreased $1.7 million to $10.6 million from $12.3 million during the same period in 2003. The decrease is primarily due to the decision to lease rather than purchase most equipment since the third quarter of 2001.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Service Revenue
Total service revenue was $244.8 million in 2003, an increase of $36.3 million compared to 2002 service revenue of $208.5 million. Service revenue at existing operations increased by $43.6 million due to the additional volume of mortgage and consumer related credit reports delivered and continued expansion of both the sub-prime credit market business and the membership based consumer products and services business. The disposition of CMSI’s Credit Online subsidiary during March 2003 decreased service revenues by $7.3 million when compared to the same period in 2002.
Cost of Revenue
Total cost of revenue was $82.0 million in 2003, an increase of $15.4 million compared to cost of revenue of $66.6 million in 2002. Several factors contributed to this increase, including an increase of $9.2 million attributable to an increase in the volume and related cost of credit reports purchased from the three credit repositories, an increase of $5.8 million related to commissions based on the increased levels of credit revenues, and an increase of $3.0 million related to other costs based on increased revenue levels and a minor shift in the business mix during 2003. The disposition of CMSI’s Credit Online subsidiary during March 2003 resulted in a decrease in the cost of revenue of $2.6 million compared to the same period in 2002. Cost of revenue as a percentage of service revenue increased from 31.9% to 33.5%. This increase is primarily due to a minor shift in the business mix which included a higher percentage of membership based consumer products and services that have a higher cost of revenue compared to the other portions of the CIG Business.
Salaries and Benefits
Salaries and benefits expense were $60.6 million in 2003, an increase of $1.2 million compared to $59.4 million in 2002. Salary expense increased by $0.9 million and benefit costs increased by $0.3 million as a result of an increase in headcount due to the increased volume of transactions processed in 2003 as compared to 2002.
Facilities and Telecommunications
Facilities and telecommunications expense decreased $0.5 million in 2003 to $10.7 million when compared to facilities and telecommunications expense of $11.2 million in 2002.
Other Operating Expenses
Other operating expenses for 2003 were $35.0 million, an increase of $10.3 million compared to other operating expenses of $24.7 million in 2002. The most notable factors include an increase of $1.2 million related to the addition of temporary staffing due to higher volumes in the conventional credit business, an increase of $1.8 million in bad debt expense, an increase of $4.9 million related to advertising costs for the direct to consumer operations and an increase in other operating expenses resulting from increased transaction volume.
Depreciation and Amortization
Depreciation and amortization expense increased $0.6 million, to $12.3 million in 2003 from $11.7 million in 2002. Depreciation expense decreased by $1.1 million due to the decision to lease rather than purchase most equipment since the third quarter of 2001. This is offset by an increase in amortization expense of $1.7 million due primarily to the commencement of amortization on completed capitalized software projects.
Liquidity and Capital Resources
The CIG Business primary source of liquidity is cash flow from operations. As of December 31, 2004, cash and cash equivalents were $2.4 million.
Cash provided by operating activities was $35.0 million, $36.1 million and $42.2 million for the years ended December 31, 2004, 2003 and 2002, respectively. The cash provided was primarily derived from net income of $32.4 million, $35.5 million and $26.4 million for the years ended December 31, 2004, 2003 and 2002, respectively.
Cash used in investing activities was $1.9 million, $6.2 million and $6.9 million for the years ended December 31, 2004, 2003 and 2002, respectively. Cash was used primarily to purchase computer hardware, software and to fund capitalized software and database development costs.
Cash used in financing activities was $33.8 million, $29.2 million and $35.5 million for the years ended December 31, 2004, 2003 and 2002, respectively. Cash used was primarily attributable to distributions to First American and the repayment of term notes. Cash provided by financing operations is from proceeds from the issuance of term notes.
The following is a schedule of long-term contractual commitments as of December 31, 2004 over the periods in which they are expected to be paid.
2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | Total | |||||||||||||||
Operating leases | $ | 6,354,000 | $ | 5,482,000 | $ | 4,703,000 | $ | 3,461,000 | $ | 2,784,000 | $ | 1,867,000 | $ | 24,651,000 | |||||||
Long-term indebtedness | 4,456,000 | 456,000 | 114,000 | — | — | — | 5,026,000 | ||||||||||||||
Total | $ | 10,810,000 | $ | 5,938,000 | $ | 4,817,000 | $ | 3,461,000 | $ | 2,784,000 | $ | 1,867,000 | $ | 29,677,000 | |||||||
Quantitative and Qualitative Disclosures about Market Risk
The CIG Business considered the provisions of Financial Reporting Release No. 48, “Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent In Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments.” The CIG Business had no holdings of derivative financial instruments at December 31, 2004 and its total liabilities as of December 31, 2004 consist primarily of notes payable and accounts payable that are not subject to any significant risk.
The CIG Business variable rate debt consists primarily of uncollateralized term notes based on the prime rate. A 1% increase in interest rates due to increased rates nationwide would not result in a significant amount of additional interest payments by the CIG Business.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements have been prepared to give effect to the acquisition of The First American Corporation’s (“First American”) Credit Information Group (“CIG”) Business by First Advantage Corporation (“First Advantage”). The First American transaction is between businesses under the common control of First American. In acquisitions of businesses under common control, the acquiring company records acquired assets and liabilities at historical cost. The financial statements of the acquirer are restated to include operations of the acquired business in a manner similar to a pooling of interests.
The unaudited pro forma balance sheet as of March 31, 2005 reflects the acquisition of the assets and liabilities of the CIG Business at historical cost, assuming the First American transaction was completed on March 31, 2005. Pending acquisitions by the CIG Business and First Advantage are reflected in the accompanying unaudited pro forma balance sheet as of March 31, 2005 at estimated fair value using the purchase method of accounting assuming the acquisitions were completed on March 31, 2005.
The unaudited pro forma combined income statements for the years ended December 31, 2004, 2003 and 2002 and three months ended March 31, 2005 and 2004 include the historical results of operations for First Advantage and the historical operating results for the CIG Business. Past acquisitions by First Advantage and pending acquisitions by the CIG Business and First Advantage are reflected in the accompanying unaudited pro forma combined income statement for the year-end December 31, 2004 and the three months ended March 31, 2005 at estimated fair value using the purchase method of accounting and assuming the past and pending acquisitions were completed on January 1, 2004.
The pro forma information is based upon the historical consolidated financial statements of First Advantage, the historical combined financial statements of the CIG Business, and the assumptions, estimates and adjustments described in the notes to the unaudited pro forma combined financial information included in this proxy statement. The assumptions, estimates and adjustments are preliminary and have been made solely for purposes of developing such pro forma information.
The unaudited pro forma combined financial statements are presented for illustrative purposes only and are not necessarily indicative of the consolidated financial position or consolidated results of operations of First Advantage that would have been reported had the First American transaction occurred on the dates indicated, nor do they represent a forecast of the consolidated financial position of First Advantage at any future date or the consolidated results of operations for any future period. Furthermore, no effect has been given in the unaudited pro forma combined statements of operations for synergistic benefits or cost savings that may be realized through the combination of First Advantage and the CIG Business. The unaudited pro forma combined financial information should be read in conjunction with the historical financial statements and related notes and management’s discussion and analysis of financial condition and results of operations of the CIG Business included in this proxy statement and the historical financial condition and results of operations of First Advantage incorporated by reference in this proxy statement.
First Advantage Corporation and Subsidiaries
Unaudited Pro Forma Combined Balance Sheet
as of March 31, 2005
(F) | ||||||||||||||||||||||||||
First Advantage Historical | CIG Historical | Combining Adjustments | First Advantage Combined | Pro forma Adjustments | First Advantage Adjusted | Pending Acquisitions | First Advantage Pro forma | |||||||||||||||||||
Assets | ||||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||||
Cash and cash equivalents | $ | 8,282,000 | $ | 3,776,000 | $ | — | $ | 12,058,000 | $ | 1,224,000 | (C) | $ | 13,282,000 | $ | 1,226,000 | $ | 14,508,000 | |||||||||
Accounts receivable, net | 47,286,000 | 34,011,000 | — | 81,297,000 | — | 81,297,000 | 4,650,000 | 85,947,000 | ||||||||||||||||||
Prepaid expenses and other current assets | 2,344,000 | 2,054,000 | — | 4,398,000 | — | 4,398,000 | 428,000 | 4,826,000 | ||||||||||||||||||
Total current assets | 57,912,000 | 39,841,000 | — | 97,753,000 | 1,224,000 | 98,977,000 | 6,304,000 | 105,281,000 | ||||||||||||||||||
Property and equipment, net | 22,354,000 | 23,654,000 | — | 46,008,000 | — | 46,008,000 | 5,050,000 | 51,058,000 | ||||||||||||||||||
Goodwill | 309,199,000 | 87,120,000 | — | 396,319,000 | — | 396,319,000 | 48,200,000 | 444,519,000 | ||||||||||||||||||
Intangible assets, net | 40,101,000 | 6,737,000 | — | 46,838,000 | — | 46,838,000 | 15,675,000 | 62,513,000 | ||||||||||||||||||
Database development costs, net | 8,388,000 | 1,440,000 | — | 9,828,000 | — | 9,828,000 | — | 9,828,000 | ||||||||||||||||||
Investment inequity investee | — | 35,321,000 | — | 35,321,000 | — | 35,321,000 | — | 35,321,000 | ||||||||||||||||||
Other assets | 2,644,000 | 184,000 | — | 2,828,000 | — | 2,828,000 | 895,000 | 3,723,000 | ||||||||||||||||||
Deferred other | — | 1,402,000 | — | 1,402,000 | — | 1,402,000 | — | 1,402,000 | ||||||||||||||||||
Total assets | $ | 440,598,000 | $ | 195,699,000 | $ | — | $ | 636,297,000 | $ | 1,224,000 | $ | 637,521,000 | $ | 76,124,000 | $ | 713,645,000 | ||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||||
Accounts payable | $ | 9,509,000 | $ | 3,552,000 | $ | — | $ | 13,061,000 | $ | — | $ | 13,061,000 | $ | 4,389,000 | $ | 17,450,000 | ||||||||||
Accrued compensation | 8,629,000 | 9,561,000 | — | 18,190,000 | — | 18,190,000 | — | 18,190,000 | ||||||||||||||||||
Accrued liabilities | 12,053,000 | 14,463,000 | 4,000,000 | (B) | 30,516,000 | — | 30,516,000 | 3,969,000 | 34,485,000 | |||||||||||||||||
Due to affiliates | 407,000 | — | — | 407,000 | — | 407,000 | — | 407,000 | ||||||||||||||||||
Due to joint venture | — | 2,845,000 | — | 2,845,000 | — | 2,845,000 | — | 2,845,000 | ||||||||||||||||||
Income taxes payable | 1,253,000 | — | — | 1,253,000 | — | 1,253,000 | 479,000 | 1,732,000 | ||||||||||||||||||
Current portion of long-term debt and capital leases | 19,514,000 | 456,000 | — | 19,970,000 | — | 19,970,000 | 3,827,000 | 23,797,000 | ||||||||||||||||||
Total current liabilities | 51,365,000 | 30,877,000 | 4,000,000 | 86,242,000 | — | 86,242,000 | 12,664,000 | 98,906,000 | ||||||||||||||||||
Long-term debt and capital leases, net of current portion | 92,038,000 | 456,000 | — | 92,494,000 | (20,000,000 | )(D) | 72,494,000 | 27,213,000 | 99,707,000 | |||||||||||||||||
Deferred income taxes | — | 8,227,000 | — | 8,227,000 | — | 8,227,000 | — | 8,227,000 | ||||||||||||||||||
Other liabilities | 1,947,000 | 996,000 | — | 2,943,000 | — | 2,943,000 | 747,000 | 3,690,000 | ||||||||||||||||||
Total liabilities | 145,350,000 | 40,556,000 | 4,000,000 | 189,906,000 | (20,000,000 | ) | 169,906,000 | 40,624,000 | 210,530,000 | |||||||||||||||||
Commitments and contingencies | ||||||||||||||||||||||||||
Stockholders’ equity: | ||||||||||||||||||||||||||
Preferred stock, $.001 par value; 1,000,000 shares authorized, no shares issued or outstanding | — | — | — | — | — | — | — | — | ||||||||||||||||||
Class A common stock, $.001 par value; 75,000,000 shares authorized; 7,334,952 shares issued and outstanding as of March 31, 2005 | 7,000 | — | — | 7,000 | — | 7,000 | 1,000 | 8,000 | ||||||||||||||||||
Class B common stock, $.001 par value; 25,000,000 shares authorized; 16,027,286 shares issued and outstanding as of March 31, 2005 | 16,000 | — | 28,000 | (A) | 44,000 | 1,000 | (D) | 45,000 | 1,000 | 46,000 | ||||||||||||||||
Additional paid-in capital | 273,861,000 | 46,275,000 | (28,000 | )(A) | 320,108,000 | 19,999,000 | (D) | 341,331,000 | 35,498,000 | 376,829,000 | ||||||||||||||||
1,224,000 | (C) | |||||||||||||||||||||||||
Retained earnings | 21,122,000 | 108,868,000 | (4,000,000 | )(B) | 125,990,000 | — | 125,990,000 | — | 125,990,000 | |||||||||||||||||
Accumulated other comprehensive income | 242,000 | — | — | 242,000 | — | 242,000 | — | 242,000 | ||||||||||||||||||
Total stockholders’ equity | 295,248,000 | 155,143,000 | (4,000,000 | ) | 446,391,000 | 21,224,000 | 467,615,000 | 35,500,000 | 503,115,000 | |||||||||||||||||
Total liabilities and stockholders’ equity | $ | 440,598,000 | $ | 195,699,000 | $ | — | $ | 636,297,000 | $ | 1,224,000 | $ | 637,521,000 | $ | 76,124,000 | $ | 713,645,000 | ||||||||||
See the accompanying notes to the unaudited pro forma financial information.
First Advantage Corporation and Subsidiaries
Unaudited Pro Forma Combined Income Statement
Three months ended March 31, 2005
(H) | (F) | |||||||||||||||||||||||||||||||
First Advantage Historical | CIG Historical | First Advantage Combined | Proforma Adjustments | First Advantage Adjusted | Past Acquisitions | Pending Acquisitions | First Advantage Proforma | |||||||||||||||||||||||||
Service revenue | $ | 60,148,000 | $ | 66,345,000 | $ | 126,493,000 | $ | — | $ | 126,493,000 | $ | 29,410,000 | $ | 10,504,000 | $ | 166,407,000 | ||||||||||||||||
Other income | — | 1,612,000 | 1,612,000 | — | 1,612,000 | — | — | 1,612,000 | ||||||||||||||||||||||||
Reimbursed government fee revenue | 12,216,000 | — | 12,216,000 | — | 12,216,000 | — | — | 12,216,000 | ||||||||||||||||||||||||
Total revenue | 72,364,000 | 67,957,000 | 140,321,000 | — | 140,321,000 | 29,410,000 | 10,504,000 | 180,235,000 | ||||||||||||||||||||||||
Cost of service revenue | 14,334,000 | 23,499,000 | 37,833,000 | — | 37,833,000 | 6,063,000 | 5,831,000 | 49,727,000 | ||||||||||||||||||||||||
Government fees paid | 12,216,000 | — | 12,216,000 | — | 12,216,000 | — | — | 12,216,000 | ||||||||||||||||||||||||
Total cost of service | 26,550,000 | 23,499,000 | 50,049,000 | — | 50,049,000 | 6,063,000 | 5,831,000 | 61,943,000 | ||||||||||||||||||||||||
Gross margin | 45,814,000 | 44,458,000 | 90,272,000 | — | 90,272,000 | 23,347,000 | 4,673,000 | 118,292,000 | ||||||||||||||||||||||||
Salaries and benefits | 23,115,000 | 15,848,000 | 38,963,000 | — | 38,963,000 | 10,564,000 | 949,000 | 50,476,000 | ||||||||||||||||||||||||
Other operating expenses | 12,686,000 | 7,947,000 | 20,633,000 | — | 20,633,000 | 6,569,000 | 2,993,000 | 30,195,000 | ||||||||||||||||||||||||
Depreciation and amortization | 3,408,000 | 2,347,000 | 5,755,000 | — | 5,755,000 | 1,735,000 | 741,000 | 8,231,000 | ||||||||||||||||||||||||
Total operating expenses | 39,209,000 | 26,142,000 | 65,351,000 | — | 65,351,000 | 18,868,000 | 4,683,000 | 88,902,000 | ||||||||||||||||||||||||
Income (loss) from operations | 6,605,000 | 18,316,000 | 24,921,000 | — | 24,921,000 | 4,479,000 | (10,000 | ) | 29,390,000 | |||||||||||||||||||||||
Interest (expense) income, net | (1,048,000 | ) | (9,000 | ) | (1,057,000 | ) | 215,000 | (D) | (842,000 | ) | (1,582,000 | ) | (389,000 | ) | (2,813,000 | ) | ||||||||||||||||
Equity in earnings of investee | — | 467,000 | 467,000 | — | 467,000 | — | — | 467,000 | ||||||||||||||||||||||||
Income (loss) before income taxes | 5,557,000 | 18,774,000 | 24,331,000 | 215,000 | 24,546,000 | 2,897,000 | (399,000 | ) | 27,044,000 | |||||||||||||||||||||||
Provision (benefit) for income taxes | 2,330,000 | 7,815,000 | 10,145,000 | 90,000 | (E) | 10,235,000 | 1,240,000 | (168,000 | ) | 11,307,000 | ||||||||||||||||||||||
Net income (loss) | $ | 3,227,000 | $ | 10,959,000 | $ | 14,186,000 | $ | 125,000 | $ | 14,311,000 | $ | 1,657,000 | $ | (231,000 | ) | $ | 15,737,000 | |||||||||||||||
Per share amounts: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.14 | N/A | $ | 0.28 | $ | 0.27 | $ | 0.29 | (G) | ||||||||||||||||||||||
Diluted | $ | 0.14 | N/A | $ | 0.28 | $ | 0.27 | $ | 0.29 | (G) | ||||||||||||||||||||||
Weighted-average common shares outstanding: | ||||||||||||||||||||||||||||||||
Basic | 23,294,096 | 27,804,877 | (A) | 51,098,973 | 975,610 | (D) | 52,074,583 | — | 1,747,027 | (F) | 53,821,610 | |||||||||||||||||||||
Diluted | 23,575,106 | 27,804,877 | (A) | 51,379,983 | 975,610 | (D) | 52,355,593 | — | 1,747,027 | (F) | 54,102,620 |
See the accompanying notes to the unaudited pro forma financial information.
Unaudited Pro Forma Combined Income Statement
Three months ended March 31, 2004
First Advantage Historical | CIG Historical | First Advantage Combined | ||||||||||
Service revenue | $ | 45,959,000 | $ | 62,452,000 | $ | 108,411,000 | ||||||
Other income | — | 2,143,000 | 2,143,000 | |||||||||
Reimbursed government fee revenue | 11,474,000 | — | 11,474,000 | |||||||||
Total revenue | 57,433,000 | 64,595,000 | 122,028,000 | |||||||||
Cost of service revenue | 13,981,000 | 22,200,000 | 36,181,000 | |||||||||
Government fees paid | 11,474,000 | — | 11,474,000 | |||||||||
Total cost of service | 25,455,000 | 22,200,000 | 47,655,000 | |||||||||
Gross margin | 31,978,000 | 42,395,000 | 74,373,000 | |||||||||
Salaries and benefits | 17,712,000 | 15,057,000 | 32,769,000 | |||||||||
Other operating expenses | 10,304,000 | 9,175,000 | 19,479,000 | |||||||||
Depreciation and amortization | 2,640,000 | 2,800,000 | 5,440,000 | |||||||||
Total operating expenses | 30,656,000 | 27,032,000 | 57,688,000 | |||||||||
Income from operations | 1,322,000 | 15,363,000 | 16,685,000 | |||||||||
Interest (expense) income, net | (220,000 | ) | 111,000 | (109,000 | ) | |||||||
Equity in losses of investee | — | (232,000 | ) | (232,000 | ) | |||||||
Income before income taxes | 1,102,000 | 15,242,000 | 16,344,000 | |||||||||
Provision for income taxes | 463,000 | 6,266,000 | 6,729,000 | |||||||||
Net income | $ | 639,000 | $ | 8,976,000 | $ | 9,615,000 | ||||||
Per share amounts: | ||||||||||||
Basic | $ | 0.03 | N/A | $ | 0.20 | |||||||
Diluted | $ | 0.03 | N/A | $ | 0.20 | |||||||
Weighted-average common shares outstanding: | ||||||||||||
Basic | 21,155,223 | 27,804,877 | (A) | 48,960,100 | ||||||||
Diluted | 21,346,133 | 27,804,877 | (A) | 49,151,010 |
See the accompanying notes to the unaudited pro forma financial information.
First Advantage Corporation and Subsidiaries
Unaudited Pro Forma Combined Income Statement
Twelve months ended December 31, 2004
(H) | (F) | |||||||||||||||||||||||||||||||
First Advantage Historical | CIG Historical | First Advantage Combined | Pro forma Adjustments | First Advantage Adjusted | Past Acquisitions | Pending Acquisitions | First Advantage Pro forma | |||||||||||||||||||||||||
Service revenue | $ | 221,938,000 | $ | 242,812,000 | $ | 464,750,000 | $ | — | $ | 464,750,000 | $ | 23,727,000 | $ | 62,466,000 | $ | 550,943,000 | ||||||||||||||||
Other income | — | 7,392,000 | 7,392,000 | — | 7,392,000 | — | — | 7,392,000 | ||||||||||||||||||||||||
Reimbursed government fee revenue | 44,599,000 | — | 44,599,000 | — | 44,599,000 | — | — | 44,599,000 | ||||||||||||||||||||||||
Total revenue | 266,537,000 | 250,204,000 | 516,741,000 | — | 516,741,000 | 23,727,000 | 62,466,000 | 602,934,000 | ||||||||||||||||||||||||
Cost of service revenue | 60,884,000 | 85,573,000 | 146,457,000 | — | 146,457,000 | 4,185,000 | 30,683,000 | 181,325,000 | ||||||||||||||||||||||||
Government fees paid | 44,599,000 | — | 44,599,000 | — | 44,599,000 | — | — | 44,599,000 | ||||||||||||||||||||||||
Total cost of service | 105,483,000 | 85,573,000 | 191,056,000 | — | 191,056,000 | 4,185,000 | 30,683,000 | 225,924,000 | ||||||||||||||||||||||||
Gross margin | 161,054,000 | 164,631,000 | 325,685,000 | — | 325,685,000 | 19,542,000 | 31,783,000 | 377,010,000 | ||||||||||||||||||||||||
Salaries and benefits | 81,904,000 | 60,107,000 | 142,011,000 | — | 142,011,000 | 9,030,000 | 6,808,000 | 157,849,000 | ||||||||||||||||||||||||
Other operating expenses | 45,928,000 | 41,069,000 | 86,997,000 | — | 86,997,000 | 4,931,000 | 20,406,000 | 112,334,000 | ||||||||||||||||||||||||
Depreciation and amortization | 12,542,000 | 10,642,000 | 23,184,000 | — | 23,184,000 | 1,551,000 | 4,436,000 | 29,171,000 | ||||||||||||||||||||||||
Total operating expenses | 140,374,000 | 111,818,000 | 252,192,000 | — | 252,192,000 | 15,512,000 | 31,650,000 | 299,354,000 | ||||||||||||||||||||||||
Income (loss) from operations | 20,680,000 | 52,813,000 | 73,493,000 | — | 73,493,000 | 4,030,000 | 133,000 | 77,656,000 | ||||||||||||||||||||||||
Interest (expense) income, net | (2,237,000 | ) | 282,000 | (1,955,000 | ) | 858,000 | (D) | (1,097,000 | ) | (1,554,000 | ) | (1,794,000 | ) | (4,445,000 | ) | |||||||||||||||||
Equity in earnings of investee | — | 1,782,000 | 1,782,000 | — | 1,782,000 | — | — | 1,782,000 | ||||||||||||||||||||||||
Income (loss) before income taxes | 18,443,000 | 54,877,000 | 73,320,000 | 858,000 | 74,178,000 | 2,476,000 | (1,661,000 | ) | 74,993,000 | |||||||||||||||||||||||
Provision (benefit) for income taxes | 7,762,000 | 22,477,000 | 30,239,000 | 360,000 | (E) | 30,599,000 | 1,039,000 | (698,000 | ) | 30,940,000 | ||||||||||||||||||||||
Net income (loss) | $ | 10,681,000 | $ | 32,400,000 | $ | 43,081,000 | $ | 498,000 | $ | 43,579,000 | $ | 1,437,000 | $ | (963,000 | ) | $ | 44,053,000 | |||||||||||||||
Per share amounts: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.49 | N/A | $ | 0.87 | $ | 0.86 | $ | 0.82 | (G) | ||||||||||||||||||||||
Diluted | $ | 0.48 | N/A | $ | 0.86 | $ | 0.85 | $ | 0.82 | (G) | ||||||||||||||||||||||
Weighted-average common shares outstanding: | ||||||||||||||||||||||||||||||||
Basic | 21,906,507 | 27,804,877 | (A) | 49,711,384 | 975,610 | (D) | 50,686,994 | 1,402,054 | (H) | 1,747,027 | (F) | 53,836,075 | ||||||||||||||||||||
Diluted | 22,230,642 | 27,804,877 | (A) | 50,035,519 | 975,610 | (D) | 51,011,129 | 1,234,381 | (H) | 1,747,027 | (F) | 53,992,537 |
See the accompanying notes to the unaudited pro forma financial information.
First Advantage Corporation and Subsidiaries
Unaudited Restated Combined Income Statement
Twelve months ended December 31, 2003
First Advantage Historical | CIG Historical | First Advantage Combined | ||||||||||
Service revenue | $ | 134,910,000 | $ | 244,806,000 | $ | 379,716,000 | ||||||
Other income | — | 9,060,000 | 9,060,000 | |||||||||
Reimbursed government fee revenue | 31,585,000 | — | 31,585,000 | |||||||||
Total revenue | 166,495,000 | 253,866,000 | 420,361,000 | |||||||||
Cost of service revenue | 38,154,000 | 81,970,000 | 120,124,000 | |||||||||
Government fees paid | 31,585,000 | — | 31,585,000 | |||||||||
Total cost of service | 69,739,000 | 81,970,000 | 151,709,000 | |||||||||
Gross margin | 96,756,000 | 171,896,000 | 268,652,000 | |||||||||
Salaries and benefits | 51,178,000 | 60,564,000 | 111,742,000 | |||||||||
Other operating expenses | 30,449,000 | 45,616,000 | 76,065,000 | |||||||||
Depreciation and amortization | 8,428,000 | 12,291,000 | 20,719,000 | |||||||||
Impairment loss | 1,739,000 | — | 1,739,000 | |||||||||
Total operating expenses | 91,794,000 | 118,471,000 | 210,265,000 | |||||||||
Income from operations | 4,962,000 | 53,425,000 | 58,387,000 | |||||||||
Interest (expense) income, net | (113,000 | ) | 430,000 | 317,000 | ||||||||
Equity in losses of investee | — | (326,000 | ) | (326,000 | ) | |||||||
Gain on investment | — | 13,028,000 | 13,028,000 | |||||||||
Income before income taxes | 4,849,000 | 66,557,000 | 71,406,000 | |||||||||
Provision for income taxes | 2,046,000 | 31,023,000 | 33,069,000 | |||||||||
Net income | $ | 2,803,000 | $ | 35,534,000 | $ | 38,337,000 | ||||||
Per share amounts: | ||||||||||||
Basic | $ | 0.14 | N/A | $ | 0.80 | |||||||
Diluted | $ | 0.14 | N/A | $ | 0.80 | |||||||
Weighted-average common shares out standing: | ||||||||||||
Basic | 20,260,854 | 27,804,877 | (A) | 48,065,731 | ||||||||
Diluted | 20,397,587 | 27,804,877 | (A) | 48,202,464 |
See the accompanying notes to the unaudited pro forma financial information.
First Advantage Corporation and Subsidiaries
Unaudited Restated Combined Income Statement
Twelve months ended December 31, 2002
First Advantage Historical | CIG Historical | First Advantage Combined | |||||||||
Service revenue | $ | 73,040,000 | $ | 208,521,000 | $ | 281,561,000 | |||||
Other income | — | 9,654,000 | 9,654,000 | ||||||||
Reimbursed government fee revenue | 27,885,000 | — | 27,885,000 | ||||||||
Total revenue | 100,925,000 | 218,175,000 | 319,100,000 | ||||||||
Cost of service revenue | 17,534,000 | 66,581,000 | 84,115,000 | ||||||||
Government fees paid | 27,885,000 | — | 27,885,000 | ||||||||
Total cost of service | 45,419,000 | 66,581,000 | 112,000,000 | ||||||||
Gross margin | 55,506,000 | 151,594,000 | 207,100,000 | ||||||||
Salaries and benefits | 31,863,000 | 59,374,000 | 91,237,000 | ||||||||
Other operating expenses | 15,046,000 | 35,826,000 | 50,872,000 | ||||||||
Depreciation and amortization | 4,096,000 | 11,671,000 | 15,767,000 | ||||||||
Total operating expenses | 51,005,000 | 106,871,000 | 157,876,000 | ||||||||
Income from operations | 4,501,000 | 44,723,000 | 49,224,000 | ||||||||
Interest (expense) income, net | (170,000 | ) | 11,000 | (159,000 | ) | ||||||
Income before income taxes | 4,331,000 | 44,734,000 | 49,065,000 | ||||||||
Provision for income taxes | 1,629,000 | 18,340,000 | 19,969,000 | ||||||||
Net income | $ | 2,702,000 | $ | 26,394,000 | $ | 29,096,000 | |||||
Per share amounts: | |||||||||||
Basic | N/A | N/A | N/A | ||||||||
Diluted | N/A | N/A | N/A | ||||||||
See the accompanying notes to the unaudited pro forma financial information.
FIRST ADVANTAGE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(A) In accordance with the terms of the master transfer agreement, First Advantage will issue to an affiliate of First American 29,073,170 shares of Class B common stock in exchange for First American’s ownership interest in the CIG Business and related businesses.
(B) Estimated investment banking fees, legal and accounting fees, and other incremental costs incurred by First Advantage in connection with the acquisition of the CIG Business.
(C) In accordance with the terms of the master transfer agreement, the CIG Business will have a cash balance of $5 million at closing. This adjustment reflects a cash capital contribution of $1.2 million needed to achieve the $5 million balance assuming the First American transaction closed on March 31, 2005.
(D) Adjustment represents the exchange of $20 million of First Advantage debt outstanding (at an average interest rate of 4.29%) to Newco for 975,610 shares of First Advantage Class B shares at a price of $20.50 per share. This will result in a reduction in interest expense of $215,000 and $858,000, for the three months ended March 31, 2005 and year ended December 31, 2004, respectively, assuming that the exchange took place on January 1, 2004.
(E) Adjustment to the provision for income taxes resulting from the items in Note D using an estimated effective rate of 42%.
(F) First Advantage has three other pending acquisitions, all closed subsequent to March 31, 2005. The CIG Business has one pending acquisition which closed subsequent to March 31, 2005. None of these acquisitions are significant either individually or in the aggregate.
The estimated aggregate purchase price of the pending First Advantage acquisitions is as follows:
Cash | $ | 18,295,000 | |
Notes payable | 8,905,000 | ||
Class A shares issued (478,734 shares) | 9,500,000 | ||
Purchase price | $ | 36,700,000 | |
In accordance with the terms of the original master transfer agreement, First Advantage was to acquire the pending CIG Business acquisition from First American in exchange for 1,268,293 shares of First Advantage Class B shares based on a value of $20.50 per share, for an aggregate purchase price of $26 million. The pending acquisition closed subsequent to March 31, 2005 and per the amended and restated master transfer agreement it is now included in the total purchase price of the CIG Business and related businesses.
A summary of the pending acquisitions and pro forma adjustments, assuming the acquisitions occurred on January 1, 2004 for income statement purposes and March 31, 2005 for balance sheet purposes is as follows:
First Advantage Acquisitions | CIG Acquisitions | Pro forma Adjustments | Total | |||||||||||
Assets | ||||||||||||||
Current assets: | ||||||||||||||
Cash and cash equivalents | $ | 615,000 | $ | 611,000 | $ | — | $ | 1,226,000 | ||||||
Accounts receivable, net | 2,534,000 | 2,116,000 | — | 4,650,000 | ||||||||||
Prepaid expenses and other current assets | 72,000 | 356,000 | — | 428,000 | ||||||||||
Total current assets | 3,221,000 | 3,083,000 | — | 6,304,000 | ||||||||||
Property and equipment, net | 2,344,000 | 2,706,000 | — | 5,050,000 | ||||||||||
Goodwill | — | — | 48,200,000 | F (1) | 48,200,000 | |||||||||
Intangible assets, net | — | — | 15,675,000 | F (1) | 15,675,000 | |||||||||
Other assets | 638,000 | 257,000 | — | 895,000 | ||||||||||
Total assets | $ | 6,203,000 | $ | 6,046,000 | $ | 63,875,000 | $ | 76,124,000 | ||||||
Liabilities and Stockholders’ Equity | ||||||||||||||
Current liabilities: | ||||||||||||||
Accounts payable | $ | 376,000 | $ | 4,013,000 | $ | — | $ | 4,389,000 | ||||||
Accrued liabilities | 922,000 | 3,047,000 | — | 3,969,000 | ||||||||||
Income taxes payable | 479,000 | — | 479,000 | |||||||||||
Current portion of long-term debt and capital leases | 118,000 | 3,709,000 | — | 3,827,000 | ||||||||||
Total current liabilities | 1,895,000 | 10,769,000 | — | 12,664,000 | ||||||||||
Long-term debt and capital leases, net of current portion | — | 13,000 | 27,200,000 | F (2) | 27,213,000 | |||||||||
Other liabilities | 94,000 | 653,000 | — | 747,000 | ||||||||||
Total liabilities | 1,989,000 | 11,435,000 | 27,200,000 | 40,624,000 | ||||||||||
Commitments and contingencies | ||||||||||||||
Stockholders’ equity: | ||||||||||||||
Common Stock | — | — | 2,000 | F (2) | 2,000 | |||||||||
Equity acquired | 4,214,000 | (5,389,000 | ) | 1,175,000 | F (1) | — | ||||||||
Additional paid-in capital | — | — | 35,498,000 | F (2) | 35,498,000 | |||||||||
Total stockholders’ equity | 4,214,000 | (5,389,000 | ) | 36,675,000 | 35,500,000 | |||||||||
Total liabilities and stockholders’ equity | $ | 6,203,000 | $ | 6,046,000 | $ | 63,875,000 | $ | 76,124,000 | ||||||
F (1) Adjustment reflects purchase price allocation as follows:
First Advantage | CIG | Combined | |||||||||
Goodwill | $ | 23,311,000 | $ | 24,889,000 | $ | 48,200,000 | |||||
Identifiable intangible assets | 9,175,000 | 6,500,000 | 15,675,000 | ||||||||
Net assets acquired | 4,214,000 | (5,389,000 | ) | (1,175,000 | ) | ||||||
Purchase price | $ | 36,700,000 | $ | 26,000,000 | $ | 62,700,000 | |||||
F (2) Adjustment reflects consideration given for acquisitions as noted previously.
Three months ended March 31, 2005 Pro forma Adjustment Service revenue Cost of service revenue Gross margin Operating expenses Income (loss) from operations Interest (expense) income, net Income (loss) before income taxes Provision (benefit) for income taxes Net (loss) income Twelve months ended December 31, 2004 Pro forma Adjustment Service revenue Cost of service revenue Gross margin Operating expenses Income (loss) from operations Interest (expense) income, net Income (loss) before income taxes Provision (benefit) for income taxes Net (loss) income First
Advantage
Acquisitions CIG
Acquisitions Total $ 3,020,000 $ 7,484,000 $ — $ 10,504,000 1,345,000 4,486,000 — 5,831,000 1,675,000 2,998,000 — 4,673,000 1,419,000 2,872,000 392,000 F (3) 4,683,000 256,000 126,000 (392,000) (10,000) 10,000 (93,000) (306,000) F (4) (389,000) 266,000 33,000 (698,000) (399,000) 112,000 13,000 (293,000) F (5) (168,000) $ 154,000 $ 20,000 $ (405,000) $ (231,000) First
Advantage
Acquisitions CIG
Acquisitions Total $ 13,774,000 $ 48,692,000 $ — $ 62,466,000 4,811,000 25,872,000 — 30,683,000 8,963,000 22,820,000 — 31,783,000 7,547,000 22,535,000 1,568,000 F (3) 31,650,000 1,416,000 285,000 (1,568,000) 133,000 70,000 (487,000) (1,377,000) F (4) (1,794,000) 1,486,000 (202,000) (2,945,000) (1,661,000) 624,000 (85,000) (1,237,000) F (5) (698,000) $ 862,000 $ (117,000) $ (1,708,000) $ (963,000)
F (3) Adjustment reflects the amortization of identifiable intangible assets over their estimated useful lives of 10 years.
F (4) Adjustment reflects interest expense on debt incurred to finance the acquisition with a rate of 4.5%.
F (5) Adjustment to the provision for income taxes resulting from the items in Notes F (3) and F (4) using an estimated effective rate of 42%.
The allocation of the purchase price is based upon preliminary estimates of the assets and liabilities acquired in accordance with SFAS No.141, “Business Combinations.” The pending acquisitions are based on management’s consideration of past and expected future performance as well as the potential strategic fit of the businesses to be acquired with the long-term goals of First Advantage. The expected long-term growth, market position of the pending acquisitions and expected synergies to be generated by inclusion of the businesses are the primary factors that gave rise to an acquisition price which will result in the recognition of goodwill. Shown above is a preliminary estimate of the allocation of the purchase price. First Advantage will perform a full determination of the purchase price allocation upon receipt of a final valuation analysis of tangible and intangible assets. It is anticipated that the final purchase price allocation will not differ materially from the preliminary allocation.
(G) Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Weighted average shares used in the calculation of pro forma earnings per share is based on the shares
to be issued in connection with the following: (1) the CIG Business acquisition (Note A); (2) the exchange of First Advantage common stock for debt (Note D); and (3) pending First Advantage and CIG Business acquisitions (Note F).
The acquisition adjustments to shares outstanding are as follows:
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(H) Past acquisitions include fourteen businesses acquired during the year ended December 31, 2004, one business acquired in the first quarter 2005 by First Advantage, and one business acquired in the first quarter 2005 by the CIG Business. The impact of these acquisitions is included in the unaudited pro forma combined income statement assuming the acquisitions were completed on January 1, 2004.
DESCRIPTION OF FIRST ADVANTAGE COMMON STOCK
Authorized Capital Stock
First Advantage’s authorized capital stock currently consists of:
If the certificate amendment proposal is approved and the certificate is amended, the authorized Class A common stock will be increased to 125,000,000 shares, and the authorized Class B common stock will be increased to 75,000,000 shares.
Outstanding Capital Stock
Our Class A common stock is traded on the Nasdaq National Market under the trading symbol “FADV.” On August 4, 2005, the last reported sale price of our common stock on the Nasdaq National Market was $23.89 per share. Our Class B common stock is not listed or quoted on any exchange or quotation system.
As of June 30, 2005, 7,844,483 shares of First Advantage Class A common stock were issued and outstanding.
Class A Common Stock
Holders of First Advantage Class A common stock are entitled to one vote for each share held of record on all matters submitted to a vote of holders of First Advantage common stock. Subject to preferences that may be applicable to any outstanding preferred stock, holders of First Advantage Class A common stock are entitled to dividends as may be declared from time to time by the First Advantage board of directors out of funds legally available for that purpose. Holders of First Advantage Class A common stock have no preemptive, redemption, conversion or sinking fund rights. Upon a liquidation, dissolution or winding up of the affairs of First Advantage, the holders of First Advantage Class A common stock are entitled to share equally and ratably, together with the holders of First Advantage Class B common stock, in the assets of First Advantage, if any, remaining after the payment of all debts and liabilities of First Advantage and the liquidation preference of any First Advantage preferred stock then outstanding.
Class B Common Stock
Except as otherwise described below, the rights, preferences and privileges of the Class B common stock are identical to those of the Class A common stock described above. Holders of First Advantage Class B common stock are entitled to ten votes for each share held of record on all matters submitted to a vote of holders of First Advantage common stock.
First American currently owns all of the outstanding shares of our Class B common stock. After the First American Transaction, Newco, a subsidiary of First American, will also own shares of our Class B common stock.
The First Advantage Class B common stock is convertible into shares of First Advantage Class A common stock at a one-to-one conversion ratio as follows:
Notwithstanding the foregoing, First American may transfer shares of Class B common stock (without conversion into Class A common stock) if such transfer is effected as part of a distribution by First American of shares of Class B common stock to its shareholders in a tax-free “spinoff” under Section 355(a) of the Internal Revenue Code of 1986, as amended, and any subsequent transfer of such shares will not cause such shares to convert into Class A common stock.
Preferred Stock.First Advantage’s certificate of incorporation allows its board of directors to issue shares of preferred stock in one or more series without stockholder approval. First Advantage’s board of directors will have discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption rights and liquidation preferences of each series of preferred stock.
The purpose of authorizing First Advantage’s board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with stockholder approval of specific issuances. First Advantage has no shares of preferred stock outstanding and has no present plans to issue any of its authorized but unissued shares of preferred stock.
Stockholders Agreement.First Advantage has entered into a stockholders agreement with First American and Pequot Private Equity Fund II, L.P., which are First Advantage’s largest stockholders. In the stockholders agreement, First American agreed to:
The stockholders agreement is further discussed on in “Certain Relationships and Related Transactions” beginning on page 117.
Standstill Agreement
First Advantage has also entered into a standstill agreement with First American. Under the standstill agreement, First American agreed that it will not, and will not permit any of its affiliates to, acquire, offer or propose or agree to acquire, beneficial ownership of any voting securities of First Advantage or securities of any subsidiary of First Advantage other than:
In addition, without the prior written approval of a majority of disinterested directors of First Advantage, First American will not and will not cause or permit any of its subsidiaries to enter into any transaction with First Advantage or any subsidiary of First Advantage, except transactions engaged in by First Advantage or its subsidiary in the ordinary course of business.
First American has also agreed that it will not and will not cause or permit any of its subsidiaries to transfer First Advantage voting securities to any non-affiliate person or group of persons, unless such person or group acquiring such shares agrees in writing to assume all of the obligations of First American under the standstill agreement, if such transfer results in:
For purposes of the standstill agreement, “disinterested director” means any member of First Advantage’s board of directors that is not:
For purposes of the standstill agreement, “voting securities” means, collectively, the First Advantage Class A common stock, the First Advantage Class B common stock and any other securities entitled, or that are entitled in the future, to vote generally for the election of members of First Advantage’s board of directors.
The standstill agreement will terminate on the earlier of June 5, 2007 and the date on which First American no longer controls First Advantage.
As a condition to the closing of the First American Transaction, First Advantage will deliver to First American a written waiver of First Advantage’s rights under the standstill agreement with respect to the First American Transaction.
The stockholders agreement is further discussed in “Certain Relationships and Related Transactions” beginning on page 117.
Delaware Law Merger Provisions
Immediately after the closing of the First American Transaction, First American will control approximately 46,076,066 Class B shares of First Advantage (without giving effect to any of our Class B common stock issued in respect to the DealerTrack Earn-Out). Under certain circumstances those Class B shares may be convertible into Class A shares representing in excess of 85% of First Advantage’s outstanding shares on a pro forma basis. Under Delaware law, a parent company that owns at least 90% of the outstanding shares of each class of stock of First Advantage can cause, without a shareholder vote, a merger involving First Advantage in which the other
stockholders of First Advantage would receive cash in lieu of a continuing ownership interest. First American has no current intention to increase its ownership position in First Advantage (other than any shares that Newco may acquire in connection with the DealerTrack Earn-Out) or to effect such a merger or similar transaction. Furthermore, during the term of the standstill agreement described above, the standstill agreement prevents First American from effectuating such a transaction. However, in the event First American or any other entity were to acquire at least 90% of each class of First Advantage’s stock and were to effect such a merger, your interests could be adversely affected. In addition, by virtue of its ownership interest, First American controls First Advantage and, subject to the standstill agreement, may be able to take or cause other actions adverse to your interests as more fully described under our annual report on Form 10-K for the fiscal year ended December 31, 2004, which is incorporated by reference into this proxy statement.
Proposed Issuance of Class B Common Shares to a Subsidiary of First American
We are proposing to issue 30,048,780 shares of our Class B common stock to Newco, a subsidiary of First American, in connection with the First American Transaction (which excludes any future issuances as part of the DealerTrack Earn-Out). These shares will not be registered under the Securities Act of 1933. We intend to issue these shares in reliance on exemptions from registration under Section 4(2) of the Securities Act and Rule 506 promulgated pursuant to the Securities Act. We believe that the issuance will be exempt from registration because Newco is wholly-owned by First American, FARES and FAREISI, each of which have total assets in excess of $5 million, which means that Newco is an accredited investor and the First American Transaction otherwise meets the requirements for exemption from registration.
None of our stockholders will have any pre-emptive rights with respect to the issuance of these Class B common shares to Newco under our organizational documents, any agreement or under Delaware law.
As a result of the issuance of 30,048,780 shares of Class B common stock to Newco (without taking into account additional shares that may be issued in connection with the DealerTrack Earn-Out), the current holders of First Advantage’s Class A common stock, which as of the Record Date own approximately 33% of our outstanding common stock (on a pro forma basis), will own approximately 15% of our outstanding common stock. The closing of the First American Transaction therefore will result in substantial dilution of the ownership percentage of the holders of our Class A common stock and will result in First American controlling, directly or indirectly approximately 85% of our issued and outstanding capital stock (on a pro forma basis) and approximately 98% of the voting power of First Advantage.
If DealerTrack consummates an initial public offering within two years after the closing of the First American Transaction, we will be required to issue additional shares of Class B common stock to Newco. This will result in a further dilution of the percentage of our outstanding common stock owned by stockholders other than First American and its subsidiaries. We cannot ascertain at this time how many shares we will have to issue if the DealerTrack Earn-Out is triggered and there is no cap on the number of shares we may be required to issue. For sample calculations of how many shares we would have to issue if the DealerTrack Earn-Out were triggered see “Structure of the First American Transaction—DealerTrack Earn-Out” beginning on page15.
APPROVAL OF THE CERTIFICATE AMENDMENT PROPOSAL
At a meeting held on June 28, 2005, the board of directors, by unanimous vote, approved, subject to approval by the stockholders, an amendment to First Advantage’s First Amended and Restated Certificate of Incorporation to increase the number of shares of Class A common stock which we are authorized to issue from 75,000,000 shares to 125,000,000 shares and the number of shares of Class B common stock which we are authorized to issue from 25,000,000 shares to 75,000,000 shares. The text of the proposed amendment is set forth as Annex I to this proxy statement. Stockholders are urged to read Annex I in its entirety.
Purpose and Effect of the Certificate Amendment Proposal
Assuming that the First American Transaction proposal is approved by the stockholders and the other conditions of closing are satisfied, First Advantage will be required to issue 30,048,780 shares of Class B common stock to Newco at the closing of the First American Transaction. If DealerTrack completes an initial public offering within two years of the closing of the First American Transaction and the value of the DealerTrack Interest exceeds $50 million, First Advantage will be required to issue additional shares to Newco. In addition, because each share of Class B common stock is convertible into one share of Class A common stock, after consummation of the First American Transaction, First Advantage will be required to reserve 30,048,780 shares of Class A common stock for issuance upon conversion of the Class B common stock, and if the DealerTrack Earn-Out is triggered, we will be required to reserve one share of Class A common stock for each additional share of Class B common stock issued to Newco. Moreover, if the incentive plan amendment proposal is approved by our stockholders, we will be required to reserve an additional 4,000,000 shares of Class A common stock for issuance under the incentive compensation plan.
If the amendment to the certificate of incorporation proposal is approved by First Advantage’s stockholders, sufficient additional shares of Class A and Class B common stock will be available for issuance and reservation by First Advantage in connection with the First American Transaction, the DealerTrack Earn-Out and the amendment to the incentive compensation plan and thereafter from time to time, without further action or authorization by the stockholders (except as may be required in a specific case by law or by the Nasdaq National Market), for such corporate purposes as may be deemed to be in the best interests of First Advantage and its stockholders.
As of the date of this proxy statement, other than the agreements described herein, the board of directors has no agreements, commitments or plans to issue any additional shares of Class A or Class B common stock. Stockholders generally do not have preemptive rights.
Vote Required For Approval of the Certificate Amendment Proposal
Under Delaware law, the affirmative vote of the holders of a majority of the issued and outstanding shares of Class A common stock and Class B common stock entitled to vote, voting as separate classes, is required to approve the adoption of the proposed amendment to First Advantage’s certificate of incorporation. First Advantage will not file the amendment to the certificate with the Secretary of State of the State of Delaware unless and until the First American Transaction proposal is approved by the required vote of the stockholders. First Advantage intends to file the amendment as soon as practicable following approval of the First American Transaction proposal and the certificate amendment proposal by the stockholders. The amendment will take effect upon the filing of the amendment with the Secretary of State of the State of Delaware.
The special committee unanimously approved the certificate amendment proposal and unanimously recommended to the full First Advantage board of directors that it recommend the certificate amendment proposal. Our board of directors, after receiving the unanimous recommendation of the special committee, unanimously approved the certificate amendment proposal and recommends that you vote “FOR” approval of the certificate amendment proposal.
NOMINEES FOR ELECTION OF DIRECTORS
Our charter documents require our entire board of nineeleven directors to be elected annually. Our board has designated the persons listed below as candidates for election. Each is currently serving as a director.Unless otherwise specified in the proxy card, the proxies solicited by the board will be voted “FOR” the election of these candidates. In case any of these candidates becomes unavailable to stand for election to the board, an event that is not anticipated, the proxy holders will have full discretion and authority to vote or refrain from voting for any substitute nominee in accordance with their judgment.
The terms of directors elected at the annual meeting expire at the annual meeting to be held in 20062007 or as soon thereafter as their successors are duly elected and qualified. The board has no reason to believe that any of the nominees will be unable or unwilling to serve as a director if elected.
Directors are elected by a plurality vote of shares present at the meeting, meaning that the nominee with the most affirmative votes for a particular seat is elected for that seat. If you do not vote for a particular nominee, or if you withhold authority to vote for a particular nominee on your proxy card, your vote will not count either “FOR”“for” or “AGAINST”“against” the nominee.
None of the nominees has a family relationship with the other nominees, any existing director or any executive officer of our company. Pursuant to the stockholders agreement dated as of December 13, 2002 among First American, Pequot Private Equity Fund II, L.P. and First Advantage, First American and each of its affiliates has agreed to vote its shares for one nominee designated by Pequot, whichwho has chosen Lawrence D. Lenihan, Jr. as its designee.
The board recommends a vote “FOR” the election of each nominee listed below.
Parker Kennedy,Chairman and Director since 2003. Mr. Kennedy, age 58, was president of our parent company First American until 2004, served as executive vice president from 1986 to 1993, was appointed to its board of directors in 1987, and was named chairman and chief executive officer in 2003. Mr. Kennedy has been employed by First American’s primary subsidiary, First American Title Insurance Company, since 1977. He was appointed vice president of that company in 1979 and in 1981 he joined its board of directors. During 1983, he was appointed executive vice president of First American Title Insurance Company, and in 1989 was appointed its president. He now serves as its chairman, a position to which he was appointed in 1999.
John Long, Chief Executive Officer, and Director since 2003. Mr. Long, age 50, has served as chief executive officer of First Advantage since June 2003. Before joining First Advantage, Mr. Long was with First American since 1990, serving first as senior vice president of sales, then as executive vice president and then president of First American Real Estate Tax Services, Inc. From November 1993 to March 2000, Mr. Long was president and chief executive officer of First American Real Estate Information Services, Inc., overseeing that company’s strategic and acquisition direction, completing over 40 acquisitions. In March 2000, he became president and chief executive officer of HireCheck, Inc. where he oversaw the acquisition of Substance Abuse Management, Inc., Employee Health Programs, Inc., American Driving Records, Inc., First American Registry, Inc., and SafeRent, all of which are now part of First Advantage. Mr. Long also serves on the board of directors of First American Title Insurance Company, a wholly-owned subsidiary of First American. Mr. Long earned a Bachelor of Arts degree from the College of New Rochelle and a Masters degree in business administration from Hofstra University in New York.
J. David Chatham, Director since 2003. Mr. Chatham, age 53, has been a director of First American since 1989, and has been a director of First Advantage since 2003. Mr. Chatham currently serves as chairman of First American’s audit committee and as a member of its compensation and nominating and corporate governance committees. Mr. Chatham has also been a member of the board of directors of First American Title Insurance Company since 1989. Since 1972, he has been president and chief executive officer of Chatham Holdings, Inc., a real estate development company.
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Barry Connelly, Director since 2003. Mr. Connelly, age 65, serves on the board of Collection House LTD, a company quoted on the Australian Exchange. Mr. Connelly also serves as the chairman and on the board of Director Rapid Ratings, LTD, a subsidiary of Collection House LTD. In December 2002, he retired from the Consumer Data Industry Association (“CDIA”) after 33 years of service, including eight years as president. During his tenure with CDIA, he was a contributor in drafting the first Fair Credit Reporting Act in 1970 and its successor in 1997.
Lawrence Lenihan, Jr., Director since 2003. Mr. Lenihan, age 41, was a director of US SEARCH.com, Inc. (“US SEARCH”) from September 2000 until June 2003 when First Advantage acquired that company. Mr. Lenihan is a senior managing director of Pequot Capital Management, Inc. and managing general partner and co-head of the Pequot venture funds and the Pequot private equity funds. Previously, Mr. Lenihan was a principal with Broadview Associates, L.L.C. where he was a senior member of the mergers and acquisitions team. Prior to joining Broadview, Mr. Lenihan held various positions within IBM. Mr. Lenihan is also a member of the board of directors of Saba Software, Inc., a Nasdaq-quoted company and serves as a member of its audit and compensation committees as well as chairman of its governance committee. In addition, Mr. Lenihan serves as a director on several non-public companies, including Duck Creek Technologies, Haley Systems and OutlookSoft. Mr. Lenihan was recommended as a nominee by Pequot Private Equity Fund II, L.P., a holder of our Class A common stock who is entitled to designate one director that First American and its affiliates are required to vote for under the terms of a stockholders agreement, as amended, which is described in “Certain Relationships and Related Transactions” beginning on page 24.
Frank McMahon, Director since April 2006. Mr. McMahon, age 46, serves as vice chairman and chief financial officer of First American. Prior to joining First American in April 2006, Mr. McMahon was a managing director of the Investment Banking Division with Lehman Brothers, Inc. and was responsible for managing their western region financial institutions group, as well as their U.S. asset management sector. Prior to that, Mr. McMahon managed a similar group for Merrill Lynch.
Donald Nickelson, Director since 2003. Mr. Nickelson, age 73, serves as a director and vice chairman of the leveraged buy-out firm, Harbour Group Industries, Inc., and also sits on its executive and compensation committees. In addition, Mr. Nickelson serves as a director of Adolor Corporation, where he serves on the audit and nominating-governance committee, and serves as a director of Mainstay Mutual Funds, where he serves on the nominating and audit committees. Mr. Nickelson also holds directorship positions for several non-public companies, including AddressFree Corporation and Del Industries. Prior to joining Harbour Group, he served as president of PaineWebber Group, an investment banking and brokerage firm, from February 1988 to January 1990.
Donald Robert, Director since 2003. Mr. Robert, age 46, is currently chief executive officer of Experian Group, a global information technology company and a wholly owned subsidiary of GUS Plc, a British retailing and consumer information conglomerate. Prior to his current appointment, Mr. Robert served as chief executive officer of Experian North America, and chief operating officer, and president of its Information Solutions business unit, beginning in April 2001. From 1995 to 2001, Mr. Robert was a group executive of First American with responsibility for its Consumer Information and Services Group. From 1992 to 1995, Mr. Robert was president of Credco, Inc., now First Advantage Credco, the nation’s largest specialized credit reporting company and a wholly-owned subsidiary of First Advantage. He is a member of the GUS Plc board of directors.
Adelaide Sink, Director since December, 2003. Ms. Sink, age 57, currently serves on the board of Raymond James Financial Inc. and Raymond James Bank, where she serves as a member of Raymond James Inc.’s compensation committee, and as a member of Raymond James Bank’s audit committee, and is an active board member of several non-profit organizations, including the Community Foundation of Tampa Bay, Nature Conservancy of Florida and Wake Forest University. Ms. Sink had a 26-year career with Bank of America—Florida, which culminated in her appointment as president from 1993 until 2000.
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D Van Skilling, Director since November 2005. Mr. Skilling, age 72, currently serves as a director of First American, where he sits on the audit and executive committees; Lamson & Sessions, where he chairs the compensation, nomination and governance committees; McData, where he is a member of the audit and governance committees; Onvia, where he is a member of the compensation committee; and American Business Bank, where he chairs the compensation committee and is a member of the audit committee. Mr. Skilling formally served as the chairman and chief executive officer of Experian Information Solutions, Inc. (formerly TRW Information Systems & Services), a position he was appointed to in 1996.
David Walker, Director since 2003. Mr. Walker, age 52, is currently serving as the Director of Programs of Accountancy and Social Responsibility and Corporate Reporting in the College of Business at the University of South Florida St. Petersburg, and is a consultant on corporate governance matters, both roles he has held since 2002. From 1975 through 2002, Mr. Walker was with Arthur Andersen LLP, serving as a partner in the firm from 1986 through 2002. Mr. Walker is also a member of the boards of directors of, Technology Research Corporation, Inc. where he also sits on its compensation committee, and Chico’s, FAS.
INFORMATION ABOUT OUR BOARD OF DIRECTORS
Composition of Board and Committees
Our board of directors oversees our business and affairs and monitors the performance of management. Management is responsible for the day-to-day operations of our company. As of the date of this proxy statement, our board has nineeleven directors and the following committees: audit, nominating, compensation and compensation.special. The membership during the last fiscal year and the function of each of the committees are described below. Each of the committees is required to be comprised of three or more members of the board.
We have held 6seven board meetings during the 2004 fiscal year.in 2005. Each director attended at least 75% of all board and applicable committee meetings. The following table lists membership of our board of directors and board committees:
Committees | |||||||||||||
Name of Director | Audit | Nominating | Compensation | Special | |||||||||
Parker Kennedy | |||||||||||||
John Long | |||||||||||||
J. David Chatham | X | ||||||||||||
Barry Connelly | X | X | |||||||||||
Lawrence Lenihan, Jr. | X | X | X | ||||||||||
Donald Nickelson | X | * | X | X | * | ||||||||
Donald Robert | X | X | * | ||||||||||
Adelaide Sink | X | X | X | ||||||||||
D. Van Skilling | X | ||||||||||||
David Walker | * | X | * |
X= Committee Member; X*= Committee Chair
Our board has determined that each of our directors is independent within the meaning of applicable Nasdaq and SEC rules, except for Parker Kennedy, who is chairman and chief executive officer of our parent company First American; and John Long, who is our chief executive officer; and Frank McMahon, who is the vice chairman and chief financial officer and president.of First American. However, First Advantage is a “controlled company” within the meaning of the Nasdaq Marketplace Rules because First American controls more than 50% of the voting power in First Advantage. As such, we are relying on Nasdaq Marketplace Rule 4350(c), which allows controlled companies to be exempt from rules requiring (a) the compensation and nominating committees to be composed solely of independent directors; (b) the compensation of the executive officers to be determined by a majority of
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the independent directors or a compensation committee composed solely of independent directors; and (c) director nominees to be selected or recommended for the board’s selection, either by a majority of the independent directors, or a nominating committee composed solely of independent directors.
Audit CommitteeCommittee.. Our board established the audit committee for the primary purposes of overseeing the accounting and financial reporting processes of our company and audits of our financial statements, and preparing an annual report of the committee. Our board of directors has made an affirmative determination that each member of the audit committee (a) is an “independent director” as that term is defined by Nasdaq Marketplace Rules and (b) satisfies Nasdaq Marketplace Rules relating to financial literacy and experience. Our board of directors has further determined that David Walker satisfies the criteria for being an “audit committee financial expert” as such term is defined in Item 401(h) of Regulation S-K promulgated by the SEC.
The audit committee is solely responsible for selecting First Advantage’s independent registered certified accounting firm;public accountants; approving in advance all audit services and related fees and terms; and approving in advance all non-audit services, if any, provided by our independent public accountants and related fees and terms. The audit committee also oversees and monitors our internal control system, evaluates the independence standards for our independent accountants,outside auditors, reviews the conduct of and personnel in our internal audit function, reviews financial information in our quarterly reports, and reviews and evaluates the audit performed by our independent
accountants.outside auditors. The committee reports any significant developments with respect to its duties to the full board. The audit committee met 1613 times during 2004.2005. Our board of directors has adopted a written audit committee charter, a copy of which is attached to this proxy statement as Appendix A. The audit committee charter may also be viewed in the Corporate Governance page of the Investor Relations section of our website located at www.fadv.com. For more information regarding the audit committee, see “Report of the Audit Committee of the Board of Directors” beginning on page 101.
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Compensation CommitteeCommittee.. The compensation committee is responsible for recommending compensation arrangements for officers of our company; evaluating the performance of our company’s chief executive officer; administering our company’s compensation plans, and preparing annual and other reports of the committee. Each member of the committee is a non-employee director. The compensation committee met four9 times in 2004.2005. The compensation committee charter may be viewed on the Corporate Governance page of the Investor Relations section of our website located atwww.fadv.com. www.fadv.com. For additional information regarding the compensation committee, see “Report of the Compensation Committee of the Board of Directors on Executive Compensation” beginning on page 111.17 of this proxy statement.
Nominating CommitteeCommittee.. Our board of directors has established a nominating committee to assist the board in identifying individuals qualified to become directors and recommending to the board for nomination candidates for election or reelection to the board or to fill board vacancies. The nominating committee met oncetwo times in 2004.2005.
The nominating committee acts under a written charter (a copy of which may be viewed in the Corporate Governance page of the Investor Relations section of our website located at www.fadv.com) specifying, among other things, the following minimum qualifications for candidates recommended for election to the board:
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The nominating committee also will consider, among other factors, whether an individual has any direct experience with our company or its subsidiaries (whether as a director, officer, employee, supplier or otherwise); the individual’s experience in the industry in which our company operates; the individual’s other obligations and time commitments; whether the individual is an employee of a company or institution on the board of directors of which a senior executive of our company serves; whether the individual has specific knowledge, skills or experience that may be of value to our company or a committee of the board; whether an individual has been recommended by a stockholder of our company, an independent member of the board, another member of the board, senior management of our company or a customer of our company; and the findings of any third parties that may be engaged to assist the committee in identifying directors.
The nominating committee recommended the slate of directors proposed for election at the annual meeting, which was unanimously approved by the full board of directors, including unanimous approval by the independent directors. Lawrence D. Lenihan, Jr. was recommended as a nominee by Pequot Private Equity Fund II, L.P., a holder of our Class A common stock who is entitled to designate one director that First American and its affiliates are required to vote for under the terms of a stockholders agreement, which is described in “Certain Relationships and Related Transactions” beginning on page 117. Theagreement.
Special Committee. In January 2005, the board appointed Adelaide A. Sink onof directors formed a special committee comprised of independent directors for the recommendationpurpose of evaluating the acquisition of the chief executive officer of our company after the board was expanded to nine members. Ms. Sink joined the board in December 2003.
Credit Information Group (“CIG”) from First American. The committee is not currently active.
Procedure for Stockholder Nominations of Directors
Nominations for the election of directors may only be made by the board of directors in consultation with its nominating committee. A stockholder of record who has the power to vote ten percent or more of the outstanding capital stock of our company may recommend to the nominating committee up to one candidate for consideration as a nominee in any 12-month period. The nominating committee will consider a stockholder nominee only if a stockholder gives written notice to the secretary of our company at our principal executive offices not later than the close of business on November 1 of the year immediately preceding the year of the annual meeting of stockholders at which the stockholder desires to have his or her candidate presented by the board. Each such notice must include the name, address and telephone number of the potential nominee; a detailed biography of the potential nominee; and evidence of stock ownership by the presenting stockholder, including the number of shares owned. Nominees properly proposed by eligible stockholders will be evaluated by the nominating committee in the same manner as nominees identified by the committee.
Our stockholders may communicate directly with the members of the board of directors or individual members by writing directly to it or those individuals, care of the secretary of our company at our principal executive offices, together with evidence of stock ownership. We strongly encourage our board of directors to attend our annual meeting of stockholders, and any member who misses three consecutive annual meetings will be removed.
First Advantage has adopted a code of ethics that applies to its chief executive officer, chief financial officer, controller and all of its other officers, employees and directors. A copy of our code of ethics may be viewed in the Corporate Governance page of the Investor Relations section of our website located at www.fadv.com. You may also obtain a copy of our Code of Ethics, free of charge, by sending your written request to One Progress Plaza, Suite 2400, St. Petersburg, Florida 33701.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the compensation committee for fiscal 20042005 were Messrs. Lenihan, Nickelson and Robert.Robert and Ms. Sink. No member of this committee was at any time during the 20042005 fiscal year or at any other time an officer or employee of First Advantage, and no member had any relationship with First Advantage requiring disclosure under Item 404 of Regulation S-K. No executive officer of First Advantage has served on the board of directors or compensation committee of any other entity that has or has had one or more executive officers who served as a member of the board of directors or the compensation committee of First Advantage during the 20042005 fiscal year.
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REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
In the performance of its oversight function, the audit committee has met and held discussions with management of First Advantage, who represented to the audit committee that our company’s consolidated financial statements were prepared in accordance with generally accepted accounting principles. The audit committee has reviewed and discussed the consolidated financial statements with both management and our company’s independentregistered certified public accountants, PricewaterhouseCoopers LLP. The audit committee also discussed with our company’s independentregistered certified public accountants matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees), as currently in effect.
Our company’s independentregistered certified public accountants also provided to the audit committee the written disclosures required by the current version of Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the audit committee discussed their independence with the independent public accountants. In connection with that, the audit committee has considered whether the provision of non-auditing services (and the aggregate fees billed for these services) in fiscal 20042005 by PricewaterhouseCoopers LLP to First Advantage is compatible with maintaining the independentregistered certified public accountants’ independence.
Based upon the reports and discussions described in this report, the audit committee recommended to the board of directors that the audited consolidated financial statements be included in our company’s annual report on Form 10-K for the fiscal year ended December 31, 2004,2005, filed with the SEC.
By the Audit Committee of the Board of
Directors
/s/ DAVID WALKER
David Walker, Chairman
J. David Chatham
Barry Connelly
D. Van Skilling
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Our executive officers in addition to Parker Kennedy and John Long are listed below:
Anand Nallathambi, 44, president since September 2005. Following the acquisition of the CIG from First American, Mr. Nallathambi was appointed president of First Advantage. Prior to joining First Advantage, Mr. Nallathambi served as president of First American’s Credit Information Group and as president of First American Appraisal Services from 1996 to 1998. Mr. Nallathambi received a masters in business administration from California Lutheran University after obtaining a bachelor of arts degree in economics from Loyola University in Madras, India.
Akshaya Mehta, 45,46, chief operating officer and executive vice president since 2003. Previously executive vice president and chief operating officer of American Driving Records (“ADR”ADR”), a wholly-owned subsidiary of First Advantage, Mr. Mehta has over 15 years of management experience and over 20 years of technology development expertise. Prior to joining ADR in 1999, Mr. Mehta served as division vice president of product development at Automatic Data Processing, Inc., vice president of development at Security Pacific Bank, and Deputy Head of Development at UBS London. Mr. Mehta earned a Mastersmasters degree in computer science at the Imperial College of the University of London after obtaining a Bachelorbachelor of Sciencescience degree in physics and medical physics from the same university.
John Lamson, 54,55, chief financial officer and executive vice president since 2003. Prior to joining First Advantage, Mr. Lamson served as chief financial officer of First American Real Estate Information Services Inc., a wholly-owned subsidiary of First American, a position he held from September 1997 to June 2003. Prior to that, Mr. Lamson served as chief financial officer of a financial institution and as a certified public accountant with Arthur Andersen & Co. Mr. Lamson is a member of the American Institute of Certified Public Accountants and holds a Bachelorbachelor of Artsarts degree in business administration from the University of South Florida.
Evan BarnettJulie Waters, 57, president of resident screening services division since 2003. Mr. Barnett has served as president of our subsidiary First American Registry, Inc. since December 1994. Previously, Mr. Barnett held senior management positions with Omni International Corporation and related entities from 1974 through December 1994. He was employed as a certified public accountant with Grant Thornton LLP (then Alexander Grant & Co) from 1970 to 1974. Mr. Barnett graduated from The American University with a Bachelor of Science degree in accounting and a Masters degree in business administration in financial management.
Rick Mansfield, 41,39, joined First Advantage in DecemberApril 2004 as Chief Marketing Officervice president and Senior Vice President.general counsel. Prior to joining First Advantage, MansfieldMs. Waters was responsiblegeneral counsel for corporate marketing, brand strategyUSA Floral Products, Inc., formally a publicly traded company on NASDAQ. Ms. Waters was previously employed as in-house counsel for Teco Corporation and certain business development activities as chief marketing officer for Catalina Marketing Corporation (NYSE: POS),Spalding & Evenflo Corporation. Ms. Waters received her juris doctorate from George Washington University after receiving a marketing services organization. Previously, Mansfield was employed in senior level marketing positions for the Quaker Oats Company in Chicago, Ill., and was responsible for developing and implementing strategic and operating go-to-market plans for Gatorade® and other household brands. Mansfield received his bachelor’sbachelor of arts degree in AccountingEnglish and Rhetoric & Communications from Eastern Illinoisthe University and his masters in business administration from Kellogg Graduate School of Management, Northwestern University.Virginia.
Alan Missen42,, 43, chief information officer since March 2005. Prior to joining First Advantage, Mr. Missen was with PricewaterhouseCoopers LLP, first as director of shared services applications and most recently as director of portfolio management. Before joining PricewaterhouseCoopers LLP, Mr. Missen was a senior information technology manager with Arthur Andersen LLP. Mr. Missen has more than 20 years of experience in information technology. Mr. Missen holds a Bachelorbachelor of Sciencescience degree in statistics from the University of Toronto.
Evan Barnett, 58, president of multifamily services segment since 2003. Previously, Mr. Barnett held senior management positions with Omni International Corporation and related entities from 1974 through December 1994. He was employed as a certified public accountant with Grant Thornton LLP (then Alexander Grant & Co) from 1970 to 1974. Mr. Barnett graduated from The American University with a bachelor of science degree in accounting and a master’s degree in business administration in financial management.
Bart Valdez, 42,43, president of screeningemployment services divisionsegment since 2003. Mr. Valdez was named president of HireCheck, Inc. in October 2002 after joining the company in October 2000 as Chief Operating Officer.chief operating officer. From August 2001 until October 2002, he also served as president of Substance Abuse Management, Inc. (“SAMI”SAMI”). From June of 1998 until he joined HireCheck, Mr. Valdez served as vice president of business development and operations for Employee Information Services, Inc. (“EIS”EIS”). HireCheck, SAMI and EIS are now subsidiariespart of First Advantage.Advantage’s employment services segment. He received his Bachelorbachelor of Sciencescience degree from Colorado State University and his Mastersmaster’s degree in business administration from the University of Colorado.
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Julie WatersAndrew MacDonald, 39,42, joined First Advantage in 2002 through the acquisition of Employee Health Programs by Hirecheck, now part of First Advantage’s employment services segment, where he was president and chief financial officer. Following the acquisition, Mr. MacDonald served as both president of First Advantage Occupational Health Services and then as vice president and general counsel since April 2004.corporate development officer. In January 2006, Mr. MacDonald was appointed president of First Advantage Litigation Consulting, LLC, part of the investigative and litigation support services segment. Mr. MacDonald received his bachelor of arts degree in business administration from Emory University.
Howard Tischler, 53, joined First Advantage in September 2005 through the acquisition of CIG from First American and currently serves as the president of the dealer services segment of the company. Prior to joining First Advantage, Mr. Tischler served as chief executive officer and president of First American CMSI, a company acquired in connection with the acquisition of the CIG from First American Corporation. Mr. Tischler received his bachelor of science degree in mathematics from the University of Maryland and his masters of science degree in engineering and operations research from the George Washington University.
Isabelle Thiesen, 45, joined First Advantage as chief security officer in October 2005. Prior to joining First Advantage, Ms. Waters was general counsel and secretary for publicly traded wholesale floral distributor, U.S.A. Floral Products, Inc. Previously, Ms. WatersThiesen served as in-house corporate counselvice president of information security for TECO Energy, Inc.Warner Bros. Prior to Warner Bros., Ms. Thiesen served in security positions for Universal Studios, American Express and in-house corporate
counsel for SpaldingErnst & Evenflo Companies, Inc.Young. Ms. WatersThiesen has a masters of science degree in business administration from California State Polytechnic University after having received her bachelor’sa bachelor of arts degree in mass media communication and film studies from the University of Virginia and holds a juris doctor degree from the George Washington University School of Law.
Beth Henricks, 45, president of First Advantage’s tax consulting division since May 2004. Prior to joining the tax consulting division, Ms. Henricks had a position with ADP in California managing the client service function for the payroll division. Ms. Henricks received a Masters in Business Administration from Butler University in Indianapolis, Indiana and a Bachelor of Arts degree in Business Administration from Taylor University in Upland, Indiana.Utah.
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COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the total compensation paid or to be paid by First Advantage, as well as certain other compensation paid or accrued, during the periods presented to the chief executive officer and the four most highly compensated executive officers serving at the end of 2004,2005, based on salary and bonus. The table also includes information relating to David Wachtel, our former chief technology officer, who resigned frombonus (collectively, the company on November 30, 2004. We refer to each of the officers listed in the following table as the “Named“Named Executive Officers.”
Officers”):
Summary Compensation Table(1)Table
Annual Compensation | Long-Term Compensation | |||||||||||||||||||||||||||||
Name and Principal Position | Year | Annual Compensation | Long-Term Compensation | All Other Compensation | ||||||||||||||||||||||||||
Year | Salary | Bonus(2) | Number of Securities Underlying Options/SARs | All Other Compensation | Salary | Bonus | Number of Securities Underlying Options/SARs | |||||||||||||||||||||||
John Long, | 2004 | $ | 400,000 | $ | 360,000 | 0 | $ | 7,669 | 2005 | $ | 440,000 | $ | 550,000 | (3) | 150,000 | $ | 8,350 | (6) | ||||||||||||
Chief Executive Officer | 2003 | $ | 306,954 | $ | 409,846 | 420,000 | $ | 12,039 | (4) | 2004 | $ | 400,000 | $ | 360,000 | (2) | 0 | $ | 7,669 | (5) | |||||||||||
2003 | $ | 306,954 | $ | 409,846 | (1) | 420,000 | $ | 12,039 | (4) | |||||||||||||||||||||
Anand Nallathambi | 2005 | $ | 400,000 | $ | 1,600,00 | (3)(7) | 200,000 | $ | 5,236 | (6) | ||||||||||||||||||||
President | 2004 | $ | — | (8) | $ | — | (8) | — | $ | — | (8) | |||||||||||||||||||
2002 | — | — | — | — | 2003 | $ | — | (8) | $ | — | (8) | — | $ | — | (8) | |||||||||||||||
Akshaya Mehta, | 2004 | $ | 275,000 | $ | 240,000 | 0 | $ | 4,792 | (3) | 2005 | $ | 290,000 | $ | 251,333 | (3) | 75,000 | $ | 4,904 | (6) | |||||||||||
Chief Operating Officer | 2003 | $ | 238,864 | $ | 200,000 | 135,000 | $ | 8,094 | (4) | 2004 | $ | 275,000 | $ | 240,000 | (2) | 0 | $ | 4,792 | (5) | |||||||||||
2002 | — | — | — | — | 2003 | $ | 238,864 | $ | 200,000 | (1) | 135,000 | $ | 8,094 | (4) | ||||||||||||||||
John Lamson, | 2004 | $ | 220,000 | $ | 240,000 | 0 | $ | 5,272 | (3) | 2005 | $ | 240,000 | $ | 288,000 | (3) | 75,000 | $ | 5,439 | (6) | |||||||||||
Chief Financial Officer | 2003 | $ | 205,570 | $ | 200,000 | 100,000 | $ | 11,177 | (4) | 2004 | $ | 220,000 | $ | 240,000 | (2) | 0 | $ | 5,272 | (5) | |||||||||||
2002 | — | — | — | — | 2003 | $ | 205,570 | $ | 200,000 | (1) | 100,000 | $ | 11,177 | (4) | ||||||||||||||||
Evan Barnett, | 2004 | $ | 235,000 | $ | 300,000 | 0 | $ | 5,128 | (3) | 2005 | $ | 250,000 | $ | 325,000 | (3) | 0 | $ | 4,904 | (6) | |||||||||||
President of Resident | 2003 | $ | 226,155 | $ | 205,531 | 75,000 | $ | 12,039 | (4) | |||||||||||||||||||||
Screening Services Division | 2002 | — | — | — | — | |||||||||||||||||||||||||
Beth Henricks, | 2004 | $ | 240,000 | $ | 384,000 | 25,000 | $ | 4,677 | (3) | |||||||||||||||||||||
President of Tax Consulting Division (5) | 2003 | — | — | — | — | |||||||||||||||||||||||||
2002 | — | — | — | — | ||||||||||||||||||||||||||
David Wachtel, | 2004 | $ | 250,000 | $ | 100,000 | 0 | $ | 423 | (3) | |||||||||||||||||||||
Chief Technology Officer (6) | 2003 | $ | 237,618 | $ | 225,000 | 40,000 | $ | 65 | (4) | |||||||||||||||||||||
2002 | — | — | — | — | ||||||||||||||||||||||||||
President of Multifamily | 2004 | $ | 235,000 | $ | 300,000 | (2) | 0 | $ | 5,128 | (5) | ||||||||||||||||||||
Services Segment | 2003 | $ | 226,155 | $ | 205,531 | (1) | 75,000 | $ | 12,039 | (4) |
(1) |
|
(2) | Bonuses for the individuals noted above for fiscal year 2004 (except for |
(3) |
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(4) | Consists of matching contributions made in First American’s 401(k) Savings Plan during, or with respect to, 2003, plus the dollar value of insurance premiums paid by, or on behalf of, First American during 2003 with respect to term life insurance for the benefit of such officer. |
(5) |
(6) | Consists of matching contributions made in First Advantages’ 401(k) savings plan during, or with respect to, 2005, plus the dollar value of insurance premiums paid by or on behalf of, First Advantage during 2005 with respect to terms life insurance for the benefit of such officer. |
(7) | Of the $1,600,000 bonus received by Mr. |
(8) | Mr. Nallathambi was not employed by First Advantage during fiscal years 2003 and |
Named Executive Officer Stock Option Grants and Exercises
The following table provides information about stock option grants made to each of the Named Executive Officers during 20042005 pursuant to the First Advantage Corporation 2003 Amended and Restated Incentive Compensation Plan. No other options and no stock appreciation rights were granted to the Named Executive Officers during 2004.
2005.
Option Grants In 20042005
Name of Executive Officer | Number of Securities Underlying Options Granted(1) | Percent of Total Options Granted to Employees in 2004 | Exercise or Base Price Per Share | Expiration Date | Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(2) | Number of Securities Underlying Options Granted(1) | Percent of Total Options Granted to Employees in 2005 | Exercise or Base Price Per Share | Expiration Date | Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(2) | ||||||||||||||||||||||
5% | 10% | 5% | 10% | |||||||||||||||||||||||||||||
John Long | 0 | 0 | 0 | 0 | $ | 0 | $ | 0 | 150,000 | 9.6 | % | $ | 19.49 | 2/23/2015 | $ | 1,838,573 | $ | 4,659,306 | ||||||||||||||
Akshaya Mehta | 0 | 0 | 0 | 0 | $ | 0 | $ | 0 | 75,000 | 4.8 | % | $ | 19.49 | 2/23/2015 | $ | 919,287 | $ | 2,329,653 | ||||||||||||||
John Lamson | 0 | 0 | 0 | 0 | $ | 0 | $ | 0 | 75,000 | 4.8 | % | $ | 19.49 | 2/23/2015 | $ | 919,287 | $ | 2,329,653 | ||||||||||||||
Evan Barnett | 0 | 0 | 0 | 0 | $ | 0 | $ | 0 | 30,000 | 2 | % | $ | 19.49 | 2/23/2015 | $ | 367,715 | $ | 931,861 | ||||||||||||||
Beth Henricks | 25,000 | 0.9 | % | $ | 18.08 | May 2013 | $ | 284,260 | $ | 720,372 | ||||||||||||||||||||||
David Wachtel | 0 | 0 | 0 | 0 | $ | 0 | $ | 0 | ||||||||||||||||||||||||
Anand Nallathambi | 200,000 | 12.8 | % | $ | 27.07 | 9/16/2015 | $ | 3,404,820 | $ | 8,628,522 |
(1) | Options vest in approximately equal parts on each of the first three anniversaries of the date of grant. |
(2) | The potential realized value figures assume that the market price of our Class A common stock at the time each option is granted will appreciate at annual rates of 5% and 10%, respectively, over the term of the grant. |
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The following table provides information about stock options held by the Named Executive Officers as of December 31, 2004.
2005.
Aggregated Option Exercises in 2004 2005
and Option Values as of December 31, 20042005
Name of | Number of Shares Acquired on Exercise | Value Realized | Number of Securities Underlying Unexercised Options on December 31, 2004 | Value of Unexercised In-The- Money Options on December 31, 2004(1) | Number of Shares Acquired on Exercise | Value Realized | Number of Securities Underlying Unexercised Options on December 31, 2005 | Value of Unexercised In-The- Money Options on December 30, 2005(1) | |||||||||||||||||||||
Exercisable | Unexercisable | Exercisable | Unexercisable | Exercisable | Unexercisable | Exercisable | Unexercisable | ||||||||||||||||||||||
John Long | 0 | 0 | 90,000 | 180,000 | $ | 190,250 | $ | 220,500 | 2,500 | $ | 11,762 | 180,000 | 87,500 | $ | 914,400 | $ | 444,500 | ||||||||||||
John Long | 0 | 0 | 50,000 | 100,000 | $ | 100,000 | $ | 200,000 | 0 | 0 | 100,000 | 50,000 | $ | 831,000 | $ | 415,500 | |||||||||||||
John Long | 0 | 0 | 0 | 150,000 | $ | 0 | $ | 1,083,000 | |||||||||||||||||||||
Akshaya Mehta | 0 | 0 | 33,333 | 16,667 | $ | 169,331 | $ | 84,668 | |||||||||||||||||||||
Akshaya Mehta | 0 | 0 | 16,667 | 33,333 | $ | 20,417.07 | $ | 40,833.79 | 0 | 0 | 56,666 | 28,334 | $ | 470,894 | $ | 235,455 | |||||||||||||
Akshaya Mehta | 0 | 0 | 28,334 | 56,666 | $ | 56,668 | $ | 113,332 | 0 | 0 | 0 | 75,000 | $ | 0 | $ | 541,500 | |||||||||||||
John Lamson | 0 | 0 | 16,667 | 33,333 | $ | 33,334 | $ | 66,666 | 0 | 0 | 33,333 | 16,667 | $ | 169,331 | $ | 84,668 | |||||||||||||
John Lamson | 0 | 0 | 16,667 | 33,333 | $ | 20,417.07 | $ | 40,833.79 | 0 | 0 | 33,333 | 16,667 | $ | 276,997 | $ | 138,502 | |||||||||||||
John Lamson | 0 | 0 | 0 | 75,000 | $ | 0 | $ | 541,500 | |||||||||||||||||||||
Evan Barnett | 0 | 0 | 8,334 | 16,666 | $ | 16,668 | $ | 33,332 | 0 | 0 | 33,333 | 16,667 | $ | 169,331 | $ | 84,778 | |||||||||||||
Evan Barnett | 0 | 0 | 16,667 | 33,333 | $ | 20,417.07 | $ | 40,833.79 | 0 | 0 | 16,666 | 8,334 | $ | 138,494 | $ | 69,255 | |||||||||||||
Beth Henricks | 0 | 0 | 0 | 25,000 | 0 | $ | 58,000 | ||||||||||||||||||||||
David Wachtel(2) | 0 | 0 | 49,869.16 | 0 | $ | 128,869.16 | $ | 0 | |||||||||||||||||||||
Evan Barnett | 0 | 0 | 0 | 30,000 | $ | 0 | $ | 216,600 | |||||||||||||||||||||
Anand Nallathambi | 0 | 0 | 0 | 200,000 | $ | 0 | $ | 720,000 |
(1) | These values are calculated based upon the difference between the exercise price and |
Certain employees of First Advantage are eligible to participate in the following benefit plans maintained by First American for the benefit of certain officers and employees of First American and its subsidiaries, including First Advantage and its subsidiaries.
Pension Plans. Employees of First Advantage and its subsidiaries who were participants in First American’s defined benefit pension plan prior to First Advantage’s June 5, 2003 acquisition of First American’s screening technology division, and who have become employees of First Advantage or its subsidiaries in connection with such acquisition generally are permitted to continue their participation in the pension plan, to the extent available to employees of First American. NoAs of December 31, 2001, no new participants have been or will be permitted to participate in the defined benefit pension plan after December 31, 2001.plan.
Pension Plan Table
Remuneration (Final Average Pay)(1) | Years of Benefit Service | |||||||||||||||||
5 | 10 | 20 | 30 | 40 | 50 | |||||||||||||
$100,000 | $ | 4,850 | $ | 9,950 | $ | 22,150 | $ | 34,350 | $ | 46,550 | $ | 58,750 | ||||||
125,000 | 6,100 | 12,513 | 27,838 | 43,163 | 58,488 | 73,813 | ||||||||||||
150,000 | 7,350 | 15,075 | 33,525 | 51,975 | 70,425 | 88,875 | ||||||||||||
175,000 | 8,600 | 17,638 | 39,213 | 60,788 | 82,363 | 103,938 | ||||||||||||
200,000 | 9,850 | 20,200 | 44,900 | 69,600 | 94,300 | 119,000 | ||||||||||||
225,000 | 11,100 | 22,763 | 50,588 | 78,413 | 106,238 | 134,063 | ||||||||||||
250,000 | 12,350 | 25,325 | 56,275 | 87,225 | 118,175 | 149,125 | ||||||||||||
275,000 or more | 13,600 | 27,888 | 61,963 | 96,038 | 130,113 | 164,188 |
(1) | Final average pay is defined as the highest consecutive five-year average “pay,” as defined in the pension plan, during the 10-year period ending December 31, 2001. |
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The above table sets forth estimated annual benefits upon retirement (assuming such benefits will be paid in the form of a life annuity) at various compensation levels and years of service under First American’s pension plans. Subject to certain conditions of age and tenure, all regular employees of First American and its participating subsidiaries were eligible to join First American’s qualified pension plan until December 31, 2001. No employees are eligible to join the pension plan after that date.
In order to participate, during plan years ending on or prior to December 31, 1994, an employee was required to contribute 1 1/2% of pay (i.e., salary, plus cash bonuses, commissions and other pay) to the plan. As a result of amendments to the pension plan that were adopted in 1994, during plan years commencing after December 31, 1994, an employee was not required to contribute to the plan in order to participate. As a result of further amendments, which were adopted in 2000, the pension plan will not accept new participants after December 31, 2001.
A participant generally vests in his accrued benefit attributable to First American’s contributions upon the completion of three years of service or, if earlier, the attainment of normal retirement age while an employee. Normal retirement age is defined under the plan as the later of the employee’s attainment of age 65 or his third anniversary of participation in the plan.
Upon retirement at normal retirement age, an employee receives full monthly benefits which are equal, when calculated as a life annuity:
• | for years of credited service with First American and its subsidiaries (including First Advantage and its subsidiaries) as of December 31, 1994, to 1% of the first $1,000 and 1 1/4% of remaining final average pay (i.e., the average of the monthly “pay,” as defined above, during the five highest paid consecutive calendar years out of the last ten years prior to retirement) times the number of years of credited service as of December 31, 1994; and |
An employee with at least three years of participation in the plan may elect to retire after attaining age 55, but prior to age 65, and receive reduced benefits.
First American funds the plan based on actuarial determinations of the amount required to provide the stated benefits. The table is based on retirement at age 65 or later, with contributions having been made by the employee in each year of credited service prior to 1995. The benefits are not subject to deduction for Social Security payments or any other offsets. Currently, John Long, John Lamson and Evan Barnett have 1516 1/2,8 1/2, 8and 5 1/2 and 7 1/2 years, respectively, of credited service.
The compensation levels shown in the table are less than those set forth in the summary compensation table because the federal tax law limits the maximum amount of pay that may be considered in determining benefits under the tax-qualified pension plan, and First American’s pension restoration plan, which is described below, does not make up for these limits for pay exceeding $275,000. The limit on pay that could be recognized by tax-qualified retirement plans was $200,000 in 1989. This amount was adjusted for inflation for each year
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through 1993, when the limit was $235,840. In 1993, this limit was decreased to $150,000 for plan years beginning in 1994. The $150,000 limit has been adjusted for inflation and was increased to $160,000 as of January 1, 1997, and to $170,000 as of January 1, 2000. The highest final average pay that could be considered in determining benefits accruing under the pension plan before 1994 is $219,224, and since First American’s pension plan does not consider pay earned after December 31, 2001, the highest final average pay that can be considered in determining benefits accruing after 1993 is $164,000.
During 1996, First American adopted its pension restoration plan. This plan is an unfunded, nonqualified plan designed to make up for the benefit accruals that are restricted by the indexed $150,000 pay limit. However, in order to limit its expense, the pension restoration plan does not make up for benefit accruals on compensation exceeding $275,000. The pension restoration plan also makes up for benefits that cannot be paid from First American’s pension plan because of limitations imposed by the federal tax laws. Vesting of benefits payable to an employee under First American’s pension restoration plan occurs at the same time that vesting occurs for that employee in his or her pension plan benefits. The pension restoration plan is effective as of January 1, 1994, but only covers selected pension plan participants who were employees of First American or its participating subsidiaries on that date. As noted above, January 1, 1994, is the date as of which the pay limit for the pension plan was reduced from $235,840 to $150,000. The pension restoration plan excludes pay earned after December 31, 2001, as does the pension plan.
Supplemental Benefit Plan. First American maintains an executive supplemental benefit plan that it believes assists in attracting and retaining highly qualified individuals for upper management positions. The plan provides retirement benefits for, and pre-retirement death benefits with respect to, certain key management personnel selected by First American’s board of directors, and may include executives of First Advantage or its subsidiaries at and to the extent selected by First American’s board of directors. Under the plan, upon retirement at normal retirement date (the later of age 65 or, unless waived by First American’s board of directors, completion of ten years of service), a participant receives a joint life and 50% survivor annuity benefit equal to 35% of “final average compensation.” “Final average compensation” is the average annual compensation, composed of base salary, plus cash and stock bonuses, for those three calendar years out of the last ten years of employment preceding retirement in which such compensation is the highest.
The benefit is reduced by 5% for each year prior to normal retirement date in which retirement occurs and, until age 70, increased by 5% (compounded in order to approximate the annuitized value of the benefit had retirement occurred at age 65) for each year after such date in which retirement occurs. With respect to such postponed retirement, the plan takes into account covered compensation received until age 70, so that the retirement benefit of an executive who retires after normal retirement date is equal to the greater of the annuitized benefit or the benefit calculated using final average compensation until age 70.
To be eligible to receive benefits under the plan, a participant must be at least age 55, have been an employee of First American, or an employee of one of its subsidiaries (including First Advantage and its
subsidiaries), for at least ten years and, unless waived by First American’s board of directors, covered by the plan for at least five years. A pre-retirement death benefit is provided consisting of ten annual payments, each of which equals 50% of final average compensation. Vesting of rights under the plan is accelerated in the event of a change in control (as defined in the plan) of First American.
The supplemental benefit plan is unfunded and unsecured. First American purchases insurance, of which First American is the owner and beneficiary, on the lives of the participants in the plan. This insurance is designed to recover, over the life of the plan, First American’s costs incurred with respect to the plan. Currently, only John Long, Anand Nallathambi, and one additional employee has been selected by the First American board to participate in the plan. No amounts are payable by First Advantage in connection with this plan, other than the reimbursable expenses for administration of the plan.
On October 11, 2005, the company and First American entered into a reimbursement agreement, which requires the company to reimburse First American for the actual costs associated with the participation of
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executives of First Advantage or its subsidiaries in the supplemental benefit plan. The reimbursement of such costs will commence in 2006 and are estimated to be approximately $343,000 per year.
Deferred Compensation Plan. First American’s deferred compensation plan offers to a select group of management and highly compensated employees of First American and its subsidiaries, including First Advantage and its subsidiaries, the opportunity to elect to defer portions of salary, commissions and bonuses. A committee appointed by First American’s board is responsible for administering the plan, which became effective January 1, 1998. First American maintains a deferral account for each participating employee on a fully vested basis for all deferrals. Participants can choose to have their cash benefits paid in one lump sum or in quarterly payments upon termination of employment or death. Subject to the terms and conditions of the plan, participants also may elect to schedule in-service withdrawals of deferred compensation and the earnings and losses attributable thereto. For all participants who joined the plan prior to December 31, 2001, the plan provides a pre-retirement life insurance benefit equal to the lesser of 15 times the amount deferred in a participant’s first year of participation or $2.0 million. The life insurance benefit is reduced beginning at age 61 by 20% per year. Participants who join the plan after December 31, 2001, are not eligible for any life insurance benefit. First American pays a portion of the cost of such life insurance benefits. John Long, John Lamson, and Akshaya Mehta and Anand Nallathambi participate in this plan. The plan is unfunded and unsecured.
Change of Control Arrangements
First American’s supplemental benefit plan calls for accelerated vesting of all benefits in the event of a change in control of First American. The First Advantage Corporation 2003 Incentive Compensation Plan calls for accelerated vesting of all awards in the event of a change in control of First American or First Advantage.
A “change in control” for purposes of First American’s supplemental benefit plan means any one of the following:
A “change in control” for purposes of the First Advantage Corporation 2003 Incentive Compensation Plan means any one of the following:
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Employment ContractDirector Compensation
On May 3, 2004, First Advantage entered into an employment agreement with Beth Henricks, presidentFor 2005, the directors received the following compensation: (i) a chair retainer fee of $10,000 per year for the audit committee chair; (ii) a chair retainer fee of $4,000 per year for the compensation committee chair; (iii) a member retainer fee of $10,000 per year for each member of the tax consulting services division. The agreement has an initial term ending on January 2007, but automatically renews unless either party provides 30 days prior written notice. The agreement includesaudit committee; (iv) a base salarymember retainer fee of $240,000 and an annual bonus payable on or before the last day of February following the end of$4,000 per year for each fiscal yearmember of the employment term. The bonus is calculated as the amount equal to the greater of: $160,000 or the productcompensation committee; (v) a member meeting fee of operating earnings$1,500 for each fiscal yearmeeting of the employment term,Board; and 5% of the first $5,000,000 of operating earnings and 4% thereafter. Operating earnings is defined as the operating earnings of the employer, before taxes, for such period, determined in accordance with United States generally accepted accounting principles applied consistently and further applied in accordance with the guidance of the staff of the SEC. In addition to salary and bonus, Ms. Henricks received an option to purchase 25,000 shares of our Class A common stock at an exercise price of $18.08. Terms of that grant are otherwise the same as provided in our incentive compensation plan. Ms. Henricks also receives(vi) a car allowance and other benefits given to similarly situated executives.
The agreement also provides that in the event of termination of employment without cause (as defined in the employment agreement) and termination for good reason (as defined in the employment agreement), Ms. Henricks shall be entitled to receive wages in lieu of notice in an amount equivalent to the greater of: $330,000, bonus (pro-rated as to the date of termination) and fringe benefits for the period from the termination date to the end of the then current employment term; or six (6) months of salary (calculated at $330,000 on an annualized basis), bonus (pro-rated as to the date of termination) and fringe benefits for a period of six (6) months.
First Advantage entered into an employment agreement with David Wachtel, chief technology officer dated August 4, 2003. The agreement had a term ending December 31, 2005 and included a base salary of $250,000 per year and a minimum bonus of $100,000 for 2003. The agreement provided for bonuses to be paid for calendar years 2004 and 2005 in an amount equal to the lesser of (a) 1.0% of pre-tax net income of First Advantage (as defined in the employment agreement) for the applicable year and (b) $250,000. Additional bonuses would be paid for calendar years 2004 and 2005 in an amount equal to 0.5% of pre-tax net income of First Advantage in excess of $25,000,000, if any. Mr. Wachtel was also granted an option to acquire 40,000 shares of our Class A common stock at an exercise price of $16.66 per share under the terms of the employment agreement. Terms of the grant are otherwise the same as provided in our incentive compensation plan. The agreement provided that if Mr. Wachtel is terminated on or prior to December 31, 2005 for cause (as defined in the employment agreement) or retires for good reason (as defined in the employment agreement), he would receive salary for up to one-year, any accrued but unpaid bonus, and reimbursement of health insurance premiums for up to one year or until he obtains replacement health insurance. The agreement further provided that if Mr. Wachtel became disabled (as defined in the employment agreement), he would receive base salary for six-months in addition to any insurance benefits he may be eligible to receive. If Mr. Wachtel is terminated or retires for any other reason, he would receive only health insurance premiums required by applicable law. Following 2005, if Mr. Wachtel is terminated for any reason other than death, disability or for cause, he would receive base salary for one year and a bonus equal to the pro rata portion of the bonus he received for the full calendar year ended immediately preceding the date of termination. The employment agreement also calls for Mr. Wachtel to receive a car allowance of $900 per month and other benefits given to similarly situated executives.
On November 30, 2004, Mr. Wachtel terminated his employment with First Advantage pursuant to the terms of the employment agreement. Under the terms of the employment agreement, Mr. Wachtel received his base salary until December 31, 2005, payment of a bonus equal to the bonus for 2003 in the amount of $100,000, and he will receive reimbursement of health premiums required by applicable law until December 31, 2005. Additionally, Mr. Wachtel had ninety (90) days from the date of his termination to exercise options to purchase 73,000 shares of Class A common stock and has one (1) year from the date of the termination of his employment to exercise his option to purchase 13,334 shares of Class A common stock.
During 2004 each director who was not also an employee of First Advantage receives a yearlymember meeting fee of $20,000 plus fees of $1,000 for each board meeting attended by members of the audit committee, compensation committee and $500 for each board committee meeting attended. Effectivenominating committee. The compensation approved by the Board in February was retroactive to January 1, 2005 each director who is not also an employee of First Advantage receives a yearly fee of $20,000, each member of any board committee receives a yearly fee of $10,000 and each chairman of any board committee receives a yearly fee of $10,000. In addition, effective January 1, 2005, the fees payable to our directors increased to $1,500 for each board meeting attended and $1,000 for each board committee meeting attended.2005. Non-employee directors receive an option to acquire 5,000 shares of our Class A common stock upon election to the board. Non-employee directors who have served for six months or more also receive an option to acquire 2,500 shares of our Class A common stock upon reelection. In all cases, the exercise price of options is the fair market value of our Class A common stock on the date of grant. In addition, First Advantage reimburses the directors for travel expenses incurred in connection with their duties as directors of First Advantage. Employees of First Advantage who also are directors receive no additional compensation for their service on the board or on any board committee.
The members of the special committee will beformed in 2005 were compensated for their service on the special committee, with each individual receiving a committee fee of $10,000 (or, in the case of each of Messrs. Nickelson and Walker, as co-chairmen, $15,000) plus a $1,000 meeting fee for each committee meeting, as well as reimbursement of out-of-pocket expenses.
In addition, the Company’scompany’s by-laws provide each director of the Company (including each member of the special committee) with certain indemnification rights and the Company has entered into an indemnity agreement with each member of the Company’s board of directors, including each member of the special committee.
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REPORT OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS ON
EXECUTIVE COMPENSATION
The compensation committee of our board of directors is charged with developing, overseeing and reviewing the general compensation plans and policies of First Advantage, and recommends the individual compensation arrangements for our chief executive officer, our other executive officers and the presidents of our primary operating subsidiaries. The compensation committee also administers the incentive compensation plan, including the equity-based component thereof.
The compensation committee is committed to designing and implementing a program of executive compensation that will contribute to the achievement of our business objectives and enhance stockholder value. We have an executive compensation program that we believe also:
Elements of Executive Compensation
Our executive compensation program has four key components:
These components combine fixed and variable elements to create a total compensation package that links a significant portion of compensation to corporate, business unit and individual performance.
Base Salary. Base salaries are set within ranges, which are targeted around the competitive norm for similar executive positions in similar companies. Individual salaries may be above or below the competitive norm. We consider the following factors in approving adjustments to salary levels for our executive officers:
Annual Bonuses. Annual bonuses are granted pursuant to our executive compensation plan and are intended to serve two primary functions. First, annual bonuses permit us to compensate officers directly if we achieve specific performance targets. Second, annual bonuses also serve to reward executives for performance on those activities that are most directly under their control and for which they are held accountable.
We set specific performance goals for our company, each business unit and each individual executive. Performance awards are increased or decreased from the target to reflect performance levels that exceed or fall
17
below expectations. Business unit and individual performance goals are based on each individual executive’s responsibilities and his or her respective contribution to our success.
The annual bonus is largely based on objective factors and, except with respect to bonuses required to be paid pursuant to employment agreements, the committee has the authority to approve, reduce or entirely eliminate annual bonuses. Annual bonuses typically are cash-based or issuance of restricted shares and are paid at the end of each fiscal year. Generally, annual bonus amounts increase as financial measures increase above the levels originally set by the compensation committee.
Long-Term Incentive Awards. Long-term incentive awards are granted pursuant to the First Advantage Corporation 2003 Incentive Compensation Plan and are intended to align the interests of executive officers and other key employees with those of our stockholders. To achieve this purpose, the plan allows the granting of stock options to purchase our Class A common stock, stock appreciation rights, restricted stock awards of our Class A common stock, performance unit awards, performance share awards, restricted stock units and cash-based awards to eligible persons at the discretion of the compensation committee. To date, the committee has granted only stock options, restricted stock units and restricted sharesstock under the plan.
The size of an individual’s stock option award is based primarily on individual performance and the individual’s responsibilities and position with our company. These options are granted with an exercise price equal to the fair market value of our Class A common stock on the date of grant, therefore, the stock options have value only if our Class A common stock price appreciates from the value on the date the options were granted. These options generally vest and become exercisable in three equal, annual, installments beginning on the first anniversary of the date of grant. The incentive compensation plan is a discretionary plan; however, it has been the compensation committee’s practice generally to award options annually.
quarterly.
Amendments to Incentive Compensation Plan. As part of its duties and its ongoing review of our company’s compensation plans and policies, the Committeecommittee reviewed and approved the amendments to the First Advantage Corporation 2003 Incentive Compensation Plan, described elsewhere in this proxy statement, including the increase in the number of shares available for grant under the plan to a total of 7,000,000. The Committeecommittee determined that having 4,000,000 additional7,000,000 shares available under the plan and the expansion of the type of awards available to include “other stock-based awards”, under which shares can be granted to participants in the company’s Management Stock Purchase Programmanagement stock purchase program in lieu of cash bonuses, are critical to our company’s efforts to adequately compensate our key employees, to provide them with incentives to maintain and increase our profitability, and to recruit and retain employees of the caliber necessary to continue our company’s growth. The Committeecommittee also determined that having the additional shares available for grant under the plan is necessary to reflect the fact that, after the acquisition of CIG from First American, Transaction, we will beFirst Advantage is a much larger company with significantly more employees. In addition, the Committeecommittee determined that some of the other amendments were necessary to comply with Internal Revenue Code Section 409A, which recently became effective and is applicable to deferred compensation arrangements.
Benefits. Benefits offered to executives serve a different purpose than do the other elements of executive compensation. In general, they are designed to provide a safety net of protection against the financial catastrophes that can result from illness, disability or death and to provide a reasonable level of retirement income. Benefits offered to executives are largely those that are offered to the general employee population.
Chief Executive Officer Compensation
In December 2003, the Committeecommittee increased Mr. Long’s base salary from $300,000 to $400,000 for the year 2004. In 2005, the Committeecommittee increased Mr. Long’s base salary from $400,000 to $440,000 effective January 1, 2005. In February 2006, Mr. Long’s base salary was increased to $600,000, effective February 2006. The committee’s decision to increase Mr. Long’s salary was based upon the committee’s opinion that Mr. Long’s base salary was below current market conditions.conditions as well as the increase of the company’s size following the acquisition of CIG from First American. In increasing Mr. Long’s base salary, the committee considered the median salary range for chief executive officers in the group of comparable companies.
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In addition to receiving an increase in his base salary, Mr. Long received a 2005 bonus in the formamount of $550,000, of which $275,000 was paid in cash and the remainder was paid in restricted stock equivalentunits in the amount of 9,707, which was matched by the company, for a total amount of 12,942 restricted stock units. The issuance of the restricted stock units was pursuant to $360,000.the management stock purchase plan, adopted by the committee in 2005, which permitted certain executive officers to receive a portion of their bonus in restricted stock units, with a company match of one restricted stock unit for every three restricted stock units received. The restricted stock units vest ratably over a three year period, and are subject to customary terms and conditions, including continued employment with our company. Factors that the committee considered in awarding the bonus included objective
factors based upon the financial performance of First Advantage, such as earnings per share, as well as subjective criteria relating to the execution of the desired strategic direction of First Advantage, including growth through acquisitions, and increased shareholder value. Mr. Long was also awarded options to acquire 150,000 common shares for his performance during 2004.
2005.
By the Compensation Committee of the Board of
Directors
/s/ DONALD ROBERT
Donald Robert, Chairman
Lawrence Lenihan, Jr.
Donald Nickelson
Alex Sink
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth information, as of June 30, 2005,March 31, 2006, concerning (a) each person that is known to First Advantage to be the beneficial owner of more than 5% of First Advantage’s Class A common stock and Class B common stock; (b) each Named Executive Officer; (c) each director of First Advantage; and (d) all of the directors and executive officers of First Advantage as a group. Unless otherwise indicated, to our knowledge, all persons listed below have sole voting and investment power with respect to their shares, except to the extent spouses share authority under applicable law. Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number and percentage of shares beneficially owned by a person, shares that may be acquired by such person within 60 days of June 30, 2005March 31, 2006 are counted as outstanding, while these shares are not counted as outstanding for computing the percentage ownership of any other person.
Class A Common | Class B Common | |||||||||
Name(1) | Number of Shares Beneficially Owned | Percent of Class(2) | Number of Shares Beneficially Owned | Percent of Class(2) | ||||||
Holders of 5% or More | ||||||||||
The First American Corporation(3) 1 First American Way | 16,027,286 | 68.0 | % | 16,027,286 | 100.0 | % | ||||
Pequot Capital Management, Inc.(4) 500 Nyala Farm Road | 2,208,376 | 28.2 | % | 0 | * | |||||
T. Rowe Price Associates(5) 100 E. Pratt Street | 724,400 | 9.2 | % | 0 | * | |||||
Baron Capital Group, Inc.(6) BAMCO, Inc. | 1,200,000 | 15.3 | % | 0 | * | |||||
Directors | ||||||||||
Parker Kennedy(7) | 15,167 | * | 0 | * | ||||||
John Long(8) | 289,992 | * | 0 | * | ||||||
J. David Chatham(7) | 6,167 | * | 0 | * | ||||||
Barry Connelly(7) | 4,167 | * | 0 | * | ||||||
Lawrence Lenihan, Jr.(4)(7) | 2,208,376 | 28.2 | % | 0 | * | |||||
Donald Nickelson(7) | 4,167 | * | 0 | * | ||||||
Donald Robert(7) | 9,167 | * | 0 | * | ||||||
Adelaide Sink(7) | 4,500 | * | 0 | * | ||||||
David Walker(7) | 5,167 | * | 0 | * | ||||||
Named Executive Officers Who Are Not Directors | ||||||||||
Akshaya Mehta(9) | 62,521 | * | 0 | * | ||||||
John Lamson(10) | 55,285 | * | 0 | * | ||||||
Evan Barnett(11) | 41,903 | * | 0 | * | ||||||
Beth Henricks(12) | 8,570 | * | 0 | * | ||||||
All Directors and Executive Officers as a group (13 persons) | 2,715,149 | 34.7 | % | 0 | * |
|
|
The following table sets forth as of June 5, 2005 the total number of First American common shares beneficially owned and the percentage of the outstanding shares so owned, based on 94,595,687 shares of First American common stock outstanding on that date, by:
Unless otherwise indicated in the notes following the table, those listed are the beneficial owners of the listed shares of First American with sole voting and investment power (or, in the case of individual stockholders, shared power with such individual’s spouse) over the shares listed. First American common shares subject to rights exercisable within 60 days ofJune 5, 2005 are treated as outstanding when determining the amount and percentage beneficially owned by a person or entity.
Name | Number of First American Common Shares | Percent of Class | |||
Directors | |||||
Parker Kennedy(1)(2) | 3,471,182 | 3.7 | % | ||
John Long | 0 | * | |||
J. David Chatham(3) | 33,093 | * | |||
Donald Robert | 715 | * | |||
Named Executive Officers Who Are Not Directors | |||||
Akshaya Mehta(4) | 4,592 | * | |||
John Lamson(5) | 33,351 | * | |||
Evan Barnett(6) | 27,900 | * | |||
Beth Hendrix | 0 | * | |||
All Directors and Executive Officers as a group (8 persons) | 3,570,833 | 3.8 | % |
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, as amended, requires our directors and executive officers, as well as persons who own ten percent or more of our outstanding Class A and Class B common stock, to file an initial report of beneficial ownership of company stock and reports of changes in beneficial ownership thereafter with the SEC. Section 16(a) requires these insiders to deliver copies of all reports filed under Section 16(a) to our company. Based solely on a review of these copies available to us, we believe that insiders have complied with all applicable Section 16(a) filing requirements for fiscal 2004, except for Paul Areida, former president of First Advantage’s motor vehicle record service division, who filed one Form 4 late.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
First Advantage effectively commenced operations on June 5, 2003 with our acquisition of First American’s screening technology division and US SEARCH. As consideration for those acquisitions, we issued on or about June 5, 2003, 100% of our outstanding Class B common stock to First American and 100% of our Class A common stock to former stockholders of US SEARCH. Each share of our Class B common stock entitles the holder to ten votes in any meeting of stockholders. As a result, First American received approximately 80% of the outstanding capital stock of our company and approximately 97% of the voting power in our company. Former stockholders of US SEARCH received the remaining approximately 20% of our outstanding capital stock. Pequot Capital Management, Inc., formerly a stockholder of US SEARCH, received approximately 10% of our Class A common stock in the transaction. First American and Pequot Private Equity Fund II, L.P. entered into a stockholders agreement concurrently with the acquisitions that grants Pequot Private Equity Fund II, L.P. certain registration rights and the right to sell shares of our Class A common stock at the same time First American sells any of our shares under certain circumstances, and generally requires First American to vote for one nominee for director designated by Pequot Capital Management, Inc.
In connection with the June 2003 acquisitions discussed above, First Advantage and First American entered into a services agreement pursuant to which First American agreed to provide certain financial, administrative and managerial support services to First Advantage. On January 1, 2004, First Advantage and First American amended and restated the services agreement to eliminate most of the services and fees covered by the original agreement. Under the amended and restated agreement, First American provides certain business services to First Advantage at actual cost or on pricing at the same rate provided to similarly situated affiliates of First American. First American also provides certain human resources systems, payroll systems and financial systems to First Advantage at a cost of $300,000 per year under the terms of the amended and restated service agreement. First Advantage provides certain business services in India to First American at actual cost.First Advantage performs employment screening services for First American. Total revenue from First American under the agreement was approximately $422,000, $353,000 and $249,000 for the years ended December 31, 2004, 2003 and 2002, respectively. As described above, the parties intend to amend and restate the services agreement in connection with the closing of the First American Transaction. See “Amended and Restated Services Agreement” beginning on page 61.
On March 18, 2004, First Advantage entered into a three year $25 million uncollateralized revolving line of credit with Bank of America, N.A. (the “Line of Credit”). The Line of Credit is guaranteed by First American. The Line of Credit bears interest at a rate equal to the 30-day LIBOR Rate plus an applicable margin ranging from 1.29% per annum to 2.29% per annum. Accrued interest is payable monthly. The Line of Credit matures in March, 2007.
On July 31, 2003, First Advantage entered into a promissory note with First American. The loan evidenced by the promissory note is a $10 million uncollateralized revolving loan, with interest payable monthly. The principal balance of the promissory note is payable on July 31, 2006. The promissory note is subordinated to the $20 million bank debt and bears interest at the rate payable under the $20 million bank debt plus 0.5% per annum.
On April 27, 2004, First Advantage entered into a promissory note with First American. The loan evidenced by the promissory note is a $20 million uncollateralized revolving loan, with interest payable monthly. The principal balance of the promissory note is due on July 31, 2006. The promissory note is subordinated to the bank loan agreement and Line of Credit and bears interest at the rate payable under the $20 million bank loan agreement plus 0.5% per annum. As described above, First Advantage intends to repay in full its obligations under this note in connection with the closing of the First American Transaction. See “Master Transfer Agreement” beginning on page 33.
In 2004, First Advantage incurred costs of approximately $150,000 for internal audit services provided by First American.
Effective January 1, 2003, First Advantage and a subsidiary of First American entered into an agreement whereby First Advantage agreed to act as an agent in selling renters insurance. First Advantage receives a commission of 12% of the insurance premiums and 20% of the profits (as defined in the agreement) of the insurance premiums written. Commission earned under this agreement in 2004 and 2003 were approximately $87,000 and $11,000 respectively.
Parker Kennedy serves as chairman of First Advantage. Mr. Kennedy also serves as chairman, chief executive officer and president of First American. Mr. Kennedy also serves as an executive officer of and on the board of directors of several First American affiliates. David Chatham, a member of the First Advantage’s board of directors, also serves on the board of directors of First American and is the chairman of First American’s audit committee. Donald Robert, a member of First Advantage’s board of directors and compensation committee is also chief executive officer of Experian Group, an affiliate of Experian, which upon consummation of the First American Transaction will indirectly own approximately 6.5% of First Advantage’s capital stock. John Long is a member of the board of director and is president of First Advantage. Mr. Long also serves as on the board of directors of First American Title Insurance Company, a wholly-owned subsidiary of First American.
Set forth below is a line graph comparing change in the cumulative total stockholder return on First Advantage’s Class A common stock to the cumulative total stockholder return on the S&P SmallCap 600, and the publicly traded common stock of ChoicePoint Inc. ChoicePoint is a company with business lines substantially similar to First Advantage’s business lines. The period presented begins June 6, 2003, the first day our Class A common stock was quoted on the Nasdaq National Market, and ends December 31, 2004.
COMPARISON OF 19 MONTH CUMULATIVE TOTAL RETURN*
AMONG FIRST ADVANTAGE CORPORATION, CHOICEPOINT INC.
AND THE S & P SMALLCAP 600 INDEX
Copyright© 2002, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved. www.researchdatagroup.com/S&P.htm
PRINCIPAL ACCOUNTING FEES AND SERVICES
The firm of PricewaterhouseCoopers LLP has been selected by the audit committee of our board as independent registered certified public accounting firm to audit the books and accounts of our company and its subsidiaries for the fiscal year ending December 31, 2005. This firm has served as independent accountants for our company since 2003. A representative of PricewaterhouseCoopers LLP is expected to be present at the annual meeting and will have an opportunity to make any desired statement and to answer any appropriate questions by stockholders.
Audit Firm Fee Summary
We retained PricewaterhouseCoopers LLP as our independent accountants to provide services in the following categories and amounts during the relevant periods:
Service | 2004 | 2003 | ||||
Audit | $ | 966,827 | $ | 295,000 | ||
Audit-Related | $ | 356,712 | $ | 56,223 | ||
Tax Fees | $ | 0 | $ | 32,364 | ||
All Other Fees | $ | 0 | $ | 0 | ||
Total | $ | 1,323,539 | $ | 383,587 |
Audit Fees. This category includes the aggregate fees billed for professional services rendered for the audits of our company’s consolidated financial statements for fiscal year 2004, for the reviews of the financial statements included in our quarterly reports on Form 10-Q during fiscal 2004, and for services that are normally provided by PricewaterhouseCoopers LLP in connection with statutory and regulatory filings or engagements for the relevant fiscal year.
Audit-Related Fees. This category includes the aggregate fees billed during the period from January 1, 2004 to December 31, 2004 for assurance and related services by PricewaterhouseCoopers LLP that are reasonably related to the performance of the audits or reviews of the financial statements and are not reported above under “Audit Fees,” and generally consist of fees for due diligence accounting consultation with respect to our registration statements and agreed-upon procedure reports.
Tax Fees. This category includes the aggregate fees billed during the period from January 1, 2004 to December 31, 2004 for professional services rendered by the independent accountants for tax advice and tax planning. First Advantage was not billed any fees in this category during such period.
All Other Fees. This category includes the aggregate fees billed during the period from January 1, 2004 to December 31, 2004 for products and services provided by the independent accountants that are not reported above under “Audit Fees,” “Audit-Related Fees,” or “Tax Fees.” First Advantage was not billed any fees in this category during such period.
The audit committee has considered the compatibility of the non-audit services performed by and fees paid to PricewaterhouseCoopers LLP in fiscal 2004 and determined that such services and fees were compatible with the independence of the accountants. During fiscal year 2004, PricewaterhouseCoopers LLP did not utilize any personnel in connection with the audit other than its full-time, permanent employees.
Policy for Approval of Audit and Non-audit Services. The audit committee has adopted an approval policy regarding the approval of audit and non-audit services provided by the independent accountants, which approval policy describes the procedures and the conditions pursuant to which the audit committee may grant general pre-approval for services proposed to be performed by our independent accountants.
All services provided by our independent accountants, both audit and non-audit, must be pre-approved by the audit committee. Our audit committee has delegated to the chairman of the audit committee the authority to grant pre-approvals of non-audit services provided by PricewaterhouseCoopers LLP. The decisions of the chairman of the audit committee to pre-approve such a service are required to be reported to the audit committee at its regularly scheduled meetings.
In determining whether to approve a particular audit or permitted non-audit service, the audit committee will consider, among other things, whether such service is consistent with maintaining the independence of the independent accountant. The audit committee will also consider whether the independent accountant is best positioned to provide the most effective and efficient service to our company and whether the service might be expected to enhance our ability to manage or control risk or improve audit quality.
AMENDMENT TO FIRST ADVANTAGE CORPORATION’S
2003 INCENTIVE COMPENSATION PLAN
TO INCREASE THE NUMBER OF SHARES AVAILABLE AND OTHER AMENDMENTS
First Advantage’s 2003 Incentive Compensation Plan was adopted by our board of directors on February 28, 2003 and approved by the sole stockholder of the company by unanimous written consent February 28, 2003. The plan became effective on April 1, 2003.
The compensation committee amended the plan on April 19, 2005 to increase the number of shares available for grant under the plan, to expand the types of awards available under the plan and to comply with newly effective rules pertaining to deferred compensation. The amendment will not become effective unless and until stockholder approval is obtained. At the time of the plan’s adoption, the number of shares of Class A common stock that could be issued under the plan was 3,000,000 shares. After giving effect to stock options already granted under the plan, as of May 31, 2005 approximately 229,098 shares of Class A common stock remain available for grant under the plan. On August 4, 2005, the closing price of the company’s Class A common stock as reported on Nasdaq was $23.89 per share.
The description of the plan provided below includes the amendments. In general, the amendments were adopted to increase the number of shares available for grant under the plan by 4,000,000 shares to a total of 7,000,000 shares and to make certain additional changes to the plan. The additional changes (i) expand the types of awards available under the plan to include “other stock-based awards”, under which shares can be granted to participants in the Company’s Management Stock Purchase Program in lieu of cash bonuses, (ii) affect certain plan provisions for the purpose of complying with Code Section 409A, which recently became effective and is applicable to deferred compensation arrangements, and (iii) clarify certain other plan provisions.
We established the plan to provide additional incentives to non-employee directors, officers, key employees and consultants of us and our affiliates whose substantial contributions are essential to our continued growth and success. We intend for awards granted to such individuals under the plan to strengthen their commitment to us and to align their interests with the interests of our stockholders. The plan will also assist us and our affiliates in attracting and retaining competent and dedicated individuals whose efforts will result in our long-term growth and profitability.
Under the plan, the eligible employees, consultants, and non-employee directors may receive options to purchase shares of the Company’s Class A common stock for a period up to ten years at option prices that may not be less than the fair market value on the date of grant. Stock options granted under the plan become exercisable at such times or upon the occurrence of such events as determined by the committee administering the plan. Under the plan, eligible participants may also receive stock appreciation rights, awards of restricted stock, performance units, performance shares, other stock-based awards and cash awards.
The board of directors recommends that the stockholders vote “FOR” adoption of the amendment to the plan that would increase the number of shares of Class A common stock available for grant by 4,000,000 shares to a total of 7,000,000 shares, and make the changes described.
We believe that having these 4,000,000 additional shares available under the plan and the expansion of the types of awards available is critical to our efforts to adequately compensate our key employees, to provide them with incentives to maintain and increase our profitability, and to recruit and retain employees of a caliber necessary to continue our growth. The proxies solicited on behalf of the board of directors will be voted for the amendment to the plan unless otherwise specified. The favorable vote of the holders of a majority of the shares of common stock represented in person or by proxy at the annual meeting of stockholders and entitled to vote, a quorum being present, is required for adoption of the amendment to the plan.
Full text of the plan, as amended to include the proposed amendment to increase the number of shares available, is set forth as Annex J to this proxy statement. We urge you to read the plan. A summary description of the plan is set forth below.
Summary Description of First Advantage Corporation’s 2003 Incentive Compensation Plan
General.The purposes of the plan are to provide additional incentives to non-employee directors, officers, key employees and independent contractors of First Advantage and its affiliates whose substantial contributions are essential to the continued growth and success of First Advantage, its subsidiaries and affiliates, in order to strengthen their commitment to First Advantage, its subsidiaries and affiliates, to attract and retain competent and dedicated individuals whose efforts will result in the long-term grown and profitability of First Advantage, and to further align their interests with the interests of the stockholders of First Advantage.
The plan provides for grants of options to purchase shares of First Advantage Class A common stock (which will be referred to for purposes of this description of the plan as “common stock”), with a par value of $0.001 per share, and awards, which consist of or are based on common stock.
A total of 7,000,000 shares of common stock will be reserved for issuance under the plan (prior to giving effect to the proposed amendment), subject to adjustment by the compensation committee if there are changes in the outstanding shares by reason of a change in corporate capitalization. The shares of common stock reserved under the plan may be either authorized and unissued shares or previously issued shares that First Advantage or its subsidiaries have reacquired and hold as treasury stock.
If an option terminates or expires without being fully exercised, or if any shares subject to a restricted stock award or other award are forfeited prior to the payment of dividends on the shares, the number of shares of common stock covered by the unexercised portion of the option or which are otherwise forfeited will be added back to the number of shares available for future option grants or other awards under the plan. If an option holder pays the option price of the option using shares of common stock which the option holder previously purchased, only the number of shares issued in excess of the shares so paid by the person will count against the total number of shares that may be delivered pursuant to awards other than incentive stock options under the plan. No awards may be granted the under the plan on or after April 1, 2013.
The compensation committee may choose employees (including officers and directors who are also employees) and independent contractors of First Advantage or its affiliates to receive awards under the plan.
Administration.The compensation committee, which is selected by the board of directors, administers the plan in accordance with its terms. The compensation committee must have at least two members, each of whom is a director but not an employee of First Advantage and an outside director.
The compensation committee has exclusive authority to operate, manage and administer the plan. In addition to its other powers under the plan, the compensation committee exercises the following authorities and powers under the plan in accordance with the terms of the plan:
Decisions and actions of the compensation committee concerning the plan are final and conclusive. Within the limitations of the plan and applicable laws and rules, the compensation committee may delegate to individuals who are not compensation committee members, or allocate among its members, its administrative responsibilities and powers under the plan. Subject to similar limitations, the board of directors may exercise any of the compensation committee’s powers under the plan.
Types of Awards.The compensation committee may grant non-qualified options, incentive stock options, SARs, restricted stock, performance units, performance shares, other stock-based awards and cash-based awards. Each of these types of awards is described below.
Non-Qualified Options and Incentive Stock Options
A non-qualified stock option grants the holder of the option the opportunity to buy a certain number of shares of common stock from First Advantage at a fixed price per share during a specific time period. A non-qualified stock option does not qualify for the special income tax treatment accorded to incentive stock options. Non-employee directors are eligible to receive non-qualified stock option grants but are not eligible to receive other awards under the plan.
Only an individual that is an employee of First Advantage or a subsidiary on the date of the grant is entitled to receive an incentive stock option. An incentive stock option will contain the terms and conditions, consistent with the plan, as the compensation committee may determine to be necessary to qualify the option as an “incentive stock option” under Section 422 of the Internal Revenue Code (referred to as the “Code”). Any grant may be modified by the compensation committee to disqualify the option from treatment as an “incentive stock option” under Section 422 of the Code.
A participant cannot receive more than 1,000,000 shares of common stock subject to options (non-qualified stock options or incentive stock options) in any one fiscal year.
The compensation committee determines the number and terms of options granted. Each option granted will be subject to an award agreement that will specify:
To the extent any option does not qualify as an incentive stock option, the option or the portion that does not qualify, will be considered a non-qualified stock option.
Options are exercisable by delivering written notice of the exercise to First Advantage that sets forth the number of shares to be exercised along with payment in full for the shares (including applicable taxes, if any, as discussed in the “Tax Withholdings” section below). The option price is payable to First Advantage in cash or its equivalent, unencumbered shares meeting certain terms, conditions and limitations, or a combination of both. The option holder is not the beneficial owner of any shares subject to an option until the option is exercised.
Unless the award agreement provides otherwise, an option may be exercised only to the extent it is exercisable and will terminate upon termination except as set forth below unless the award agreement provides otherwise.
In each instance, no option may be exercised after the expiration date of the option specified in the award agreement.
Except as provided in the beneficiary designation provision of the plan, incentive stock options may be transferred only by will or by the laws of descent and distribution and may only be exercised by the participant during his or her life.
Except as provided in the award agreement or the beneficiary designation provision of the plan, non-qualified stock options may be transferred only by will or by the laws of descent and distribution and may only be exercised by the participant during his or her life.
An option granted under the plan will not be considered an incentive stock option to the extent that it, together with any other incentive stock options under the plan, are exercisable for the first time by a participant during any calendar year with respect to shares having an aggregate fair market value in excess of $100,000 (or other limit as may be required by the Code) as of the time the option is granted. For purposes of this calculation, incentive stock options is used as it is defined in Section 422 of the Code (excluding subsection (d)) and any other incentive stock option plans of First Advantage, any subsidiary and any parent corporation of First Advantage within the meaning of Section 424(e) of the Code.
An incentive stock option will not be granted to an individual otherwise eligible to participate in the plan who owns (within the meaning of Section 424(d) of the Code), at the time the option is granted, more than 10% of the total combined voting power of all class of stock of First Advantage or a subsidiary or a parent corporation within the meaning of Section 424(e) of the Code. This restriction will not apply if at the time the incentive stock option is granted the option price of the incentive stock option is at least 110% of the fair market value of the share on the date it is granted, and the incentive stock option will not be exercisable after five years from the date it is granted.
An individual who is elected or appointed as a non-employee director after the effective date of the plan will automatically receive an initial grant of a non-qualified stock option to purchase 5,000 shares. On the date of each annual meeting of First Advantage’s stockholders, each individual serving as a non-employee director following the meeting will automatically be granted a non-qualified stock option to purchase 2,500 shares. In order for the non-employee director to be entitled to receive the annual award, the non-employee director must have served as a non-employee director for at least six months. If the non-employee director was previously employed by First Advantage, any subsidiary or affiliate the non-employee director will not be eligible for the initial grant, but will be eligible for periodic annual grants of non-qualified stock options while he or she continues to serve as a non-employee director. The option price for these options will be 100% of the fair market value of the share on the date the option is granted.
Stock Appreciation Rights (SARs)
An SAR granted under the plan is an agreement that entitles the option holder upon exercise of the SAR to receive from First Advantage an amount equal to:
This amount will be paid in shares of common stock.
The compensation committee may grant an SAR in connection and simultaneously with the grant of an option provided it is granted at the time of the related option (a tandem SAR). The compensation committee may also grant an SAR independent of, and unrelated to, an option (a freestanding SAR). The compensation committee will have complete discretion in determining the number of shares granted in the form of SARs to each participant and, consistent with the provisions of the plan, in determining the terms and conditions pertaining to the SARs.
A participant cannot receive more than 5,000,000 shares of common stock subject to SARs in any one fiscal year. Shares covered by an award comprised of options and tandem SARs count against this limit and the option limit stated above.
An SAR will be evidenced by an award agreement that will specify the grant price, the term of the SAR, and such other provisions as the compensation committee may determine in accordance with the plan. The term of the SAR will be determined by the compensation committee, but any SAR granted under the plan will not be
exercisable more than ten years after it is granted. The award agreement shall also set forth the extent to which a participant will have the right to exercise the SAR following termination of the participant’s employment or service with First Advantage, its subsidiaries and/or affiliates. This provision will be determined by the compensation committee in its sole discretion, and need not be uniform among all SARs issued pursuant to the plan.
The grant price for each SAR will be determined by the compensation committee. The grant price of a freestanding SAR will not be less than 100% of the fair market value of the share on the date the SAR is granted. The grant price of a tandem SAR will be equal to the option price of the related option. Tandem SARs may be exercised for all or part of the shares subject to the option upon the surrender of the right to exercise the equivalent portion of the related option. A tandem option is only exercisable to the extent the related option is exercisable and may be exercised only with the respect to the shares for which the related option is then exercisable. A participant may elect, in the manner set forth in the plan and applicable award agreement, to surrender the option to the company with respect to any and all of the shares and receive payment of the SAR amount (described above). A participant that made this election would do so instead of exercising his or her unexercised related option for all or a portion of the shares for which such option was then exercisable pursuant to its terms.
A tandem SAR is subject to certain additional limitations.
Except as provided in the award agreement, SARs may be transferred only by will or by the laws of descent and distribution and may only be exercised by the participant during his or her life.
Restricted Stock Awards
The compensation committee may grant restricted stock awards to participants from time to time. Restricted stock is an award of shares of common stock that is subject to certain restrictions specified in the plan and the award agreement. Upon delivery of the restricted stock to the participant, or creation of a book entry evidencing the participant’s ownership of shares of restricted stock, the participant will have all of the rights of a stockholder with respect to the shares (subject to the terms and conditions of the plan concerning restricted stock awards, the award agreement or as determined by the compensation committee).
A participant cannot receive more than 1,000,000 shares of common stock subject to awards of restricted stock in any one fiscal year.
The restricted stock will be evidenced by an award agreement that will specify the period of restriction, the number of shares of restricted stock granted, and such other provisions as the compensation committee determines in accordance with the plan. Any restricted stock award must be accepted by the participant within 60 days after the award date or a shorter period as determined by the compensation committee at the time of the award. The participant will accept the award by executing the award agreement and paying the applicable purchase price, if any, as determined by the compensation committee.
The right to retain and transfer the restricted stock will be conditioned upon satisfaction of the conditions set forth in the award agreement. The participant cannot sell, transfer, pledge, assign, encumber, alienate, hypothecate or otherwise dispose of the restricted shares until the end of the period of restriction established by
the compensation committee and set forth in the award agreement. All rights with respect to the restricted stock will be available during the participant’s lifetime only to the participant.
The period of restriction will lapse based on continuing employment (or other business relationships) with First Advantage, a subsidiary or an affiliate, achievement of performance goals, or upon the occurrence of other events as determined by the compensation committee, at its discretion, and stated in the award agreement. If the restricted stock is intended to qualify for the exception for qualified performance-based compensation from tax deductibility limitations of Section 162(m) of the Code (which is referred to the “performance based exception”), the lapse of the period of restriction will be based on the achievement of pre-established objective performance goals that are determined over a measurement period established by the compensation committee and related to one or more performance criteria, which are described below in the “Performance Criteria” section. The compensation committee may impose other conditions and restrictions on any restricted stock as it determines advisable, including without limitation, a requirement that the participant pay a stipulated purchase price for each share of restricted stock.
A participant’s rights in the restricted stock will cease and the restricted shares will be forfeited if one of the following occurs prior to the termination of the period of restriction or lapse of any other restrictions set forth in the award agreement:
Subject to restrictions of law or limitations on the award, after the last day of the period of restriction or expiration or termination of all restrictions applicable to the restricted stock award, the shares of restricted stock will become freely transferable by the participant and First Advantage will deliver certificates evidencing the shares to the participant free of all restrictions under the plan.
A participant who receives an award of restricted stock will be issued a stock certificate or certificates evidencing the shares covered by the award. The stock will be registered in the name of the participant and contain an appropriate legend. The compensation committee may require a participant to deposit the certificate and a stock power or other appropriate instrument with the secretary of First Advantage or an escrow holder. The secretary or escrow holder would retain physical custody of the certificate until the period of restriction and any other restriction imposed by the compensation committee or under the award agreement expired or was removed. In lieu of delivering a certificate, the Company may evidence the award of restricted stock with a book entry in the records of the company or its designated agent in the name of the participant. Physical custody of the certificate by the secretary or escrow holder or use of a book entry will not affect the rights of the participant as owners of the shares of restricted stock award to them, nor affect the restrictions applicable to the shares under the award agreement or the plan.
Participants holding shares of restricted stock may, at the compensation committee’s discretion, be granted the right to exercise full voting rights with respect to the shares during the period of restriction. During the period of restriction, participants holding shares of restricted stock will be credited with any cash dividends paid with respect to the restricted shares during the period of restriction, unless otherwise determined by the compensation committee or set forth in the award agreement. The compensation committee may apply whatever restrictions to the dividends that it deems appropriate. If the grant or vesting of shares of restricted stock awarded to the covered employee is designed to comply with the requirements of the performance-based exception, the compensation committee may apply any restrictions it deems appropriate to the right of payment of the dividends declared so that the dividends and/or restricted stock maintain eligibility for the performance-based exception.
Except as described below, a participant’s rights in his or her shares of restricted stock will lapse:
The award agreement should set forth whether the participant will be entitled to receive shares of restricted stock following termination of the participant’s employment or period of other service with First Advantage or the applicable subsidiary or affiliate even though the period of restriction has not ended. This provision will be determined by the compensation committee in its sole discretion and need not be uniform among all shares of restricted stock and may reflect distinctions based on the reasons for, or circumstances of, such termination or employment or service.
In the event the participant is terminated due to a change of control (as described in the “Change of Control Transaction” section below), or termination of employment by reason of death or disability (or similar involuntary termination as determined by the compensation committee in its discretion), the lapse of the period of restriction of shares of restricted stock which are intended to qualify for the performance-based exception and are held by the covered employee will occur only to the extent otherwise provided in the award agreement but for the participant’s termination. Except for any restricted stock award intended to qualify for the performance based exception, the compensation committee may, in its sole discretion, remove any and all restrictions imposed on the restricted stock award.
The compensation committee may modify outstanding restricted stock awards or accept surrender of outstanding shares of restricted stock (to the extent the period of restriction or other restrictions have not yet lapsed) and grant new awards.
Performance Units, Performance Shares and Cash-Based Awards
A performance unit, performance share or cash-based award is a right granted under the plan to receive cash, shares of common stock or a combination of cash or shares that may be earned if certain conditions, including performance goals established by the compensation committee in advance and set forth in the award agreement, are satisfied during the applicable performance period. Performance units, performance shares and cash-based awards are represented by amounts credited to a bookkeeping account established for the participants.
Subject to the terms of the plan, the compensation committee determines the size and amount of the award of performance units, performance shares or cash-based award. The terms and conditions of the awards must be consistent with the plan and set forth in the award agreement and need not be uniform among all awards or all participants receiving the awards. The performance units, performance shares and cash-based awards will be valued as follows:
The maximum aggregate payment with respect to cash-based awards or awards of performance shares or performance units granted in any one fiscal year to any one participant is 5,000,000 shares (determined by the equivalent fair market value as of the beginning of the applicable performance period of the shares covered by the award).
The compensation committee will set performance goals in its discretion which, depending on the extent to which they are met, will determine the number and value of performance units and performance shares and cash-based awards that will be paid out to the participant. If the performance units and performance shares or cash-based awards are intended to qualify for the performance-based exception, the objective performance goals will be established in advance by the compensation committee and based on one or more performance criteria, as described in the “Performance Criteria” section below.
After the performance period has ended, the holder of the performance units and performance shares or cash-based awards is entitled to receive payment on the number and value of performance units and performance shares or cash-based awards earned by the participant over the performance period based on the extent to which the performance goals and other terms and conditions have been achieved or satisfied. The compensation committee will determine the extent to which the pre-established goals, terms and conditions of the performance units and performance shares or cash-based awards are attained. If the award is not intended to qualify for the performance-based exception, the compensation committee may waive any performance goals or other terms and conditions relating to the award.
Performance units and performance shares and cash-based awards will be paid in a single lump-sum within two and one-half months following the end of the performance period. Earned performance units and performance shares and cash-based awards may be paid in the form of cash or in shares of common stock or a combination of cash or shares of common stock with an aggregate fair market value equal to the value of the performance units and performance shares or cash-based awards at the close of the performance period. The compensation committee will include the form of payment in the award agreement with respect to the award. At the discretion of the compensation committee, the participant may be entitled to receive any dividends declared with respect to the shares which have been earned in connection with the performance units and/or performance shares which have been earned, but not yet distributed to the participant. In addition, participants may, at the discretion of the compensation committee, be entitled to exercise their voting rights with respect to the shares.
A participant will have the rights of a stockholder as to shares actually received by the participant upon satisfaction or achievement of the terms and conditions of the award, but not to shares subject to the award but not actually issued to the participant.
Unless the compensation committee determines otherwise and as set forth in the award agreement, in the event the employment or other service of a participant is terminated by reason of death, disability or retirement during the performance period, the participant will receive a pro-rated payment of the performance units, performance shares or cash-based awards based upon the portion of the performance period completed. The compensation committee will determine when payments are made; however, if a covered employee retires during a performance period, payments will be made at the same time as payments are made to participants who did not terminate employment during the performance period.
In the event the participant’s employment or service terminates for circumstances other than described above, all performance units, performance shares and cash-based awards will be immediately and automatically forfeited by the participant to First Advantage unless the award agreement provides otherwise or as determined by the compensation committee. Performance units, performance shares and cash-based awards can only be transferred by will or by the laws of descent and distribution.
Other Stock-Based Awards. The compensation committee is authorized, subject to limitations under applicable law, to grant to eligible employees such other awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, shares of common stock, as deemed by the compensation committee to be consistent with the purposes of the Plan, including, without limitation, shares of common stock awarded without restrictions or conditions, convertible securities, exchangeable securities or other rights convertible or exchangeable into shares of common stock. In the discretion of the compensation committee, such other stock-based awards may be used in connection with, or to satisfy obligations of the
company or a subsidiary under, other compensation or incentive plans, programs or arrangements of the company or any subsidiary for eligible participants, including without limitation the Management Share Purchase Program of the Senior Executive Annual Incentive Program, other or successor programs and executive contracts.
Performance Criteria.Unless and until the board of directors proposes for stockholder vote and stockholders approve a change in the general performance criteria set forth in the plan, the performance criteria to be used for purposes of awards shall be selected by the compensation committee from among the following:
These performance goals may relate to the performance of First Advantage, a subsidiary or an affiliate, any of their respective divisions, businesses, units or offices, an individual participant or any combination of these. The compensation committee has the discretion to adjust the determinations of the degree of attainment of the pre-established performance goals based on the above performance criteria; however, awards that are designed to qualify for the performance-based exception and which are held by covered employees may not be adjusted upward. If the applicable tax or securities law change to permit committee discretion to alter the governing performance criteria without stockholder approval, the compensation committee has the sole discretion to make this change without stockholder approval. In the event the compensation committee determines it is advisable to grant awards that do not qualify for the performance-based exception, the compensation committee may make these grants without satisfying the requirements of Section 162(m) of the Code.
In order to receive compensation for an award granted to a covered employee that is intended to qualify for the performance-based exception, the compensation committee must receive written certification that the applicable performance goals and other material terms of the award have been satisfied (except as provided in the plan).
Change of Control Transactions.A “change in control” for purposes of the plan means any one of the following:
a merger, consolidation or similar transaction involving First Advantage, unless (a) stockholders of First Advantage end up owning more than 50% of the voting securities of the surviving entity, (b) a majority
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In the event of a change of control, unless otherwise specifically prohibited under applicable laws, or rule and regulations of any governing governmental agencies or national securities exchanges:
The compensation committee may determine in its discretion and on such terms and conditions as it deems appropriate that any outstanding option or freestanding SAR shall be adjusted by substituting for shares subject to the option or freestanding SAR stock or other securities of the surviving corporation or any successor corporation to First Advantage, or its parent or its subsidiaries, or that may be issuable by another corporation that is a party to the transaction resulting in the change of control, whether or not the stock or other securities are publicly traded. If the stock or other securities are publicly traded, the aggregate option price or grant price, as applicable, will remain the same and the amount of shares or
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No participant will have the right to prevent a change of control affecting the number of shares available to or other entitlements of the participant under the plan or the participant’s award. The compensation committee need not act uniformly as to all outstanding awards, nor treat all participants identically.
If a change of control disqualifies an employee’s incentive stock options from meeting the requirements of Section 422 of the Code or results in the imposition of certain additional taxes on such an employee, the compensation committee may, in its discretion, authorize a cash payment to the employee that would leave the employee in the same after-tax position that he or she would have been in had such disqualification not occurred, or to otherwise equalize such employee for such taxes.
Subject to certain provisions of the plan, the change of control provisions of the plan may not be terminated, amended or modified on or after the date of a change of control to affect any participant’s award that will be granted and then outstanding under the plan without the prior written consent of the participant. Before a change of control, the board of directors of First Advantage may terminate, amend or modify the change of control provisions from time to time.
Amendment, Modification and Termination.Except as otherwise provided in the plan, the board of directors of First Advantage has the right to amend, alter, suspend, or terminate the plan at any time, with or without prior notice. The compensation committee may also amend outstanding awards. The plan may not be amended or terminated or an outstanding award may not be amended in a way that would materially impair any previously accrued rights of any participant under the plan without his or her written consent. The compensation committee is also limited in its ability to amend the change of control provisions, as described in the “Change of Control Transactions” section above.
In addition, the board of directors will be required to obtain approval of our stockholders, if such approval is required by any applicable law (including requirements relating to incentive stock options or qualification of awards under Section 162(m) of the Code) or rule, of any amendment of the plan that would:
In addition, the plan authorizes the compensation committee, subject to certain limitations specified in the plan, to adjust awards under the plan to recognize unusual or nonrecurring events that affect us or our financial statements, changes in applicable laws, regulations, or accounting principles whenever the compensation committee determines that such adjustments are appropriate to prevent dilution or enlargement of plan benefits.
Tax Withholding.First Advantage and/or any subsidiary or affiliate have the power and right to take whatever actions are necessary and proper to satisfy all obligations of participants for the payment of federal, state, local and foreign taxes in connection with any award. Each participant is required to (and in no event will shares be delivered to a participant with respect to an award until) pay First Advantage in cash, or make arrangements satisfactory to First Advantage, as determined by First Advantage in the compensation committee’s sole discretion, regarding payment of any taxes of any kind required by law to be withheld with respect to the shares or other property subject to the award. First Advantage and any affiliate have the right to, to the extent permitted by law, deduct any taxes from any payment of any kind due to the participant.
If permitted by the compensation committee and the plan, a participant may elect to have its tax obligations satisfied by requesting that First Advantage withhold shares of common stock otherwise deliverable to the participant upon exercise of an option or other receipt of common stock under an award or delivering to First Advantage shares of common stock that the participant already owns. If the participant elects one of these arrangements, the election will be irrevocable, must be made in writing and signed by the participant, and may be subject to any restrictions or limitations that the compensation committee, in its sole discretion, determines are appropriate.
The compensation committee may require a participant to give prompt written notice to First Advantage if the participant disposes of shares that were received in connection with exercise of an incentive stock option within the time period set forth below:
If a participant makes an election under Section 83(b) of the Code to be taxed with respect to an award as of the date of transfer of restricted stock (rather than as of the date the participant would otherwise be taxable under Section 83(a) of the Code), the participant will deliver a copy of the election to First Advantage immediately after the election is given to the Internal Revenue Service.
Miscellaneous.Each participant in the plan may name a beneficiary or beneficiaries. Upon the death of the participant, the beneficiary or beneficiaries would be entitled to exercise the participant’s option or SAR (to the extent the option or SAR are exercisable) and receive payment for any amount due to the participant under the plan. If no beneficiary is designated, the unexercised option or SAR or unpaid amounts due to the participant will pass by will or by the laws of descent and distribution.
A transfer of an employee will not be deemed a termination of employment for purposes of the plan or with respect to any award, if an employee is transferred as set forth below (and for incentive stock options to the extent permitted by the Code):
A leave of absence by an employee will not be deemed a termination of employment for purposes of the plan or with respect to any award, if the leave of absence if duly authorized in writing by First Advantage (and for incentive stock options to the extent permitted by the Code).
A change in status of a participant from an employee to a consultant will be considered a termination except to the extent that the compensation committee determines in its sole discretion otherwise with respect to any award other than incentive stock options.
Nothing in the plan will interfere with or limit the right of First Advantage or any subsidiary or affiliate to terminate any participant’s employment or other service at any time. Grants, vesting or payment of awards will not be considered as part of the participant’s salary or used for calculation of any pay, allowance, pension or other benefit unless otherwise permitted by other benefit plans provided by First Advantage or its subsidiaries or affiliates or required by law or by contractual obligation of First Advantage or its subsidiaries or affiliates.
First Advantage’s intention is that, so long as any of First Advantage’s equity securities are registered pursuant to Section 12(b) or 12(g) of the Exchange Act, with respect to awards granted to or held by an insider, the plan will comply in all respects with Rule 16b-3 under the Exchange Act and Section 162(m) of the Code. If any plan provision is later found not to be in compliance with Rule 16b-3 under the Exchange Act or Sections 162(m) and 409A of the Code, that provision will be deemed modified as necessary to meet the requirements of such Rule 16b-3 and/or Sections 162(m) and 409A.
In order for a proposal by a stockholder to be included in the proxy statement and proxy for the annual meeting to be held in 2006, such proposal must be received by First Advantage at its principal executive office, to the attention of the secretary, no later thanApril 13, 2006 (which is not more than 120 days prior to the anniversary of the mailing date of this proxy statement), assuming that the date of the annual meeting to be held in 2006 is not changed by more than 30 days from the date of this annual meeting. In such event, we will provide notice of the date by which such proposals must be received in order to be included. The determination by First Advantage of whether it will oppose inclusion of any proposal in its proxy statement and proxy will be made on a case-by-case basis in accordance with its judgment and the rules and regulations promulgated by the SEC. Proposals received afterApril 13, 2006 will not be considered for inclusion in our proxy materials for the annual meeting in 2006.
Pursuant to the rules and regulations promulgated by the SEC, any stockholder who intends to present a proposal at the annual meeting to be held in 2006 without requesting that we include such proposal in our proxy statement should be aware that he or she must notify us at our principal executive office, attention secretary, not later thanJune 27, 2006 (which is 45 days prior to the anniversary of the mailing date of this proxy statement) of the intention to present the proposal. If the date of our 2006 annual meeting changes by more than 30 days from the date of this year’s annual meeting, such notice must be received a reasonable time before we mail our proxy statement for the 2006 annual meeting. Otherwise, we may exercise discretionary voting with respect to such stockholder proposal pursuant to authority conferred by proxies to be solicited by our board and delivered in connection with the meeting.
As of the date of this proxy statement, the board is not aware of any matters to come before the annual meeting other than those set forth on the notice accompanying this proxy statement. If any other matters come before the annual meeting, the proxy card, if executed and returned, gives discretionary voting authority to the persons named as proxy holders, John Long and Julie Waters, our chief executive officer and general counsel, respectively, with respect to such matters.
All stockholders of record as of the Record Date have been sent, or are concurrently herewith being sent, a copy of our annual report for the fiscal year ended December 31, 2004. Such report contains certified consolidated financial statements of First Advantage and its subsidiaries for the fiscal year ended December 31, 2004.
Items Not Incorporated by Reference
The report of the compensation committee of the board on executive compensation and the audit committee report, and the stock performance graph above are not deemed to be “filed” with the SEC, and shall not be incorporated by reference into any prior or future filings made by First Advantage under the Securities Act or the Exchange Act, except to the extent that First Advantage specifically incorporates such information by reference.
Beginning onAugust 11, 2005, a list of holders of record of our Class A and Class B common stock as of the Record Date will be available at our principal executive office during ordinary business hours for examination by any stockholder holding any class of our common stock on the Record Date for any purpose germane to the annual meeting.
We will pay the cost of preparing, assembling and mailing the attached letter from our chief executive officer, notice of annual meeting, this proxy statement, the enclosed proxy card, and the solicitation of proxies. Directors, officers and other regular employees of First Advantage may solicit proxies. None of them will receive any additional compensation for such solicitation. People soliciting proxies may contact you in person, by telephone, via e-mail or by facsimile. First Advantage will pay brokers or other persons holding stock in their names or the names of their nominees for the expenses of forwarding soliciting material to their principals.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other information and documents with the SEC. You may read and copy any report, statement or document we file with the SEC at the SEC’s Public Reference Room located at 6432 General Green Way, Mail Stop D-5, Alexandria, Virginia 22312. You may call the SEC at (800) 732-0330 for more information on the operation of the Public Reference Room, and on the availability of other Public Reference Rooms. The SEC may charge a fee for making copies. Our filings with the SEC are also available to the public on the Internet through the SEC’s EDGAR database. You may access the EDGAR database at the SEC’s web site atwww.sec.gov.
DOCUMENTS INCORPORATED BY REFERENCE
The SEC allows us to “incorporate by reference” certain information in documents we file with them, which means that we can disclose important information to you in this proxy statement by referring you to another document filed separately with the SEC. The information incorporated by reference is deemed to be part of this proxy statement, except for any information superseded by information in this proxy statement or information filed subsequently that is incorporated by reference. These documents contain important business and financial information about First Advantage and we urge you to read them. We incorporate by reference into this proxy statement all of the following documents:
We also incorporate into this proxy statement all of our filings with the SEC made pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act that we file after the date of this proxy statement and before the annual meeting. However, except for the current report on Form 8-K filed on July 26, 2005 (which is specifically incorporated herein by reference), any documents or portions thereof or any exhibits thereto that we furnish to, but do not file with, the SEC shall not be incorporated or deemed to be incorporated by reference into this proxy statement.
Our company will, upon the written request of any person who is a beneficial owner of our Class A or Class B common stock on the Record Date, furnish without charge a copy of our annual report on Form 10-K, as amended, for the year ended December 31, 2004, together with the accompanying financial statements, and a copy of our quarterly report on Form 10-Q for the quarter ended March 31, 2005, together with the accompanying financial statements. We will also furnish a copy of the exhibits to the annual or quarterly report, if requested. Such requests should contain a representation that the person requesting this material was a beneficial owner of the our Class A common stock or Class B common stock on the Record Date and be sent to the secretary of our company at the address indicated on the first page of this proxy statement.
The consolidated financial statements of First Advantage Corporation and its subsidiaries incorporated in this proxy statement by reference to the Annual Report on Form 10-K for the year ended December 31, 2004 have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, an independent registered certified public accounting firm, given on its authority as experts in auditing and accounting.
The combined financial statements of the Credit Information Group as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004 included in this proxy statement have been so
included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm given on its authority as experts in auditing and accounting.
By Order of the Board of Directors
Ken Chin
Secretary
St. Petersburg, Florida
August 11, 2005
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Credit Information Group
Combined Financial Statements
For the Three Months Ended
March 31, 2005 and 2004
Combined Balance Sheets (Unaudited)
March 31, 2005 | December 31, 2004 | |||||
Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 3,776,000 | $ | 2,359,000 | ||
Accounts receivable (less allowance for doubtful accounts of $1,753,000 and $1,662,000 in 2005 and 2004, respectively) | 34,011,000 | 24,857,000 | ||||
Notes receivable | — | 4,000,000 | ||||
Due from related party, net | — | 714,000 | ||||
Prepaid expenses and other current assets | 2,054,000 | 1,076,000 | ||||
Total current assets | 39,841,000 | 33,006,000 | ||||
Property and equipment, net | 23,654,000 | 22,917,000 | ||||
Goodwill | 87,120,000 | 75,057,000 | ||||
Intangible assets, net | 6,737,000 | 2,609,000 | ||||
Database development costs, net | 1,440,000 | 1,431,000 | ||||
Other deferred costs, net | 1,402,000 | 1,911,000 | ||||
Investment in equity investee | 35,321,000 | 34,854,000 | ||||
Other assets | 184,000 | 127,000 | ||||
Total assets | $ | 195,699,000 | $ | 171,912,000 | ||
Liabilities and Stockholders’ Equity | ||||||
Current liabilities: | ||||||
Accounts payable | $ | 3,552,000 | $ | 4,536,000 | ||
Accrued compensation | 9,561,000 | 9,996,000 | ||||
Accrued liabilities | 12,489,000 | 10,369,000 | ||||
Deferred income | 1,974,000 | 3,197,000 | ||||
Due to related party, net | 2,845,000 | — | ||||
Current portion of long-term debt and capital leases | 456,000 | 4,456,000 | ||||
Total current liabilities | 30,877,000 | 32,554,000 | ||||
Long-term debt and capital leases, net of current portion | 456,000 | 570,000 | ||||
Deferred income taxes | 8,227,000 | 8,454,000 | ||||
Other liabilities | 996,000 | 587,000 | ||||
Total liabilities | 40,556,000 | 42,165,000 | ||||
Commitments and contingencies | ||||||
Stockholders’ equity: | ||||||
Common stock | — | — | ||||
Contributed capital | 46,275,000 | 26,275,000 | ||||
Retained earnings | 108,868,000 | 103,472,000 | ||||
Total stockholders’ equity | 155,143,000 | 129,747,000 | ||||
Total liabilities and stockholders’ equity | $ | 195,699,000 | $ | 171,912,000 | ||
The accompanying notes are an integral part of these combined financial statements.
Combined Statements of Income (Unaudited)
For the Three Months Ended March 31, | ||||||||
2005 | 2004 | |||||||
Service revenue | $ | 66,345,000 | $ | 62,452,000 | ||||
Other income | 1,612,000 | 2,143,000 | ||||||
Total revenue | 67,957,000 | 64,595,000 | ||||||
Cost of service revenue | 23,499,000 | 22,200,000 | ||||||
Gross margin | 44,458,000 | 42,395,000 | ||||||
Salaries and benefits | 15,848,000 | 15,057,000 | ||||||
Facilities and telecommunications | 1,813,000 | 2,257,000 | ||||||
Other operating expenses | 6,134,000 | 6,918,000 | ||||||
Depreciation and amortization | 2,347,000 | 2,800,000 | ||||||
Total operating expenses | 26,142,000 | 27,032,000 | ||||||
Income from operations | 18,316,000 | 15,363,000 | ||||||
Interest (expense) income: | ||||||||
Interest expense | (11,000 | ) | (127,000 | ) | ||||
Interest income | 2,000 | 238,000 | ||||||
Total interest (expense) income, net | (9,000 | ) | 111,000 | |||||
Equity in earnings (losses) of investee | 467,000 | (232,000 | ) | |||||
Income before income taxes | 18,774,000 | 15,242,000 | ||||||
Provision for income taxes | 7,815,000 | 6,266,000 | ||||||
Net income | $ | 10,959,000 | $ | 8,976,000 | ||||
The accompanying notes are an integral part of these combined financial statements.
Combined Statement of Changes in Stockholders’ Equity
For the Three Months Ended March 31, 2005 (Unaudited)
Contributed Capital | Retained Earnings | Total | |||||||||
Balance at December 31, 2004 | $ | 26,275,000 | $ | 103,472,000 | 129,747,000 | ||||||
Contribution from parent | 20,000,000 | — | 20,000,000 | ||||||||
Dividends | — | (5,563,000 | ) | (5,563,000 | ) | ||||||
Net income | — | 10,959,000 | 10,959,000 | ||||||||
Balance at March 31, 2005 | $ | 46,275,000 | $ | 108,868,000 | $ | 155,143,000 | |||||
The accompanying notes are an integral part of these combined financial statements.
Combined Statements of Cash Flows
For the Three Months Ended March 31, 2005 and 2004 (Unaudited)
For the Three Months Ended March 31, | ||||||||
2005 | 2004 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 10,959,000 | $ | 8,976,000 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 2,347,000 | 2,800,000 | ||||||
Allowance for doubtful accounts | 91,000 | 91,000 | ||||||
Equity in earnings (losses) of investee | (467,000 | ) | 232,000 | |||||
Change in operating assets and liabilities, net of acquisitions: | ||||||||
Accounts receivable | (6,820,000 | ) | (7,685,000 | ) | ||||
Prepaid expenses and other current assets | (768,000 | ) | (234,000 | ) | ||||
Due from related party | 3,559,000 | 214,000 | ||||||
Other assets | (57,000 | ) | (98,000 | ) | ||||
Deferred other assets | 509,000 | 827,000 | ||||||
Accounts payable | (1,409,000 | ) | (3,071,000 | ) | ||||
Accrued liabilities | 1,019,000 | 1,123,000 | ||||||
Deferred income | (1,223,000 | ) | (801,000 | ) | ||||
Net change in income tax accounts | (227,000 | ) | 243,000 | |||||
Accrued compensation and other liabilities | (214,000 | ) | (560,000 | ) | ||||
Net cash provided by operating activities | 7,299,000 | 2,057,000 | ||||||
Cash flows from investing activities: | ||||||||
Database development costs | (213,000 | ) | (36,000 | ) | ||||
Purchases of property and equipment | (508,000 | ) | (652,000 | ) | ||||
Cash balance of companies acquired | 516,000 | — | ||||||
Net decrease in loan receivable | 4,000,000 | 1,000,000 | ||||||
Net cash provided by investing activities | 3,795,000 | 312,000 | ||||||
Cash flows from financing activities: | ||||||||
Repayment of long-term debt | (4,114,000 | ) | (1,114,000 | ) | ||||
Dividends paid | (5,563,000 | ) | (3,200,000 | ) | ||||
Net cash used in financing activities | (9,677,000 | ) | (4,314,000 | ) | ||||
Increase in cash and cash equivalents | 1,417,000 | (1,945,000 | ) | |||||
Cash and cash equivalents at beginning of period | 2,359,000 | 2,986,000 | ||||||
Cash and cash equivalents at end of period | $ | 3,776,000 | $ | 1,041,000 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | 12,000 | $ | 15,000 | ||||
Cash paid for income taxes | $ | — | $ | — | ||||
Non-cash investing and financing activities: | ||||||||
Operations contributed by First American | $ | 20,000,000 | $ | — | ||||
The accompanying notes are an integral part of these combined financial statements.
Notes to Combined Financial Statements
March 31, 2005 and 2004 (Unaudited)
1. Organization and Nature of Business
The Credit Information Group (the “Company”) is comprised of the mortgage and consumer credit reporting operations of First American Real Estate Solutions, LLC (“FARES”); Teletrack, Inc. (“Teletrack”), a provider of credit reports specializing in sub-prime borrowers; First American Credit Management Solutions, Inc. (“CMSI”), a provider of consumer lending software; First American Membership Services, Inc. (“FAMS”), a provider of membership-based consumer products and services; and CIG Investments, LLC (“CIG Investments”), which was formed to pursue strategic investment opportunities. FARES is 80% owned by a wholly owned subsidiary of The First American Corporation (“First American”) and 20% owned by Experian Corporation. Teletrack, CMSI, FAMS and CIG Investments are all wholly owned subsidiaries of First American. See Note 3 for an acquisition in 2005 contributed by First American to the Company.
2. Summary of Significant Accounting Policies
Basis of Presentation
The interim financial data as of March 31, 2005 and for the three months ended March 31, 2005 and 2004 is unaudited; however, in the opinion of the Company, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of the interim periods. This report should be read in conjunction with the Company’s audited financials statements included in this proxy statement.
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.
Fair Value of Financial Instruments
The carrying amount of the Company’s financial instruments at March 31, 2005 and December 31, 2004, which includes cash and cash equivalents, accounts receivable, and notes receivable approximates fair value because of the short maturity of those instruments. The Company considers the variable rate debt to be representative of current market rates and, accordingly, estimates that the recorded amounts approximate fair market value.
Cash Equivalents
The Company considers cash equivalents to be cash and all short-term investments that have an initial maturity of 90 days or less. Excess cash is transferred to First American and FARES on a daily basis.
Accounts Receivable
Accounts receivable are due from companies in a broad range of industries located throughout the United States. Credit is extended based on an evaluation of the customer’s financial condition, and generally, collateral is not required.
The allowance for all probable uncollectible receivables is based on a combination of historical data, cash payment trends, specific customer issues, write-off trends, general economic conditions and other factors. These factors are continuously monitored by management to arrive at the estimate for the amount of accounts receivable that may be ultimately uncollectible. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, the Company records a specific allowance for doubtful accounts against amounts due, to reduce the net recognized receivable to the amount it reasonably believes will be collected. Management believes that the allowance at March 31, 2005 and December 31, 2004 is reasonably stated.
Credit Information Group
Notes to Combined Financial Statements—(Continued)
March 31, 2005 and 2004 (Unaudited)
Property and Equipment
Property and equipment are recorded at cost. Property and equipment includes computer software acquired and developed for internal use. Software development costs are capitalized from the time technological feasibility is established until the time when the software is ready for use.
The Company follows 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 certain payroll-related costs of employees directly associated with developing software in addition to related incremental payments to third parties.
Depreciation on leasehold improvements is computed on the straight-line method over the shorter of the life of the asset, or the lease term, ranging from 3 to 10 years. Depreciation on data processing equipment and furniture and equipment is computed using the straight-line method over their estimated useful lives ranging from 3 to 10 years. Capitalized software costs are amortized using the straight-line method over estimated useful lives of 3 to 7 years.
Database Development Costs
Database development costs represent the cost to develop the proprietary databases of information for customer usage. The costs are capitalized from the time technological feasibility is established until the information is ready for use. These costs are amortized using the straight-line method over estimated useful life of 7 to 10 years.
Goodwill and Other Intangible Assets
Other intangibles, which include customer lists, are amortized over their estimated useful lives, ranging from 4 to 10 years. The Company, through First American, regularly 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. First American has selected September 30 as the annual valuation date to test goodwill for impairment. The valuation is performed by a third party.
The Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” impairment testing process includes two phases. The first phase (Test 1) compares the fair value of each reporting unit to its book value. The fair value of each reporting unit is determined by using discounted cash flow analysis, market approach valuations and third-party valuation advisors. If the fair value of the reporting unit exceeds its book value, the goodwill is not considered impaired and no additional analysis is required. However, if the book value is greater than the fair value, a second test (Test 2) must be completed to determine if the fair value of the goodwill exceeds the book value of the goodwill. The fair value of the goodwill is determined by discounted cash flow analysis and appraised values.
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. The tax provision for the Company has been calculated on a separate return basis. The Company’s income tax returns are filed either on a separate company basis or as part of the consolidated/combined income tax returns of First American, depending on when an operating subsidiary was
Credit Information Group
Notes to Combined Financial Statements—(Continued)
March 31, 2005 and 2004 (Unaudited)
acquired and the rules of the jurisdiction. The Company is party to a tax sharing agreement with First American whereby the Company will pay to First American any tax liabilities due relating to its operations, and the Company will receive from First American any tax benefits related to its operations. Such items are accrued in the year to which they relate.
Impairment of Intangible and Long-Lived Assets
CIG carries intangible and long-lived assets at cost less accumulated amortization. Accounting standards require that assets be written down if they become impaired. Intangible and long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset is not recoverable. At such time that an impairment in value of an intangible or long-lived asset is identified, the impairment will be measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Fair value is determined by employing an expected present value technique, which utilizes multiple cash flow scenarios that reflect the range of possible outcomes and an appropriate discount rate.
Revenue Recognition
Revenue from the sale of credit reports is recognized at the time of delivery, as the Company has no significant ongoing obligation after delivery. Membership fees, billed monthly to member’s accounts, are recognized in the month the fee is earned. A portion of the membership revenue received is paid in the form of a commission to clients and is reflected in other operating expenses. Revenue earned from providing services to third party issuers of membership based consumer products is recognized at the time the service is provided, generally on a monthly basis. Software maintenance revenues are recognized ratably over the term of the maintenance period. Custom programming and professional consulting service revenue is recognized using the percentage-of-completion method pursuant to Accounting Research Bulletin (ARB) No. 45 “Long-Term Construction-Type Contracts.” To the extent that interim amounts billed to clients exceed revenue earned, deferred income is recorded. Other revenue is recognized upon completion of the contractual obligation, which is typically evidenced by delivery of the product or performance of the service.
3. Acquisitions
On March 30, 2005, First American acquired the assets of Experian RES, a mortgage credit reporting business, for $20,000,000 cash from Experian Affiliate Acquisition, LLC and contributed that business to the Company.
The preliminary allocation of the purchase price is based upon estimates of the assets and liabilities acquired in accordance with SFAS No. 141, “Business Combinations.” The allocations may be revised in 2005. The acquisition of this company is based on management’s consideration of past and expected future performance as well as the potential strategic fit with the long-term goals of the Company. The expected long-term growth, market position and expected synergies to be generated by inclusion of this company are the primary factors which gave rise to an acquisition price which resulted in the recognition of goodwill.
The preliminary allocation of the aggregate purchase price of this acquisition is as follows:
Goodwill | $ | 12,063,000 | |
Identifiable intangible assets | 4,228,000 | ||
Software | 1,000,000 | ||
Net assets acquired | 2,709,000 | ||
$ | 20,000,000 | ||
Credit Information Group
Notes to Combined Financial Statements—(Continued)
March 31, 2005 and 2004 (Unaudited)
Unaudited pro forma results of operations assuming the acquisition of Experian RES was consummated January 1, 2004 are as follows:
For the Three Months Ended March 31, | ||||||
2005 | 2004 | |||||
Total revenue | $ | 72,902,000 | $ | 68,975,000 | ||
Net income | $ | 11,356,000 | $ | 8,261,000 | ||
The changes in the carrying amount of goodwill are as follows for the three months ended March 31, 2005:
Goodwill | |||
Balance, at December 31, 2004 | $ | 75,057,000 | |
Acquisitions | 12,063,000 | ||
Balance, at March 31, 2005 | $ | 87,120,000 | |
The changes in the carrying amount of intangible assets are as follows for the three months ended March 31, 2005:
Intangible Assets | ||||
Balance, at December 31, 2004 | $ | 2,609,000 | ||
Acquisitions | 4,228,000 | |||
Amortization | (100,000 | ) | ||
Balance, at March 31, 2005 | $ | 6,737,000 | ||
Amortization expense totaled $100,000 for the three months ended March 31, 2005 and 2004.
4. Subsequent Events
On May 25, 2005, First American acquired Bar None, Inc., a provider of credit-based lead generation, processing and tracking services of consumers with sub-prime credit for auto dealers, for an initial investment of $23,500,000 in cash and notes and the assumption of $1,000,000 in long-term debt and contributed that business and $1,500,000 in additional working capital to the Company. The purchase price is subject to adjustment during each of the next three years based on an earn-out agreement, which could increase the total purchase price to $35,000,000 by the end of the third year.
Pending Acquisition of the Company
On May 25, 2005, First American, FARES, First American Real Estate Information Services, Inc. (a wholly owned subsidiary of First American) and First Advantage Corporation (“First Advantage”), a 69% owned subsidiary of First American, entered into a Master Transfer Agreement whereby First Advantage will acquire the Company in exchange for 29,073,170 shares of Class B common stock of First Advantage. On June 22, 2005, First American, FARES, First American Real Estate Information Services, Inc., FADV Holdings LLC, and First Advantage entered into an Amended and Restated Master Transfer Agreement.
Credit Information Group
Combined Financial Statements
For the Years Ending December 31, 2004, 2003 and 2002
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
The First American Corporation:
In our opinion, the accompanying combined balance sheets of the Credit Information Group of the First American Corporation and its affiliates and the related combined statements of income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2004 present fairly, in all material respects, the combined financial position of the Credit Information Group at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the management of the Credit Information Group. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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 our opinion.
As discussed in Notes 1 and 11, the Credit Information Group is a component of The First American Corporation and its affiliates and receives services and has significant transactions with related parties.
|
|
Los Angeles, California
June 16, 2005
Combined Balance Sheets
As of December 31, 2004 and 2003
2004 | 2003 | |||||
Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 2,359,000 | $ | 2,986,000 | ||
Accounts receivable (less allowance for doubtful accounts of $1,662,000 and $1,786,000 in 2004 and 2003, respectively) | 24,857,000 | 24,763,000 | ||||
Notes receivable | 4,000,000 | 5,000,000 | ||||
Due from related party, net | 714,000 | — | ||||
Prepaid expenses and other current assets | 1,076,000 | 1,812,000 | ||||
Total current assets | 33,006,000 | 34,561,000 | ||||
Property and equipment, net | 22,917,000 | 29,656,000 | ||||
Goodwill, net | 75,057,000 | 75,057,000 | ||||
Intangible assets, net | 2,609,000 | 3,007,000 | ||||
Database development costs, net | 1,431,000 | 2,071,000 | ||||
Other deferred costs, net | 1,911,000 | 5,142,000 | ||||
Investment in equity investee | 34,854,000 | 33,072,000 | ||||
Other assets | 127,000 | 220,000 | ||||
Total assets | $ | 171,912,000 | $ | 182,786,000 | ||
Liabilities and Stockholders’ Equity | ||||||
Current liabilities: | ||||||
Accounts payable | $ | 4,536,000 | $ | 4,768,000 | ||
Accrued compensation | 9,996,000 | 8,843,000 | ||||
Accrued liabilities | 10,369,000 | 11,432,000 | ||||
Deferred income | 3,197,000 | 3,400,000 | ||||
Due to related party, net | — | 1,103,000 | ||||
Current portion of long-term debt | 4,456,000 | 5,456,000 | ||||
Total current liabilities | 32,554,000 | 35,002,000 | ||||
Long-term debt, net of current portion | 570,000 | 1,026,000 | ||||
Deferred income taxes | 8,454,000 | 14,100,000 | ||||
Other liabilities | 587,000 | 2,998,000 | ||||
Total liabilities | 42,165,000 | 53,126,000 | ||||
Commitments and contingencies (Note 12) | ||||||
Stockholders’ equity: | ||||||
Common stock | — | — | ||||
Contributed capital | 26,275,000 | 26,275,000 | ||||
Retained earnings | 103,472,000 | 103,385,000 | ||||
Total stockholders’ equity | 129,747,000 | 129,660,000 | ||||
Total liabilities and stockholders’ equity | $ | 171,912,000 | $ | 182,786,000 | ||
The accompanying notes are an integral part of these combined financial statements.
Combined Statements of Income
For the Years Ended December 31, 2004, 2003 and 2002
2004 | 2003 | 2002 | ||||||||||
Service revenue | $ | 242,812,000 | $ | 244,806,000 | $ | 208,521,000 | ||||||
Other income | 7,392,000 | 9,060,000 | 9,654,000 | |||||||||
Total revenue | 250,204,000 | 253,866,000 | 218,175,000 | |||||||||
Cost of service revenue | 85,573,000 | 81,970,000 | 66,581,000 | |||||||||
Gross margin | 164,631,000 | 171,896,000 | 151,594,000 | |||||||||
Salaries and benefits | 60,107,000 | 60,564,000 | 59,374,000 | |||||||||
Facilities and telecommunications | 8,708,000 | 10,654,000 | 11,172,000 | |||||||||
Other operating expenses | 32,361,000 | 34,962,000 | 24,654,000 | |||||||||
Depreciation and amortization | 10,642,000 | 12,291,000 | 11,671,000 | |||||||||
Total operating expenses | 111,818,000 | 118,471,000 | 106,871,000 | |||||||||
Income from operations | 52,813,000 | 53,425,000 | 44,723,000 | |||||||||
Interest (expense) income: | ||||||||||||
Interest expense | (457,000 | ) | (386,000 | ) | (3,000 | ) | ||||||
Interest income | 739,000 | 816,000 | 14,000 | |||||||||
Total interest income, net | 282,000 | 430,000 | 11,000 | |||||||||
Equity in earnings (losses) of investee | 1,782,000 | (326,000 | ) | — | ||||||||
Gain on sale of investment | — | 13,028,000 | — | |||||||||
Income before income taxes | 54,877,000 | 66,557,000 | 44,734,000 | |||||||||
Provision for income taxes | 22,477,000 | 31,023,000 | 18,340,000 | |||||||||
Net income | $ | 32,400,000 | $ | 35,534,000 | $ | 26,394,000 | ||||||
The accompanying notes are an integral part of these combined financial statements.
Combined Statement of Changes in Stockholders’ Equity
For the Years Ended December 31, 2004, 2003 and 2002
Contributed Capital | Retained Earnings | Total | |||||||||
Balance at January 1, 2002 | $ | 26,275,000 | $ | 112,672,000 | $ | 138,947,000 | |||||
Dividends | — | (35,525,000 | ) | (35,525,000 | ) | ||||||
Net income for 2002 | — | 26,394,000 | 26,394,000 | ||||||||
Balance at December 31, 2002 | $ | 26,275,000 | $ | 103,541,000 | $ | 129,816,000 | |||||
Dividends | — | (35,690,000 | ) | (35,690,000 | ) | ||||||
Net income for 2003 | — | 35,534,000 | 35,534,000 | ||||||||
Balance at December 31, 2003 | $ | 26,275,000 | $ | 103,385,000 | $ | 129,660,000 | |||||
Dividends | — | (32,313,000 | ) | (32,313,000 | ) | ||||||
Net income for 2004 | — | 32,400,000 | 32,400,000 | ||||||||
Balance at December 31, 2004 | $ | 26,275,000 | $ | 103,472,000 | $ | 129,747,000 | |||||
The accompanying notes are an integral part of these combined financial statements.
Combined Statements of Cash Flows
For the Years Ended December 31, 2004, 2003 and 2002
2004 | 2003 | 2002 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 32,400,000 | $ | 35,534,000 | $ | 26,394,000 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 10,642,000 | 12,291,000 | 11,671,000 | |||||||||
Allowance for doubtful accounts | (125,000 | ) | (63,000 | ) | (501,000 | ) | ||||||
Equity in earnings (losses) of investee | (1,782,000 | ) | 326,000 | — | ||||||||
Gain on investment | — | (13,028,000 | ) | — | ||||||||
Change in operating assets and liabilities, net of acquisitions: | ||||||||||||
Accounts receivable | 31,000 | (1,865,000 | ) | 2,529,000 | ||||||||
Prepaid expenses and other current assets | 736,000 | (10,000 | ) | (296,000 | ) | |||||||
Due to related party | (1,817,000 | ) | (144,000 | ) | (282,000 | ) | ||||||
Other assets | 93,000 | (1,625,000 | ) | (882,000 | ) | |||||||
Deferred other assets | 3,231,000 | (3,584,000 | ) | (1,559,000 | ) | |||||||
Accounts payable | (232,000 | ) | (440,000 | ) | 3,648,000 | |||||||
Accrued liabilities | (1,062,000 | ) | 777,000 | 571,000 | ||||||||
Deferred income | (203,000 | ) | 1,719,000 | (734,000 | ) | |||||||
Net change in income tax accounts | (5,646,000 | ) | 7,557,000 | (3,603,000 | ) | |||||||
Accrued compensation and other liabilities | (1,259,000 | ) | (1,342,000 | ) | 5,221,000 | |||||||
Net cash provided by operating activities | 35,007,000 | 36,103,000 | 42,177,000 | |||||||||
Cash flows from investing activities: | ||||||||||||
Database development costs | (139,000 | ) | (120,000 | ) | (153,000 | ) | ||||||
Purchases of property and equipment | (2,726,000 | ) | (1,057,000 | ) | (6,726,000 | ) | ||||||
Net decrease (increase) in loan receivable | 1,000,000 | (5,000,000 | ) | — | ||||||||
Net cash used in investing activities | (1,865,000 | ) | (6,177,000 | ) | (6,879,000 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from long-term debt | — | 6,824,000 | — | |||||||||
Repayment of long-term debt | (1,456,000 | ) | (349,000 | ) | (24,000 | ) | ||||||
Dividends paid | (32,313,000 | ) | (35,690,000 | ) | (35,525,000 | ) | ||||||
Net cash used in financing activities | (33,769,000 | ) | (29,215,000 | ) | (35,549,000 | ) | ||||||
(Decrease) increase in cash and cash equivalents | (627,000 | ) | 711,000 | (251,000 | ) | |||||||
Cash and cash equivalents at beginning of period | 2,986,000 | 2,275,000 | 2,526,000 | |||||||||
Cash and cash equivalents at end of period | $ | 2,359,000 | $ | 2,986,000 | $ | 2,275,000 | ||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Cash paid for interest | $ | 54,000 | $ | 44,000 | $ | 3,000 | ||||||
Cash paid for income taxes | $ | — | $ | — | $ | — | ||||||
Cash received for tax refund | $ | 2,146,000 | $ | — | $ | — | ||||||
Non-cash investing and financing activities: | ||||||||||||
Gain on sale of investment | $ | — | $ | 13,028,000 | $ | — | ||||||
The accompanying notes are an integral part of these combined financial statements.
Notes to Combined Financial Statements
For the Years Ended December 31, 2004, 2003 and 2002
1. Organization and Nature of Business
The Credit Information Group (the “Company”) is comprised of the mortgage and consumer credit reporting operations of First American Real Estate Solutions, LLC (“FARES”); Teletrack, Inc. (“Teletrack”), a provider of credit reports specializing in sub-prime borrowers; First American Credit Management Solutions, Inc. (“CMSI”), a provider of consumer lending software; First American Membership Services, Inc. (“FAMS”), a provider of membership-based consumer products and services; and CIG Investments, LLC (“CIG Investments”), which was formed to pursue strategic investment opportunities. FARES is 80% owned by a wholly owned subsidiary of The First American Corporation (“First American”) and 20% owned by Experian Corporation. Teletrack, CMSI, FAMS and CIG Investments are all wholly owned subsidiaries of First American.
The credit reporting business provides credit information reports for mortgage lenders throughout the United States. In preparing its merged credit reports for mortgage lenders, the Company obtains credit reports from at least two of the three United States primary credit bureaus, merges and summarizes the credit reports and delivers its report in a standard format acceptable to mortgage loan originators and secondary mortgage purchasers. The Company has grown primarily through acquisitions in the 1990’s and subsequently through organic growth of its credit related operations. The Company also provides specialized credit reports to non-mortgage lenders, such as auto lenders, and direct to consumers. These reports may be derived from credit reports obtained from one or more of the three United States credit bureaus and may be specially formatted for ease of use by the creditor or to facilitate interpretation by a consumer.
Teletrack’s credit reports are derived from its proprietary database. Its primary customers include pay-day loan and check-advance stores, people locator services, rent-to-own retailers, credit card issuers, and similar types of creditors.
CMSI provides comprehensive solutions that help organizations meet their lending, leasing and other consumer credit automation needs. By delivering innovative systems, services and data solutions, CMSI helps companies reduce risk, decrease costs and improve service. CMSI specializes in strategic lending solutions that combine precise business information with the latest technologies to help customers make better decisions and gain a competitive edge. Products and services offered by CMSI are used in a wide range of credit products, including vehicle loans and leases, home equity loans, student loans, telecommunication services, credit cards, and small business credit. During 2003, CMSI sold its Credit On-line subsidiary to DealerTrack Holdings, Inc. (“DealerTrack”) in a stock transaction wherein CMSI became a 21% shareholder in DealerTrack, a provider of transformational business processes for the auto finance industry.
FAMS was formed in 2001 to broaden the scope of First American’s existing membership-based consumer products and services.
CIG Investments, LLC was formed in 2003 to pursue strategic investment opportunities.
2. Summary of Significant Accounting Policies
Principles of Combination
The combined financial statements include the accounts of each operating entity. All significant inter-company transactions and balances have been eliminated.
Credit Information Group
Notes to Combined Financial Statements—(Continued)
For the Years Ended December 31, 2004, 2003 and 2002
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.
Fair Value of Financial Instruments
The carrying amount of the Company’s financial instruments at December 31, 2004 and 2003, which includes cash and cash equivalents, accounts receivable, and notes receivable approximates fair value because of the short maturity of those instruments. The Company considers the variable rate debt to be representative of current market rates and, accordingly, estimates that the recorded amounts approximate fair market value.
Cash Equivalents
The Company considers cash equivalents to be cash and all short-term investments that have an initial maturity of 90 days or less. Excess cash is transferred to First American and FARES on a daily basis.
Accounts Receivable
Accounts receivable are due from companies in a broad range of industries located throughout the United States. Credit is extended based on an evaluation of the customer’s financial condition, and generally, collateral is not required.
The allowance for all probable uncollectible receivables is based on a combination of historical data, cash payment trends, specific customer issues, write-off trends, general economic conditions and other factors. These factors are continuously monitored by management to arrive at the estimate for the amount of accounts receivable that may be ultimately uncollectible. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, the Company records a specific allowance for doubtful accounts against amounts due, to reduce the net recognized receivable to the amount it reasonably believes will be collected. Management believes that the allowance at December 31, 2004 and 2003 is reasonably stated.
Property and Equipment
Property and equipment are recorded at cost. Property and equipment includes computer software acquired and developed for internal use. Software development costs are capitalized from the time technological feasibility is established until the time when the software is ready for use.
The Company follows 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 certain payroll-related costs of employees directly associated with developing software in addition to related incremental payments to third parties.
Depreciation on leasehold improvements is computed on the straight-line method over the shorter of the life of the asset, or the lease term, ranging from 3 to 10 years. Depreciation on data processing equipment and furniture and equipment is computed using the straight-line method over their estimated useful lives ranging from 3 to 10 years. Capitalized software costs are amortized using the straight-line method over estimated useful lives of 3 to 7 years.
Credit Information Group
Notes to Combined Financial Statements—(Continued)
For the Years Ended December 31, 2004, 2003 and 2002
Database Development Costs
Database development costs represent the cost to develop the proprietary databases of information for customer usage. The costs are capitalized from the time technological feasibility is established until the information is ready for use. These costs are amortized using the straight-line method over estimated useful life of 7 to 10 years.
Goodwill and Other Intangible Assets
Other intangibles, which include customer lists, are amortized over their estimated useful lives, ranging from 4 to 10 years. The Company, through First American, regularly 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. First American has selected September 30 as the annual valuation date to test goodwill for impairment. The valuation is performed by a third party.
The Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” impairment testing process includes two phases. The first phase (Test 1) compares the fair value of each reporting unit to its book value. The fair value of each reporting unit is determined by using discounted cash flow analysis, market approach valuations and third-party valuation advisors. If the fair value of the reporting unit exceeds its book value, the goodwill is not considered impaired and no additional analysis is required. However, if the book value is greater than the fair value, a second test (Test 2) must be completed to determine if the fair value of the goodwill exceeds the book value of the goodwill. The fair value of the goodwill is determined by discounted cash flow analysis and appraised values.
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. The tax provision for the Company has been calculated on a separate return basis. The Company’s income tax returns are filed either on a separate company basis or as part of the consolidated/combined income tax returns of First American, depending on when an operating subsidiary was acquired and the rules of the jurisdiction. The Company is party to a tax sharing agreement with First American whereby the Company will pay to First American any tax liabilities due relating to its operations, and the Company will receive from First American any tax benefits related to its operations. Such items are accrued in the year to which they relate.
Impairment of Long-Lived Assets and Loans Receivable
With respect to long-lived assets to be held and used, an asset (or group of assets) will be considered impaired when the expected undiscounted cash flows from use and disposition are less than the asset’s carrying value. The amount of any impairment charge will be based on the difference between the carrying and fair value of the asset. The determination of fair values considers quoted market prices, if available, and prices for similar assets and the results of other valuation techniques.
Revenue Recognition
Revenue from the sale of credit reports is recognized at the time of delivery, as the Company has no significant ongoing obligation after delivery. Membership fees, billed monthly to member’s accounts, are
Credit Information Group
Notes to Combined Financial Statements—(Continued)
For the Years Ended December 31, 2004, 2003 and 2002
recognized in the month the fee is earned. A portion of the membership revenue received is paid in the form of a commission to clients and is reflected in other operating expenses. Revenue earned from providing services to third party issuers of membership based consumer products is recognized at the time the service is provided, generally on a monthly basis. Software maintenance revenues are recognized ratably over the term of the maintenance period. Custom programming and professional consulting service revenue is recognized using the percentage-of-completion method pursuant to Accounting Research Bulletin (ARB) No. 45 “Long-Term Construction-Type Contracts.” To the extent that interim amounts billed to clients exceed revenue earned, deferred income is recorded. Other revenue is recognized upon completion of the contractual obligation, which is typically evidenced by delivery of the product or performance of the service.
3. Notes Receivable
Notes receivable consist of uncollateralized loan participation interests issued by financial institutions with respect to certain single payment, short term loans made by these financial institutions to their customers. The interest rate of the notes was 19.4% and 26.3% at December 31, 2004 and 2003, respectively. The notes and related accrued interest at December 31, 2004 were paid in full during January 2005.
4. Goodwill and Intangible Assets
The Company’s reporting units for purposes of allocating goodwill and testing for impairment are conventional credit information and sub-prime credit information. In accordance with the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company, through First American, completed the goodwill impairment test for all reporting units for the years ended December 31, 2004 and 2003 and determined that each reporting unit had a fair value in excess of carrying value, therefore, no goodwill impairment was recorded.
The Company has approximately $2.6 million of net intangible assets at December 31, 2004, with definite lives ranging from 4 to 10 years.
Goodwill and other intangible assets for the years ended December 31, 2004 and 2003 are as follows:
2004 | 2003 | |||||||
Goodwill, net | $ | 75,057,000 | $ | 75,057,000 | ||||
Intangible assets: | ||||||||
Customer lists | $ | 4,000,000 | $ | 4,000,000 | ||||
Other | 2,000 | — | ||||||
4,002,000 | 4,000,000 | |||||||
Less accumulated amortization | (1,393,000 | ) | (993,000 | ) | ||||
Intangible assets, net | $ | 2,609,000 | $ | 3,007,000 | ||||
Credit Information Group
Notes to Combined Financial Statements—(Continued)
For the Years Ended December 31, 2004, 2003 and 2002
Amortization expense of intangible assets was approximately $400,000, $494,000 and $784,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Amortization expense relating to intangible asset balances as of December 31, 2004 is expected to be as follows over the next five years:
Year ending December 31, | |||
2005 | $ | 400,000 | |
2006 | 400,000 | ||
2007 | 400,000 | ||
2008 | 400,000 | ||
2009 | 400,000 | ||
Thereafter | 609,000 | ||
$ | 2,609,000 | ||
The change in the carrying amount of intangible assets is as follows for the years ending December 31, 2004 and 2003:
Intangible Assets | ||||
Balance, at December 31, 2002 | $ | 6,187,000 | ||
Sale of Credit On-Line | (2,686,000 | ) | ||
Amortization | (494,000 | ) | ||
Balance, at December 31, 2003 | 3,007,000 | |||
Addition | 2,000 | |||
Amortization | (400,000 | ) | ||
Balance, at December 31, 2004 | $ | 2,609,000 | ||
5. Property and Equipment
As of December 31, 2004 and 2003, property and equipment is as follows:
2004 | 2003 | |||||||
Furniture and equipment | $ | 7,042,000 | $ | 7,199,000 | ||||
Data processing equipment | 11,818,000 | 12,179,000 | ||||||
Capitalized software | 52,069,000 | 50,521,000 | ||||||
Leasehold improvements | 1,707,000 | 2,471,000 | ||||||
72,636,000 | 72,370,000 | |||||||
Less accumulated depreciation | (49,719,000 | ) | (42,714,000 | ) | ||||
Property and equipment, net | $ | 22,917,000 | $ | 29,656,000 | ||||
Depreciation and amortization expense was approximately $9,464,000, $11,037,000 and $10,146,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
Credit Information Group
Notes to Combined Financial Statements—(Continued)
For the Years Ended December 31, 2004, 2003 and 2002
6. Database Development Costs
Database development costs for the years ended December 31, 2004 and 2003 are as follows:
2004 | 2003 | |||||||
Sub-prime credit data | $ | 5,512,000 | $ | 5,374,000 | ||||
Less accumulated amortization | (4,081,000 | ) | (3,303,000 | ) | ||||
Database development costs | $ | 1,431,000 | $ | 2,071,000 | ||||
Amortization expense relating to database development costs was approximately $778,000, $760,000 and $741,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
7. Investment in Equity Investee
During March 2003, the Company exchanged its equity interest in a subsidiary of CMSI for a 21% equity interest in DealerTrack, a leading provider of transformational business processes for the auto finance industry. The transaction was accounted for at fair value determined by a third party and resulted in a gain of approximately $13.0 million. The investment in DealerTrack is accounted for on the equity method. An investor using the equity method initially records an investment at cost. Subsequently, the carrying amount of the investment is increased to reflect the investor’s share of income of the investee and is reduced to reflect the investor’s share of losses of the investee or dividends received from the investee. The cost of the investment exceeded the Company’s ownership interest in the equity of DealerTrack by approximately $25.1 million at the date of acquisition and the excess purchase price was accounted for as goodwill. The Company has reviewed the carrying value of its Investment in Equity Investee and has determined that there is no impairment of value.
8. Debt
2004 | 2003 | |||||
Uncollateralized note payable | ||||||
Interest rate of prime (4.5% at December 31, 2004 and 4% at December 2003), principal payments quarterly of approximately $114,000 plus interest, matures February 2007 | $ | 1,026,000 | $ | 1,482,000 | ||
Uncollateralized note payable to First American | ||||||
Interest rate of 10%, paid in full on January 7, 2005 | 4,000,000 | 5,000,000 | ||||
Total long-term debt | 5,026,000 | 6,482,000 | ||||
Less current portion of long-term debt | 4,456,000 | 5,456,000 | ||||
Long-term debt, net of current portion | $ | 570,000 | $ | 1,026,000 | ||
The uncollateralized note payable includes interest at the prime rate adjusted at each six month anniversary of the note.
Credit Information Group
Notes to Combined Financial Statements—(Continued)
For the Years Ended December 31, 2004, 2003 and 2002
9. Income Taxes
The provision (benefit) for income taxes is summarized as follows:
2004 | 2003 | 2002 | |||||||||
Current: | |||||||||||
Federal | $ | 22,222,000 | $ | 19,010,000 | $ | 17,855,000 | |||||
State | 5,901,000 | 4,456,000 | 4,088,000 | ||||||||
28,123,000 | 23,466,000 | 21,943,000 | |||||||||
Deferred: | |||||||||||
Federal | (4,590,000 | ) | 5,791,000 | (3,201,000 | ) | ||||||
State | (1,056,000 | ) | 1,766,000 | (402,000 | ) | ||||||
(5,646,000 | ) | 7,557,000 | (3,603,000 | ) | |||||||
Total current and deferred | $ | 22,477,000 | $ | 31,023,000 | $ | 18,340,000 | |||||
Income taxes differ from the amounts computed by applying the federal income tax rate of 35.0%. A reconciliation of the difference is as follows:
2004 | 2003 | 2002 | |||||||
Taxes calculated at federal rate | $ | 19,207,000 | $ | 23,295,000 | $ | 15,657,000 | |||
State taxes, net of federal benefit | 3,149,000 | 4,044,000 | 2,395,000 | ||||||
Exclusion of certain meals and entertainment expenses | 38,000 | 41,000 | 42,000 | ||||||
Gain on sale of investment | — | 3,345,000 | — | ||||||
Other items, net | 83,000 | 298,000 | 246,000 | ||||||
$ | 22,477,000 | $ | 31,023,000 | $ | 18,340,000 | ||||
The primary components of temporary differences that give rise to the Company’s net deferred tax liability are as follows:
2004 | 2003 | |||||||
Deferred tax assets: | ||||||||
Federal net operating loss carryforwards | $ | 62,000 | $ | — | ||||
State tax | 1,669,000 | 1,957,000 | ||||||
Bad debt reserves | 718,000 | 768,000 | ||||||
Employee benefits | 533,000 | 642,000 | ||||||
Accrued expenses and loss reserves | 286,000 | 216,000 | ||||||
Deferred revenue | — | 154,000 | ||||||
Other | 211,000 | 183,000 | ||||||
3,479,000 | 3,920,000 | |||||||
Deferred tax liabilities: | ||||||||
Depreciation and amortization | (11,336,000 | ) | (18,020,000 | ) | ||||
Equity in earnings of investee | (597,000 | ) | — | |||||
(11,933,000 | ) | (18,020,000 | ) | |||||
Net deferred tax liability | $ | (8,454,000 | ) | $ | (14,100,000 | ) | ||
Credit Information Group
Notes to Combined Financial Statements—(Continued)
For the Years Ended December 31, 2004, 2003 and 2002
10. Employee Benefits
Employees of the Company are included in the benefit plans of First American. Employees of the Company are eligible to participate in The First American 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. The Company’s expense related to the Savings Plan amounted to approximately $2,155,000, $2,122,000 and $1,630,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
Employees of the Company are also included as part of First American’s pension plan. The Company charged to expense payments to the pension plan of approximately $417,000, $364,000 and $461,000 for the years ended December 31, 2004, 2003 and 2002, respectively. This defined benefit plan covers substantially all of the Company’s employees. The actuarial present value of accumulated plan benefits and net assets available for benefits to the Company’s employees under this plan is not readily available.
11. Related Parties
First American and certain affiliates provide sales and marketing, legal, financial, technology, leased facilities, leased equipment and other administrative services to the Company. The Company recognized approximately $11,664,000, $11,627,000 and $12,078,000 in selling, general and administrative expense in 2004, 2003 and 2002, respectively, relating to these services. The Company capitalized approximately $447,000, $1,383,000 and $0 in software development in 2004, 2003 and 2002, respectively. The amounts allocated to the Company are based on management’s assumptions (primarily usage, time incurred and number of employees) as to the proportion of the services used by the Company in relation to the actual costs incurred by First American Corporation and affiliates in providing the services.
FARES owns 50% of a joint venture that provides mortgage credit reports and operations support to a nationwide mortgage lender. In accordance with the terms of the joint venture operating agreement, the mortgage and consumer credit reporting operation of FARES receives a merge fee per credit report issued and is reimbursed for certain operating costs. In addition, the mortgage and consumer credit reporting operation of FARES records the 50% share of the earnings of the joint venture using the equity method of accounting. These earnings are included in other income in the accompanying combined statements of income and totaled $6,672,000, $8,062,000, and $8,623,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Total merge fees were $7,379,000, $9,056,000 and $8,944,000 for the years ended December 31, 2004, 2003 and 2002, respectively and are included in service revenue in the accompanying combined statement of income. Total reimbursement for operating costs were $7,476,000, $8,471,000, and $8,516,000 for the years ended December 31, 2004, 2003 and 2002, respectively. The reimbursement of operating costs is reflected as a reduction in operating expenses in the accompanying financial statements.
Due to and from related party represents amounts resulting from the FARES joint venture.
12. Commitments and Contingencies
Operating Leases
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. Certain leases are entered into by First American on behalf of the Company and are guaranteed First
Credit Information Group
Notes to Combined Financial Statements—(Continued)
For the Years Ended December 31, 2004, 2003 and 2002
American. Rent expense under operating leases, including operating leases with First American, was approximately $6,906,000, $7,182,000 and $6,524,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
Year ending December 31, | |||
2005 | $ | 6,354,000 | |
2006 | 5,482,000 | ||
2007 | 4,703,000 | ||
2008 | 3,461,000 | ||
2009 | 2,784,000 | ||
Thereafter | 1,867,000 | ||
$ | 24,651,000 | ||
Future minimum rental payments under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2004, are as follows:
Litigation
The Company is involved in litigation from time to time in the ordinary course of business. The Company does not believe that the outcome of any pending or threatened litigation will have a material adverse effect on the Company’s financial position or operating results.
In the third quarter 2004, the Company paid $3.0 million to settle a lawsuit involving a limited liability company owned by the Company and another entity. In the settlement the Company obtained a full release of liability and an assignment of the other entity’s member ship interest. Subsequently, the carrying value of the limited liability company’s stock was written off and resulted in a loss of approximately $2.1 million.
13. Subsequent Events
Acquisitions
On March 30, 2005, First American acquired the assets of Experian RES, a mortgage credit reporting business, for $20,000,000 cash from Experian Affiliate Acquisition, LLC and contributed that business to the Company.
On May 25, 2005, First American acquired Bar None, Inc., a provider of credit-based lead generation, processing and tracking services of consumers with sub-prime credit for auto dealers, for an initial investment of $23,500,000 in cash and notes and the assumption of $1,000,000 in long-term debt and contributed that business and $1,500,000 in additional working capital to the Company. The purchase price is subject to adjustment during each of the next 3 years based on an earn-out agreement, which could increase the total purchase price to $35,000,000 by the end of the third year.
Pending Acquisition of the Company
On May 25, 2005, First American, FARES, First American Real Estate Information Services, Inc. (a wholly owned subsidiary of First American) and First Advantage Corporation (“First Advantage”), a 69% owned subsidiary of First American, entered into a Master Transfer Agreement whereby First Advantage will acquire the Company in exchange for 29,073,170 shares of Class B common stock of First Advantage.
Annex A
AMENDED AND RESTATED
MASTER TRANSFER AGREEMENT
among
THE FIRST AMERICAN CORPORATION,
FIRST AMERICAN REAL ESTATE INFORMATION SERVICES, INC.,
FIRST AMERICAN REAL ESTATE SOLUTIONS, LLC,
FADV HOLDINGS LLC,
and
FIRST ADVANTAGE CORPORATION
Dated as of June 22, 2005
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Note: Pursuant to Item 601(b)(2) of Regulation S-K, schedules containing disclosure of certain materials and exceptions to the representations and warranties have been omitted. First Advantage will provide a copy of such schedules supplementally to the SEC upon request. The description of the schedules are included only for purposes of Item 601(b)(2) of Regulation S-K.
AMENDED AND RESTATED
MASTER TRANSFER AGREEMENT
This AMENDED AND RESTATED MASTER TRANSFER AGREEMENT (as the same may be amended, modified and supplemented from time to time, this “Agreement”) is entered into as of June 22, 2005 by and among THE FIRST AMERICAN CORPORATION, a California corporation (“First American”); FIRST AMERICAN REAL ESTATE INFORMATION SERVICES, INC., a California corporation (“FAREISI”); FIRST AMERICAN REAL ESTATE SOLUTIONS, LLC, a California limited liability company (“FARES”); FADV HOLDINGS LLC, a Delaware limited liability company (“Newco”); and FIRST ADVANTAGE CORPORATION, a Delaware corporation (“FADV”; First American, FAREISI, FARES, Newco and First Advantage are each a “Party” and are collectively the “Parties”).
W I T N E S S E T H :
WHEREAS, First American, FAREISI, FARES and FADV previously entered into that certain Master Transfer Agreement, dated as of May 25, 2005 (the “Original Agreement”);
WHEREAS, First American, FAREISI, FARES and FADV wish to amend and restate the Original Agreement as provided herein;
WHEREAS, as of immediately prior to Closing (as defined below), Newco will be the beneficial owner of (a) all of the issued and outstanding (i) capital stock of North American CREDCO, Inc., a Delaware corporation (“NA CREDCO”); First Canadian CREDCO, Inc., an Ontario corporation (“FC CREDCO”); First American Credit Management Solutions, Inc., a Delaware corporation (“CMSI”); CMSI Credit Services, Inc., a Maryland corporation (“Credit Services”); Teletrack, Inc., a Georgia corporation (“Teletrack”); and Teletrack Canada, Inc., an Ontario corporation (“Teletrack Canada”); (ii) membership interests of CreditReportPlus, LLC, a Maryland limited liability company (“Credit Report+”); and (iii) capital stock of Bar None, Inc., a Delaware corporation (“Bar None”); and (b) 4,071,618 shares of Series A-2 Preferred Stock of DealerTrack Holdings, Inc., a Delaware corporation (“DealerTrack”), and 1,357,206 shares of Series C-3 Preferred Stock of DealerTrack (collectively, the “DealerTrack Interest”);
WHEREAS, as of immediately prior to Closing, Newco will be the record owner of all of the issued and outstanding (a) capital stock of First American Membership Services, Inc., a California corporation (“Membership Services”); and (b) membership interests of CIG Investments, LLC, a Delaware limited liability company (“CIG”);
WHEREAS, as of immediately prior to Closing, (a) FARES will be the record owner of a 50.1% membership interest in RELS, LLC, a Delaware limited liability company (“RELS”); and (b) Newco will be the owner of the securities, assets, properties and rights constituting FARES’ CREDCO Division (collectively, the “CREDCO Division”), including all of the issued and outstanding capital stock of First American Credco of Puerto Rico, Inc., a Delaware corporation (“PR CREDCO”);
WHEREAS, the companies, assets, properties and rights referred to in the above recitals (other than the DealerTrack Interest, Bar None, RELS and the XRES Business (as defined below)) comprise First American’s Credit Information Segment (the “Business”); and
WHEREAS, First American, FAREISI, FARES and Newco (each, a “Contributor” and collectively, “Contributors”) desire to contribute or cause the contribution, and FADV desires to accept the contribution, of the Business, Bar None and the DealerTrack Interest pursuant to the terms and conditions of this Agreement and the Related Agreements (as defined below).
NOW, THEREFORE, in consideration of the premises and of the mutual covenants, representations, warranties and agreements herein contained, the Parties hereby amend and restate the Original Agreement in its entirety as follows:
ARTICLE I.
DEFINITIONS AND INTERPRETATIONS
1.1Defined Terms. In this Agreement the following words and expressions shall have the following meanings (such meaning to be equally applicable to both the singular and plural forms of the terms defined):
“Affiliate” means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with, such Person. For purposes of this definition, “control” (including, with correlative meanings, the terms “controlled by” and “under common control with”), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by Contract or otherwise;provided that FADV and its Subsidiaries shall not be deemed to be Affiliates of any Contributor for purposes of this Agreement, and Contributors and their Subsidiaries shall not be deemed to be Affiliates of FADV for purposes of this Agreement.
“Agreement” has the meaning provided in the introductory paragraph.
“Assignment and Assumption Agreement” has the meaning provided inSection 4.1(o).
“Assignment of Intellectual Property” has the meaning provided inSection 4.1(p).
“Audited Financial Statements” has the meaning provided inSection 6.2(l).
“Bill of Sale” has the meaning provided inSection 4.1(n).
“Beaverton Lease Assignment” has the meaning provided inSection 4.1(f).
“Business” has the meaning provided in the sixth recital.
“Business Day” means any day, other than a Saturday, Sunday or other day on which banks located in Los Angeles, California or St. Petersburg, Florida are authorized or required by law to close.
“Certificate of Amendment” has the meaning provided inSection 5.4.
“CIG” has the meaning provided in the fourth recital.
“Class A Common Stock” means FADV’s Class A common stock, par value $0.001 per share.
“Class B Common Stock” means FADV’s Class B common stock, par value $0.001 per share.
“Closing” has the meaning provided inSection 4.2.
“Closing Date” has the meaning provided inSection 4.2.
“CMSI” has the meaning provided in the third recital.
“Code” means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and the rulings issued thereunder.
“Common Stock” means the Class A Common Stock and the Class B Common Stock.
“Company” and “Companies” means, as the context requires, any or all of NA CREDCO; FC CREDCO; CMSI; Credit Services; Teletrack; Teletrack Canada; Credit Report+; Membership Services; CIG; and PR CREDCO.
“Confidentiality Agreement” has the meaning provided inSection 5.2(c).
“Contract” means any contract, agreement, understanding, note, bond, mortgage, indenture, guarantee, license, franchise, commitment, lease or instrument, whether oral or written, including all amendments and supplements thereto and restatements thereof.
“Contribution Agreement” and “Contribution Agreements” means the First American Contribution Agreement and/or the FARES Contribution Agreement, as the context may require.
“Contributor” and “Contributors” has the meaning provided in the seventh recital.
“CREDCO Division” has the meaning provided in the fifth recital.
“Credit Report+” has the meaning provided in the third recital.
“Credit Services” has the meaning provided in the third recital.
“DealerTrack” has the meaning provided in the third recital.
“DealerTrack Interest” has the meaning provided in the third recital.
“eAppraiseIT Sublease” has the meaning provided inSection 4.1(i).
“Ellie Mae” has the meaning provided inSection 5.10(a).
“Encumbrances” means all liens, security interests, options, rights of first refusal, claims, easements, mortgages, charges, indentures, deeds of trust, rights of way, restrictions on the use of real property, encroachments, licenses to third parties, leases to third parties, security agreements and any other encumbrances and other restrictions or limitations on use or irregularities in title thereto.
“Entity” means any Person that is not a natural person.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“FADV” has the meaning provided in the introductory paragraph.
“FADV Note” has the meaning provided inSection 2.6.
“FAIG Sublease” has the meaning provided inSection 4.1(j).
“FAREISI” has the meaning provided in the introductory paragraph.
“FARES” has the meaning provided in the introductory paragraph.
“FARES Contribution Agreement” has the meaning provided inSection 4.1(b).
“FC CREDCO” has the meaning provided in the third recital.
“Final Proxy Statement” has the meaning provided inSection 5.4.
“First American” has the meaning provided in the introductory paragraph.
“First American Contribution Agreement” has the meaning provided inSection 4.1(a).
“GAAP” means United States generally accepted accounting principles applied on a consistent basis.
“GE Sublease” has the meaning provided inSection 4.1(d).
“Governmental Entity” means any instrumentality, subdivision, court, administrative agency, commission, official or other authority of the United States or any other country or any state, province, prefect, municipality, locality or other government or political subdivision thereof, or any quasi-governmental or private body exercising any regulatory, taxing, importing or other governmental or quasi-governmental authority.
“Indebtedness” of any Person shall mean and include (a) indebtedness for borrowed money or indebtedness issued or incurred in substitution or exchange for indebtedness for borrowed money, (b) amounts owing as deferred purchase price for property or services, including all stockholder notes and “earn-out” payments, (c) indebtedness evidenced by any note, bond, debenture, mortgage or other debt instrument or debt security, (d) commitments or obligations by which such Person assures a creditor against loss (including contingent reimbursement obligations with respect to letters of credit), (e) indebtedness
secured by an Encumbrance on assets or properties of such Person, (f) obligations under any interest rate, currency or other hedging agreement or (g) guarantees or other contingent liabilities (including so-called take-or-pay or keep-well agreements) with respect to any indebtedness, obligation, claim or liability of any other Person of a type described in clauses (a) through (f) above.
“Independent Committee” has the meaning provided inSection 6.1(f).
“Material Adverse Effect” means, (a) when used with respect to any Contributor, (i) any material adverse change in or effect on the properties, assets, businesses, liabilities, results of operations or condition (financial or otherwise) of the Business, taken as a whole, and (ii) any materially adverse change in or effect on (including any material delay) the ability of such Contributor to perform its respective obligations under this Agreement or any Related Agreement to which such Contributor is a party, (b) when used with respect to the Business, (i) any material adverse change in or effect on the properties, assets, businesses, liabilities, results of operations or condition (financial or otherwise) of the Business, taken as a whole, and (c) when used with respect to FADV, (i) any material adverse change in or effect on the properties, assets, businesses, liabilities, results of operations or condition (financial or otherwise) of FADV and its Subsidiaries, taken as a whole, and (ii) any materially adverse change in or effect on (including any material delay) the ability of FADV to perform its obligations under this Agreement or any Related Agreement to which FADV is a party;provided,however, that the term “Material Adverse Effect” shall not include any adverse change or effect that is proximately caused by (1) conditions affecting the United States economy generally or the economy of the regions in which the applicable Person and its Subsidiaries (if any), taken as a whole, conducts a material part of its business, (2) changes in financial markets, (3) conditions affecting the industries in which the applicable Person and its Subsidiaries (if any) compete or (4) the announcement, or other disclosure, of the Transaction (to the extent such announcement or disclosure is not effected in contravention of any term of this Agreement) or the consummation of the Transaction (including compliance by such Person with its covenants hereunder).
“Membership Services” has the meaning provided in the fourth recital.
“NA CREDCO” has the meaning provided in the third recital.
“Newco” has the meaning provided in the introductory paragraph.
“New York Lease Assignment” has the meaning provided inSection 4.1(g).
“Officer” has the meaning provided in Rule 16a-1(f) promulgated under the Exchange Act.
“Ordinary Course” means, with respect to any Person, the ordinary course of commercial operations customarily engaged in by such Person, consistent with past practices (including with respect to quantity and frequency).
“Original Agreement” has the meaning provided in the first recital.
“Party” or “Parties” has the meaning provided in the introductory paragraph.
“Person” means and includes any individual, partnership, joint venture, association, joint stock company, corporation, trust, limited liability company, unincorporated organization, a group and a government or other department, agency or political subdivision thereof.
“Portal Agreement” and “Portal Agreements” have the meanings provided inSection 5.10.
“Poway Lease” has the meaning provided inSection 4.1(e).
“PR CREDCO” has the meaning provided in the fifth recital.
“Preliminary Proxy Statement” has the meaning provided inSection 5.4.
“Related Agreements” has the meaning provided inSection 4.1.
“RELS” has the meaning provided in the fifth recital.
“SEC” has the meaning provided inSection 5.4.
“Standstill Agreement” has the meaning provided inSection 6.3(i).
“Stockholders Meeting” has the meaning provided inSection 5.6(b).
“Subsidiary” means, with respect to any Person, (a) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person and/or one or more Subsidiaries of such Person and (b) any Entity (other than a corporation) in which such Person and/or one more Subsidiaries of such Person has more than a 50% equity interest or otherwise controls the management and affairs of such Entity (including the power to veto any material act or decision);provided that FADV and its Subsidiaries shall not be deemed to be Subsidiaries of First American for purposes of this Agreement.
“Teletrack” has the meaning provided in the third recital.
“Teletrack Canada” has the meaning provided in the third recital.
“Transaction” means the contribution of the Business, Bar None and the DealerTrack Interest to FADV pursuant to the Related Agreements and the other transactions contemplated by this Agreement and the Related Agreements.
“XRES Business” has the meaning provided in FARES Contribution Agreement.
“XRES Lease Assignment” has the meaning provided inSection 4.1(h).
1.2Principles of Construction.
(a) All references to Articles, Sections and subsections are to Articles, Sections and subsections in this Agreement unless otherwise specified. The words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. The term “including” is not limiting and means “including without limitation.”
(b) All accounting terms not specifically defined herein shall be construed in accordance with GAAP.
(c) In the computation of periods of time from a specified date to a later specified date, the words “from” and “within” mean “from and including”; the words “to” and “until” each mean “to but excluding”; and the word “through” means “to and including.”
(d) The Article and Section headings herein are for convenience only and shall not affect the construction hereof.
(e) In the event that the final day of any time period provided herein does not fall on a Business Day, such time period shall be extended such that the final day of such period shall fall on the next Business Day thereafter.
(f) This Agreement is the result of negotiations among and has been reviewed by each Party’s counsel. Accordingly, this Agreement shall not be construed against any Party merely because of such Party’s involvement in its preparation.
ARTICLE II.
REPRESENTATIONS OF CONTRIBUTORS
Each Contributor severally, and not jointly, represents, warrants and agrees in favor of FADV, as of the date of this Agreement and as of the Closing Date (unless a representation speaks as of a specific date, in which case, as of such date), as follows:
2.1Existence and Good Standing; Binding Effect; Power.
(a) Each of First American and FAREISI (i) is a corporation validly existing and in good standing under the laws of the State of California and (ii) has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted.
(b) FARES (i) is a limited liability company validly existing and in good standing under the laws of the State of California and (ii) has all requisite limited liability company power and authority to own, lease and operate its properties and to carry on its business as now being conducted.
(c) Newco (i) is a limited liability company validly existing and in good standing under the laws of the State of Delaware and (ii) has all requisite limited liability company power and authority to own, lease and operate its properties and to carry on its business as now being conducted.
2.2Capacity; Binding Effect. Each Contributor has the requisite organizational power and authority to execute and deliver this Agreement and to perform its obligations hereunder. The execution, delivery and performance of this Agreement by each Contributor has been duly authorized and approved by all necessary organizational action of such Contributor. This Agreement has been duly executed and delivered by each Contributor, and assuming the due execution and delivery of the other Parties hereto, constitutes its valid and binding agreement, enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency or similar laws and equitable principles relating to or affecting the rights of creditors generally from time to time in effect.
2.3Restrictive Documents. Assuming the receipt of any and all consents of third parties in connection with the contribution of the Business, Bar None and the DealerTrack Interest to FADV under the Related Agreements (other than the consents listed onSchedule 6.2(f)), no Contributor is subject to, or a party to, any charter, bylaw, mortgage, lien, lease, license, permit, Contract, instrument, law, rule, ordinance, regulation, order, judgment or decree, or any other restriction of any kind or character, which would reasonably be expected to have a material adverse effect on (including any material delay) the ability of such Contributor to perform its respective obligations under this Agreement or any Related Agreement to which such Contributor is a party.
2.4Litigation. There is no action, suit, proceeding at law or in equity, arbitration or administrative or other proceeding by or before (or to the knowledge of any Contributor any investigation by) any Governmental Entity or other instrumentality or agency, pending, or, to the knowledge of any Contributor, threatened, against or affecting such Contributor that would reasonably be expected to have a material adverse effect on (including any material delay) the ability of such Contributor to perform its respective obligations under this Agreement or any Related Agreement to which such Contributor is a party. No Contributor is subject to any judgment, order or decree entered in any lawsuit or proceeding which would reasonably be expected to have a material adverse effect on (including any material delay) the ability of such Contributor to perform its respective obligations under this Agreement or any Related Agreement to which such Contributor is a party.
2.5Consents and Approvals; No Violations. The execution and delivery of this Agreement by each Contributor and the consummation of the transactions contemplated hereby by each Contributor will not (a) violate any provision of its organizational documents, (b) violate any statute, ordinance, rule, regulation, order or decree of any court or any Governmental Entity applicable to such Contributor, (c) require any filing with, or permit, consent or approval of, or the giving of any notice to, any Governmental Entity having authority over such Contributor, or (d) require any consent or approval of, or the giving of any notice to, any shareholder or
member of any Contributor other than the notice and consent contemplated bySection 6.1(i), (e) assuming the receipt of any and all consents of third parties in connection with the contribution of the Business, Bar None and the DealerTrack Interest to FADV under the Related Agreements (other than the consents listed onSchedule 6.2(f)), result in a violation or breach of, conflict with, constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, payment or acceleration) under, increase in obligations or loss of rights, or result in the creation of any Encumbrance upon any of the properties or assets of the Business under, any of the terms, conditions or provisions of any Contract to which such Contributor or any of its Affiliates is a party and which relates to the Business, or by which such Contributor’s or its Affiliates’ properties or assets constituting all or a part of the properties or assets of the Business may be bound.
2.6Newco. Newco is a newly formed entity that (a) immediately prior to consummation of the Transaction will be owned 61.25% by First American, 1.16% by FAREISI, and 37.58% by FARES, (b) has not conducted, and will not prior to Closing conduct, any business other than (i) the receipt of the Business, Bar None, the XRES Business, the DealerTrack Interest and the Promissory Note in the original principal amount of $20 million, dated as of April 27, 2004, made by FADV in favor of First American (the “FADV Note”), from the other Contributors by way of a contribution immediately prior to Closing substantially on the terms described to FADV in connection with the amendment and restatement of the Original Agreement and (ii) upon consummation of the Transaction, the contribution of the Business, Bar None, the XRES Business and the DealerTrack Interest to FADV or its wholly-owned Subsidiary pursuant to this Agreement and the Related Agreements, (c) has no indebtedness or other liabilities, whether contingent or otherwise, other than (i) its obligations under and as contemplated by this Agreement and the Related Agreements and (ii) the indebtedness and other liabilities of the Business, Bar None, the XRES Business, the DealerTrack Interest and the FADV Note during the period from its receipt of the contribution of the Business, Bar None, the XRES Business, the DealerTrack Interest and the FADV Note from the other Contributors to its contribution thereof to FADV or its wholly-owned Subsidiary pursuant to the terms hereof and the Related Agreements, and (d) has not and will not, during the period from its receipt of the contribution of the Business, Bar None, the XRES Business, the DealerTrack Interest and the FADV Note from the other Contributors to its contribution thereof to FADV or its wholly-owned Subsidiary pursuant to the terms hereof and the Related Agreements, changed or modified any of the assets or liabilities related to the Business, Bar None, the XRES Business, the DealerTrack Interest or the FADV Note.
ARTICLE III.
REPRESENTATIONS OF THE BUYER
FADV represents, warrants and agrees in favor of each Contributor, as of the date of this Agreement and as of the Closing Date (unless a representation or warranty speak as of a specific date, in which case, as of such date), as follows:
3.1Existence and Good Standing; Binding Effect; Power. FADV (i) is a corporation validly existing and in good standing under the laws of the State of Delaware; (ii) has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted; and (iii) is duly qualified and/or licensed to conduct its business, and is in good standing, in each jurisdiction in which the character or location of the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification necessary, except where the failure to be so qualified or licensed would not have a Material Adverse Effect on FADV.
3.2Capacity; Binding Effect. FADV has the requisite corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. The execution, delivery and, assuming the stockholders of FADV and the Independent Committee (as defined below) duly approve of the transactions contemplated by this Agreement as required bySections 6.1(d) and(f), respectively, performance of this Agreement by FADV has been duly authorized and approved by all necessary corporate and stockholder action of FADV. This Agreement has been duly executed and delivered by FADV, and assuming the due execution and delivery of the other Parties
hereto, constitutes its valid and binding agreement, enforceable against it in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency or similar laws and equitable principles relating to or affecting the rights of creditors generally from time to time in effect.
3.3Restrictive Documents. FADV is not subject to, or a party to, any charter, bylaw, mortgage, lien, lease, license, permit, Contract, instrument, law, rule, ordinance, regulation, order, judgment or decree, or any other restriction of any kind or character, which would reasonably be expected to have a material adverse effect on (including any material delay) the ability of FADV to perform its obligations under this Agreement or any Related Agreement to which FADV is a party.
3.4Litigation. There is no action, suit, proceeding at law or in equity, arbitration or administrative or other proceeding by or before (or to the knowledge of FADV any investigation by) any Governmental Entity or other instrumentality or agency, pending, or, to the knowledge of FADV, threatened, against or affecting FADV that would reasonably be expected to have a material adverse effect on (including any material delay) the ability of FADV to perform its obligations under this Agreement or any Related Agreement to which FADV is a party. FADV is not subject to any judgment, order or decree entered in any lawsuit or proceeding which would reasonably be expected to have a material adverse effect on (including any material delay) the ability of FADV to perform its obligations under this Agreement or any Related Agreement to which FADV is a party.
3.5Consents and Approvals; No Violations. Assuming the approval of the stockholders of FADV required bySection 6.1(d), and the filing of the Certificate of Amendment with the Delaware Secretary of State, the execution and delivery of this Agreement by FADV and the consummation of the transactions contemplated hereby by FADV will not (a) violate any provision of its organizational documents, (b) violate any statute, ordinance, rule, regulation, order or decree of any court or any Governmental Entity applicable to FADV, (c) require any filing with, or permit, consent or approval of, or the giving of any notice to, any Governmental Entity having authority over FADV, or (d) result in a violation or breach of, conflict with, constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, payment or acceleration) under, or result in the creation of any Encumbrance upon any of the properties or assets of FADV under, any of the terms, conditions or provisions of any Contract to which FADV is a party, or by which FADV or any of its properties or assets may be bound.
ARTICLE IV.
THE TRANSACTION
4.1Documents To Be Delivered by Parties. FADV and each applicable Contributor will deliver, and each will cause each of its appropriate Affiliates to deliver, as applicable, at Closing the following documents (collectively, and together with all agreements, certificates and documents contemplated by such agreements, the “Related Agreements”):
(a) a Contribution Agreement among First American, FAREISI, Newco and FADV substantially in the form attached hereto asExhibit A (the “First American Contribution Agreement”);
(b) a Contribution Agreement among FARES, Newco and FADV substantially in the form attached hereto asExhibit B (the “FARES Contribution Agreement”);
(c) a Subordinated Promissory Note between First American and FADV substantially in the form attached hereto asExhibit C;
(d) a Sublease Agreement among General Electric Capital Corporation, FARES and FADV substantially in the form attached hereto asExhibit D (the “GE Sublease”);
(e) a Lease Agreement between First American Title Insurance Company and FADV relating to the buildings located at 12385 and 12395 First American Way, Poway, California, 92064, substantially in the form attached hereto asExhibit E (the “Poway Lease”);
(f) an Assignment of Lease Agreement and Consent among FARES, FADV and Opus Northwest, LLC in form and substance reasonably satisfactory to FARES, FADV and Opus Northwest, LLC (the “Beaverton Lease Assignment”), pursuant to which FARES will assign its rights, and FADV will assume FARES’ obligations, under the Lease Agreement, dated as of September 14, 2002, between Opus Northwest, LLC and FARES, relating to the property located at 1500 S.W. Bethany Boulevard, Suite 300, Beaverton, Oregon 97006.
(g) an Assignment of Lease Agreement and Consent among FARES, FADV and MagnaCare LLC in form and substance reasonably satisfactory to FARES, FADV and MagnaCare LLC (the “New York Lease Assignment”), pursuant to which FARES will assign its rights, and FADV will assume FARES’ obligations, under the Lease Agreement, dated as of August 18, 2004, between MagnaCare LLC and FARES d/b/a the CREDCO Division, relating to the property located at 825 East Gate Boulevard, Garden City, New York, 11530.
(h) an Assignment of Lease Agreement and Consent among FARES, FADV and Executive IV, LLC in form and substance reasonably satisfactory to FARES, FADV and Executive IV, LLC (the “XRES Lease Assignment”), pursuant to which FARES will assign its rights, and FADV will assume FARES’ obligations, under the Lease Agreement, dated November 27, 2001, between Executive IV, LLC and CBA Information Services, as amended by the First Amendment to Lease Agreement, as assigned to Experian Affiliate Acquisition, LLC pursuant to that certain Assignment and Assumption of Lease Agreement, dated January 23, 2004, between CBA Information Services and Experian Affiliate Acquisition, LLC and consented to by Executive IV, LLC, and as assigned to FARES pursuant to that certain Assignment and Assumption of Lease Agreement, dated March 30, 2005, between Experian Affiliate Acquisition, LLC and FARES and consented to by Executive IV, LLC;
(i) a Sublease Agreement between First American Title Insurance Company and FADV relating to the portion of the buildings located at 12385 and 12395 First American Way, Poway, California, 92064, used by eAppraiseIT, LLC, substantially in the form attached hereto asExhibit F (the “eAppraiseIT Sublease”);
(j) a Sublease Agreement between First American Title Insurance Company and FADV relating to the portion of the buildings located at 12385 and 12395 First American Way, Poway, California, 92064, used by First American Interactive Group, substantially in the form attached hereto asExhibit G (the “FAIG Sublease”);
(k) an Amended and Restated Services Agreement between First American and FADV substantially in the form attached hereto asExhibit H;
(l) an Outsourcing Agreement between First American and FADV substantially in the form attached hereto asExhibit I;
(m) a Registration Rights Agreement between Experian Information Solutions, Inc. and FADV in form and substance reasonably satisfactory to FARES and FADV;
(n) one or more bills of sale in form and substance reasonably satisfactory to FARES and FADV (including the Independent Committee) (each, a “Bill of Sale”);
(o) one or more assignment and assumption agreements in form and substance reasonably satisfactory to FARES and FADV (including the Independent Committee) as reasonably requested by FADV to more fully assign to FADV the CREDCO Division (each, an “Assignment and Assumption Agreement”); and
(p) one or more assignment of intellectual property agreements relating to the assignment by Contributors of certain intellectual property used in the Business to FADV in form and substance reasonably satisfactory to FARES and FADV (each, an “Assignment of Intellectual Property”).
4.2Closing. The closing of the contribution of the Business, Bar None and the DealerTrack Interest to FADV and the issuance of the Class B Common Stock under this Agreement and the Related Agreements (the “Closing”) shall take place at 10:00 a.m. local time at the offices of First American, 1 First American Way, Santa
Ana, California, 92707, on July 31, 2005, or if later, as soon as practicable after all conditions precedent to the Closing described inSections 6.1,6.2 and6.3 are met or waived, or such other date as First American and FADV (including the Independent Committee) shall mutually agree (the “Closing Date”).
ARTICLE V.
CERTAIN COVENANTS
5.1Conduct of Business Prior to Closing.
(a) Except as otherwise expressly contemplated by this Agreement or the Related Agreements, during the period from the date of this Agreement to the Closing Date, each Contributor shall cause the Business to be conducted only according to the Ordinary Course. Except as otherwise expressly contemplated by this Agreement or the Related Agreements, during the period from the date of this Agreement to the Closing Date, each Contributor shall use commercially reasonable efforts to preserve its business organizations, to keep available the services of its key officers, and to substantially maintain current relationships with material licensors, suppliers, distributors, customers and other third party business relationships;provided,however, that nothing in this sentence shall require any Contributor or its Affiliates to (1) take any action or refrain from taking any action that could cause a breach of any representation or warranty of the Contributors in this Agreement or in any of the Related Agreements, (2) repay any loan agreement or Contract for borrowed money in whole or in part, except as currently required by its terms, (3) amend any Contract to increase the amount payable thereunder or otherwise to be more burdensome to any Contributor or its Affiliates, (4) make any cash payment, provide any guaranty or relinquish any property or contractual rights, or (5) be required to commit to any divestiture transaction, agree to sell or hold separate or agree to license to competitors of such Contributor or its Affiliates, before or after the Closing Date, any of such Contributor’s or its Affiliates’ businesses, product lines, properties or assets (other than the Business pursuant to this Agreement and the Related Agreements), or agree to any changes or restrictions in the operation of such businesses, product lines, properties or assets. Without limiting the immediately preceding sentence, prior to the Closing Date, except as may be first approved in writing by the Chief Executive Officer, Chief Operating Officer or Chief Financial Officer of FADV or as expressly permitted by this Agreement or in the Related Agreements, each Contributor shall, and shall cause each Company to, cause the Business to refrain from:
(i) increasing its Indebtedness;
(ii) canceling or waiving any claim or right of substantial value;
(iii) selling, leasing or otherwise disposing of any material asset or property used by the Business, other than in the Ordinary Course;
(iv) entering into any Contract that is reasonably expected to generate annual revenue in excess of $1,000,000, or amending any Contract that generated revenue in excess of $1,000,000 for the twelve month period ended April 30, 2005;
(v) liquidating or dissolving;
(vi) changing its capital structure;
(vii) entering into or amending any Contract with an Affiliate of any Contributor (or any director or Officer of a Contributor or any of its Affiliates or any “associates” or members of the “immediate family” (as such terms are respectively defined in Rule 12b-2 and Rule 16a-1 promulgated under the Exchange Act) of any such director or Officer, other than Experian Information Solutions, Inc. and its Affiliates) other than on arms-length terms; and
(viii) writing off as uncollectible any notes or accounts receivable of the Business, except write-offs in the Ordinary Course.
(b) Except as otherwise expressly contemplated by this Agreement or the Related Agreements, during the period from the date of this Agreement to the Closing Date, each Contributor shall cause the business of Bar None and the XRES Business to be conducted only according to the Ordinary Course.
5.2Due Diligence.
(a) FADV may, prior to the Closing Date, directly or through its representatives and advisers, review the properties, books and records of the Business and Bar None to the extent FADV deems reasonably necessary to familiarize itself with such properties, books and records, in a manner so as not to interfere with the normal business operation of the Business, Bar None and the Companies. Prior to the Closing Date, each Contributor shall, and shall cause each Company and Bar None, to permit FADV and its representatives to have reasonable access during normal business hours to the business operations, properties, and books and records of the Business and Bar None, and to cause the officers of each Contributor and each Company and Bar None to furnish FADV, subject to compliance by Contributors, Bar None and the Companies with all applicable restrictions imposed by law, rule, regulation or court order and subject to compliance by FADV and its representatives with the restrictions contained in any confidentiality agreement entered into by FADV, Contributors, Bar None or the Companies, the existence of which has been disclosed, with such financial and operating data and other information with respect to the Business and Bar None as FADV shall from time to time reasonably request, in a manner so as not to interfere with the normal business operation of the Business or Bar None.
(b) First American may, prior to the Closing Date, directly or through its representatives and advisers, review the properties, books and records of FADV to the extent First American deems reasonably necessary to familiarize itself with such properties, books and records, in a manner so as not to interfere with the normal business operation of the FADV and its Subsidiaries. Prior to the Closing Date, FADV shall, and shall cause its Subsidiaries to, permit First American and its representatives to have reasonable access during normal business hours to the business operations, properties, and books and records of FADV and its Subsidiaries, and to cause the officers of FADV and its Subsidiaries to furnish First American, subject to compliance by FADV with all applicable restrictions imposed by law, rule, regulation or court order and subject to compliance by Contributors and their representatives with the restrictions contained in any confidentiality agreement entered into by FADV, Contributors or the Companies, the existence of which has been disclosed, with such financial and operating data and other information with respect to FADV and its Subsidiaries as First American shall from time to time reasonably request, in a manner so as not to interfere with the normal business operation of FADV.
(c) In the event of a termination of this Agreement, FADV shall, and shall cause its Subsidiaries and each of their representatives and advisers to, keep confidential any information obtained from Contributors and any Subsidiaries thereof concerning any Contributor and its Subsidiaries and, at the request of any Contributor, shall return to Contributors all copies of any schedules, statements, documents or other written information obtained in connection herewith. In the event of a termination of this Agreement, Contributors shall, and shall cause their Subsidiaries and each of their representatives and advisers to, keep confidential any information obtained from FADV and any Subsidiaries thereof concerning FADV and its Subsidiaries and, at the request of FADV, shall return to FADV all copies of any schedules, statements, documents or other written information obtained in connection herewith. The Confidentiality Agreement between First American and FADV dated as of February 4, 2005 (the “Confidentiality Agreement”) shall remain in full force and effect.
5.3Commercially Reasonable Efforts. Subject toSection 5.8, until such time as this Agreement is terminated pursuant toSection 7.1, FADV and each Contributor shall each cooperate and use its respective commercially reasonable efforts to take, or cause to be taken, all necessary action, and to make, or cause to be made, all filings necessary under applicable laws and regulations to consummate and make effective the Transaction, including its respective commercially reasonable efforts to obtain, prior to the Closing Date, all licenses, permits, consents, approvals, authorizations, qualifications and orders of Governmental Entities as are necessary for consummation of the Transaction and to fulfill the conditions to the Transaction.
5.4Proxy Statement. As soon as practicable following the date of this Agreement, FADV shall prepare and file with the Securities and Exchange Commission (the “SEC”) a preliminary proxy statement and proxy meeting the requirements of Regulation 14A under the Exchange Act (the “Preliminary Proxy Statement”) describing, among other things, the Transaction, and the proposals to be voted on by the stockholders of FADV at the Stockholders Meeting (as defined below), including (a) the approval of this Agreement, the Related Agreements and the Transaction by a majority of shares of Class A Common Stock (calculated without giving effect to beneficial holdings of Common Stock by First American, its Affiliates (including directors and officers of First American and its Affiliates), Donald Robert, and any member of management of FADV) present in person or represented by proxy at the Stockholders Meeting, and by a majority of shares of Common Stock present in person or represented by proxy at the Stockholders Meeting, and (b) the approval of an amendment to FADV’s Certificate of Incorporation substantially in the form ofExhibit J hereto (the “Certificate of Amendment”) by a majority of outstanding shares of Class A Common Stock (calculated without giving effect to beneficial holdings of Common Stock by First American, its Affiliates (including directors and officers of First American and its Affiliates), Donald Robert, and any member of management of FADV), and by a majority of outstanding shares of Common Stock. At the earliest time permitted by Rule 14a-6 of the Exchange Act, FADV shall prepare and file with the SEC a final proxy statement and proxy meeting the requirements of Regulation 14A under the Exchange Act covering the foregoing and, if necessary, including disclosure required by Nasdaq Marketplace Rule 4350(i)(2) (the “Final Proxy Statement”). Final forms of the Preliminary Proxy Statement and the Final Proxy Statement shall be subject to approval by First American, such approval not to be unreasonably withheld, conditioned or delayed. FADV shall use all commercially reasonable efforts to cause the Final Proxy Statement to be mailed as promptly as reasonably practicable. Each Party shall take such action as the other Parties may reasonably request in connection with the preparation and filing of the Preliminary Proxy Statement and the Final Proxy Statement. If at any time prior to the mailing of the Final Proxy Statement any event or information should be discovered by any Party that should be set forth in the Final Proxy Statement, the Party discovering such event or information shall promptly inform the other Parties, and to the extent required by law, FADV will promptly file a revised proxy statement and proxy with the SEC and disseminate such revised proxy statement and proxy to FADV’s stockholders as promptly as practicable.
5.5Authorization. FADV has, or before the Closing Date will have, authorized the issuance and sale pursuant to the Contribution Agreements of 29,073,170 shares of its Class B Common Stock, plus an additional number of shares of its Class B Common Stock sufficient to (a) pay the DealerTrack Earnout (as defined in the First American Contribution Agreement) in full and (b) repay in full the amounts owing under the FADV Note in accordance with the First American Contribution Agreement. FADV has, or before the Closing will have, taken all action required under applicable federal and state laws in connection with the issuance of shares of Class B Common Stock in connection with the Transaction.
5.6Stockholder Approval. Prior to Closing, FADV, acting through its Board of Directors, shall, in accordance with applicable law:
(a) mail a copy of the Final Proxy Statement to each of its stockholders;
(b) promptly and duly call, give notice of, convene and hold a special or annual meeting of its stockholders (the “Stockholders Meeting”) for the purpose of voting upon this Agreement and the Related Agreements, the Certificate of Amendment and the Transaction, and FADV agrees that this Agreement, the Related Agreements, the Certificate of Amendment and the Transaction shall be submitted for approval at the Stockholders Meeting; and
(c) use its commercially reasonable efforts to obtain the stockholder approvals required bySection 6.1(d);provided, that nothing herein shall require any member of the Board of Directors of FADV to take any action that is inconsistent with his or her fiduciary duties under Delaware law.
5.7Notices of Certain Events. Prior to Closing, each Contributor, on the one hand, and FADV, on the other:
(a) may elect at any time to notify the other Parties (i) of any development causing a breach or potential breach of any of its representations and warranties in this Agreement or any Related Agreement to which it is a party, or (ii) if the schedules to any Related Agreement deliverable by such Party are not true and accurate in all material respects; and
(b) shall promptly deliver written notice to the other Parties if it obtains knowledge that (i) the representations and warranties of such other Party or Parties, as the case may be, in this Agreement or the Related Agreements to which it is or they are a party are not true and accurate in all material respects, or (ii) the schedules to any Related Agreement deliverable by such other Party or Parties, as the case may be, are not true and accurate in all material respects.
Notwithstanding the foregoing, unless FADV or any Contributor has the right to terminate this Agreement pursuant toSection 7.1(i),(j),(k) or(l) by reason of any of the foregoing and exercises that right within the period of time provided in such Sections, the notice of the foregoing will be deemed to have amended the disclosure schedules delivered by any Contributor or FADV, respectively, to have qualified the representations and warranties of such Parties in the relevant Articles of the First American Contribution Agreement or the FARES Contribution Agreement, as applicable, and to have cured any misrepresentation or breach of warranty that otherwise might have existed under such Contribution Agreement by reason of the development.
5.8Consents and Further Assurances.
(a) Each Contributor agrees that it will, and it will cause the Companies and Bar None to, use commercially reasonable efforts to obtain the written consent of any other necessary party to the assignment of any Contract or undertaking constituting a part of the Business to be transferred under the Related Documents and, to the extent that any such Contract or undertaking requiring such consent is transferred or assigned pursuant to the terms of the Related Agreements without such consent, each Contributor shall, and shall cause the Companies and Bar None to, cooperate with FADV in any lawful arrangement designed to provide FADV the benefits of such Contract or undertaking;provided,however, that, in order to obtain any such consent, no (a) loan agreement or Contract for borrowed money shall be repaid except as currently required by its terms, in whole or in part, (b) Contract shall be amended to increase the amount payable thereunder or otherwise to be more burdensome to any Contributor or its Affiliates, (c) Contributor or its Affiliates shall be required to make any cash payment, provide any guaranty or relinquish any property or contractual rights and (d) Contributor or its Affiliates shall, and no Contributor or its Affiliates shall be required to, commit to any divestiture transaction, agree to sell or hold separate or agree to license to competitors of such Contributor or its Affiliates, before or after the Closing Date, any of such Contributor’s or its Affiliates’ businesses, product lines, properties or assets, or agree to any changes or restrictions in the operation of such businesses, product lines, properties or assets.
(b) Subject to the proviso in (a) above, on or after the Closing Date and without further consideration, FADV and each Contributor shall from time to time execute and deliver such further instruments of conveyance, assignment and transfer and shall take, or cause to be taken, such other action as any other Party may reasonably request for the more effective conveyance, assignment and transfer to FADV of any part of the Business as contemplated by this Agreement and the Related Agreements, and each shall lend its assistance in the effectuation of the intentions and purposes of this Agreement and the Related Agreements.
5.9Use of Names.
(a) Notwithstanding any other provision of this Agreement and the Related Agreements, no interest in or right to use the names “The First American Corporation,” “First American Real Estate Solutions,” “First American Information Services,” “First American” or any derivation thereof, or the respective logos, names, trademarks, service marks, trade names or any derivatives thereof, are being transferred hereunder or under the Related Agreements.
(b) FADV agrees that it will as promptly as practicable, but in any event within one hundred eighty (180) calendar days following the date of delivery of a written request by First American, cause any of its Subsidiaries to change its corporate name and/or the name under which it does business to remove “First American” and any derivations thereof. FADV further agrees that it will, and will cause its Subsidiaries to, as promptly as practicable, but in any event within one hundred eighty (180) calendar days following the date of delivery of a written request by First American, discontinue the use of “First American” and all logos, names, trademarks, service marks, trade names or any derivatives thereof, and to remove or obliterate them from all signs, packaging stock, letterhead, labels, websites, and other materials used or produced by FADV or its Subsidiaries and Affiliates, except as otherwise permitted by Contributors.
5.10Portal Agreements. From and after the Closing, FADV agrees to perform the obligations of First American, FAREISI, FARES and their respective Affiliates (including the CREDCO Division) with respect to the provision of credit reports and related products and services under the following agreements (each, a “Portal Agreement” and collectively, the “Portal Agreements”):
(a) the Services Agreement, dated as of February 1, 2001, by and between Ellie Mae, Inc. (“Ellie Mae”) and First American, as amended by Amendment No. 1 to Services Agreement, dated as of October 12, 2001, by and between Ellie Mae and First American and by Amendment No. 2 to Services Agreement, dated as of June 10, 2002 by and between Ellie Mae and First American; and
(b) the Retained Portal Agreements (as defined in the FARES Contribution Agreement);
as each such Portal Agreement existed on the date hereof. FADV shall fulfill such obligations under the Portal Agreements in the same or better manner and with the same or better quality as First American, FAREISI, FARES and their respective Affiliates (including the CREDCO Division) were fulfilling their respective obligations thereunder prior to the Closing. FADV’s obligations under each Portal Agreement pursuant to thisSection 5.10 shall expire upon the expiration of the term of such Portal Agreement, as such term was specified in the relevant Portal Agreement on the date hereof. To the extent First American, FAREISI, FARES or one of their respective Affiliates receives payment for services rendered by FADV pursuant to thisSection 5.10, First American, FARESISI or FARES shall, or shall cause such Affiliates to, remit to FADV such payment within five (5) Business Days of receipt thereof.
5.11Bar None. Within thirty (30) days of the date hereof, First American shall contribute to Bar None an amount in cash equal to $1,500,000. Prior to Closing, First American shall not permit Bar None to pay any cash dividends or other distributions to its stockholders. On or prior to Closing, First American shall assume the obligations of Bar None under the Promissory Note, dated May 25, 2005, in the original principal amount of $1,000,000, made by Bar None in favor of Francis A. Tarkenton.
ARTICLE VI.
CONDITIONS PRECEDENT
6.1Conditions of all Parties. The obligation of each of the Parties to consummate the Transaction is subject to the satisfaction or waiver by such Party (including, in the case of FADV, the Independent Committee) on or before the Closing, of the following conditions precedent:
(a)Injunction. No preliminary or permanent injunction or other order shall have been issued by any court or by any Governmental Entity which prohibits or restrains the consummation of the Transaction and which is in effect on the Closing Date.
(b)Statutes; Governmental Approvals. No statute, rule, regulation, executive order, decree or order of any kind shall have been enacted, entered, promulgated or enforced by any court or other Governmental Entity which prohibits the consummation of the Transaction; all governmental and other consents and approvals necessary to permit the consummation of the Transaction shall have been received; any waiting period (and any extension thereof) in connection with the foregoing shall have expired or been terminated.
(c)No Litigation. As of the Closing Date, no action or proceedings shall have been threatened or instituted before a court or other Governmental Entity or by any public authority challenging the legality of the Transaction, or restraining or prohibiting the consummation of the Transaction.
(d)Stockholders Meeting; Approval of FADV’s Stockholders. The Stockholders Meeting shall have occurred and (i) this Agreement, the Related Agreements and the Transaction shall have been duly approved by a majority of shares of Class A Common Stock (calculated without giving effect to beneficial holdings of Common Stock by First American, its Affiliates (including directors and officers of First American and its Affiliates), Donald Robert, and any member of management of FADV) present in person or represented by proxy at the Stockholders Meeting, and by a majority of shares of Common Stock present in person or represented by proxy at the Stockholders Meeting, and (ii) the Certificate Amendment shall have been duly approved by a majority of outstanding shares of Class A Common Stock (calculated without giving effect to beneficial holdings of Common Stock by First American, its Affiliates (including directors and officers of First American and its Affiliates), Donald Robert, and any member of management of FADV), and by a majority of outstanding shares of Common Stock or such other vote as may be required under applicable law and FADV’s certificate of incorporation and bylaws, and the Stockholders Meeting and such stockholder approvals shall have been obtained in accordance with applicable law and FADV’s certificate of incorporation and bylaws.
(e)Certificate of Amendment. The Certificate of Amendment shall have been filed with the Delaware Secretary of State and all proceedings necessary therefor shall have been taken by FADV and its directors and stockholders.
(f)FADV Board and Committee Approval. In addition to the approval of the FADV’s Board of Directors required under Delaware law, a committee of independent directors appointed by FADV’s Board of Directors meeting independence requirements of Nasdaq Marketplace Rule 4200(15) (the “Independent Committee”) shall have, at a meeting duly called and held in accordance with FADV’s certificate of incorporation and bylaws, acting with a quorum throughout, (i) approved this Agreement, the Related Agreements and the Transaction for purposes of Nasdaq Marketplace Rule 4350(h), (ii) determined that the Transaction, taken as a whole, is fair to and in the best interests of the stockholders of FADV, and (iii) resolved to recommend that the Board of Directors of FADV approve this Agreement, the Related Agreements and the Transaction, including the adoption and filing of the Certificate of Amendment. In addition to the foregoing, the Board of Directors of FADV shall have resolved to approve, and to recommend that the Stockholders of FADV approve, this Agreement, the Related Agreements and the Transaction, including the adoption and filing of the Certificate of Amendment.
(g)Contributor Board Approval. First American’s Board of Directors shall have approved of this Agreement, the Transaction and each Related Agreement.
(h)Note. The original FADV Note shall have been delivered to Newco and marked “Cancelled.”
(i)Consent. Experian Information Solutions, Inc. shall have provided to FARES a written consent to FARES’ participation in the Transaction in form and substance reasonably satisfactory to First American and FADV.
6.2Conditions of FADV. The obligation of the FADV to consummate the Transaction is additionally subject to the satisfaction or waiver by FADV (including the Independent Committee) on or before the Closing Date of the following conditions precedent:
(a)Truth of Representations and Warranties. The representations and warranties of each Contributor contained herein and in the Related Agreements to which such Contributor is a party shall be true and accurate in all material respects, in each case at and as of the date of this Agreement or such Related Agreement, as applicable, and as of the Closing Date (except to the extent a representation or warranty speaks specifically as of another date (in which case such representation and warranty shall be true and accurate in all material respects as of such date) or as expressly provided for in this Agreement or a Related Agreement), and an officer of each Contributor shall have delivered to FADV a certificate dated the Closing Date to such effect.
(b)Performance of Agreements. All of the agreements of each Contributor to be performed at or prior to the Closing pursuant to this Agreement and the Related Agreements to which such Contributor is a party shall have been duly performed in all material respects, and an officer of each Contributor shall have delivered to FADV a certificate dated the Closing Date to such effect.
(c)Good Standing and Charter Documents.
(i) First American shall have delivered, or caused to be delivered, to FADV:
(A) a copy of the articles or certificate of incorporation (or other charter document) of First American, NA CREDCO, FC CREDCO, CMSI, Credit Services, Teletrack, Teletrack Canada and Bar None, including all amendments thereto, certified by the Secretary of State or other appropriate official of the jurisdiction of organization of each such entity as being true and correct and in effect as of a date not more than ten (10) days prior to the Closing Date;
(B) a copy of the bylaws, including all amendments thereto, of First American, NA CREDCO, FC CREDCO, CMSI, Credit Services, Teletrack, Teletrack Canada and Bar None, certified by First American’s Secretary or Assistant Secretary as being true and correct and in effect on the Closing Date;
(C) a copy of the articles of organization of Credit Report+, certified by the Maryland State Department of Assessments and Taxation as being true and correct and in effect as of a date not more than ten (10) days prior to the Closing Date, and a copy of the operating agreement of Credit Report+, including all amendments thereto, certified by First American’s Secretary or Assistant Secretary as being true and correct and in effect on the Closing Date;
(D) a copy of the certificate of formation of Newco certified by the Secretary of State of Delaware as being true and correct and in effect as of a date not more than ten (10) days prior to the Closing Date, and a copy of the operating agreement of Newco, including all amendments thereto, certified by First American’s Secretary or Assistant Secretary as being true and correct and in effect on the Closing Date; and
(E) a certificate from the Secretary of State or other appropriate official of the jurisdiction of organization to the effect that First American, Newco, NA CREDCO, FC CREDCO, CMSI, Credit Services, Teletrack, Teletrack Canada, Credit Report+ and Bar None are each in good standing or validly existing in its jurisdiction of organization as of a date not more than ten (10) days prior to the Closing Date.
(ii) FAREISI shall have delivered, or caused to be delivered, to FADV:
(A) a copy of the articles of incorporation, including all amendments thereto, of FAREISI and Membership Services, certified by the Secretary of State of California as being true and correct and in effect as of a date not more than ten (10) days prior to the Closing Date;
(B) a copy of the bylaws, including all amendments thereto, of FAREISI and Membership Services, certified by FAREISI’s Secretary or Assistant Secretary as being true and correct and in effect on the Closing Date;
(C) a copy of the certificate of organization of CIG, certified by the Secretary of State of Delaware as being true and correct and in effect as of a date not more than ten (10) days prior to the Closing Date, and a copy of the operating agreement of CIG, including all amendments thereto, certified by FAREISI’s Secretary or Assistant Secretary as being true and correct and in effect on the Closing Date;
(D) certificates from the Secretary of State of Delaware to the effect that CIG and DealerTrack are each in good standing or validly existing in such State as of a date not more than ten (10) days prior to the Closing Date; and
(E) certificates from the Secretary of State of California to the effect that FAREISI and Membership Services are each in good standing or validly existing in such State as of a date not more than ten (10) days prior to the Closing Date.
(iii) FARES shall have delivered, or cause to be delivered, to FADV:
(A) a copy of the articles of organization of FARES, certified by the Secretary of State of California as being true and correct and in effect as of a date not more than ten (10) days prior to the Closing Date, and a copy of the operating agreement of FARES, including all amendments thereto, certified by FARES’ Secretary or Assistant Secretary as being true and correct and in effect on the Closing Date;
(B) a copy of the certificate of incorporation of PR CREDCO, including all amendments thereto, certified by the Secretary of State of Delaware as being true and correct and in effect as of a date not more than ten (10) days prior to the Closing Date;
(C) a copy of the bylaws, including all amendments thereto, of PR CREDCO, certified by FARES’ Secretary or Assistant Secretary as being true and correct and in effect on the Closing Date; and
(D) a certificate from the Secretary of State or other appropriate official of the jurisdiction of organization to the effect that FARES, and PR CREDCO is each is in good standing or validly existing in its jurisdiction of organization as of a date not more than ten (10) days prior to the Closing Date.
(d)No Material Adverse Effect. As of the Closing Date there shall have been no Material Adverse Effect on the Business, and there shall not have occurred any change or development that would be reasonably likely to have a Material Adverse Effect on the Business.
(e)Certificates. Contributors shall have delivered or caused to have been delivered to FADV the certificates evidencing the following interests, properly endorsed in blank for transfer or accompanied by duly executed stock powers (or in lieu thereof an affidavit of lost certificate and an indemnification agreement reasonably acceptable to FADV) or, if any of the following interests are not certificated, Contributors shall have caused the transfers thereof to have been duly recorded on the books and records of the applicable issuer:
(i) all of the issued and outstanding shares of Common Stock of NA CREDCO;
(ii) all of the issued and outstanding shares of Common Stock of CMSI;
(iii) all of the issued and outstanding shares of Common Stock of Teletrack;
(iv) all of the issued and outstanding shares of Common Stock of Membership Services;
(v) all of the outstanding membership interests of CIG;
(vi) all of the issued and outstanding shares of Common Stock of PR CREDCO; and
(vii) all of the issued and outstanding shares of Common Stock of Bar None.
(f)Consents. Bank of America, N.A. shall have provided to FADV a written consent to the Transaction. Each third party with a Contract relating to the Business set forth onSchedule 6.2(f) shall have provided to FADV a written consent to the assignment of the applicable Contract to FADV as contemplated by the Transaction if assignment is required by the terms of such Contract.
(g)Proceedings. As of the Closing Date, all corporate proceedings of Contributors to be taken in connection with the transactions contemplated by this Agreement, the Related Agreements and all documents incident hereto and thereto shall be reasonably satisfactory in form and substance to FADV, and FADV shall have received copies of all such documents and other evidences as it may reasonably request in order to establish the consummation of such transactions and the taking of all corporate proceedings in connection therewith.
(h)Related Agreements. Each of the Related Agreements shall have been duly executed and delivered by the parties thereto (other than the FADV).
(i)Corporate Record Books; DealerTrack Interest. Contributors shall have delivered or caused to have been be delivered to FADV the original corporate record books and stock or membership interest record books of the Companies and Bar None, and the certificates evidencing the DealerTrack Interest and the outstanding capital stock or equity interests, as applicable, held by each Company that owns one or more Subsidiaries, including all of the issued and outstanding shares of Common Stock of FC CREDCO, all of the issued and outstanding shares of Common Stock of Credit Services, all of the issued and outstanding shares of Teletrack Canada, and all of the outstanding membership interests of Credit Report+ (or in lieu thereof an affidavit of lost certificate and an indemnification agreement reasonably acceptable to FADV).
(j)Resignation Letters. Contributors shall have delivered to FADV the resignation letters of all members of the boards of directors and management committees of the Companies and Bar None and/or any officer of the Companies and Bar None as FADV shall have requested at or prior to the Closing, together with an acknowledgment that they have no prior or present claim whatsoever against the Company or Companies for which they served or Bar None, as applicable, in connection with so acting as directors and/or officers.
(k)Opinion of FADV Financial Advisor. The Independent Committee shall have been advised in writing by its financial advisor, Morgan Stanley & Co., that in such advisor’s opinion, as of May 23, 2005, the price to be paid for contribution of the Business and the DealerTrack Interest under the Related Agreements is fair to FADV from a financial point of view.
(l)Audited Financial Statements. First American shall have delivered, or caused to have been delivered, to FADV the audited and unaudited financial statements of the Business required to be included in FADV’s filings with the SEC (the “Audited Financial Statements”), including the Preliminary Proxy Statement, and such Audited Financial Statements shall be consistent in all material respects with all of the Financial Statements (as defined in each Contribution Agreement) considered as a whole.
6.3Conditions of Contributors. The obligations of each Contributor to consummate the Transaction are additionally subject to the satisfaction or waiver on or before the Closing Date of the following conditions precedent:
(a)Truth of Representations and Warranties. The representations and warranties of FADV contained herein and in the Related Agreements to which it is a party shall be true and accurate in all material respects, in each case at and as of the date of this Agreement or such Related Agreement, as applicable, and as of the Closing Date (except to the extent a representation or warranty speaks specifically as of another date (in which case such representation and warranty shall be true and accurate in all material respects as of such date) or as expressly provided for in this Agreement or a Related Agreement), and an officer of FADV shall have delivered to Contributors a certificate dated the Closing Date to such effect.
(b)Performance of Agreements. All of the agreements of FADV to be performed at or prior to the Closing pursuant to this Agreement and the Related Agreements to which FADV is a party shall have been duly performed in all material respects, and an officer of FADV shall have delivered to Contributors a certificate dated the Closing Date to such effect.
(c)Good Standing and Charter Documents. FADV shall have delivered, or caused to be delivered, to Contributors (i) a copy of the certificate of incorporation of FADV, including all amendments thereto, certified by the Secretary of State of Delaware as being true and correct and in effect as of a date not more than ten (10) days prior to the Closing Date; (ii) a copy of the bylaws, including all amendments thereto, of FADV, certified by FADV’s Secretary or Assistant Secretary as being true and correct and in effect on the Closing Date; and (iii) a certificate from the Secretary of State of Delaware to the effect that FADV is in good standing or validly existing in Delaware as of a date not more than ten (10) days prior to the Closing Date.
(d)No Material Adverse Effect. As of the Closing Date there shall have been no Material Adverse Effect on FADV, and there shall not have occurred any change or development that would be reasonably likely to have a Material Adverse Effect on FADV.
(e)Class B Common Stock Certificates. FADV shall have delivered or caused to have been delivered to Newco an aggregate total of 30,048,780 shares of Class B Common Stock.
(f)Notice. FADV shall have timely delivered to the Nasdaq National Market the notice required by Nasdaq Marketplace Rule 4310(c)(17)(D).
(g)Proceedings. As of the Closing Date, all corporate proceedings of FADV to be taken in connection with the transactions contemplated by this Agreement, the Related Agreements and all documents incident hereto and thereto shall be reasonably satisfactory in form and substance to Contributors, and Contributors shall have received copies of all such documents and other evidences as they may reasonably request in order to establish the consummation of such transactions and the taking of all corporate proceedings in connection therewith.
(h)Related Agreements. The Related Agreements to which FADV is a party shall have been duly executed and delivered by the parties thereto (other than Contributors).
(i)Standstill Agreement. FADV shall have delivered to Contributors a written waiver of FADV’s rights under the Standstill Agreement, dated as of June 5, 2003, between First American and FADV (the “Standstill Agreement”), with respect to the Transaction, and FADV shall have delivered to Contributors the written approval of the Transaction by a majority of the Disinterested Directors (as defined in the Standstill Agreement).
(j)Opinion of First American Financial Advisor. First American shall have been advised in writing by its financial advisor, Lehman Brothers, that in such advisor’s opinion, as of May 25, 2005, the price to be received for contribution of the Business and the DealerTrack Interest under the Related Agreements is fair to Contributors from a financial point of view.
ARTICLE VII.
TERMINATION
7.1Events of Termination. This Agreement may be terminated in whole, but not in part, as follows:
(a) at any time by mutual written agreement of the Parties;
(b) by FADV, by written notice to First American if the conditions set forth inSections 6.1 and6.2 hereof shall not have been complied with or performed on or prior to the one hundred twentieth (120th) calendar day from the date hereof (or such later date as the Parties may have agreed to in writing) in any material respect and FADV shall not have materially breached any of its representations, warranties, covenants or agreements contained herein;
(c) by First American, by written notice to FADV if the conditions set forth inSections 6.1 and6.3 hereof shall not have been complied with or performed on or prior to the one hundred twentieth (120th) calendar day from the date hereof (or such later date as the Parties may have agreed to in writing) in any material respect and no Contributor shall have materially breached any of its representations, warranties, covenants or agreements contained herein;
(d) by First American or FADV, by written notice to the other, if the Board of Directors of FADV or the Independent Committee shall have withdrawn or adversely modified its approval or recommendation of the Transaction;
(e) by FADV or First American, by written notice to the other Parties, if a court of competent jurisdiction or other Governmental Entity shall have issued a final, non-appealable order, decree or ruling, or taken any other action, having the effect of permanently restraining, enjoining or otherwise prohibiting the Transaction;
(f) by either First American or FADV, by written notice to the other, if at the Stockholders Meeting (including any adjournment or postponement thereof), the requisite vote of the stockholders of FADV in favor of this Agreement, the Related Agreements and the Transaction, including approval of the Certificate of Amendment, shall not have been obtained as required bySection 6.1(d);
(g) by either First American or FADV, by written notice to the other, if Morgan Stanley & Co., FADV’s financial advisor, withdraws its opinion referred to inSection 6.2(k) or otherwise notifies the Board of Directors of FADV that it may no longer rely on such opinion;
(h) by either First American or FADV, by written notice to the other, if Lehman Brothers, First American’s financial advisor, withdraws its opinion referred to inSection 6.3(j) or otherwise notifies the Board of Directors of First American that it may no longer rely on such opinion;
(i) by FADV by written notice to First American delivered prior to the Closing, if FADV reasonably determines that the developments set forth in any notice delivered by Contributors underSection 5.7, together with any developments set forth in any other notice or notices delivered by Contributors underSection 5.7, will result in a material breach of any representation or warranty of First American or FAREISI contained in the First American Contribution Agreement;
(j) by FADV by written notice to First American delivered prior to the Closing, if FADV reasonably determines that the developments set forth in any notice delivered by Contributors underSection 5.7, together with any developments set forth in any other notice or notices delivered by Contributors underSection 5.7, will result in a material breach of any representation or warranty of FARES contained in the FARES Contribution Agreement;
(k) by First American by written notice to FADV delivered prior to the Closing, if First American reasonably determines that the developments set forth in any notice delivered by FADV underSection 5.7, together with any developments set forth in any other notice or notices delivered by FADV underSection 5.7, will result in a material breach of any representation or warranty of FADV contained in the First American Contribution Agreement;
(l) by First American by written notice to FADV delivered prior to the Closing, if First American reasonably determines that the developments set forth in any notice delivered by FADV underSection 5.7, together with any developments set forth in any other notice or notices delivered by FADV underSection 5.7, will result in a material breach of any representation or warranty of FADV contained in the FARES Contribution Agreement; or
(m) in whole and not in part by FADV, by written notice to First American, if, as a condition to receiving the approval of the Transaction by any Governmental Entity, FADV or any of its Subsidiaries or Affiliates shall be required to, or required to agree to, (i) divest, sell or hold separate or agree to license to its competitors, before or after the Closing Date, any of FADV’s, its Subsidiaries’ or Affiliates’, the Business’ or Bar None’s businesses, product lines, properties or assets, (ii) make any material changes or accept material restrictions in the operation of such businesses, product lines, properties or assets or (iii) make any changes or accept any restrictions in any of FADV’s, its Subsidiaries’ or Affiliates’, the Business’ or Bar None’s businesses, product lines, properties, assets, or to this Agreement, the Related Agreements or the Transaction.
7.2Effect of Termination. In the event that this Agreement shall be terminated pursuant toSection 7.1, all further obligations of the Parties under this Agreement (other than pursuant toSections 5.2(c) (Confidentiality),9.2 (Expenses) and9.3 (Confidentiality), which shall continue in full force and effect) shall terminate without further liability or obligation of any Party to any other Party hereunder;provided,however, that no Party shall be released from liability hereunder if this Agreement is terminated and the Transaction abandoned by reason of (a) willful failure of such Party to have performed its obligations hereunder and (b) any knowing misrepresentation made by such Party of any matter set forth herein.
ARTICLE VIII.
NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
8.1General. Except for the covenants and agreements inSection 5.1 and the covenants and agreements which, by their express terms, are to be performed after the Closing Date, none of the representations, warranties, covenants and agreements of the Parties in this Agreement shall survive the Closing, and thereafter no Party and no Subsidiary, officer, director, member, manager or employee of any such Party, shall have any liability under this Agreement with respect to any such representation, warranty, covenant or agreement except for liabilities arising from intentional fraud, willful (tortious or illegal) misconduct or criminal acts.
ARTICLE IX.
MISCELLANEOUS
9.1Knowledge. Where any representation or warranty contained in this Agreement is expressly qualified by reference to the knowledge of a Person, the Person making such representation or warranty confirms that the senior executive officers of such Person have made a reasonable inquiry of the managers reporting to them as to the matters that are the subject of such representations and warranties.
9.2Expenses. Except as expressly provided herein, each Party shall bear its own (a) costs incurred as a result of the Transaction, including payments to third parties, if any, to obtain their consent to such transfer and (b) professional fees and related costs and expenses (including fees, costs and expenses of accountants, attorneys, benefits specialists, investment banks, financial advisors, tax advisors and appraisers) incurred by it in connection with the preparation, execution and delivery of this Agreement and the Related Agreements and the Transaction.
9.3Publicity; Confidentiality. Except as otherwise required by law, neither First American (and its Affiliates) nor FADV (and its Affiliates) shall issue any press release or make any other public statement, in each case relating to, connected with or arising out of this Agreement or the Related Agreements or the matters contained herein or therein, without obtaining the prior written consent of the other to the contents and the manner of presentation and publication thereof, which consent shall not be unreasonably or untimely withheld, delayed or conditioned;provided,however, that either First American or FADV may, without the prior written consent of the other, issue any such press release or other public statement as may, upon the advice of counsel, be required by law or the rules or regulations of the New York Stock Exchange or the Nasdaq National Market, as applicable, if it has used all reasonable efforts to consult with the other.
9.4Governing Law; Jurisdiction.
(a) The interpretation and construction of this Agreement, and all matters relating hereto, shall be governed by the laws of the State of New York (exclusive of conflict of laws principles) applicable to agreements executed and to be performed solely within such State.
(b) Each of the Parties hereby irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of any New York state court sitting in the borough of Manhattan, New York, or Federal court of the United States of America in the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, the Related Agreements or the agreements delivered in connection herewith or therewith or the Transaction or for recognition or enforcement of any judgment relating thereto, and each of the Parties hereby irrevocably and unconditionally (i) agrees not to commence any such action or proceeding except in such courts, (ii) agrees that any claim in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by law, in such Federal court, (iii) waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any such action or proceeding in any such New York State or Federal court and (iv) waives, to the fullest extent
permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such New York State or Federal court. Each of the Parties agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.
(c) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT OR THE RELATED AGREEMENTS IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE RELATED AGREEMENTS AND ANY OF THE AGREEMENTS DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE EITHER OF SUCH WAIVERS, (ii) IT UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF SUCH WAIVERS, (iii) IT MAKES SUCH WAIVERS VOLUNTARILY AND (iv) IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.4.
9.5Notices. Any notice or other communication required or permitted under this Agreement shall be sufficiently given if delivered in person or sent by facsimile or by registered or certified mail, postage prepaid, addressed as follows:
or such other address or number as shall be furnished in writing by any such Party. Except for a notice of a change of address, which shall be effective only upon receipt thereof, all such notices, requests, demands, waivers and communications properly addressed shall be effective: (i) if sent by U.S. mail, three (3) Business Days after deposit in the U.S. mail, postage prepaid; (ii) if sent by FedEx or other overnight delivery service, one (1) Business Day after delivery to such service; (iii) if sent by personal courier, upon receipt; and (iv) if sent by facsimile, upon receipt.
9.6Parties in Interest. This Agreement may not be transferred, assigned, pledged or hypothecated by any Party hereto, other than by operation of law, except that FADV may assign any of its rights and benefits (but not its obligations) hereunder to any of its wholly-owned subsidiaries. This Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective successors and permitted assigns.
9.7Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one instrument.
9.8Entire Agreement. This Agreement, including the Related Agreements, the Confidentiality Agreement and the other documents referred to herein and therein, and in the exhibits and schedules thereto which form a part thereof, contains the entire understanding of the Parties with respect to the subject matter contained herein and therein. This Agreement, including the Related Agreements, the Confidentiality Agreement and the other documents referred to herein and therein, supersedes all prior oral and written agreements and understandings between the Parties with respect to such subject matter.
9.9Amendments. This Agreement may not be amended or modified orally, but only by an agreement in writing signed by the Parties and consented to by the Independent Committee;provided that non-substantive changes to the Exhibits attached hereto may be made by the Parties without the consent of the Independent Committee.
9.10Severability. If any term, provision, agreement, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, agreements, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any Party. Upon such a determination, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in a reasonably acceptable manner in order that the transactions contemplated hereby may be consummated as originally contemplated to the fullest extent possible.
9.11Extension; Waiver. At any time prior to the Closing, the Parties may, to the extent legally allowed, but shall not be obligated to, (a) extend the time for performance of any of the obligations or other acts of the other Parties, (b) waive any inaccuracies in the representations and warranties of the other Parties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions of the other Parties contained herein;provided that, except as otherwise permitted by this Agreement, any extension or waiver granted by FADV shall require the consent of the Independent Committee to be effective. Any agreement on the part of a Party to any such extension or waiver shall be valid only if and to the extent set forth in a written instrument signed by such Party.
9.12Third Party Beneficiaries. Each Party hereto intends that this Agreement shall not benefit or create any right or cause of action in or on behalf of any Person other than the Parties.
9.13Consent. FADV hereby consents to First American’s assignment of the FADV Note to Newco.
* * *
IN WITNESS WHEREOF, each Party has caused its name to be hereunto subscribed by its duly authorized signatory as of the day and year first above written.
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-Signature Page-
Master Transfer Agreement
Annex B
CONTRIBUTION AGREEMENT
among
THE FIRST AMERICAN CORPORATION,
FIRST AMERICAN REAL ESTATE INFORMATION SERVICES, INC.,
FADV HOLDINGS LLC,
and
FIRST ADVANTAGE CORPORATION
Dated as of [ ], 2005
TABLE OF CONTENTS1
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Note: Pursuant to Item 601(b)(2) of Regulation S-K, schedules containing disclosure of certain materials and exceptions to the representations and warranties have been omitted. First Advantage will provide a copy of such schedules supplementally to the SEC upon request. The description of the schedules are included only for purposes of Item 601(b)(2) of Regulation S-K.
CONTRIBUTION AGREEMENT
This CONTRIBUTION AGREEMENT (as the same may be amended, modified and supplemented from time to time, this “Agreement”) is entered into as of [ ], 2005 by and among THE FIRST AMERICAN CORPORATION, a California corporation (“First American”); FIRST AMERICAN REAL ESTATE INFORMATION SERVICES, INC., a California corporation (“FAREISI”); FADV HOLDINGS LLC, a Delaware limited liability company (“Newco”); and FIRST ADVANTAGE CORPORATION, a Delaware corporation (“FADV”; First American, FAREISI, Newco and FADV are each a “Party” and are collectively the “Parties”).
W I T N E S S E T H :
WHEREAS, Newco is the beneficial owner of (a) all of the issued and outstanding (i) capital stock of North American CREDCO, Inc., a Delaware corporation (“NA CREDCO”); First Canadian CREDCO, Inc., an Ontario corporation (“FC CREDCO”); First American Credit Management Solutions, Inc., a Delaware corporation (“CMSI”); CMSI Credit Services, Inc., a Maryland corporation (“Credit Services”); Teletrack, Inc., a Georgia corporation (“Teletrack”); and Teletrack Canada, Inc., an Ontario corporation (“Teletrack Canada”); (ii) membership interests of CreditReportPlus, LLC, a Maryland limited liability company (“Credit Report+”); and (iii) capital stock of Bar None, Inc., a Delaware corporation (“Bar None”); and (b) 4,071,618 shares of Series A-2 Preferred Stock of DealerTrack Holdings, Inc., a Delaware corporation (“DealerTrack”), and 1,357,206 shares of Series C-3 Preferred Stock of DealerTrack (collectively, the “DealerTrack Interest”);
WHEREAS, Newco is the record owner of all of the issued and outstanding (a) capital stock of First American Membership Services, Inc., a California corporation (“Membership Services”); and (b) membership interests of CIG Investments, LLC, a Delaware limited liability company (“CIG” and collectively with the companies referred to in the above recitals (other than DealerTrack and the DealerTrack Interest), the “FACO Business”);
WHEREAS, First American, FAREISI, First American Real Estate Solutions, LLC, Newco and FADV are parties to that certain Amended and Restated Master Transfer Agreement, dated as of June 22, 2005 (the “Master Transfer Agreement”), pursuant to which, among other things, First American, FAREISI, Newco and FADV shall have entered into this Agreement as a condition precedent to closing of the transactions contemplated by the Master Transfer Agreement; and
WHEREAS, First American, Newco and FAREISI (each, a “Contributor” and collectively, “Contributors”) desire to contribute or cause the contribution, and FADV desires to accept the contribution, of the FACO Business, Bar None and the DealerTrack Interest, pursuant to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants, representations, warranties and agreements herein contained, the Parties agree as follows:
ARTICLE I.
DEFINITIONS AND INTERPRETATIONS
1.1Defined Terms. Capitalized terms used in this Agreement but not defined herein shall have the meanings assigned in the Master Transfer Agreement. In this Agreement the following words and expressions shall have the following meanings (such meaning to be equally applicable to both the singular and plural forms of the terms defined):
“ 24/7” has the meaning provided inSection 3.12(k).
“Accredited Investor” has the meaning set forth in Regulation D promulgated under the Securities Act of 1933, as amended.
“Acquisition Agreement” and “Acquisition Agreements” have the meanings provided inSection 7.3(a).
“Affiliate” means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with, such Person. For purposes of this definition, “control” (including, with correlative meanings, the terms “controlled by” and “under common control with”), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by Contract or otherwise;provided that FADV and its Subsidiaries shall not be deemed to be Affiliates of Contributors for purposes of this Agreement, and Contributors and their Subsidiaries shall not be deemed to be Affiliates of FADV for purposes of this Agreement.
“Agreed Claims” has the meaning provided inSection 8.3(d).
“Agreement” has the meaning provided in the introductory paragraph.
“Balance Sheet Date” means March 31, 2005.
“Balance Sheet” means the unaudited pro forma balance sheet of First American’s Credit Information Group for the quarter ended on the Balance Sheet Date.
“Bar None” has the meaning provided in the first recital.
“Business Day” means any day, other than a Saturday, Sunday or other day on which banks located in Los Angeles, California or St. Petersburg, Florida are authorized or required by law to close.
“Certificate” has the meaning provided inSection 8.3(a).
“CIG” has the meaning provided in the second recital.
“Class A Common Stock” means FADV’s Class A common stock, par value $0.001 per share.
“Class B Common Stock” means FADV’s Class B common stock, par value $0.001 per share.
“CMSI” has the meaning provided in the first recital.
“Code” means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and the rulings issued thereunder.
“Common Stock” means the Class A Common Stock and the Class B Common Stock.
“Company” and “Companies” means, as the context requires, any or all of NA CREDCO; FC CREDCO; CMSI; Credit Services; Teletrack; Teletrack Canada; Credit Report+; Membership Services; and CIG.
“Company Intellectual Property” means all Intellectual Property owned by a Company and/or any Subsidiary thereof or used in the business of a Company and/or any Subsidiary thereof.
“Company Permitted Liens” has the meaning provided inSection 3.5.
“Contracts” means any Contract, agreement, understanding, note, bond, mortgage, indenture, guarantee, license, franchise, commitment, lease or instrument, whether oral or written, including all amendments and supplements thereto and restatements thereof.
“Contributor” and “Contributors” have the meanings provided in the fourth recital.
“Contributor Indemnified Party” has the meaning provided inSection 8.2(b).
“Credit Report+” has the meaning provided in the first recital.
“Credit Services” has the meaning provided in the first recital.
“DealerTrack” has the meaning provided in the first recital.
“DealerTrack Earnout” has the meaning provided inSection 6.3.
“DealerTrack Excess Value” has the meaning provided inSection 6.3(a).
“DealerTrack Interest” has the meaning provided in the first recital.
“Distributions” has the meaning provided inSection 7.2.
“Encumbrances” means all liens, security interests, options, rights of first refusal, claims, easements, mortgages, charges, indentures, deeds of trust, rights of way, restrictions on the use of real property, encroachments, licenses to third parties, leases to third parties, security agreements and any other encumbrances and other restrictions or limitations on use or irregularities in title thereto.
“Entity” means any Person that is not a natural person.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“FACO Business” has the meaning provided in the second recital.
“FADV” has the meaning provided in the introductory paragraph.
“FADV Financial Statements” has the meaning provided inSection 5.4.
“FADV Indemnified Party” has the meaning provided inSection 8.2(a).
“FADV Note” has the meaning provided inSection 6.2(b).
“FADV SEC Reports” has the meaning provided inSection 5.4.
“FAREISI” has the meaning provided in the introductory paragraph.
“FARES Contribution Agreement” means the Contribution Agreement, dated as of the date hereof, among First American Real Estate Solutions, LLC, Newco and FADV.
“FC CREDCO” has the meaning provided in the first recital.
“First American” has the meaning provided in the introductory paragraph.
“Financial Statements” means the unaudited balance sheet and income statement of First American’s Credit Information Group for the years ended December 31, 2002, 2003 and 2004, and the Balance Sheet and related income statement for the three months ended on the Balance Sheet Date.
“GAAP” means United States generally accepted accounting principles applied on a consistent basis.
“Governmental Entity” means any instrumentality, subdivision, court, administrative agency, commission, official or other authority of the United States or any other country or any state, province, prefect, municipality, locality or other government or political subdivision thereof, or any quasi-governmental or private body exercising any regulatory, taxing, importing or other governmental or quasi-governmental authority.
“Indebtedness” of any Person shall mean and include (a) indebtedness for borrowed money or indebtedness issued or incurred in substitution or exchange for indebtedness for borrowed money, (b) amounts owing as deferred purchase price for property or services, including all stockholder notes and “earn-out” payments, (c) indebtedness evidenced by any note, bond, debenture, mortgage or other debt instrument or debt security, (d) commitments or obligations by which such Person assures a creditor against loss (including contingent reimbursement obligations with respect to letters of credit), (e) indebtedness secured by an Encumbrance on assets or properties of such Person, (f) obligations under any interest rate, currency or other hedging agreement or (g) guarantees or other contingent liabilities (including so-called take-or-pay or keep-well agreements) with respect to any indebtedness, obligation, claim or liability of any other Person of a type described in clauses (a) through (f) above.
“Indemnified Party” has the meaning provided inSection 8.3(a).
“Indemnifying Party” has the meaning provided inSection 8.3(a).
“Intellectual Property” means all domestic and foreign patents, patent applications, trademarks, service marks and other indicia of origin, trademark and service mark registrations and applications for registrations thereof, copyrights, copyright registrations and applications for registration thereof, Internet domain names, applications and reservations therefor, uniform resource locators (“URLs”) and the Internet sites (collectively, the “Sites”) corresponding thereto, trade secrets, inventions (whether or not patentable), invention disclosures, moral and economic rights of authors and inventors (however denominated), technical data, customer lists, corporate and business names, trade names, trade dress, brand names, know-how, show-how, maskworks, formulae, methods (whether or not patentable), designs, processes, procedures, technology, source codes, object codes, computer software programs, databases, data collectors and other proprietary information or material of any type, whether written or unwritten (and all goodwill associated with, and all derivatives, improvements and refinements of, any of the foregoing).
“IRS” means the Internal Revenue Service.
“Licenses” has the meaning provided inSection 3.14.
“Losses” has the meaning provided inSection 8.2(a).
“Master Transfer Agreement” has the meaning provided in the third recital.
“Material Adverse Effect” means, (a) when used with respect to the Business, any material adverse change in or effect on the properties, assets, businesses, liabilities, results of operations or condition (financial or otherwise) of the Business, taken as a whole, and (b) when used with respect to FADV, (i) any materially adverse change in or effect on (including any material delay) the ability of FADV to perform its obligations under this Agreement, and (ii) any material adverse change in or effect on the properties, assets, businesses, liabilities, results of operations or condition (financial or otherwise) of FADV and its Subsidiaries, taken as a whole;provided,however, that the term “Material Adverse Effect” shall not include any adverse change or effect that is proximately caused by (1) conditions affecting the United States economy generally or the economy of the regions in which the applicable Person and its Subsidiaries (if any), taken as a whole, conducts a material part of its business, (2) changes in financial markets, (3) conditions affecting the industries in which the applicable Person and its Subsidiaries (if any) compete or (4) the announcement, or other disclosure, of the Transaction (to the extent such announcement or disclosure is not effected in contravention of any term of this Agreement) or the consummation of the Transaction (including compliance by such Person with its covenants hereunder).
“Membership Services” has the meaning provided in the second recital.
“NA CREDCO” has the meaning provided in the first recital.
“Newco” has the meaning provided in the introductory paragraph.
“Ordinary Course” means, with respect to any Person, the ordinary course of commercial operations customarily engaged in by such Person, consistent with past practices (including with respect to quantity and frequency).
“Overlap Period” has the meaning provided inSection 9.2(a).
“Party” or “Parties” has the meaning provided in the introductory paragraph.
“Person” means and includes any individual, partnership, joint venture, association, joint stock company, corporation, trust, limited liability company, unincorporated organization, a group and a government or other department, agency or political subdivision thereof.
“Pre-Closing Period” has the meaning provided inSection 3.11(b).
“Returns” has the meaning provided inSection 3.11(a).
“SEC” means the Securities and Exchange Commission.
“Securities Act” means the Securities Act of 1933, as amended.
“Subsidiary” means, with respect to any Person, (a) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person and/or one or more Subsidiaries of such Person and (b) any Entity (other than a corporation) in which such Person and/or one more Subsidiaries of such Person has more than a 50% equity interest or otherwise controls the management and affairs of such Entity (including the power to veto any material act or decision);provided that FADV and its Subsidiaries shall not be deemed to be Subsidiaries of First American for purposes of this Agreement.
“Taxes” means all taxes, assessments, charges, duties, fees, levies or other governmental charges, including all Federal, state, local, foreign and other income, franchise, profits, gross receipts, capital gains, capital stock, transfer, property, sales, use, value-added, occupation, property, excise, severance, windfall profits, stamp, license, payroll, social security, withholding and other taxes, assessments, charges, duties, fees, levies or other governmental charges of any kind whatsoever (whether payable directly or by withholding and whether or not requiring the filing of a Tax Return), all estimated taxes, deficiency assessments, additions to tax, penalties and interest and shall include any liability for such amounts as a result either of being a member of a combined, consolidated, unitary or Affiliated group or of a contractual obligation to indemnify any Person.
“Tax Matter” has the meaning provided inSection 9.4(a).
“Teletrack” has the meaning provided in the first recital.
“Teletrack Canada” has the meaning provided in the first recital.
“Trading Day” means a day on which the Nasdaq National Market is open for at least one-half of its normal business hours.
1.2Principles of Construction.
(a) All references to Articles, Sections, subsections, Schedules and Exhibits are to Articles, Sections, subsections, Schedules and Exhibits in or to this Agreement unless otherwise specified. The words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. The term “including” is not limiting and means “including without limitation.”
(b) All accounting terms not specifically defined herein shall be construed in accordance with GAAP.
(c) In the computation of periods of time from a specified date to a later specified date, the words “from” and “within” each mean “from and including”; the words “to” and “until” each mean “to but excluding”; and the word “through” means “to and including.”
(d) The Article and Section headings herein are for convenience only and shall not affect the construction hereof.
(e) In the event that the final day of any time period provided herein does not fall on a Business Day, such time period shall be extended such that the final day of such period shall fall on the next Business Day thereafter.
(f) This Agreement is the result of negotiations among and has been reviewed by each Party’s counsel. Accordingly, this Agreement shall not be construed against any Party merely because of such Party’s involvement in its preparation.
(g) All references to (i) Schedules inArticle III are to Schedules that form a part of the disclosure schedule delivered by Contributors to FADV on the date of the Master Transfer Agreement as updated pursuant toSection 5.7 of the Master Transfer Agreement, and (ii) Schedules inArticle V are to Schedules that form a part of the disclosure schedule delivered by FADV to Contributors on the date of the Master
Transfer Agreement as updated pursuant toSection 5.7 of the Master Transfer Agreement. The Schedules referred to herein are incorporated herein by reference.
(h) It is understood and agreed that neither the specification of any dollar amount in the representations and warranties contained in this Agreement nor the inclusion of any specific item in the Schedules or Exhibits hereto is intended to imply that such amounts or higher or lower amounts, or the items so included or other items, are or are not material, and no Party shall use the fact of the setting of such amounts or the fact of the inclusion of any such item in the Schedules or Exhibits hereto in any dispute or controversy between the Parties as to whether any obligation, item or matter is or is not material for purposes of this Agreement. Whenever a representation or warranty made by Contributors is qualified by materiality or immateriality, such materiality or immateriality, as the case may be, shall be construed in respect of the Business, taken as a whole.
ARTICLE II.
REPRESENTATIONS OF CONTRIBUTORS
First American and FAREISI jointly and severally represent, warrant and agree in favor of FADV, as of the Closing Date (unless a representation speaks as of a specific date, in which case, as of such date), as follows:
2.1Existence and Good Standing. Each of First American and FAREISI (a) is a corporation validly existing and in good standing under the laws of the State of California, and (b) has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Newco is (i) a limited liability company validly existing and in good standing under the laws of the State of Delaware, and (ii) has all requisite limited liability company power and authority to own, lease and operate its properties and to carry out its business as now being conducted.
2.2Binding Effect. Each Contributor has the requisite corporate or limited liability company power and authority to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement (a) has been duly authorized and approved by all required corporate or limited liability company action of First American, Newco and FAREISI, (b) has been duly executed and delivered by First American, Newco and FAREISI, and (c) assuming the due execution and delivery hereof by FADV, constitutes the valid and binding agreement of First American, Newco and FAREISI enforceable against each in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency or similar laws and equitable principles relating to or affecting the rights of creditors generally from time to time in effect.
2.3Investment. Newco is acquiring the Class B Common Stock hereunder for investment for its own account, not as nominee or agent, and not with the view to, or for resale in connection with, any distribution thereof. Each Contributor understands that the Class B Common Stock to be purchased hereunder has not been, and may not be, registered under the Securities Act, by reason of a specific exemption from the registration provisions of the Securities Act, the availability of which depends upon, among other things, the bona fide nature of each Newco’s investment intent and the accuracy of Contributors’ representations as expressed in thisSection 2.3. Each Contributor acknowledges that the Class B Common Stock to be acquired hereunder must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from such registration is available. Newco is an Accredited Investor.
2.4Restrictive Documents. Assuming the receipt of any and all consents of third parties in connection with the transactions contemplated hereby, no Contributor is subject to, or a party to, any charter, bylaw, mortgage, lien, lease, license, permit, Contract, instrument, law, rule, ordinance, regulation, order, judgment or decree, or any other restriction of any kind or character, which would, individually or in the aggregate, reasonably be expected to have a material adverse effect on (including any material delay) the ability of such Contributor to perform its respective obligations under this Agreement.
2.5Litigation. There is no action, suit, proceeding at law or in equity, arbitration or administrative or other proceeding by or before (or to the knowledge of any Contributor any investigation by) any Governmental Entity or other instrumentality or agency, pending, or, to the knowledge of any Contributor, threatened, against or affecting such Contributor that would, individually or in the aggregate, reasonably be expected to have a material adverse effect on (including any material delay) the ability of such Contributor to perform its obligations under this Agreement. No Contributor is subject to any judgment, order or decree entered in any lawsuit or proceeding which would, individually or in the aggregate, reasonably be expected to have a material adverse effect on (including any material delay) the ability of such Contributor to perform its obligations under this Agreement.
2.6Newco. Newco is a newly formed entity that (a) immediately prior to consummation of the Transaction will be owned 61.25% by First American, 1.16% by FAREISI, and 37.58% by FARES, (b) has not conducted, and will not prior to Closing conduct, any business other than (i) the receipt of the Business, Bar None, the XRES Business, the DealerTrack Interest and the FADV Note from the other Contributors by way of a contribution immediately prior to Closing substantially on the terms described to FADV in connection with the amendment and restatement of the Master Transfer Agreement and (ii) upon consummation of the Transaction, the contribution of the Business, Bar None, the XRES Business and the DealerTrack Interest to FADV or its wholly-owned Subsidiary pursuant to this Agreement and the Related Agreements, (c) has no indebtedness or other liabilities, whether contingent or otherwise, other than (i) its obligations under and as contemplated by this Agreement and the Related Agreements and (ii) the indebtedness and other liabilities of the Business, Bar None, the XRES Business, the DealerTrack Interest and the FADV Note during the period from its receipt of the contribution of the Business, Bar None, the XRES Business, the DealerTrack Interest and the FADV Note from the other Contributors to its contribution thereof to FADV or its wholly-owned Subsidiary pursuant to the terms hereof and the Related Agreements, and (d) has not and will not, during the period from its receipt of the contribution of the Business, Bar None, the XRES Business, the DealerTrack Interest and the FADV Note from the other Contributors to its contribution thereof to FADV or its wholly-owned Subsidiary pursuant to the terms hereof and the Related Agreements, changed or modified any of the assets or liabilities related to the Business, Bar None, the XRES Business, the DealerTrack Interest or the FADV Note.
ARTICLE III.
REPRESENTATIONS OF CONTRIBUTORS
REGARDING THE COMPANIES
Subject toSection 10.12, First American and FAREISI jointly and severally represent, warrant and agree in favor of FADV as of the Closing Date (unless a representation speaks as of a specific date, in which case, as of such date), as follows:
3.1Companies; Subsidiaries.
(a) Set forth onSchedule 3.1 is a list of each Company and each direct or indirect Subsidiary thereof and the percentage ownership of each such Company in any such Subsidiary. Each Company and each Subsidiary thereof is validly existing and in good standing under the laws of the jurisdiction of its organization (as set forth inSchedule 3.1) and has all requisite corporate or limited liability power, as applicable, to own, lease and operate its properties and to carry on its business as now being conducted. No Company or any of its Subsidiaries is in violation of any of the provisions of its articles of incorporation or bylaws (or equivalent organizational documents).
(b) Set forth onSchedule 3.1 is a list of jurisdictions in which each Company and each Subsidiary thereof is duly qualified or licensed to conduct its business, and each such Company is in good standing in each such jurisdiction. Such jurisdictions are the only jurisdictions in which the character or location of the properties owned, leased or operated by each Company and each Subsidiary thereof, or the nature of the business conducted by each Company and each Subsidiary thereof, makes such qualification or licensing necessary, except where the failure to be so qualified or licensed would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business.
(c) Except as set forth onSchedule 3.1, none of the Companies owns, directly or indirectly, any capital stock of, or other equity, ownership, proprietary or voting interest in, any Person.
3.2Capitalization.
(a)Schedule 3.2 sets forth (i) the capitalization of each Company that is a corporation and (ii) the outstanding membership interests of each Company that is a limited liability company. All outstanding shares of the capital stock of each Company that is a corporation have been duly authorized and validly issued and are fully paid and nonassessable. Except as set forth onSchedule 3.2, there are no outstanding options, warrants, rights, calls, commitments, conversion rights, rights of exchange, plans or other agreements of any character providing for the purchase, issuance or sale of any shares of capital stock or membership interests of any Company, any other securities of any Company, or any equity interest in any Company or its business, and none of the foregoing will arise as a result of the execution or performance of this Agreement or the transactions contemplated herein. No Person has any demand or piggyback registration rights in respect of shares of common stock or other securities of any Company. All securities, rights, options and plans set forth (or required to be set forth) onSchedule 3.2 have been issued or granted in accordance with applicable law and not in contravention with the articles or certificate of incorporation, bylaws, articles of organization or operating agreement, as applicable, of the relevant Company.
(b) (i) Newco owns, beneficially and of record, 100% of the capital stock or other equity interests of each of NA CREDCO, CMSI, Teletrack, Membership Services and CIG, free and clear of all Encumbrances, (ii) NA CREDCO owns, beneficially and of record, 100% of the capital stock or other equity interests of FC CREDCO, free and clear of all Encumbrances, (iii) Teletrack owns, beneficially and of record, 100% of the capital stock or other equity interests of Teletrack Canada, free and clear of all Encumbrances and (iv) CMSI owns, beneficially and of record, 100% of the capital stock or other equity interests of Credit Services and Credit Report+, free and clear of all Encumbrances.
3.3Financial Statements.
(a)Schedule 3.3(a) contains copies of each of the Financial Statements. Except as specifically disclosed therein and except as set forth inSchedule 3.3(a), that portion of the Financial Statements relating to the Companies has been prepared from, and in accordance with, the books and records of the Business, were prepared in accordance with GAAP and fairly present in all material respects, subject to the absence of notes with respect to interim periods and audit adjustments, the financial position of each of the Companies on a combined basis with the other businesses constituting the Business, as of the dates thereof and the results of operations of each of the Companies on a combined basis with the other businesses constituting the Business for the periods presented therein.
(b) Except as set forth onSchedule 3.3(b), from the Balance Sheet Date through the date of this Agreement, the Business has been conducted in the Ordinary Course and there has not been any incurrence, assumption or guarantee by the Companies or their Subsidiaries of any Indebtedness other than in the Ordinary Course.
3.4Books and Records. Except as set forth onSchedule 3.4, none of the Companies and their Subsidiaries has any material records, systems, controls, data or information recorded, stored, maintained, operated or otherwise wholly or partly dependent upon or held by any means (including any electronic, mechanical or photographic process, whether computerized or not) which (including all means of access thereto and therefrom) are not under the exclusive ownership and direct control of a Company or an Affiliate thereof.
3.5Title to Properties; Encumbrances. Except (a) as set forth onSchedule 3.5 (and except for property leased by a Company or Subsidiary thereof, which, for the avoidance of doubt, is represented and warranted to inSection 3.7) and (b) for properties and assets reflected in the Balance Sheet or acquired since the Balance Sheet Date which have been sold or otherwise disposed of in the Ordinary Course, the Companies and their respective Subsidiaries have good, valid and marketable title to (i) all of their respective properties and assets (real and
personal, tangible and intangible), including all of the properties and assets the Companies and their respective Subsidiaries reflected in the Balance Sheet, except as indicated in the notes thereto, and (ii) all of the properties and assets purchased by a Company or a Subsidiary thereof since the Balance Sheet Date; in each case subject to no Encumbrance, except for (A) liens reflected in the Balance Sheet, (B) liens consisting of zoning or planning restrictions, easements, permits and other restrictions or limitations on the use of real property or irregularities in title thereto, and other liens or other imperfections in title, if any, which do not, individually or in the aggregate, materially detract from the value of, or impair the use of, such property by such Company or such Subsidiary in the operation of its business, (C) liens for current taxes, assessments or governmental charges or levies on property not yet due and delinquent and (D) liens described onSchedule 3.5 (liens of the type described in clauses (A), (B, (C) and (D) above are hereinafter sometimes referred to as “Company Permitted Liens”). The tangible personal property, real property and assets owned or leased by the Companies, together with the Contributed Assets (as defined in the FARES Contribution Agreement), the tangible personal property, real property and assets subject to the Related Agreements, and the tangible personal property, real property and assets used by First American and its Affiliates to provide services to FADV and its Affiliates under the Related Agreements, constitute all of the tangible personal property, real property and assets necessary for the conduct of the Business as conducted in the Ordinary Course in all material respects.
3.6Real Property. No Company or Subsidiary thereof owns, directly or indirectly, in whole or in part, any fee interest in any real property.
3.7Leases.Schedule 3.7 contains an accurate and complete list of each real and personal property lease for which total annual rent payments equal or exceed $100,000 to which a Company or any Subsidiary thereof is a party (as lessee or lessor). Each lease set forth onSchedule 3.7 (or required to be set forth onSchedule 3.7) is in full force and effect; all rents and additional rents due by a Company or a Subsidiary thereof to date on each such lease have been paid (other than any pass through expenses not yet invoiced to any Company or Subsidiary thereof); in each case, the lessee has been in peaceable possession since the commencement of the original term of such lease and is not in default thereunder and no waiver, indulgence or postponement of the lessee’s obligations thereunder has been granted by the lessor; and there exists no event of default or event, occurrence, condition or act which, with the giving of notice, the lapse of time or the happening of any further event or condition, would become a default under such lease, except where such defaults would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business. The tangible personal property leased by the Companies and their respective Subsidiaries is in a state of good maintenance and repair, reasonable wear and tear excepted, except where the state of such property would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business.
3.8Material Contracts.
(a) Except as set forth onSchedule 3.8(a), none of the Companies and their respective Subsidiaries is bound by (i) any agreement, Contract or commitment relating to the employment of any Person (as hereinafter defined) by any Company or any Subsidiary thereof or any bonus, deferred compensation, pension, profit sharing, stock option, employee stock purchase, retirement or other employee benefit plan (including any agreement under which an employee of a Company or a Subsidiary thereof would be entitled to payment, vesting of rights or benefits or other compensation upon a change in control of such Company or Subsidiary thereof), (ii) any agreement, indenture or other instrument which contains restrictions with respect to payment of dividends or any other distribution in respect of its capital stock, (iii) any agreement, Contract or commitment relating to capital expenditures in excess of $350,000 per individual item or $750,000 in the aggregate, (iv) any loan or advance to, or investment in, any Person or any agreement, Contract or commitment relating to the making of any such loan, advance or investment, (v) any guarantee or other contingent liability in respect of any Indebtedness or obligation of any Person other than a Company or a Subsidiary thereof (other than the endorsement of negotiable instruments for collection in the Ordinary Course), (vi) any management service, consulting or any other similar type Contract, (vii) any agreement, Contract or commitment limiting the ability of any Company to engage in any line of business or to compete with any Person, (viii) any agreement, Contract or commitment not entered into in the Ordinary
Course which involves $350,000 or more and is not cancelable without penalty within 30 days, or (ix) any agreement, Contract or commitment which by its operation or termination would reasonably be expected to have a Material Adverse Effect on the Business. To the knowledge of Contributors, the Contracts listed onSchedule 3.8(a) and the other schedules attached hereto, together with the customer contracts not required to be listed onSchedule 3.8(a), constitute all the material Contracts of the Companies and their respective Subsidiaries, taken as a whole.
(b) Each Contract or agreement set forth (or required to be set forth) onSchedule 3.8(a) is in full force and effect. Except as set forth inSchedule 3.8(b), and except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business, assuming the receipt of any and all consents of third parties in connection with the transactions contemplated hereby, each Contract set forth (or required to be set forth) onSchedule 3.8(a) is in full force and effect and there exists no (i) default or event of default by any Company or, to the knowledge of Contributors, any other party to any such Contract, or (ii) event, occurrence, condition or act which, with the giving of notice, the lapse of time or the happening of any other event or condition, would become a default or event of default by any Company or, to the knowledge of Contributors, any other party thereto, with respect to any term or provision of any such Contract. None of the Companies and their respective Subsidiaries has violated any of the material terms or conditions of any Contract or agreement (x) to which any Company (or a Subsidiary thereof) and any customer that accounts for more than 2% of the total sales of the Business are parties or (y) set forth (or required to be set forth) onSchedule 3.8(a) in any material respect, and, to the knowledge of the Contributors, all of the material covenants to be performed by any other party thereto have been fully performed in all material respects.
3.9Restrictive Documents. Assuming the receipt of any and all consents of third parties in connection with the transactions contemplated hereby, and except as set forth onSchedule 3.9, none of the Companies and their respective Subsidiaries is subject to, or a party to, any charter, bylaw, mortgage, lien, lease, license, permit, agreement, Contract, instrument, law, rule, ordinance, regulation, order, judgment or decree, or any other restriction of any kind or character, which, by its own operation, and not by the breach or violation, as the case may be, thereof, (a) would materially restrict the ability of the Business to acquire any property or conduct business in any area or business line, (b) has or would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business or (c) prevent or materially delay the consummation of the transactions contemplated by this Agreement.
3.10Litigation. Except as set forth onSchedule 3.10, there is no action, suit, proceeding at law or in equity, arbitration or administrative or other proceeding by or before (or to the knowledge of Contributors and the Companies, any investigation by) any governmental or other instrumentality or agency, pending, or, to the knowledge of Contributors and the Companies, threatened, against or impacting any Company, any Subsidiary thereof or any of their respective properties or rights which would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business. None of the Companies and their respective Subsidiaries is subject to any judgment, order or decree entered in any lawsuit or proceeding which has or would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business.
3.11Taxes.
(a)Tax Returns. The Companies and each of their respective Subsidiaries have timely filed or caused to be filed, and will timely file or cause to be timely filed, with the appropriate taxing authorities all material returns, statements, forms and reports (including elections, declarations, disclosures, schedules, estimates and information tax returns) for Taxes (“Returns”) that are required to be filed by, or with respect to, any Company or such Subsidiary on or prior to the Closing Date. The Returns have accurately reflected in all material respects and will accurately reflect in all material respects all liability for Taxes of the Companies and such Subsidiaries for the periods covered thereby.
(b)Payment of Taxes. All material Taxes and Tax liabilities due by or with respect to the income, assets or operations of the Companies and each of their respective Subsidiaries for all taxable years or other
taxable periods that end on or before the Closing Date and, with respect to any taxable year or other taxable period beginning before and ending after the Closing Date, the portion of such taxable year or period ending on and including the Closing Date (the “Pre-Closing Period”), have been (or by the Closing Date will be) timely paid in full on or before the Closing Date or adequately accrued and disclosed and fully provided for on the books and records of the Companies and each of their respective Subsidiaries in accordance with GAAP.
(c)Other Tax Matters. All material Taxes which any Company or any Subsidiary thereof is (or was) required by law to withhold or collect in connection with amounts paid or owing to any employee, independent Contractor, creditor, stockholder or other third party have been duly withheld or collected, and have been timely paid over to the proper authorities to the extent due and payable.
3.12Intellectual Properties.
(a)Schedule 3.12(a) is an accurate and complete list of all domestic and foreign patents, patent applications, trademarks, service marks and other indicia of origin, trademark and service mark registrations and applications for registrations thereof, registered copyrights and applications for registration thereof, Internet domain names, corporate and business names, trade names, brand names and material computer software programs owned by the Companies and their respective Subsidiaries. The Intellectual Property listed (or required to be listed) onSchedule 3.12(a), except as indicated on such Schedule, has been duly registered in, filed in or issued by the United States Patent and Trademark Office, United States Copyright Office, a duly accredited and appropriate domain name registrar, the appropriate offices in the various states of the United States and the appropriate offices of other jurisdictions (foreign and domestic), and each such registration, filing and issuance remains in full force and effect as of the Closing Date.
(b) Except (i) as set forth inSchedule 3.12(b) and (ii) for licenses related to “off the shelf” or other software widely available on generally standard terms and conditions, none of the Companies and their respective Subsidiaries is a party to any license or agreement, whether as licensor, licensee or otherwise, with respect to any Intellectual Property. To the extent any Intellectual Property is used under license in the business of any Company and/or any of its Subsidiaries, no notice of a material default has been sent or received by such Company or any of its Subsidiaries under any such license which remains uncured and, assuming the receipt of any and all consents of third parties in connection with the assignment of such licenses to FADV, the execution, delivery or performance of Contributors’ obligations hereunder will not result in such a material default. Each such license agreement is a legal, valid and binding obligation of the Company and/or Subsidiary thereof that is a party thereto and, to the knowledge of the Companies, each of the other parties thereto, enforceable by such Company in accordance with the terms thereof.
(c) Except as set forth inSchedule 3.12(c), a Company or a Subsidiary thereof owns or is licensed to use, all of the Company Intellectual Property (including all of the Intellectual Property set forth (or required to be set forth) inSchedule 3.12(a)), free and clear of any Encumbrances, without obligation to pay any royalty or any other fees with respect thereto. Neither any Company’s nor any Company’s Subsidiary’s use of the Company Intellectual Property (including the manufacturing, marketing, licensing, sale or distribution of products and the general conduct and operations of the business of the Companies and their respective Subsidiaries) violates, infringes, misappropriates or misuses any intellectual property rights of any third party. No Company Intellectual Property has been cancelled, abandoned or otherwise terminated and all renewal and maintenance fees in respect thereof have been duly paid. The Companies and their respective Subsidiaries have the exclusive right to file, prosecute and maintain all applications and registrations with respect to the Intellectual Property that is owned by any Companies or any Subsidiary thereof.
(d) Except as set forth inSchedule 3.12(d), none of the Companies and their respective Subsidiaries has received any written notice or claim from any third party challenging the right of any Company or any Subsidiary thereof to use any of the Company Intellectual Property. Except as set forth inSchedule 3.12(d), the Company Intellectual Property listed (or required to be listed) onSchedules 3.12(a) and3.12(b), together with the Intellectual Property listed onSchedule 2.13(a) andSchedule 2.13(b) of the FARES Contribution
Agreement, constitutes all the Intellectual Property necessary to operate the Business as of the Closing Date, in the manner in which it is presently operated, except for licenses related to “off the shelf” or other software widely available on generally standard terms and conditions.
(e) Except as set forth inSchedule 3.12(e), none of the Companies and their respective Subsidiaries has made any claim in writing of a violation, infringement, misuse or misappropriation by any third party (including any employee or former employee of any Company or any Subsidiary thereof) of its rights to, or in connection with any Intellectual Property, which claim is still pending. Except as set forth inSchedule 3.12(e), none of the Companies and their respective Subsidiaries has entered into any agreement to indemnify any other person against any charge of infringement of any Intellectual Property, other than indemnification provisions contained in purchase orders or license agreements arising in the Ordinary Course.
(f) Except as set forth inSchedule 3.12(f), there is no pending or, to the knowledge of Contributors, threatened claim by any third party of a violation, infringement, misuse or misappropriation by any Company or any Subsidiary thereof of any Intellectual Property owned by any third party, or of the invalidity of any patent or registration of a copyright, trademark, service mark, domain name, or trade name included in the Company Intellectual Property. To the knowledge of Contributors, no valid basis exists for any such claims.
(g) Except as set forth inSchedule 3.12(g), there are no interferences or other contested proceedings, either pending or, to the knowledge of the Companies, threatened, in the United States Copyright Office, the United States Patent and Trademark Office, or any governmental authority (foreign or domestic) relating to any pending application with respect to the Company Intellectual Property owned by the Company.
(h) Except as set forth inSchedule 3.12(h), either a Company or a Subsidiary thereof has secured valid written assignments from all consultants and employees who contributed to the creation or development of Company Intellectual Property of the rights to such contributions that either a Company or a Subsidiary thereof does not already own by operation of law.
(i) The Companies and their respective Subsidiaries have taken all necessary and reasonable steps to protect and preserve the confidentiality of all trade secrets, know-how, source codes, databases, customer lists, schematics, ideas, algorithms and processes and all use, disclosure or appropriation thereof by or to any third party has been pursuant to the terms of a written agreement between such third party and a Company or a Subsidiary thereof. None of the Companies and their respective Subsidiaries has materially breached any agreements of non-disclosure or confidentiality.
(j) Each of the material computer software programs used or held for use in the businesses of the Companies and their respective Subsidiaries operates and runs in a commercially reasonable business manner, conforms in all material respects to the specifications thereof, and, with respect to each of such computer software programs that are owned by a Company or a Subsidiary thereof, the applications can be compiled from their associated source code without undue burden.
(k) For the twelve-month period prior to the Closing Date, the active Internet domain names and URLs of the Companies and their respective Subsidiaries direct and resolve to the appropriate Internet protocol addresses and are and have been accessible to Internet users on those certain computers used by the Companies and their respective Subsidiaries to make the Sites so accessible substantially twenty-four (24) hours per day, seven (7) days per week (“24/7”), excluding maintenance periods, and are and have been operational for transacting from those certain computers used by the Companies and their respective Subsidiaries to make the Sites so accessible on a 24/7 basis, excluding maintenance periods. Except as set forth inSchedule 3.12(k), none of the Companies has any reason to believe that the Sites will not operate or will not continue to be accessible to Internet users on substantially a 24/7 basis, excluding maintenance periods, prior to, at the time of and after the Closing Date.
3.13Compliance with Laws. Except as set forth inSchedule 3.13, the Companies and each of their respective Subsidiaries are in compliance with all applicable laws, regulations, orders, judgments and decrees,
except where the failure to comply would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business. In furtherance of, and not by way of limitation of, the preceding sentence, none of the Companies and their respective Subsidiaries has violated any privacy, data protection, publicity, advertising or similar federal, state or local law of any kind in the United States or any other nation (including the Fair Credit Reporting Act, 15 U.S.C. §§ 1681 et seq.), nor has any of the Companies and their respective Subsidiaries received written notice of any such violation, and neither Contributors nor any Company is aware of any facts that would give rise to such a violation, except where such violation would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business.
3.14Governmental Licenses. Except as set forth inSchedule 3.14, each of the Companies and its respective Subsidiaries has all governmental licenses, permits, franchises, approvals, permits and other authorizations of, and have made all registrations and/or filings with, all Governmental Entities (“Licenses”) necessary to own, lease and operate its properties and to enable it to carry on its respective business as presently conducted, except where the failure to have such Licenses would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business. All Licenses held by any Company or any Subsidiary thereof, are in full force and effect, except where the failure of such Licenses to be in full force and effect would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business. No such License is the subject of a proceeding for suspension or revocation or similar proceedings. Except as set forth inSchedule 3.14, no jurisdiction has demanded or requested that any Company or any Subsidiary thereof qualify or become licensed as a foreign corporation.
3.15Labor Matters.
(a) Each of the Companies and their respective Subsidiaries is in compliance with all federal, state or other applicable laws, domestic or foreign, respecting employment and employment practices, terms and conditions of employment and wages and hours, and has not and is not engaged in any unfair labor practice, except in each case as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business. The Companies and their respective Subsidiaries are not subject to or bound by any collective bargaining or labor union agreement applicable to any Person employed by the Companies and their respective Subsidiaries and no collective bargaining or labor union agreement is currently being negotiated by the Companies and their respective Subsidiaries.
(b) No unfair labor practice complaint against any Company or any Subsidiary thereof is pending before the National Labor Relations Board and, to the knowledge of the Companies, no unfair labor practice complaint is threatened or pending against any Company or any Subsidiary thereof before the National Labor Relations Board.
(c) There is no labor strike, dispute, slowdown or stoppage actually pending or, to the knowledge of Contributors, threatened against or involving any Company or any Subsidiary thereof.
(d) There is no grievance that would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business.
(e) None of the Companies and their respective Subsidiaries has experienced any material labor difficulty during the last three years.
(f) There has been no, and will not be any, “layoff” or “plant closing” as defined by the Worker Adjustment Retraining and Notification Act during the 90 days prior to the Closing Date with respect to any Company or any Subsidiary thereof.
3.16Consents and Approvals; No Violations. Assuming the receipt of any and all consents of third parties in connection with the transactions contemplated hereby, the execution and delivery of this Agreement by Contributors and the consummation of the transactions contemplated hereby will not (i) violate any provision of the articles or certificate of incorporation or bylaws (or similar organizational documents) of either Contributor, any Company or any Subsidiary of a Company, (ii) violate any statute, ordinance, rule, regulation, order or
decree of any court or any governmental or regulatory body, agency or authority applicable to any Contributor, any Company or any Subsidiary of a Company, (iii) except as set forth onSchedule 3.16, require any filing with, or permit, consent or approval of, or the giving of any notice to, any governmental or regulatory body, agency or authority, other than those required under or in relation to the Exchange Act, state securities or “blue sky” laws, and rules and regulations of the Nasdaq National Market, or (iv) except as set forth onSchedule 3.16, result in a violation or breach of, conflict with, constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, payment or acceleration) under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of any Contributor, any Company or any Subsidiary of a Company under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, franchise, permit, agreement, lease, franchise agreement or other instrument or obligation to which any Contributor, any Company or any Subsidiary of a Company is a party, or by which any Contributor, any Company or any Subsidiary of a Company or any of their respective properties or assets may be bound, other than, in the case of clauses (ii), (iii) and (iv) above, any violations, breaches, conflicts, defaults and liens which, and filings, permits, consents, approvals and notices the absence of which, would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business.
3.17Broker’s or Finder’s Fees. Except as set forth onSchedule 3.17, no agent, broker, person or firm acting on behalf of any Contributor, any Company or any of their respective Affiliates is, or will be, entitled to any commission or broker’s or finder’s fees from any of the Parties or from any Affiliate of any of the Parties hereto, in connection with any of the transactions contemplated by this Agreement.
3.18Copies of Documents. Contributors have caused to be made available for inspection and copying by FADV and its advisers, true, complete and correct copies of all documents listed on any Schedule referred to in thisArticle III.
3.19Affiliate Transactions. Except as set forth onSchedule 3.19, no Company is a party to any Contract with any Contributor or any Affiliate of any Contributor (or any director or Officer of a Contributor or any of its Affiliates or any “associates” or members of the “immediate family” (as such terms are respectively defined in Rule 12b-2 and Rule 16a-1 promulgated under the Exchange Act) of any such director or Officer, other than Experian Information Solutions, Inc. and its Affiliates) except for such Contracts that are on an arm’s length basis.
3.20Undisclosed Liabilities. Except as set forth inSchedule 3.20, to the actual knowledge of Contributors, there are no liabilities of the Companies other than (a) liabilities incurred in the Ordinary Course, (b) liabilities disclosed on any exhibit or schedule hereto or on any exhibit or schedule to any Related Document, (c) liabilities provided for in the Financial Statements or the Audited Financial Statements, or disclosed in the notes thereto, if any, or (d) other undisclosed liabilities which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on the Business.
3.21Disclosure. To the actual knowledge of Contributors, the information disclosed in this Agreement with respect to the Companies does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading, except as would not, individually or in the aggregate, reasonably be expect to have a Material Adverse Effect on the Business.
3.22Bar None. Except as set forth onSchedule 3.22 or any other Schedule attached hereto, solely with respect to matters, events, actions or omissions that occur exclusively during the period from the date of First American’s acquisition of Bar None to the date of this Agreement (and not, for the avoidance of doubt, with respect to any matters, events, actions or omissions occurring or beginning to occur on or prior to the date of First American’s acquisition of Bar None, including the execution or breach of any Contract, the undertaking of any obligation or the incurrence of any liability or obligation prior to the date of the acquisition of Bar None), First American and FAREISI jointly and severally make the representations and warranties in (a)Sections 3.4,3.5,3.6,3.7,3.8,3.9,3.10,3.12,3.13,3.14,3.15,3.16,3.18,3.19,3.20 and3.21, (b)Section 3.11 and (c)Section 3.17 with respect to Bar Nonemutatis mutandis.
ARTICLE IV.
REPRESENTATIONS OF CONTRIBUTORS
REGARDING DEALERTRACK INTEREST
First American and FAREISI jointly and severally represent, warrant and agree in favor of FADV as of the Closing Date (unless a representation speaks as of a specific date, in which case, as of such date), as follows:
4.1DealerTrack Interest. Except for any restrictions under applicable securities laws, the Certificate of Incorporation and Bylaws of DealerTrack, and the Fourth Amended and Restated Stockholders’ Agreement, dated as of March 19, 2003, among the stockholders of DealerTrack, CMSI is the record owner of the DealerTrack Interest free and clear of all Encumbrances and CMSI has not previously entered into any agreement or commitment for the sale of all or part of the DealerTrack Interest or otherwise conveyed or encumbered CMSI’s interest (voting or otherwise) with respect to the DealerTrack Interest.
ARTICLE V.
REPRESENTATIONS OF BUYER
FADV represents, warrants and agrees in favor of each Contributor as of the Closing Date (unless a representation or warranty speak as of a specific date, in which case, as of such date), as follows:
5.1Existence and Good Standing. FADV is a corporation validly existing and in good standing under the laws of the State of Delaware. FADV has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted. FADV is duly qualified or licensed to conduct its business, and is in good standing, in each jurisdiction in which the character or location of the property owned, leased or operated by FADV or the nature of the business conducted by FADV makes such qualification or licensing necessary, except where the failure to be so qualified, licensed or in good standing would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on FADV.
5.2Binding Effect. FADV has the requisite corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement (a) has been duly authorized and approved by all required corporate action of FADV, (b) has been duly executed and delivered by FADV and (c) assuming the due execution and delivery of this Agreement by Contributors, constitutes the valid and binding agreement of FADV enforceable against FADV in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency or similar laws and equitable principles relating to or affecting the rights of creditors generally from time to time in effect.
5.3Capitalization.
(a) As of May 4, 2005, the authorized capital stock of FADV is (a) 100,000,000 shares of Common Stock, $0.001 par value per share, (i) 75,000,000 of which are designated as “Class A Common Stock” and 7,824,285 are issued and outstanding, and (ii) 25,000,000 of which are designated as “Class B Common Stock” and 16,027,086 are issued and outstanding, and (b) 1,000,000 shares of Preferred Stock, $0.001 par value, none of which are issued and outstanding. All such outstanding shares have been, and all shares of capital stock of FADV issued after the date hereof will be, duly authorized and validly issued and are, or upon such issuance will be, fully paid and nonassessable. Except as set forth onSchedule 5.3, there are no outstanding options, warrants, rights, calls, commitments, conversion rights, rights of exchange, plans or other agreements of any character providing for the purchase, issuance or sale of any shares of FADV’s Common Stock, any other securities of FADV, or any equity interest in FADV or its business, and none of the foregoing will arise as a result of the execution or performance of this Agreement or the transactions contemplated herein. Except as set forth onSchedule 5.3, no Person has any demand or piggyback registration rights in respect of shares of FADV’s Common Stock or any other securities of FADV. All securities, rights, options and plans set forth (or required to be set forth) onSchedule 5.3 have been issued or granted in accordance with applicable law and not in contravention with the certificate of incorporation or bylaws of FADV.
(b) The shares of Class B Common Stock to be issued to Newco hereunder, when issued in compliance with the provisions of this Agreement and FADV’s Certificate of Incorporation as amended by the Certificate of Amendment, (i) have been authorized for issuance hereunder by FADV’s Board of Directors, (ii) will be validly issued, fully paid and nonassessable, (iii) will be issued in compliance with all applicable federal and state securities laws, and will have the rights, preferences and privileges described in FADV’s Certificate of Incorporation as amended by the Certificate of Amendment, (iv) will be free and clear of all Encumbrances, other than restrictions on transfer under applicable securities laws, and (v) will not be subject to any preemptive rights or rights of first refusal;provided,however, that no representation or warranty is being made in thisSection 5.3(b)(iii) with respect to the Preliminary Proxy Statement’s or the Final Proxy Statement’s compliance with Section 14 of the Exchange Act or Regulation 14A promulgated thereunder.
5.4SEC Reports and Financial Statements. Each form, report, schedule, registration statement and definitive proxy statement filed by FADV with the SEC as such documents have been amended prior to the date hereof (the “FADV SEC Reports”), as of their respective dates (and, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing), complied in all material respects with the applicable requirements of the Securities Act, the Exchange Act, the rules and regulations thereunder and the court interpretations thereof and the rules of the Nasdaq National Market. None of FADV SEC Reports, as of their respective dates (and, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing), contained any untrue statement of fact or omitted a statement of a fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, other than facts that did not have, or would not, individually or in the aggregate, reasonably be expected to have, a Material Adverse Effect on FADV. The consolidated financial statements of FADV and its Subsidiaries included in such FADV SEC Reports (the “FADV Financial Statements”) comply as to form in all material respects with applicable accounting requirements and with published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP (except as may be indicated in the notes thereto, or in the case of unaudited interim financial statements, as permitted by Form 10-Q under the Exchange Act) and fairly present in all material respects, subject, in the case of the unaudited interim financial statements, to the absence of complete notes and normal, year-end adjustments, the consolidated financial position of FADV and its Subsidiaries as of the dates thereof. Without limiting the generality of the foregoing, (i) no executive officer of FADV has failed in any respect to make the certifications required of him or her under Section 302 or 906 of the Sarbanes-Oxley Act of 2002 with respect to any form, report or schedule filed by FADV with the SEC since the enactment of the Sarbanes-Oxley Act of 2002 (excluding any failure to make such certifications occurring after the date of this Agreement that is inadvertent but promptly corrected by filing the requisite certification or is attributable to the physical incapacity of an officer required to make such a certification) and (ii) no enforcement action has been initiated against FADV by the SEC relating to disclosures contained in any Company SEC Report.
5.5Restrictive Documents. Except as set forth onSchedule 5.5, neither FADV nor any of its Subsidiaries is subject to, or a party to, any charter, bylaw, mortgage, lien, lease, license, permit, agreement, Contract, instrument, law, rule, ordinance, regulation, order, judgment or decree, or any other restriction of any kind or character, which, by its own operation, and not by the breach or violation, as the case may be, thereof, (a) would materially restrict the ability of FADV or any of its Subsidiaries to acquire any property or conduct business in any area or business line or (b) has or would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on FADV.
5.6Litigation. Except as set forth onSchedule 5.6, there is no action, suit, proceeding at law or in equity, arbitration or administrative or other proceeding by or before (or to the knowledge of FADV any investigation by) any governmental or other instrumentality or agency, pending, or, to the knowledge of FADV, threatened, against or impacting FADV, any of its Subsidiaries or any of their respective properties or rights which would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on FADV. Neither FADV nor any of its Subsidiaries is subject to any judgment, order or decree entered in any lawsuit or proceeding which has or would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on FADV.
5.7Compliance with Laws. FADV and each of its Subsidiaries are in compliance in all material respects with all applicable laws, regulations, orders, judgments and decrees, except where the failure to comply would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on FADV. In furtherance of, and not by way of limitation of, the preceding sentence, neither FADV nor any of its Subsidiaries has violated any privacy, data protection, publicity, advertising or similar federal, state or local law of any kind in the United States or any other nation (including the Fair Credit Reporting Act, 15 U.S.C. §§ 1681 et seq.), nor has FADV or any Subsidiary thereof received written notice of any such violation, and neither FADV nor any of its Subsidiaries is aware of any facts that would give rise to such a violation, except where such violation would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on FADV.
5.8Consents and Approvals; No Violations. The execution and delivery of this Agreement by FADV and the consummation of the transactions contemplated hereby will not (i) violate any provision of the articles or certificate of incorporation or bylaws of FADV or any of its Subsidiaries, (ii) violate any statute, ordinance, rule, regulation, order or decree of any court or any governmental or regulatory body, agency or authority applicable to FADV or any of its Subsidiaries, (iii) require any filing with, or permit, consent or approval of, or the giving of any notice to, any governmental or regulatory body, agency or authority, other than those required under or in relation to the Exchange Act, the Securities Act, state securities or “blue sky” laws, and rules and regulations of the Nasdaq National Market, or (iv) except as set forth onSchedule 5.8, result in a violation or breach of, conflict with, constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, payment or acceleration) under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of FADV or any of its Subsidiaries under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, franchise, permit, agreement, lease, franchise agreement or other instrument or obligation to which either FADV or any of its Subsidiaries is a party, or by which either FADV or any of its Subsidiaries or any of their respective properties or assets may be bound, other than, in the case of clauses (ii), (iii) and (iv) above, any violations, breaches, conflicts, defaults and liens which, and filings, permits, consents, approvals and notices the absence of which, would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on FADV.
5.9Broker’s or Finder’s Fees. Except as set forth onSchedule 5.9, no agent, broker, person or firm acting on behalf of FADV or any of its Subsidiaries is, or will be, entitled to any commission or broker’s or finder’s fees from any of the Parties or from any Affiliate of any of the Parties, in connection with any of the transactions contemplated by this Agreement.
5.10Copies of Documents. FADV has caused to be made available for inspection and copying by Contributors and their advisers, true, complete and correct copies of all documents listed on any Schedule referred to in thisArticle V.
5.11Board Approval. Prior to the date of the Master Transfer Agreement, the Board of Directors of FADV and the Independent Committee (at meetings duly called and held) (a) approved this Agreement and the transactions contemplated hereby, (b) determined that the transactions contemplated by this Agreement, taken together, are fair to and in the best interests of the stockholders of FADV and (c) resolved to recommend that the stockholders of FADV approve this Agreement and the transactions contemplated hereby.
5.12Undisclosed Liabilities. Except as set forth inSchedule 5.12, to the actual knowledge of FADV, there are no liabilities of FADV other than (a) liabilities incurred in the Ordinary Course, (b) liabilities disclosed on any exhibit or schedule hereto or on any exhibit or schedule to any Related Document, (c) liabilities provided for in the FADV Financial Statements or disclosed in the notes thereto, if any, or (d) other undisclosed liabilities which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on FADV.
5.13Disclosure. To the actual knowledge of FADV, the information disclosed in this Agreement with respect to FADV does not contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading, except as would not, individually or in the aggregate, reasonably be expect to have a Material Adverse Effect on FADV.
ARTICLE VI.
THE TRANSACTION
6.1Contribution.
(a) Upon the terms and subject to the conditions set forth in this Agreement, Newco agrees to, and each other Contributor agrees to cause Newco to, contribute to FADV or its wholly-owned Subsidiary on the Closing Date, and FADV agrees to accept the contribution of (or cause its wholly-owned Subsidiary to accept the contribution of) from Newco, the following securities:
(i) all of the issued and outstanding shares of Common Stock of NA CREDCO;
(ii) all of the issued and outstanding shares of Common Stock of CMSI;
(iii) all of the issued and outstanding shares of Common Stock of Teletrack;
(iv) all of the issued and outstanding shares of Common Stock of Membership Services;
(v) all of the issued and outstanding membership interest of CIG;
(vi) all of the capital stock of DealerTrack representing the DealerTrack Interest; and
(vii) all of the issued and outstanding shares of Common Stock of Bar None.
(b) The certificates representing the above securities, if any, shall be duly endorsed in blank, or accompanied by stock powers duly executed in blank (or in lieu thereof an affidavit of lost certificate and an indemnification agreement reasonably acceptable to FADV), by the Newco or, if any of the foregoing securities are not certificated, Newco shall have caused the transfers thereof to have been duly recorded on the books and records of the applicable Company.
(c) Newco and each Contributor agrees to cure any deficiencies with respect to the endorsement of the certificate or certificates representing any of the foregoing securities, or with respect to the stock power accompanying any such securities.
6.2Consideration; Debt Repayment.
(a) In consideration for the contribution by Newco to FADV (or its wholly-owned Subsidiary) of the FACO Business, Bar None and the DealerTrack Interest, FADV shall deliver on the Closing Date an aggregate total of 11,756,097 shares of Class B Common Stock to Contributors, and FADV shall issue to Newco a certificate in its name representing such shares of Class B Common Stock.
(b) As repayment in full of all obligations owing under the Promissory Note in the original principal amount of $20,000,000, dated as of April 27, 2004, made by FADV in favor of First American (the “FADV Note”), FADV shall deliver to Newco in its name a certificate representing 975,610 shares of Class B Common Stock.
6.3DealerTrack Earn-Out. In addition to the Class B Common Stock deliverable pursuant toSection 6.2(a), FADV shall pay to Newco an additional number of shares of Class B Common Stock as follows (the “DealerTrack Earnout”):
(a) If DealerTrack or its successor conducts an initial public offering of its capital stock on or prior to the date that is one hundred eighty (180) days from and including the Closing Date, FADV shall pay to Newco, within one hundred eighty (180) days of such initial public offering, as additional consideration for the DealerTrack Interest, an additional number of shares of Class B Common Stock equal to the quotient
resulting from dividing (A) the product of (1) 0.50 and (2) the DealerTrack Excess Value (if greater than zero), by (B) $20.50. As used herein, “DealerTrack Excess Value” means the amount, if any, by which the value of the DealerTrack Interest exceeds $50,000,000, calculated using the average closing price per share of such publicly listed DealerTrack capital stock, rounded to the fourth decimal place, as reported on the exchange or quotation system then listing such shares, for the sixty (60) Business Day period beginning on the fifth (5th) Business Day from and after the closing of such initial public offering by DealerTrack or its successor.
(b) If DealerTrack or its successor conducts an initial public offering of its capital stock after the date that is one hundred eighty (180) days from and including the Closing Date, but on or prior to the date that is the second anniversary of the Closing Date, FADV shall pay to Newco, within one hundred eighty (180) days of such initial public offering, as additional consideration for the DealerTrack Interest, an additional number of shares of Class B Common Stock equal to the quotient resulting from dividing (A) the product of (1) 0.50 and (2) the DealerTrack Excess Value (if greater than zero), by (B) the average closing price per share of the Class A Common Stock, rounded to the fourth decimal place, as reported on the Nasdaq National Market for the thirty (30) Trading Days ending on the third (3rd) Trading Day from and prior to the date of pricing of DealerTrack’s capital stock in its initial public offering;provided,however, that if such average closing price is less than $20.50, then the average closing price per share of the Class A Common Stock for purposes of this Section 6.3(b) shall be deemed to equal $20.50.
6.4Minimum Cash. As of the Closing, the aggregate amount of cash and cash equivalents of the Companies and their respective Subsidiaries shall be $1,950,000 or more.
6.5Closing. The closing of the contribution of the FACO Business, Bar None the DealerTrack Interest, the issuance of the Class B Common Stock hereunder and the other transactions contemplated hereby shall take place at the Closing under and in accordance with the Master Transfer Agreement.
ARTICLE VII.
CERTAIN COVENANTS
7.1Employees. First American and FAREISI shall be jointly and severally responsible for payment of bonuses to employees of the Companies for that portion of the 2005 calendar year occurring on and prior to the Closing Date. FADV shall be responsible for payment of bonuses to employees of the Companies for that portion of the 2005 calendar year occurring after the Closing Date, and for all periods thereafter.
7.2Pre-Closing Distribution. Prior to the Closing, Contributors shall be entitled to cause the Companies to transfer, whether by way of dividends, distributions or other lawful means (collectively, the “Distributions”) to the shareholders of the Companies all of the Companies’ cash and cash equivalent balances in excess of $1,950,000.
7.3Certain Benefits Relating to Acquisition Agreements.
(a) Each Contributor, as applicable, shall assign or cause its Affiliates to assign its or their rights under (i) each of the agreements by which such Contributor or its Affiliates acquired the Companies and their respective Subsidiaries from any third parties, whether by merger, purchase of equity securities, purchase of assets or otherwise, (ii) the Agreement and Plan of Merger, dated as of May 20, 2005, among First American, Bar None, Delaware Bay Merger Corp. and James Crouse, and (iii) the agreement by which such Contributor or its Affiliates acquired the DealerTrack Interest (each, an “Acquisition Agreement” and collectively, the “Acquisition Agreements”), if permitted to do so by the terms of such Acquisition Agreements, and FADV shall assume all of such Contributor’s obligations under any Acquisition Agreement so assigned (including any earn-out payments required thereunder, but excluding such Contributor’s obligations in respect of any breach of (1) a representation or warranty made by such Contributor or its Affiliate in such Acquisition
Agreement and (2) a covenant by such Contributor or its Affiliate in the Acquisition Agreement required by its terms to be performed prior to Closing). Notwithstanding the foregoing, each Contributor agrees that it will use commercially reasonable efforts to obtain the written consent of any other necessary party to the assignment of any Acquisition Agreement;provided,however, that, in order to obtain any such consent, neither Contributor nor its Affiliates shall be required to (A) repay any loan agreement or Contract for borrowed money except as currently required by its terms, in whole or in part, (B) amend any Contract to increase the amount payable thereunder or otherwise to be more burdensome to such Contributor or its Affiliates, (C) make any cash payment, provide any guaranty or relinquish any property or contractual rights, or (D) commit to any divestiture transaction, agree to sell or hold separate or agree to license to competitors of such Contributor or its Affiliates, before or after the Closing Date, any of such Contributor’s or its Affiliates’ businesses, product lines, properties or assets, or agree to any changes or restrictions in the operation of such businesses, product lines, properties or assets.
(b) If the terms of any Acquisition Agreement requires the written consent of a necessary party to the assignment of such Acquisition Agreement and such party does not grant such consent, or if any Acquisition Agreement may not be transferred or assigned pursuant to the terms thereof, then (i) neither Contributor shall be required to assign, and this Agreement shall not be deemed to constitute an assignment of, any such Acquisition Agreement and FADV shall assume no direct obligations or liabilities under any such Acquisition Agreement until such consent is obtained, (ii) the applicable Contributor shall cooperate with FADV following the Closing Date in any reasonable arrangement designed to provide FADV with the rights and benefits under any such Acquisition Agreement, including enforcement for the benefit of FADV and at FADV’s expense of any and all rights of the applicable Contributor or its Affiliates against any other party arising out of any breach or cancellation of any such Acquisition Agreement by such other party and, if requested by FADV, acting as an agent on behalf of FADV or as FADV shall otherwise reasonably require;provided that FADV shall bear the applicable Contributor’s reasonable out-of-pocket expenses as such agent and shall indemnify the applicable Contributor and its Affiliates for actions taken or not taken as such agent;provided,further, that FADV shall cooperate with the applicable Contributor following the Closing Date in any reasonable arrangement designed to require FADV to assume, be responsible for and otherwise meet the burdens and obligations under any such Acquisition Agreement (excluding such Contributor’s obligations in respect of any breach of (1) a representation or warranty made by such Contributor or its Affiliate in such Acquisition Agreement and (2) a covenant by such Contributor or its Affiliate in the Acquisition Agreement required by its terms to be performed prior to Closing), and (iii) in the event that the applicable Contributor or any of its Affiliates collects indemnification or other amounts under, or reduces or offsets against any payment obligations to third parties arising from or relating to such Acquisition Agreement, including offsets or reductions against promissory notes to third parties, which promissory notes reflect payment obligations of the applicable Contributor or any of its Affiliates pursuant to such Acquisition Agreement, the applicable Contributor shall, and shall cause its Affiliates to, pay an amount of cash equal to such indemnification, amount, reduction or offset to FADV within five (5) Business Days of the date on which the applicable Contributor or its Affiliate collects such indemnification or amount or recognizes such reduction or offset, which recognition will be subject, for the avoidance of doubt, to the timing of any such reduced or offset payment obligation;provided that from and after the Closing, in the event that the applicable Contributor or any of its Affiliates is required to pay any earn-out amounts to third parties arising from or relating to, such Acquisition Agreement, FADV shall, and shall cause its Affiliates to, pay an amount of cash equal to such earn-out amounts to such Contributor within five (5) Business Days of the date on which First American or its Affiliate is required to pay such earn-out amounts.
ARTICLE VIII.
INDEMNIFICATION
8.1Survival of Representations. The representations and warranties of the Parties contained inArticles II,III,IV andV (and in any Schedule or Exhibit attached hereto or certificate delivered in connection with the Closing) are made only as of the Closing Date (unless a representation speaks as of a specific date, in which case
as of such date). Such representations and warranties shall survive the Closing until the date in the eighteenth (18th) calendar month from and after the month in which the Closing Date occurs that corresponds with the Closing Date;provided,however, that (a) the representations and warranties contained inSections 2.2,2.6,3.2,3.17, 3.22(c),4.1,5.2,5.3 and5.9 shall survive until the fifth (5th) anniversary of the Closing Date and (b) the representations and warranties contained inSections 3.11 and3.22(b) shall survive until thirty (30) days after the expiration of the applicable statute of limitations period (after giving effect to any waivers and extensions thereof).
8.2Indemnification.
(a) First American and FAREISI agree to jointly and severally indemnify and hold FADV and its Subsidiaries and Affiliates (including, after the Closing, each Company and its Subsidiaries) and each of their respective directors, officers, members, managers, shareholders, employees and agents and any successors thereto (each, a “FADV Indemnified Party”) harmless from and against any and all claims, losses, liabilities, damages, costs, and reasonable out-of-pocket expenses (including reasonable attorney fees) (collectively, “Losses”) suffered, incurred or paid, directly or indirectly, as a result of or arising out of (i) the failure of any representation or warranty made by Contributors inArticles II,III orIV of this Agreement (or in any Schedule or Exhibit attached hereto or certificate delivered by Contributors in connection with the Closing) to be true and correct in all respects as of the Closing Date (unless a representation speaks as of a specific date, in which case as of such date), and (ii) any breach or nonperformance of any covenants or agreements made by any Contributor in or pursuant to this Agreement or inSection 5.1 of the Master Transfer Agreement.
(b) FADV agrees to indemnify and hold each Contributor and its Affiliates and each of their respective directors, officers, members, managers, shareholders, employees and agents and any successors thereto (each, a “Contributor Indemnified Party”) harmless from and against any and all Losses suffered, incurred or paid, directly or indirectly, as a result of or arising out of (i) the failure of any representation or warranty made by FADV inArticle V of this Agreement (or in any Schedule or Exhibit attached hereto or certificate delivered by FADV in connection with the Closing) to be true and correct in all respects as of the Closing Date (unless a representation speaks as of a specific date, in which case as of such date) and (ii) any breach or nonperformance of any covenants or agreements made by FADV in or pursuant to this Agreement.
(c) The sole recourse and remedy of each FADV Indemnified Party for any inaccuracy in any representation or warranty or alleged representation or warranty by or on behalf of Contributors contained in or made pursuant to this Agreement shall be under the provisions of and to the extent provided in thisArticle VIII. FADV shall comply with thisSection 8.2(c) and will not assert any such inaccuracy or seek any recourse or remedy in respect thereof other than under the provisions of thisArticle VIII.
(d) The sole recourse and remedy of each Contributor Indemnified Party for any inaccuracy in any representation or warranty or alleged representation or warranty by or on behalf of FADV contained in or made pursuant to this Agreement shall be under the provisions of and to the extent provided for in thisArticle VIII. Each Contributor shall comply with thisSection 8.2(d) and no Contributor will assert any such inaccuracy or seek any recourse or remedy in respect thereof other than under the provisions of thisArticle VIII.
(e) The obligations to indemnify and hold harmless pursuant to thisSection 8.2 shall survive the consummation of the transactions contemplated by this Agreement for the time periods set forth inSection 8.1, except for claims for indemnification asserted prior to the end of such periods, which claims shall survive until final resolution thereof.
(f) First American and FAREISI shall not be required to indemnify and hold harmless for Losses pursuant toSection 8.2(a)(i) until the aggregate amount due in respect of such Losses exceeds $1,950,000, and thereafter First American and FAREISI shall be required to indemnify and hold harmless for all Losses in excess of such amount;provided,however, that the maximum aggregate amount of Losses payable by First American and FAREISI underSection 8.2(a)(i) shall not exceed $39,000,000;provided,further, that
the limitations provided in thisSection 8.2(f) shall not apply to Losses that arise from (i) a breach of any of the representations and warranties contained inSections 2.2,2.6,3.2,3.17,3.22(c) and4.1, or (ii) the intentional breach or misrepresentation of any of the representations and warranties contained inArticle III where FADV can prove such intentional breach or misrepresentation was actually caused by the actions or inactions of Parker Kennedy, Anand Nallathambi or John Stancil, which Losses in (i) and (ii) of this proviso shall be limited to a maximum aggregate amount of $214,500,000.
(g) FADV shall not be required to indemnify and hold harmless for Losses pursuant toSection 8.2(b)(i) until the aggregate amount due in respect of such Losses exceeds $1,950,000, and thereafter FADV shall be required to indemnify and hold harmless for all Losses in excess of such amount;provided,however, that the maximum aggregate amount of Losses payable by FADV underSection 8.2(b)(i) shall not exceed $39,000,000;provided,further, that the limitations provided in thisSection 8.2(g) shall not apply to Losses that arise from (i) a breach of any of the representations and warranties contained inSections 5.2,5.3 and5.9 or (ii) the intentional breach or misrepresentation of any of the representations and warranties contained inArticle V where Contributors can prove such intentional breach or misrepresentation was actually caused by the actions or inactions of John Long, John Lamson or Akshaya Mehta, which Losses in (i) and (ii) of this proviso shall be limited to a maximum aggregate amount of $214,500,000.
8.3Indemnification Procedure.
(a) Promptly after the incurring of Losses by any Party or other Person entitled to indemnification under thisArticle VIII (each, an “Indemnified Party”), including any claim by a third party described inSections 8.3(c) and8.3(d) which might give rise to indemnification hereunder, the Indemnified Party shall promptly deliver a certificate containing the information described below (a “Certificate”) to the Party or Parties that are required to indemnify such Indemnified Party under thisArticle VIII (such indemnifying party or parties collectively, the “Indemnifying Party”). Each Certificate shall:
(i) state that the Indemnified Party has paid or properly accrued Losses or reasonably anticipates that it will incur liability for Losses for which such Indemnified Party is entitled to indemnification pursuant to this Agreement; and
(ii) specify in reasonable detail each individual item of Loss included in the amount so stated, the date such item was paid, properly accrued or is estimated to be paid, the basis for any anticipated liability and the nature of the misrepresentation, inaccuracy or claim to which each such item is related and the computation of the amount to which such Indemnified Party claims to be entitled underSection 8.2 of this Agreement.
(b) In case the Indemnifying Party shall object to the indemnification of an Indemnified Party in respect of any claim or claims specified in any Certificate, the Indemnifying Party shall, within thirty (30) days after receipt by the Indemnifying Party of such Certificate, deliver to the Indemnified Party a written notice to such effect and the Indemnifying Party and the Indemnified Party shall, within the 30-day period beginning on the date of receipt by the Indemnified Party of such written objection, attempt in good faith to agree upon the rights of the respective parties with respect to each of such claims to which the Indemnifying Party shall have so objected. If the Indemnified Party and the Indemnifying Party shall succeed in reaching agreement on their respective rights with respect to any of such claims, the Indemnified Party and the Indemnifying Party shall promptly prepare and sign a memorandum setting forth such agreement. Should the Indemnified Party and the Indemnifying Party be unable to agree as to any particular item or items or amount or amounts, then such dispute shall be settled by arbitration in New York, New York, the borough of Manhattan, in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. There shall be three arbitrators, one to be chosen by each Indemnifying Party and the Indemnified Party directly at will, and the third arbitrator to be selected by the two arbitrators so chosen. Each arbitrator shall be an attorney (i) whose primary practice area comprises mergers and acquisitions, (ii) with at least fifteen years of practice experience and (iii) that is a partner of a law firm consisting of at least 200 attorneys. Each of the Indemnifying Party and the Indemnified Party shall pay the fees of the arbitrator
it selects and of its own attorneys and the expenses of its witnesses, and all other fees and costs shall be borne equally by FADV on the one hand and Contributors on the other. Judgment on any award rendered by the arbitrators may be entered in any court having jurisdiction and no Party shall object to the entry of such award.
(c) Promptly after the assertion by any third party of any claim against any Indemnified Party that, in the judgment of such Indemnified Party, may result in the incurring by such Indemnified Party of Losses for which such Indemnified Party would be entitled to indemnification pursuant to thisArticle VIII, such Indemnified Party shall deliver to the Indemnifying Party a written notice describing in reasonable detail such claim and the Indemnifying Party may at its option assume the defense of the Indemnified Party against such claim (including the employment of counsel, who shall be reasonably satisfactory to the Indemnified Party) and the payment of expenses. An Indemnified Party shall have the right to employ separate counsel in any such action or claim and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the Indemnifying Party unless (x) the Indemnifying Party shall have failed, within a reasonable time after having been notified in writing by the Indemnified Party of the existence of such claim as provided in the preceding sentence, to assume the defense of such claim, (y) the employment of such counsel has been specifically authorized in writing by the Indemnifying Party or (z) the named parties to any such action (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party and such Indemnified Party shall have been advised in writing by such counsel that there may be one or more legal defenses available to such Indemnified Party which are not available to the Indemnifying Party, or available to the Indemnified Party, but the assertion of which would be adverse to the interests of the Indemnifying Party. The Indemnifying Party shall not be liable to indemnify any Indemnified Party for any settlement of any such action or claim effected without the written consent of the Indemnifying Party, but if settled with the written consent of the Indemnifying Party, or if there be a final judgment for the plaintiff in any such action, the Indemnifying Party shall indemnify and hold harmless each Indemnified Party from and against any Losses by reason of such settlement or judgment subject toSection 8.2.
(d) Claims for Losses specified in any Certificate to which an Indemnifying Party shall not object in writing within thirty (30) days of receipt of such Certificate, claims for Losses covered by a memorandum of agreement of the nature described inSection 8.3(b), claims for Losses the validity and amount of which have been the subject of judicial determination as described inSection 8.3(b) and claims for Losses the validity and amount of which shall have been the subject of a final judicial determination, or shall have been settled with the consent of the Indemnifying party, as described inSection 8.3(c) are hereinafter referred to as “Agreed Claims”. Within ten (10) Business Days of the determination of the amount of any Agreed Claims, the Indemnifying Party shall pay to the Indemnified Party an amount equal to the Agreed Claim by wire transfer in immediately available funds to the bank account or accounts designated in writing by the Indemnified Party not less than three (3) Business Days prior to such payment.
(e) Notwithstanding anything else in this Agreement, concurrent with or prior to making a claim for indemnification under thisArticle VIII, each Indemnified Party shall make a claim or claims under any available insurance policies potentially covering the subject matter of the claim for indemnification made or to be made under thisArticle VIII and shall pursue such insurance claim or claims until paid or coverage is finally denied. To the extent there is an Agreed Claim hereunder and an Indemnified Party collects amounts under such insurance policies, the Indemnified Party shall promptly pay the Indemnifying Party the amount so collected under such insurance policies up to the amount of the Agreed Claim.
(f) Notwithstanding anything herein to the contrary, no Indemnifying Party shall be required to indemnify any Indemnified Party for any special, consequential, punitive or indirect damages hereunder.
ARTICLE IX.
TAX MATTERS
9.1Tax Returns.
(a) Contributors shall have the exclusive authority and obligation to prepare on behalf of the Companies and their Subsidiaries and timely file, or cause to be prepared and timely filed, all Returns (including amended Returns and claims for refunds) of the Companies and their Subsidiaries that are due with respect to any taxable year or other taxable period ending on or prior to the Closing Date and shall pay any Taxes due in respect of such Returns. Such authority shall include, but not be limited to, the determination of the manner in which any items of income, gain, deduction, loss or credit arising out of the income, properties and operations of the Companies and their Subsidiaries shall be reported or disclosed in such Returns.
(b) Except as provided inSection 9.1(a) above, FADV shall have the exclusive authority and obligation to prepare and timely file, or cause to be prepared and timely filed, all Returns (including amended Returns and claims for refunds) of the Companies and their Subsidiaries;provided,however, FADV shall provide First American with draft Returns for the Companies and their Subsidiaries required to be prepared by FADV pursuant to thisSection 9.1(b) that include any period or portion thereof ending on or prior to the Closing Date. FADV shall provide First American with an opportunity to review and comment on such Returns that include any period or portion thereof ending on or prior to the Closing Date and FADV shall in good faith take into account such comments in its preparation of such Returns.
9.2Payment of Taxes.
(a) First American and FAREISI shall be jointly and severally responsible and liable for the timely payment of any and all Taxes imposed on or with respect to the properties, income and operations of any Company and its Subsidiaries for all Pre-Closing Periods, including the portion of the taxable period beginning on or before the Closing Date and ending after the Closing Date (the “Overlap Period”) up to and including the Closing Date. In addition, First American and FAREISI shall jointly and severally pay to FADV the amount of any Taxes allocated to First American and FAREISI pursuant toSection 9.2(b) below (to the extent that First American and FAREISI are liable therefor and to the extent not already paid by First American and FAREISI on or before the Closing Date) on or prior to five (5) Business Days prior to the due date of such Taxes.
(b) All Taxes and Tax liabilities with respect to the income, property or operations of any Company and its Subsidiaries that relate to the Overlap Period shall be apportioned between First American and FAREISI, on the one hand, and FADV, on the other, as follows: (i) in the case of Taxes other than income, sales and use and withholding Taxes, on a per diem basis, and (ii) in the case of income, sales and use and withholding Taxes, as determined from the books and records of each Company and its Subsidiaries as though the taxable year of such Company and its Subsidiaries terminated at the close of business on the Closing Date. First American and FAREISI shall be jointly and severally liable for Taxes of each Company and its Subsidiaries which are attributable to the portion of the Overlap Period ending on and including the Closing Date and FADV shall be liable for Taxes of each Company and its Subsidiaries which are attributable to the portion of the Overlap Period beginning on the day following the Closing Date.
9.3Transfer Taxes. All transfer, sales and use, value added, registration, documentary, stamp and similar Taxes imposed in connection with the sale of the stock of the Companies or any other transaction that occurs pursuant to this Agreement shall be borne equally by First American and FAREISI, on the one hand, and FADV on the other.
9.4Controversies.
(a) FADV shall promptly within thirty (30) days of receipt notify First American in writing upon receipt by FADV or any Affiliate of FADV (including the Companies and their Subsidiaries after the
Closing Date) of written notice of any inquiries, claims, assessments, audits or similar events with respect to Taxes relating to a taxable period ending on or prior to the Closing Date for which First American of FAREISI may be liable under this Agreement (any such inquiry, claim, assessment, audit or similar event, a “Tax Matter”). First American and FAREISI at their sole expense, shall have the authority to represent the interests of the Companies and their Subsidiaries with respect to any Tax Matter before the IRS, any other taxing authority, any other governmental agency or authority or any court and shall have the sole right to control the defense, compromise or other resolution of any Tax Matter, including responding to inquiries, filing Returns and contesting, defending against and resolving any assessment for additional Taxes or notice of Tax deficiency or other adjustment of Taxes of, or relating to, a Tax Matter.
(b) Except as otherwise provided inSection 9.4(a) above, FADV shall have the sole right to control any audit or examination by any taxing authority, initiate any claim for refund or amend any Return, and contest, resolve and defend against any assessment for additional Taxes, notice of Tax deficiency or other adjustment of Taxes of, or relating to, the income, assets or operations of the Companies and their Subsidiaries for all taxable periods.
9.5Indemnification for Taxes. Notwithstanding any provision to the contrary contained in this Agreement, First American and FAREISI agree to jointly and severally indemnify, defend and hold harmless FADV Indemnified Parties on an after-tax basis against (a) all Taxes imposed on or asserted against the properties, income or operations of the Companies and their Subsidiaries or for which the Companies and/or their Subsidiaries may otherwise be liable, for all Pre-Closing Periods, but only to the extent (i) First American and FAREISI have not otherwise indemnified FADV for such Taxes underSection 8.2(a) of this Agreement and (ii) the aggregate amount of such Taxes exceeds the aggregate accruals for Taxes made by the First American and FAREISI on the books and records of the Companies and their Subsidiaries as of the Closing Date, and (b) all Taxes imposed on the Companies and any of their Subsidiaries as a result of the provisions of Treasury Regulations Section 1.1502-6 or the analogous provisions of any state, local or foreign law.
9.6Post-Closing Access and Cooperation. FADV shall afford Contributors, upon reasonable notice and without undue interruption to the business of FADV, the Companies and their Subsidiaries, access during normal business hours to the books and records of the Companies and their Subsidiaries relating to the Companies and their Subsidiaries prior to the Closing Date for a period of seven (7) years following the Closing Date in connection with (a) preparation of the Returns specified inSection 9.1 above, (b) evaluation of any claim for indemnification underSection 9.5 above, and (c) investigation or contest of any Tax Matter which First American and FAREISI have the authority to conduct underSection 9.4 above. FADV shall, and shall cause its Affiliates to, from and after the Closing Date, preserve all books and records of the Companies and their Subsidiaries relating to the Companies and their Subsidiaries prior to the Closing Date for such seven (7) year period, and, thereafter, not destroy or dispose of or allow the destruction or disposition of such books and records without first having offered in writing to deliver such books and records to Contributors at Contributors’ expense. If Contributors fail to request such books and records within ninety (90) days after receipt of the notice described in the preceding sentence, FADV may dispose of such books and records.
ARTICLE X.
MISCELLANEOUS
10.1Knowledge. Where any representation or warranty contained in this Agreement is expressly qualified by reference to (a) the knowledge of a Person, the Person making such representation or warranty confirms that the senior executive officers of such Person have made a reasonable inquiry of the managers reporting to them as to the matters that are the subject of such representations and warranties, (b) the actual knowledge of Contributors, such representation or warranty is made to the actual knowledge of Parker S. Kennedy, Anand Nallathambi and John Stancil without, for the avoidance of doubt, any duty of inquiry, and (c) the actual knowledge of FADV, such representation or warranty is made to the actual knowledge of John Long, John Lamson and Akshaya Mehta without, for the avoidance of doubt, any duty of inquiry.
10.2Expenses. Except as expressly provided herein, each Party shall bear its own (a) costs incurred as a result of the transactions contemplated hereby, including payments to third parties, if any, to obtain their consent to such transfer and (b) professional fees and related costs and expenses (including fees, costs and expenses of accountants, attorneys, benefits specialists, investment banks, financial advisors, tax advisors and appraisers) incurred by it in connection with the preparation, execution and delivery of this Agreement and the transactions contemplated hereby.
10.3Publicity; Confidentiality. Except as otherwise required by law, neither First American (and its Affiliates, including the other Contributors) nor FADV (and its Affiliates) shall issue any press release or make any other public statement, in each case relating to, connected with or arising out of this Agreement or the matters contained herein or therein, without obtaining the prior written consent of the other to the contents and the manner of presentation and publication thereof, which consent shall not be unreasonably or untimely withheld, delayed or conditioned;provided,however, that either First American or FADV may, without the prior written consent of the other, issue any such press release or other public statement as may, upon the advice of counsel, be required by law or the rules or regulations of the New York Stock Exchange or the Nasdaq National Market, as applicable, if it has used all reasonable efforts to consult with the other.
10.4Governing Law; Jurisdiction.
(a) The interpretation and construction of this Agreement, and all matters relating hereto, shall be governed by the laws of the State of New York (exclusive of conflict of laws principles) applicable to agreements executed and to be performed solely within such State.
(b) Each of the Parties hereby irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of any New York state court sitting in the borough of Manhattan, New York, or Federal court of the United States of America in the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, the agreements delivered in connection herewith, or the transactions contemplated hereby, or for recognition or enforcement of any judgment relating thereto, and each of the Parties hereby irrevocably and unconditionally (i) agrees not to commence any such action or proceeding except in such courts, (ii) agrees that any claim in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by law, in such Federal court, (iii) waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any such action or proceeding in any such New York State or Federal court and (iv) waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such New York State or Federal court. Each of the Parties agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Each Party irrevocably consents to service of process in the manner provided for notices inSection 10.5;provided that nothing in this Agreement will affect the right of any Party to serve process in any other manner permitted by law.
(c) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT AND ANY OF THE AGREEMENTS DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE EITHER OF SUCH WAIVERS, (ii) IT UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF SUCH WAIVERS, (iii) IT MAKES SUCH WAIVERS VOLUNTARILY AND (iv) IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 10.4.
10.5Notices. Any notice or other communication required or permitted under this Agreement shall be sufficiently given if delivered in person or sent by facsimile or by registered or certified mail, postage prepaid, addressed as follows:
(a) If to FADV, to:
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or such other address or number as shall be furnished in writing by any such Party. Except for a notice of a change of address, which shall be effective only upon receipt thereof, all such notices, requests, demands, waivers and communications properly addressed shall be effective: (i) if sent by U.S. mail, three (3) Business Days after deposit in the U.S. mail, postage prepaid; (ii) if sent by FedEx or other overnight delivery service, one (1) Business Day after delivery to such service; (iii) if sent by personal courier, upon receipt; and (iv) if sent by facsimile, upon receipt.
10.6Parties in Interest. This Agreement may not be transferred, assigned, pledged or hypothecated by any Party hereto, other than by operation of law, except that FADV may assign any of its rights and benefits (but not its obligations) hereunder to any of its wholly-owned subsidiaries. This Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective successors and permitted assigns.
10.7Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one instrument.
10.8Entire Agreement. This Agreement, including the other documents referred to herein and in the Exhibits and Schedules hereto which form a part hereof, contains the entire understanding of the Parties hereto with respect to the subject matter contained herein and therein. This Agreement supersedes all prior agreements and understandings between the Parties with respect to such subject matter.
10.9Amendments. This Agreement may not be amended or modified orally, but only by an agreement in writing signed by the Parties and consented to by the Independent Committee.
10.10Severability. If any term, provision, agreement, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other competent authority to be invalid, void or unenforceable, the remainder of the terms, provisions, agreements, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any Party. Upon such a determination, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in a reasonably acceptable manner in order that the transactions contemplated hereby may be consummated as originally contemplated to the fullest extent possible.
10.11Extension; Waiver. At any time prior to the Closing, the Parties may, to the extent legally allowed, but shall not be obligated to, (a) extend the time for performance of any of the obligations or other acts of the other Parties, (b) waive any inaccuracies in the representations and warranties of the other Parties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions of the other Parties contained herein;provided that, except as otherwise permitted by this Agreement, any extension or waiver granted by FADV shall require the consent of the Independent Committee to be effective. Any agreement on the part of a Party to any such extension or waiver shall be valid only if and to the extent set forth in a written instrument signed by such Party.
10.12No Other Representations or Warranties. Except for the representations and warranties contained inArticles II andIII of this Agreement or as expressly provided in the agreements contemplated hereby, if such Contributor is a party thereto, no Contributor makes any express or implied representation or warranty with respect to any Contributor or the FACO Business, and each Contributor expressly disclaims any other representations or warranties, whether made by Contributors or any of their respective Affiliates, officers, directors, employees, agents or representatives with respect thereto. Except for the representations and warranties contained inArticle IV of this Agreement, no Contributor makes any express or implied representation or warranty with respect to the DealerTrack Interest, and each Contributor expressly disclaims any other representations or warranties, whether made by Contributors or any of their respective Affiliates, officers, directors, employees, agents or representatives with respect thereto. Except for the representations and warranties contained inArticle V of this Agreement or as expressly provided in the agreements contemplated hereby, if FADV is a party thereto, FADV makes no express or implied representation or warranty with respect to FADV’s business, and FADV expressly disclaims any other representations or warranties, whether made by FADV or any of its Affiliates, officers, directors, employees, agents or representatives with respect thereto. Notwithstanding anything else in this Agreement or the other Related Agreements, no Contributor makes any representation or warranty with regard to Bar None except as provided inSection 3.22 or the effect of Bar None on the Companies or the Business (for purposes of the representations and warranties inArticles II andIII (excludingSection 3.22) or otherwise), and Bar None will be transferred to FADV on an “as is where is” basis, subject only toSection 7.3.
10.13Third Party Beneficiaries. Each Party hereto intends that this Agreement shall not benefit or create any right or cause of action in or on behalf of any Person other than the Parties hereto.
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IN WITNESS WHEREOF, each Party has caused its name to be hereunto subscribed by its duly authorized signatory as of the day and year first above written.
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B-33
-Signature Page-
First American Contribution Agreement
Annex C
CONTRIBUTION AGREEMENT
among
FIRST AMERICAN REAL ESTATE SOLUTIONS, LLC,
FADV HOLDINGS LLC,
and
FIRST ADVANTAGE CORPORATION
Dated as of [ ], 2005
TABLE OF CONTENTS1
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Note: Pursuant to Item 601(b)(2) of Regulation S-K, schedules containing disclosure of certain materials and exceptions to the representations and warranties have been omitted. First Advantage will provide a copy of such schedules supplementally to the SEC upon request. The description of the schedules are included only for purposes of Item 601(b)(2) of Regulation S-K.
CONTRIBUTION AGREEMENT
This CONTRIBUTION AGREEMENT (as the same may be amended, modified and supplemented from time to time, this “Agreement”) is entered into as of [ ], 2005 by and among FIRST AMERICAN REAL ESTATE SOLUTIONS, LLC, a California limited liability company (“FARES”); FADV HOLDINGS LLC, a Delaware limited liability company (“Newco”); and FIRST ADVANTAGE CORPORATION, a Delaware corporation (“FADV”; FARES, Newco and FADV are each a “Party” and are collectively the “Parties”).
W I T N E S S E T H :
WHEREAS, (a) FARES is the record owner of a 50.1% membership interest in RELS, LLC, a Delaware limited liability company (“RELS”); and (b) Newco is the owner of the securities, assets, properties and rights constituting FARES’ CREDCO Division (collectively, the “Division”), including all of the issued and outstanding capital stock of First American Credco of Puerto Rico, Inc., a Delaware corporation (the “Company”);
WHEREAS, FARES, The First American Corporation, First American Real Estate Information Services, Inc., Newco and FADV are parties to that certain Amended and Restated Master Transfer Agreement, dated as of June 22, 2005 (the “Master Transfer Agreement”), pursuant to which, among other things, FARES, Newco and FADV shall have entered into this Agreement as a condition precedent to closing of the transactions contemplated by the Master Transfer Agreement; and
WHEREAS, FARES and Newco (each, a “Contributor” and collectively, “Contributors”) desire to contribute, and FADV desires to accept the contribution, of the Division pursuant to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants, representations, warranties and agreements herein contained, the Parties agree as follows:
ARTICLE I.
DEFINITIONS AND INTERPRETATIONS
1.1Defined Terms. Capitalized terms used in this Agreement but not defined herein shall have the meanings assigned in the Master Transfer Agreement. In this Agreement the following words and expressions shall have the following meanings (such meaning to be equally applicable to both the singular and plural forms of the terms defined):
“24/7” has the meaning provided inSection 2.13(k).
“Accredited Investor” has the meaning set forth in Regulation D promulgated under the Securities Act of 1933, as amended.
“Acquisition Agreements” has the meaning provided inSection 5.2.
“Affiliate” means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with, such Person. For purposes of this definition, “control” (including, with correlative meanings, the terms “controlled by” and “under common control with”), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by Contract or otherwise;provided that FADV and its Subsidiaries shall not be deemed to be Affiliates of Contributors, the Company for purposes of this Agreement, and Contributors and their Subsidiaries (including the Company) shall not be deemed to be Affiliates of FADV for purposes of this Agreement.
“Agreement” has the meaning provided in the introductory paragraph.
“Agreed Claims” has the meaning provided inSection 6.3(d).
“Assumed Contracts” has the meaning provided inSection 4.1(f).
“Assumed Liabilities” has the meaning provided inSection 4.3.
“Balance Sheet Date” means March 31, 2005.
“Balance Sheet” means the unaudited pro forma balance sheet of First American’s Credit Information Group for the quarter ended on the Balance Sheet Date.
“Business Day” means any day, other than a Saturday, Sunday or other day on which banks located in Los Angeles, California or St. Petersburg, Florida are authorized or required by law to close.
“Certificate” has the meaning provided inSection 6.3(a).
“Class A Common Stock” means FADV’s Class A common stock, par value $0.001 per share.
“Class B Common Stock” means FADV’s Class B common stock, par value $0.001 per share.
“Code” means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and the rulings issued thereunder.
“Common Stock” means the Class A Common Stock and the Class B Common Stock.
“Company” has the meaning provided in the first recital.
“Contracts” means any Contract, agreement, understanding, note, bond, mortgage, indenture, guarantee, license, franchise, commitment, lease or instrument, whether oral or written, including all amendments and supplements thereto and restatements thereof.
“Contributed Assets” has the meaning provided inSection 4.1.
“Contributed Intellectual Property” has the meaning provided inSection 2.13(a).
“Contributor” and “Contributors” has the meanings provided in the third recital.
“FARES” has the meanings provided in the introductory paragraph.
“FARES Indemnified Party” has the meaning provided inSection 6.2(b).
“Division” has the meaning provided in the first recital.
“Division Permitted Liens” has the meaning provided inSection 2.6(a).
“Ellie Mae” has the meaning provided inSection 4.2(f).
“Encumbrances” means all liens, security interests, options, rights of first refusal, claims, easements, mortgages, charges, indentures, deeds of trust, rights of way, restrictions on the use of real property, encroachments, licenses to third parties, leases to third parties, security agreements and any other encumbrances and other restrictions or limitations on use or irregularities in title thereto.
“Entity” means any Person that is not a natural person.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Excluded Assets” has the meaning provided inSection 4.2.
“Excluded Liabilities” has the meaning provided inSection 4.4.
“FADV” has the meaning provided in the introductory paragraph.
“FADV Financial Statements” has the meaning provided inSection 3.4.
“FADV Indemnified Party” has the meaning provided inSection 6.2(a).
“FADV SEC Reports” has the meaning provided inSection 3.4.
“Financial Statements” means the unaudited balance sheet and income statement of First American’s Credit Information Group for the years ended December 31, 2002, 2003 and 2004, and the Balance Sheet and related income statement for the three months ended on the Balance Sheet Date.
“First American Contribution Agreement” means the Contribution Agreement, dated as of the date hereof, among Parent, First American Real Estate Information Solutions, Inc., Newco and FADV.
“GAAP” means United States generally accepted accounting principles applied on a consistent basis.
“Governmental Entity” means any instrumentality, subdivision, court, administrative agency, commission, official or other authority of the United States or any other country or any state, province, prefect, municipality, locality or other government or political subdivision thereof, or any quasi-governmental or private body exercising any regulatory, taxing, importing or other governmental or quasi-governmental authority.
“Indebtedness” of any Person shall mean and include (a) indebtedness for borrowed money or indebtedness issued or incurred in substitution or exchange for indebtedness for borrowed money, (b) amounts owing as deferred purchase price for property or services, including all stockholder notes and “earn-out” payments, (c) indebtedness evidenced by any note, bond, debenture, mortgage or other debt instrument or debt security, (d) commitments or obligations by which such Person assures a creditor against loss (including contingent reimbursement obligations with respect to letters of credit), (e) indebtedness secured by an Encumbrance on assets or properties of such Person, (f) obligations under any interest rate, currency or other hedging agreement or (g) guarantees or other contingent liabilities (including so-called take-or-pay or keep-well agreements) with respect to any indebtedness, obligation, claim or liability of any other Person of a type described in clauses (a) through (f) above.
“Indemnified Party” has the meaning provided inSection 6.3(a).
“Indemnifying Party” has the meaning provided inSection 6.3(a).
“Intellectual Property” means all domestic and foreign patents, patent applications, trademarks, service marks and other indicia of origin, trademark and service mark registrations and applications for registrations thereof, copyrights, copyright registrations and applications for registration thereof, Internet domain names, applications and reservations therefor, uniform resource locators (“URLs”) and the Internet sites (collectively, the “Sites”) corresponding thereto, trade secrets, inventions (whether or not patentable), invention disclosures, moral and economic rights of authors and inventors (however denominated), technical data, customer lists, corporate and business names, trade names, trade dress, brand names, know-how, show-how, maskworks, formulae, methods (whether or not patentable), designs, processes, procedures, technology, source codes, object codes, computer software programs, databases, data collectors and other proprietary information or material of any type, whether written or unwritten (and all goodwill associated with, and all derivatives, improvements and refinements of, any of the foregoing).
“IRS” means the Internal Revenue Service.
“Licenses” has the meaning provided inSection 2.15.
“Losses” has the meaning provided inSection 6.2(a).
“Master Lease” has the meaning provided inSection 5.5.
“Master Transfer Agreement” has the meaning provided in the second recital.
“Material Adverse Effect” means, (a) when used with respect to the Business, any material adverse change in or effect on the properties, assets, businesses, liabilities, results of operations or condition (financial or otherwise) of the Business, taken as a whole, and (b) when used with respect to FADV, (i) any materially adverse change in or effect on (including any material delay) the ability of FADV to perform its obligations under this Agreement, and (ii) any material adverse change in or effect on the properties, assets,
businesses, liabilities, results of operations or condition (financial or otherwise) of FADV and its Subsidiaries, taken as a whole;provided,however, that the term “Material Adverse Effect” shall not include any adverse change or effect that is proximately caused by (1) conditions affecting the United States economy generally or the economy of the regions in which the applicable Person and its Subsidiaries (if any), taken as a whole, conducts a material part of its business, (2) changes in financial markets, (3) conditions affecting the industries in which the applicable Person and its Subsidiaries (if any) compete or (4) the announcement, or other disclosure, of the Transaction (to the extent such announcement or disclosure is not effected in contravention of any term of this Agreement) or the consummation of the Transaction (including compliance by such Person with its covenants hereunder).
“Material Contracts” has the meaning provided inSection 2.9(b).
“Ordinary Course” means, with respect to any Person, the ordinary course of commercial operations customarily engaged in by such Person, consistent with past practices (including with respect to quantity and frequency).
“Overlap Period” has the meaning provided inSection 7.2(a).
“Parent” means The First American Corporation, a California corporation.
“Party” or “Parties” has the meaning provided in the introductory paragraph.
“Person” means and includes any individual, partnership, joint venture, association, joint stock company, corporation, trust, limited liability company, unincorporated organization (including the Division), a group and a government or other department, agency or political subdivision thereof.
“Pre-Closing Period” has the meaning provided inSection 2.12(b).
“RELS” has the meaning provided in the first recital.
“Retained Portal Agreements” has the meaning provided inSection 4.2(g).
“Returns” has the meaning provided inSection 2.12(a).
“RRS Services Agreement” has the meaning provided in the Outsourcing Agreement, dated as of the date hereof, between First American and FADV.
“SEC” means the Securities and Exchange Commission.
“Securities Act” means the Securities Act of 1933, as amended.
“Subsidiary” means, with respect to any Person, (a) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person and/or one or more Subsidiaries of such Person and (b) any Entity (other than a corporation) in which such Person and/or one more Subsidiaries of such Person has more than a 50% equity interest or otherwise controls the management and affairs of such Entity (including the power to veto any material act or decision);provided that FADV and its Subsidiaries shall not be deemed to be Subsidiaries of Parent for purposes of this Agreement.
“Taxes” means all taxes, assessments, charges, duties, fees, levies or other governmental charges, including all Federal, state, local, foreign and other income, franchise, profits, gross receipts, capital gains, capital stock, transfer, property, sales, use, value-added, occupation, property, excise, severance, windfall profits, stamp, license, payroll, social security, withholding and other taxes, assessments, charges, duties, fees, levies or other governmental charges of any kind whatsoever (whether payable directly or by withholding and whether or not requiring the filing of a Tax Return), all estimated taxes, deficiency assessments, additions to tax, penalties and interest and shall include any liability for such amounts as a result either of being a member of a combined, consolidated, unitary or Affiliated group or of a contractual obligation to indemnify any Person.
“XRES Business” has the meaning provided inSection 2.24.
“XRES Purchase Agreement” has the meaning provided inSection 4.1(l).
1.2Principles of Construction.
(a) All references to Articles, Sections, subsections, Schedules and Exhibits are to Articles, Sections, subsections, Schedules and Exhibits in or to this Agreement unless otherwise specified. The words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. The term “including” is not limiting and means “including without limitation.”
(b) All accounting terms not specifically defined herein shall be construed in accordance with GAAP.
(c) In the computation of periods of time from a specified date to a later specified date, the words “from” and “within” each mean “from and including”; the words “to” and “until” each mean “to but excluding”; and the word “through” means “to and including.”
(d) The Article and Section headings herein are for convenience only and shall not affect the construction hereof.
(e) In the event that the final day of any time period provided herein does not fall on a Business Day, such time period shall be extended such that the final day of such period shall fall on the next Business Day thereafter.
(f) This Agreement is the result of negotiations among and has been reviewed by each Party’s counsel. Accordingly, this Agreement shall not be construed against any Party merely because of such Party’s involvement in its preparation.
(g) All references to (i) Schedules inArticle II are to Schedules that form a part of the disclosure schedule delivered by FARES to FADV on the date of the Master Transfer Agreement as updated pursuant toSection 5.7 of the Master Transfer Agreement, and (ii) Schedules inArticle III are to Schedules that form a part of the disclosure schedule delivered by FADV to FARES on the date of the Master Transfer Agreement as updated pursuant toSection 5.7 of the Master Transfer Agreement. The Schedules referred to herein are incorporated herein by reference.
(h) It is understood and agreed that neither the specification of any dollar amount in the representations and warranties contained in this Agreement nor the inclusion of any specific item in the Schedules or Exhibits hereto is intended to imply that such amounts or higher or lower amounts, or the items so included or other items, are or are not material, and no Party shall use the fact of the setting of such amounts or the fact of the inclusion of any such item in the Schedules or Exhibits hereto in any dispute or controversy between the Parties as to whether any obligation, item or matter is or is not material for purposes of this Agreement. Whenever a representation or warranty made by FARES is qualified by materiality or immateriality, such materiality or immateriality, as the case may be, shall be construed in respect of the Business, taken as a whole.
ARTICLE II.
REPRESENTATIONS OF FARES
Subject toSection 8.12, FARES represents, warrants and agrees in favor of FADV as of the Closing Date (unless a representation speaks as of a specific date, in which case, as of such date), as follows:
2.1Existence and Good Standing. FARES (a) is a limited liability company validly existing and in good standing under the laws of the State of California, and (b) has all requisite limited liability company power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Newco is (i) a limited liability company validly existing and in good standing under the laws of the State of Delaware, and (ii) has all requisite limited liability company power and authority to own, lease and operate its properties and to carry out its business as now being conducted.
2.2Binding Effect. Each Contributor has the requisite corporate or limited liability company power and authority to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement (a) has been duly authorized and approved by all required limited liability company action of FARES and Newco, (b) has been duly executed and delivered by FARES and Newco, and (c) assuming the due execution and delivery hereof by FADV, constitutes the valid and binding agreement of FARES and Newco enforceable against each in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency or similar laws and equitable principles relating to or affecting the rights of creditors generally from time to time in effect.
2.3Company; Subsidiaries.
(a) The Company is validly existing and in good standing under the laws of Delaware and has all requisite corporate power to own, lease and operate its properties and to carry on its business as now being conducted. The Company is not in violation of any of the provisions of its certificate of incorporation or bylaws.
(b) Set forth onSchedule 2.3(b) is a list of jurisdictions in which the Company is duly qualified or licensed to conduct its business, and the Company is in good standing in each such jurisdiction. Such jurisdictions are the only jurisdictions in which the character or location of the properties owned, leased or operated by the Company, or the nature of the business conducted by the Company, makes such qualification or licensing necessary, except where the failure to be so qualified or licensed would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business.
(c) No Contributor (solely with respect to the Division) has any Subsidiaries and neither Contributor (solely with respect to the Division) otherwise owns, directly or indirectly, any capital stock of, or other equity, ownership, proprietary or voting interest in, any Person, other than the Company.
(d)Schedule 2.3(d) sets forth the capitalization of the Company. All outstanding shares of the capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable. Except as set forth onSchedule 2.3(d), there are no outstanding options, warrants, rights, calls, commitments, conversion rights, rights of exchange, plans or other agreements of any character providing for the purchase, issuance or sale of any shares of capital stock of the Company, any other securities of the Company, or any equity interest in the Company or its business, and none of the foregoing will arise as a result of the execution or performance of this Agreement or the transactions contemplated herein. No Person has any demand or piggyback registration rights in respect of shares of common stock or other securities of the Company. All securities, rights, options and plans set forth (or required to be set forth) onSchedule 2.3(d) have been issued or granted in accordance with applicable law and not in contravention with the articles or certificate of incorporation, bylaws, articles of organization or operating agreement of the Company.
(e) Newco owns, beneficially and of record, 100% of the capital stock of the Company, free and clear of all Encumbrances.
2.4Financial Statements.
(a)Schedule 2.4(a) contains copies of the Financial Statements. Except as specifically disclosed therein and except as set forth inSchedule 2.4(a), that portion of the Financial Statements relating to the Division has been prepared from, and in accordance with, the books and records of the Business, were prepared in accordance with GAAP and fairly present in all material respects, subject to the absence of notes with respect to interim periods and audit adjustments, the financial position of the Division on a combined basis with the other businesses constituting the Business as of the dates thereof and the results of operations of the Division on a combined basis with the other businesses constituting the Business for the periods presented therein.
(b) Except as set forth onSchedule 2.4(b), from the Balance Sheet Date through the date of this Agreement, the Business has been conducted in the Ordinary Course and there has not been any incurrence, assumption or guarantee by Contributors with respect to the Division of any Indebtedness other than in the Ordinary Course.
2.5Books and Records. Except as set forth onSchedule 2.5, the Division has no material records, systems, controls, data or information recorded, stored, maintained, operated or otherwise wholly or partly dependent upon or held by any means (including any electronic, mechanical or photographic process, whether computerized or not) which (including all means of access thereto and therefrom) are not under the exclusive ownership and direct control of the Division or an Affiliate of FARES. The minute books of the Company contain, in all material respects, accurate records of all meetings of, and corporate action taken by (including action taken by written consent) the shareholders and Board of Directors of the Company.
2.6Title to Properties; Encumbrances.
(a) Except (i) as set forth onSchedule 2.6(a) and (ii) for properties and assets reflected in the Balance Sheet or acquired since the Balance Sheet Date which have been sold or otherwise disposed of in the Ordinary Course, and except for the Excluded Assets, Newco or the Company has good, valid and marketable title to, or in the case of leased assets, a valid leasehold interest in, all of the Contributed Assets, subject to no Encumbrance, except for (A) liens reflected in the Balance Sheet, (B) liens consisting of zoning or planning restrictions, easements, permits and other restrictions or limitations on the use of real property or irregularities in title thereto, and other liens or other imperfections in title, if any, which do not, individually or in the aggregate, materially detract from the value of, or impair the use of, such property by the Division in the operation of its business, (C) liens for current taxes, assessments or governmental charges or levies on property not yet due and delinquent and (D) liens described onSchedule 2.6(a) (liens of the type described in clauses (A), (B), (C) and (D) above are hereinafter sometimes referred to as “Division Permitted Liens”). Upon the consummation of the transactions contemplated hereby, and assuming the receipt of any and all consents required to assign the Assumed Contracts, Newco shall transfer all of the Contributed Assets to FADV free and clear of any Encumbrances (other than Division Permitted Liens and the Assumed Liabilities).
(b) Except (i) as set forth onSchedule 2.6(b) (and except for property leased by the Company, which, for the avoidance of doubt, is represented and warranted to inSection 2.8) and (ii) for properties and assets reflected in the Balance Sheet or acquired since the Balance Sheet Date which have been sold or otherwise disposed of in the Ordinary Course, and except for the Excluded Assets, the Company has good, valid and marketable title to (A) all of its properties and assets (real and personal, tangible and intangible), including all of the properties and assets reflected in the Balance Sheet, except as indicated in the notes thereto, and (B) all of the properties and assets purchased by the Company since the Balance Sheet Date; in each case subject to no Encumbrance, except for Division Permitted Liens and liens described onSchedule 2.6(b). The tangible personal property, real property and assets owned or leased by the Companies (as defined in the First American Contribution Agreement), together with the Contributed Assets, the tangible personal property, real property and assets subject to the Related Agreements, and the tangible personal property, real property and assets used by First American and its Affiliates to provide services to FADV and its Affiliates
under the Related Agreements, constitute all of the tangible personal property, real property and assets necessary for the conduct of the Business as conducted in the Ordinary Course in all material respects.
2.7Real Property. None of FARES, Newco or the Company owns, directly or indirectly, in whole or in part, any fee interest in any real property used by the Division.
2.8Leases.Schedule 2.8 contains an accurate and complete list of each real and personal property lease relating solely to the Division for which total annual rent payments equal or exceed $200,000 to which either Contributor is a party (as lessee or lessor), and each real and personal property lease for which total annual rent payments equal or exceed $25,000 to which the Company is a party (as lessee or lessor). Each lease set forth onSchedule 2.8 (or required to be set forth onSchedule 2.8) is in full force and effect; all rents and additional rents due by the Contributors or the Company, as applicable, to date on each such lease have been paid (other than any pass through expenses not yet invoiced to FARES, Newco or the Company); in each case, the lessee has been in peaceable possession since the commencement of the original term of such lease and is not in default thereunder and no waiver, indulgence or postponement of the lessee’s obligations thereunder has been granted by the lessor; and there exists no event of default or event, occurrence, condition or act which, with the giving of notice, the lapse of time or the happening of any further event or condition, would become a default under such lease, except where such defaults would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business. The tangible personal property leased by the Company and leased by FARES or Newco solely for use by the Division is in a state of good maintenance and repair, reasonable wear and tear excepted, except where the state of such property would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business.
2.9Material Contracts.
(a) Except as set forth onSchedule 2.9(a), neither Contributors, solely in connection with its operation of the Division, nor the Company is bound by (i) any agreement, Contract or commitment relating to the employment of any Person (as hereinafter defined) or any bonus, deferred compensation, pension, profit sharing, stock option, employee stock purchase, retirement or other employee benefit plan (including any agreement under which an employee would be entitled to payment, vesting of rights or benefits or other compensation upon consummation of the Transaction), (ii) any agreement, indenture or other instrument which contains restrictions with respect to payment of dividends or any other distribution in respect of the capital stock of the Company, (iii) any agreement, Contract or commitment relating to capital expenditures in excess of $500,000 per individual item or $1,000,000 in the aggregate, (iv) any loan or advance to, or investment in, any Person or any agreement, Contract or commitment relating to the making of any such loan, advance or investment, (v) any guarantee or other contingent liability in respect of any Indebtedness or obligation of any Person (other than the endorsement of negotiable instruments for collection in the Ordinary Course), (vi) any management service, consulting or any other similar type Contract, (vii) any agreement, Contract or commitment limiting the ability to engage in any line of business or to compete with any Person, (viii) any agreement, Contract or commitment not entered into in the Ordinary Course which involves $500,000 or more and is not cancelable without penalty within 30 days or (ix) any agreement, Contract or commitment which by its operation or termination would reasonably be expected to have a Material Adverse Effect on the Business. To the knowledge of FARES, the Contracts listed onSchedule 2.9(a) and the other schedules attached hereto, together with the customer contracts not required to be listed onSchedule 2.9(a), constitute all the material Contracts of the Division and the Company, taken as a whole.
(b) Each Assumed Contract and each other Contract set forth onSchedule 2.9(a) (or required to be set forth onSchedule 2.9(a)) (the “Material Contracts”) is in full force and effect. Except as set forth inSchedule 2.9(b), and except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business, assuming the receipt of any and all consents of third parties in connection with the assignment of the Assumed Contracts to FADV, each Material Contract is in full force and effect and there exists no (i) default or event of default by the Division or, to the knowledge of FARES, any other party to any such Material Contract, or (ii) event, occurrence, condition or act which, with the
giving of notice, the lapse of time or the happening of any other event or condition, would become a default or event of default by the Division or, to the knowledge of FARES, any other party thereto, with respect to any term or provision of any such Material Contract. Assuming the receipt of any and all consents of third parties in connection with the transactions contemplated hereby, none of FARES, Newco nor the Company has violated any of the material terms or conditions of any Material Contract in any material respect, and, to the knowledge of FARES, all of the material covenants to be performed by any other party thereto have been fully performed in all material respects.
2.10Restrictive Documents. Assuming the receipt of any and all consents of third parties in connection with the transactions contemplated hereby, and except as set forth onSchedule 2.10, no Contributor or the Company is subject to, or a party to, any charter, bylaw, mortgage, lien, lease, license, permit, agreement, Contract, instrument, law, rule, ordinance, regulation, order, judgment or decree, or any other restriction of any kind or character, which (a) would, individually or in the aggregate, reasonably be expected to have a material adverse effect on (including any material delay) the ability of either Contributor to perform its obligations under this Agreement, or (b) by its own operation, and not by the breach or violation, as the case may be, thereof, (i) would materially restrict the ability of the Business to acquire any property or conduct business in any area or business line, (ii) has or would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business or (iii) prevent or materially delay the consummation of the transactions contemplated by this Agreement.
2.11Litigation. Except as set forth onSchedule 2.11, there is no action, suit, proceeding at law or in equity, arbitration or administrative or other proceeding by or before (or to the knowledge of FARES, any investigation by) any governmental or other instrumentality or agency, pending, or, to the knowledge of FARES, threatened, against or impacting (a) either Contributor that would, individually or in the aggregate, reasonably be expected to have a material adverse effect on (including any material delay) the ability of such Contributor to perform its obligations under this Agreement, or (b) the Division or any of its properties or rights which would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business. No Contributor or the Company is subject to any judgment, order or decree entered in any lawsuit or proceeding which would, individually or in the aggregate, reasonably be expected to have (i) a material adverse effect on (including any material delay) the ability of Contributors to perform their obligations under this Agreement, or (ii) have a Material Adverse Effect on the Business.
2.12Taxes.
(a)Tax Returns. Contributors and the Company have timely filed or caused to be timely filed, and will timely file or cause to be timely filed, with the appropriate taxing authorities all material tax returns, statements, forms and reports (including elections, declarations, disclosures, schedules, estimates and information tax returns) for Taxes (“Returns”) that are required to be filed by it or them with respect to the Company, the Division and the Contributed Assets on or prior to the Closing Date. The Returns have accurately reflected in all material respects and will accurately reflect in all material respects all liability for Taxes with respect to the Company, the Division and the Contributed Assets for the periods covered thereby.
(b)Payment of Taxes. All material Taxes and Tax liabilities due by or with respect to the income, assets or operations of the Company, the Division and the Contributed Assets for all taxable years or other taxable periods that end on or before the Closing Date and, with respect to any taxable year or other taxable period beginning before and ending after the Closing Date, the portion of such taxable year or period ending on and including the Closing Date (the “Pre-Closing Period”), have been (or by the Closing Date will be) timely paid in full on or before the Closing Date or, with respect to the Company, adequately accrued and disclosed and fully provided for on the books and records of the Company in accordance with GAAP.
(c)Other Tax Matters. All material Taxes that either Contributor (solely with respect to the Division and the Contributed Assets) or the Company are (or were) required by law to withhold or collect in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party have been duly withheld or collected, and have been timely paid over to the proper authorities to the extent due and payable.
2.13Intellectual Properties.
(a)Schedule 2.13(a) is an accurate and complete list of all domestic and foreign patents, patent applications, trademarks, service marks and other indicia of origin, trademark and service mark registrations and applications for registrations thereof, registered copyrights and applications for registration thereof, Internet domain names, corporate and business names, trade names, brand names and material computer software programs owned by the Company or included in the Contributed Assets (collectively, the “Contributed Intellectual Property”. The Intellectual Property listed (or required to be listed) onSchedule 2.13(a), except as indicated on such Schedule, has been duly registered in, filed in or issued by the United States Patent and Trademark Office, United States Copyright Office, a duly accredited and appropriate domain name registrar, the appropriate offices in the various states of the United States and the appropriate offices of other jurisdictions (foreign and domestic), and each such registration, filing and issuance remains in full force and effect as of the Closing Date.
(b) Except (i) as set forth inSchedule 2.13(b) and (ii) for licenses related to “off the shelf” or other software widely available on generally standard terms and conditions, none of the Company, or any Contributor solely with respect to the Division and the Assumed Liabilities, is a party to any license or agreement, whether as licensor, licensee or otherwise, with respect to any Intellectual Property. To the extent any Intellectual Property is used in the business of the Division under license, no notice of a material default has been sent or received by the Company or either Contributor under any such license that remains uncured and, assuming the receipt of any and all consents of third parties in connection with the assignment of the Assumed Contracts to FADV, the execution, delivery or performance of Contributors’ obligations hereunder will not result in such a material default. Each such license agreement is a legal, valid and binding obligation of FARES, Newco and/or the Company and, to the knowledge of FARES, each of the other parties thereto, enforceable by FARES, Newco and/or the Company in accordance with the terms thereof.
(c) Except as set forth inSchedule 2.13(c), Newco or the Company owns or is licensed to use, all of the Contributed Intellectual Property (including all of the Intellectual Property set forth (or required to be set forth) inSchedule 2.13(a)), free and clear of any Encumbrances, without obligation to pay any royalty or any other fees with respect thereto. The Division’s use of the Contributed Intellectual Property (including the marketing, licensing, sale or distribution of products and the general conduct and operations of the business of the Division) does not violate, infringe, misappropriate or misuse any intellectual property rights of any third party. No Contributed Intellectual Property has been cancelled, abandoned or otherwise terminated and all renewal and maintenance fees in respect thereof have been duly paid. The Company has the exclusive right to file, prosecute and maintain all applications and registrations with respect to the Intellectual Property that is owned by the Company, and FARES or Newco has the exclusive right to file, prosecute and maintain all applications and registrations with respect to the Contributed Intellectual Property that is owned by FARES or Newco.
(d) Except as set forth inSchedule 2.13(d), none of FARES, Newco and the Company has received any written notice or claim from any third party challenging the right of FARES, Newco or the Company to use any of the Contributed Intellectual Property. Except as set forth inSchedule 2.13(d), the Contributed Intellectual Property listed (or required to be listed) onSchedules 2.13(a) and2.13(b), together with the Intellectual Property listed onSchedule 3.12(a) andSchedule 3.12(b) of the First American Contribution Agreement, constitutes all the Intellectual Property necessary to operate the Division as of the Closing Date, in the manner in which it is presently operated, except for licenses related to “off the shelf” or other software widely available on generally standard terms and conditions.
(e) Except as set forth inSchedule 2.13(e), none of FARES, Newco or the Company has made any claim in writing of a violation, infringement, misuse or misappropriation by any third party (including any employee or former employee of FARES or the Company) of its rights to, or in connection with any Contributed Intellectual Property, which claim is still pending. Except as set forth inSchedule 2.13(e), the Company has not entered into any agreement to indemnify any other person against any charge of infringement of any Intellectual Property, other than indemnification provisions contained in purchase orders or license agreements arising in the Ordinary Course.
(f) Except as set forth inSchedule 2.13(f), there is no pending or, to the knowledge of FARES, threatened claim by any third party of a violation, infringement, misuse or misappropriation by Contributors (solely with respect to the operation of the Division) or the Company of any Intellectual Property owned by any third party, or of the invalidity of any patent or registration of a copyright, trademark, service mark, domain name, or trade name included in the Contributed Intellectual Property. To the knowledge of FARES, no valid basis exists for any such claims.
(g) Except as set forth inSchedule 2.13(g), there are no interferences or other contested proceedings, either pending or, to the knowledge of FARES, threatened, in the United States Copyright Office, the United States Patent and Trademark Office, or any governmental authority (foreign or domestic) relating to any pending application with respect to the Contributed Intellectual Property.
(h) Except as set forth onSchedule 2.13(h), FARES, Newco or the Company has secured valid written assignments from all consultants and employees who contributed to the creation or development of Contributed Intellectual Property of the rights to such contributions that FARES, Newco or the Company does not already own by operation of law.
(i) FARES, Newco and the Company have taken all necessary and reasonable steps to protect and preserve the confidentiality of all trade secrets, know-how, source codes, databases, customer lists, schematics, ideas, algorithms and processes included in the Contributed Intellectual Property and all use, disclosure or appropriation thereof by or to any third party has been pursuant to the terms of a written agreement between such third party and FARES, Newco or the Company. The Division has not materially breached any agreements of non-disclosure or confidentiality included in the Contributed Assets.
(j) Each of the material computer software programs used or held for use in the Division and included in the Contributed Intellectual Property operates and runs in a commercially reasonable business manner, conforms in all material respects to the specifications thereof, and, with respect to each of such computer software programs that are owned by the Company, the applications can be compiled from their associated source code without undue burden.
(k) For the twelve-month period prior to the Closing Date, the active Internet domain names and URLs of the Division direct and resolve to the appropriate Internet protocol addresses and are and have been accessible to Internet users on those certain computers used by the Division to make the Sites so accessible substantially twenty-four (24) hours per day, seven (7) days per week (“24/7”), excluding maintenance periods, and are and have been operational for transacting from those certain computers used by the Division to make the Sites so accessible on a 24/7 basis, excluding maintenance periods. Except as set forth inSchedule 2.13(k), Contributors have no reason to believe that the Sites will not operate or will not continue to be accessible to Internet users on substantially a 24/7 basis, excluding maintenance periods, prior to, at the time of and after the Closing Date.
2.14Compliance with Laws. Except as set forth inSchedule 2.14, the Company and each Contributor (solely with respect to the Division, the Contributed Assets and the Assumed Liabilities), is in compliance with all applicable laws, regulations, orders, judgments and decrees, except where the failure to comply would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business. In furtherance of, and not by way of limitation of, the preceding sentence, neither the Company nor any Contributor (solely with respect to the Division and the Contributed Assets) has violated any privacy, data protection, publicity, advertising or similar federal, state or local law of any kind in the United States or any other nation (including the Fair Credit Reporting Act, 15 U.S.C. §§ 1681 et seq.), nor has the Company or any Contributor (solely with respect to the Division and the Contributed Assets) received written notice of any such violation, and no Contributor is aware of any facts that would give rise to such a violation, except where such violation would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business.
2.15Governmental Licenses. Except as set forth inSchedule 2.15, FARES, Newco and the Company have all governmental licenses, permits, franchises, approvals, permits and other authorizations of, and have made all registrations and/or filings with, all Governmental Entities (“Licenses”) necessary to operate the Division as
presently conducted, except where the failure to have such Licenses would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business. All Licenses held by any Contributor (solely with respect to the Division and the Contributed Assets) and the Company are in full force and effect, except where the failure of such Licenses to be in full force and effect would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business. No such License is the subject of a proceeding for suspension or revocation or similar proceedings. Except as set forth inSchedule 2.15, no jurisdiction has demanded or requested that the Company qualify or become licensed as a foreign corporation.
2.16Labor Matters.
(a) Each Contributor (solely with respect to the Division and the Contributed Assets) and the Company is in compliance with all federal, state or other applicable laws, domestic or foreign, respecting employment and employment practices, terms and conditions of employment and wages and hours, and has not and is not engaged in any unfair labor practice, except in each case as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business. No Contributor (solely with respect to the Division and the Contributed Assets) is subject to or bound by any collective bargaining or labor union agreement applicable to any Person employed by the Division and no collective bargaining or labor union agreement is currently being negotiated by either Contributor (solely with respect to the Division and the Contributed Assets).
(b) No unfair labor practice complaint against Contributors (solely with respect to the Division and the Contributed Assets) or the Company is pending before the National Labor Relations Board and, to the knowledge of FARES, no unfair labor practice complaint is threatened or pending against Contributors (solely with respect to the Division and the Contributed Assets) or the Company before the National Labor Relations Board.
(c) There is no labor strike, dispute, slowdown or stoppage actually pending or, to the knowledge of FARES, threatened against or involving Contributors (solely with respect to the Division and the Contributed Assets) or the Company.
(d) Except as set forth onSchedule 2.16(d), there is no grievance that would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect upon the Business.
(e) No Contributor (solely with respect to the Division and the Contributed Assets) or the Company has experienced any material labor difficulty during the last three years.
2.17Consents and Approvals; No Violations. Assuming the receipt of any and all consents of third parties in connection with the assignment of the Assumed Contracts to FADV hereunder, the execution and delivery of this Agreement by Contributors and the consummation of the transactions contemplated hereby will not (i) violate any provision of the articles or certificate of incorporation or bylaws (or similar organizational documents) of either Contributor or the Company, (ii) violate any statute, ordinance, rule, regulation, order or decree of any court or any governmental or regulatory body, agency or authority applicable to Contributors or the Company, (iii) except as set forth onSchedule 2.17, require any filing with, or permit, consent or approval of, or the giving of any notice to, any governmental or regulatory body, agency or authority, other than those required under or in relation to the Exchange Act, state securities or “blue sky” laws, and rules and regulations of the Nasdaq National Market, or (iv) except as set forth onSchedule 2.17, result in a violation or breach of, conflict with, constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, payment or acceleration) under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company or the Contributed Assets under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, franchise, permit, agreement, lease, franchise agreement or other instrument or obligation to which either Contributor or the Company is a party, or by which either Contributor, the Company or any of its properties or assets, or the Contributed Assets may be bound, other than, in the case of clauses (ii), (iii) and (iv) above, any violations, breaches, conflicts, defaults and liens which, and filings, permits, consents, approvals and notices the absence of which, would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Business.
2.18Broker’s or Finder’s Fees. Except as set forth onSchedule 2.18, no agent, broker, person or firm acting on behalf of Contributors, the Company or any of their respective Affiliates is, or will be, entitled to any commission or broker’s or finder’s fees from any of the Parties or from any Affiliate of any of the Parties hereto, in connection with any of the transactions contemplated by this Agreement.
2.19Copies of Documents. Contributors have caused to be made available for inspection and copying by FADV and its advisers, true, complete and correct copies of all documents listed on any Schedule referred to in thisArticle II.
2.20Investment. Newco is acquiring the Class B Common Stock hereunder for investment for its own account, not as nominee or agent, and not with the view to, or for resale in connection with, any distribution thereof. Contributors understand that the Class B Common Stock to be purchased hereunder has not been, and may not be, registered under the Securities Act, by reason of a specific exemption from the registration provisions of the Securities Act, the availability of which depends upon, among other things, the bona fide nature of Newco’s investment intent and the accuracy of FARES’ representations as expressed herein. Contributors acknowledge that the Class B Common Stock to be purchased hereunder must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from such registration is available. Newco is an Accredited Investor.
2.21Affiliate Transactions. Except as set forth onSchedule 2.21, the Division is not a party to any Contract with either Contributor or any Affiliate of either Contributor (or any director or Officer of either Contributor or any of their Affiliates or any “associates” or members of the “immediate family” (as such terms are respectively defined in Rule 12b-2 and Rule 16a-1 promulgated under the Exchange Act) of any such director or Officer, other than Experian Information Solutions, Inc. and its Affiliates) except for such Contracts that are on an arm’s length basis.
2.22Undisclosed Liabilities. Except as set forth inSchedule 2.22, to the actual knowledge of FARES, there are no liabilities of the Division other than (a) liabilities incurred in the Ordinary Course, (b) liabilities disclosed on any exhibit or schedule hereto or on any exhibit or schedule to any Related Document, (c) liabilities provided for in the Financial Statements or the Audited Financial Statements, or disclosed in the notes thereto, if any, or (d) other undisclosed liabilities which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on the Business.
2.23Disclosure. To the actual knowledge of FARES, the information disclosed in this Agreement with respect to the Division does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading, except as would not, individually or in the aggregate, reasonably be expect to have a Material Adverse Effect on the Business.
2.24XRES Business. Except as set forth onSchedule 2.24 or any other Schedule attached hereto, solely with respect to matters, events, actions or omissions that occur exclusively during the period from the date of FARES’ acquisition of the business acquired pursuant to the XRES Purchase Agreement (the “XRES Business”) to the date of this Agreement (and not, for the avoidance of doubt, with respect to any matters, events, actions or omissions occurring or beginning to occur on or prior to the date of FARES’ acquisition of the XRES Business, including the execution or breach of any Contract, the undertaking of any obligation or the incurrence of any liability or obligation prior to the date of the acquisition of the XRES Business), FARES makes the representations and warranties in (a)Sections 2.5,2.6,2.7,2.8,2.9,2.10,2.11,2.12,2.13,2.14,2.15,2.16,2.17,2.18,2.19,2.21,2.22 and2.23, (b)Section 2.12 and (c)Section 2.18 with respect to the XRES Businessmutatis mutandis.
2.25Poway Rent. The amount charged as “Monthly Base Rent” under the Poway Lease is the same as the equivalent monthly base rent paid by FARES as of the date of the Master Transfer Agreement in respect of the leased property located at 12385 and 12395 First American Way, Poway, California 92064.
2.26Newco. Newco is a newly formed entity that (a) immediately prior to consummation of the Transaction will be owned 61.25% by First American, 1.16% by FAREISI, and 37.58% by FARES, (b) has not conducted, and will not prior to Closing conduct, any business other than (i) the receipt of the Business, Bar None, the XRES Business, the DealerTrack Interest and the FADV Note from the other Contributors by way of a contribution immediately prior to Closing substantially on the terms described to FADV in connection with the amendment and restatement of the Master Transfer Agreement and (ii) upon consummation of the Transaction, the contribution of the Business, Bar None, the XRES Business and the DealerTrack Interest to FADV or its wholly-owned Subsidiary pursuant to this Agreement and the Related Agreements, (c) has no indebtedness or other liabilities, whether contingent or otherwise, other than (i) its obligations under and as contemplated by this Agreement and the Related Agreements and (ii) the indebtedness and other liabilities of the Business, Bar None, the XRES Business, the DealerTrack Interest and the FADV Note during the period from its receipt of the contribution of the Business, Bar None, the XRES Business, the DealerTrack Interest and the FADV Note from the other Contributors to its contribution thereof to FADV or its wholly-owned Subsidiary pursuant to the terms hereof and the Related Agreements, and (d) has not and will not, during the period from its receipt of the contribution of the Business, Bar None, the XRES Business, the DealerTrack Interest and the FADV Note from the other Contributors to its contribution thereof to FADV or its wholly-owned Subsidiary pursuant to the terms hereof and the Related Agreements, changed or modified any of the assets or liabilities related to the Business, Bar None, the XRES Business, the DealerTrack Interest or the FADV Note.
ARTICLE III.
REPRESENTATIONS OF BUYER
FADV represents, warrants and agrees in favor of FARES as of the Closing Date (unless a representation or warranty speak as of a specific date, in which case, as of such date), as follows:
3.1Existence and Good Standing. FADV is a corporation validly existing and in good standing under the laws of the State of Delaware. FADV has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted. FADV is duly qualified or licensed to conduct its business, and is in good standing, in each jurisdiction in which the character or location of the property owned, leased or operated by FADV or the nature of the business conducted by FADV makes such qualification or licensing necessary, except where the failure to be so qualified, licensed or in good standing would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on FADV.
3.2Binding Effect. FADV has the requisite corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement (a) has been duly authorized and approved by all required corporate action of FADV, (b) has been duly executed and delivered by FADV and (c) assuming the due execution and delivery of this Agreement by FARES and Newco, constitutes the valid and binding agreement of FADV enforceable against FADV in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency or similar laws and equitable principles relating to or affecting the rights of creditors generally from time to time in effect.
3.3Capitalization.
(a) As of May 4, 2005, the authorized capital stock of FADV is (a) 100,000,000 shares of Common Stock, $0.001 par value per share, (i) 75,000,000 of which are designated as “Class A Common Stock” and 7,824,285 are issued and outstanding, and (ii) 25,000,000 of which are designated as “Class B Common Stock” and 16,027,086 are issued and outstanding, and (b) 1,000,000 shares of Preferred Stock, $0.001 par value, none of which are issued and outstanding. All such outstanding shares have been, and all shares of capital stock of FADV issued after the date hereof will be, duly authorized and validly issued and are, or upon such issuance will be, fully paid and nonassessable. Except as set forth onSchedule 3.3, there are no outstanding options, warrants, rights, calls, commitments, conversion rights, rights of exchange, plans or other agreements of any character providing for the purchase, issuance or sale of any shares of FADV’s
Common Stock, any other securities of FADV, or any equity interest in FADV or its business, and none of the foregoing will arise as a result of the execution or performance of this Agreement or the transactions contemplated herein. Except as set forth onSchedule 3.3, no Person has any demand or piggyback registration rights in respect of shares of FADV’s Common Stock or any other securities of FADV. All securities, rights, options and plans set forth (or required to be set forth) onSchedule 3.3 have been issued or granted in accordance with applicable law and not in contravention with the certificate of incorporation or bylaws of FADV.
(b) The shares of Class B Common Stock to be issued to Newco hereunder, when issued in compliance with the provisions of this Agreement and FADV’s Certificate of Incorporation as amended by the Certificate of Amendment, (i) have been authorized for issuance hereunder by FADV’s Board of Directors, (ii) will be validly issued, fully paid and nonassessable, (iii) will be issued in compliance with all applicable federal and state securities laws, and will have the rights, preferences and privileges described in FADV’s Certificate of Incorporation as amended by the Certificate of Amendment, (iv) will be free and clear of all Encumbrances, other than restrictions on transfer under applicable securities laws, and (v) will not be subject to any preemptive rights or rights of first refusal;provided,however, that no representation or warranty is being made in thisSection 3.3(b)(iii) with respect to the Preliminary Proxy Statement’s or the Final Proxy Statement’s compliance with Section 14 of the Exchange Act or Regulation 14A promulgated thereunder.
3.4SEC Reports and Financial Statements. Each form, report, schedule, registration statement and definitive proxy statement filed by FADV with the SEC as such documents have been amended prior to the date hereof (the “FADV SEC Reports”), as of their respective dates (and, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing), complied in all material respects with the applicable requirements of the Securities Act, the Exchange Act, the rules and regulations thereunder and the court interpretations thereof and the rules of the Nasdaq National Market. None of FADV SEC Reports, as of their respective dates (and, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing), contained any untrue statement of fact or omitted a statement of a fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, other than facts that did not have, or would not, individually or in the aggregate, reasonably be expected to have, a Material Adverse Effect on FADV. The consolidated financial statements of FADV and its Subsidiaries included in such FADV SEC Reports (the “FADV Financial Statements”) comply as to form in all material respects with applicable accounting requirements and with published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP (except as may be indicated in the notes thereto, or in the case of unaudited interim financial statements, as permitted by Form 10-Q under the Exchange Act) and fairly present in all material respects, subject, in the case of the unaudited interim financial statements, to the absence of complete notes and normal, year-end adjustments, the consolidated financial position of FADV and its Subsidiaries as of the dates thereof. Without limiting the generality of the foregoing, (i) no executive officer of FADV has failed in any respect to make the certifications required of him or her under Section 302 or 906 of the Sarbanes-Oxley Act of 2002 with respect to any form, report or schedule filed by FADV with the SEC since the enactment of the Sarbanes-Oxley Act of 2002 (excluding any failure to make such certifications occurring after the date of this Agreement that is inadvertent but promptly corrected by filing the requisite certification or is attributable to the physical incapacity of an officer required to make such a certification) and (ii) no enforcement action has been initiated against FADV by the SEC relating to disclosures contained in any Company SEC Report.
3.5Restrictive Documents. Except as set forth onSchedule 3.5, neither FADV nor any of its Subsidiaries is subject to, or a party to, any charter, bylaw, mortgage, lien, lease, license, permit, agreement, Contract, instrument, law, rule, ordinance, regulation, order, judgment or decree, or any other restriction of any kind or character, which, by its own operation, and not by the breach or violation, as the case may be, thereof, (a) would materially restrict the ability of FADV or any of its Subsidiaries to acquire any property or conduct business in any area or business line or (b) has or would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on FADV.
3.6Litigation. Except as set forth onSchedule 3.6, there is no action, suit, proceeding at law or in equity, arbitration or administrative or other proceeding by or before (or to the knowledge of FADV any investigation by) any governmental or other instrumentality or agency, pending, or, to the knowledge of FADV, threatened, against or impacting FADV, any of its Subsidiaries or any of their respective properties or rights which would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on FADV. Neither FADV nor any of its Subsidiaries is subject to any judgment, order or decree entered in any lawsuit or proceeding which has or would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on FADV.
3.7Compliance with Laws. FADV and each of its Subsidiaries are in compliance in all material respects with all applicable laws, regulations, orders, judgments and decrees, except where the failure to comply would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on FADV. In furtherance of, and not by way of limitation of, the preceding sentence, neither FADV nor any of its Subsidiaries has violated any privacy, data protection, publicity, advertising or similar federal, state or local law of any kind in the United States or any other nation (including the Fair Credit Reporting Act, 15 U.S.C. §§ 1681 et seq.), nor has FADV or any Subsidiary thereof received written notice of any such violation, and neither FADV nor any of its Subsidiaries is aware of any facts that would give rise to such a violation, except where such violation would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on FADV.
3.8Consents and Approvals; No Violations. The execution and delivery of this Agreement by FADV and the consummation of the transactions contemplated hereby will not (i) violate any provision of the articles or certificate of incorporation or bylaws of FADV or any of its Subsidiaries, (ii) violate any statute, ordinance, rule, regulation, order or decree of any court or any governmental or regulatory body, agency or authority applicable to FADV or any of its Subsidiaries, (iii) require any filing with, or permit, consent or approval of, or the giving of any notice to, any governmental or regulatory body, agency or authority, other than those required under or in relation to the Exchange Act, the Securities Act, state securities or “blue sky” laws, and rules and regulations of the Nasdaq National Market, or (iv) except as set forth onSchedule 3.8, result in a violation or breach of, conflict with, constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, payment or acceleration) under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of FADV or any of its Subsidiaries under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, franchise, permit, agreement, lease, franchise agreement or other instrument or obligation to which either FADV or any of its Subsidiaries is a party, or by which either FADV or any of its Subsidiaries or any of their respective properties or assets may be bound, other than, in the case of clauses (ii), (iii) and (iv) above, any violations, breaches, conflicts, defaults and liens which, and filings, permits, consents, approvals and notices the absence of which, would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on FADV.
3.9Broker’s or Finder’s Fees. Except as set forth onSchedule 3.9, no agent, broker, person or firm acting on behalf of FADV or any of its Subsidiaries is, or will be, entitled to any commission or broker’s or finder’s fees from any of the Parties or from any Affiliate of any of the Parties, in connection with any of the transactions contemplated by this Agreement.
3.10Copies of Documents. FADV has caused to be made available for inspection and copying by Contributors and their advisers, true, complete and correct copies of all documents listed on any Schedule referred to in thisArticle III.
3.11Board Approval. Prior to the date of the Master Transfer Agreement, the Board of Directors of FADV and the Independent Committee (at meetings duly called and held) (a) approved this Agreement and the transactions contemplated hereby, (b) determined that the transactions contemplated by this Agreement, taken together, are fair to and in the best interests of the stockholders of FADV and (c) resolved to recommend that the stockholders of FADV approve this Agreement and the transactions contemplated hereby.
3.12Undisclosed Liabilities. Except as set forth inSchedule 3.12, to the actual knowledge of FADV, there are no liabilities of FADV other than (a) liabilities incurred in the Ordinary Course, (b) liabilities disclosed on any exhibit or schedule hereto or on any exhibit or schedule to any Related Document, (c) liabilities provided for in the FADV Financial Statements or disclosed in the notes thereto, if any, or (d) other undisclosed liabilities which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect on FADV.
3.13Disclosure. To the actual knowledge of FADV, the information disclosed in this Agreement with respect to FADV does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading, except as would not, individually or in the aggregate, reasonably be expect to have a Material Adverse Effect on FADV.
ARTICLE IV.
THE TRANSACTION
4.1Contribution of Contributed Assets. Subject to the terms and conditions of this Agreement, Newco shall, and FARES shall cause Newco to, contribute to FADV or its wholly-owned Subsidiary, and FADV agrees to accept or cause its wholly-owned Subsidiary to accept as a contribution from Newco, at the Closing, all of Contributors’ and their Affiliates’ right, title and interest in and to the assets (personal, tangible and intangible) used exclusively in, which relate exclusively to, the Division, including those assets set forth below, free and clear of any Encumbrances (other than Division Permitted Liens and the Assumed Liabilities) (collectively, the “Contributed Assets”):
(a) all assets owned by the Division and reflected on the Balance Sheet (other than Excluded Assets);
(b) certificates representing all of the issued and outstanding shares of Common Stock of the Company, if any, duly endorsed in blank, or accompanied by stock powers duly executed in blank, by Newco or, if the foregoing securities are not certificated, Newco shall have caused the transfers thereof to have been duly recorded on the books and records of the Company;
(c) all documents, files, forms, processes, policies and procedures of Contributors that relate solely to the Division;
(d) all tangible personal property of Contributors owned by Contributors and used solely in the Division, including computer work stations, servers, printers, facsimile machines, photocopiers, scanners, furniture, fixtures and equipment;
(e) all of the Division’s and the Company’s books and records (except those expressly included inSection 4.2(b)), sales data, customer lists, all other information relating to customers, suppliers’ names and contact information, mailing lists, files, documents, correspondence, lists, advertising and promotional materials, studies, reports, and other printed or written materials relating solely to the Division;
(f) all of Contributors’ rights and interests under contracts to which either Contributor is a party that relate exclusively to the Division (the “Assumed Contracts”);
(g) all Licenses and other permits, consents and certificates of any regulatory, administrative or other Governmental Entity issued to or held by Contributors for use solely in the Division that are transferable;
(h) all claims, warranties, guarantees, refunds, causes of action, choses in action, rights of recovery, rights of set off, insurance proceeds and rights of recoupment (excluding any such item relating to the payment of Taxes) relating solely to the Division or the Contributed Assets;
(i) cash and cash equivalents in the amount of $3,050,000;
(j) all accounts receivable of Contributors derived exclusively from the business activity of the Division;
(k) all of the trademarks listed onSchedule 2.13(a); and
(l) all of the Purchased Assets (as defined in the Asset Purchase Agreement, March 30, 2005, among FARES, Experian Affiliate Acquisition, LLC and Experian Information Solutions, Inc. (the “XRES Purchase Agreement”) and, to the extent assignable, the rights and obligations of FARES under XRES Purchase Agreement and the agreements related thereto (except FARES’ obligations in respect of any breach of (i) a representation or warranty made by FARES or its Affiliate in the XRES Purchase Agreement or (ii) any covenant by FARES or its Affiliate in the XRES Purchase Agreement required by its terms to be performed prior to Closing).
4.2Excluded Assets. All assets of Contributors other than the Contributed Assets (collectively, the “Excluded Assets”) shall not be sold, assigned, conveyed, transferred or contributed to FADV, including:
(a) all cash and cash equivalents (except as provided inSection 4.1(i));
(b) the articles of organization, operating agreement, qualifications to conduct business as a foreign corporation, arrangements with registered agents relating to foreign qualifications, taxpayer and other identification numbers, seals, minute books, membership interest transfer books, blank membership interest certificates, and other documents relating to the organization, maintenance, and existence of Contributors as limited liability companies or Contributors’ businesses and assets other than related to the Division;
(c) all rights of Contributors under this Agreement and the Related Agreements to which either is a party
(d) all rights of Contributors under the Service Bureau Agreement, effective as of November 1, 1998, between the Division and RELS;
(e) all rights of Contributors under the Marketing and Support Agreement, effective as of June 26, 2000, between the Division and RESdirect, LLC;
(f) except as required bySection 5.10 of the Master Transfer Agreement, all rights of Contributors under the Services Agreement, dated as of February 1, 2001, by and between Ellie Mae, Inc. (“Ellie Mae”) and First American, as amended by Amendment No. 1 to Services Agreement, dated as of October 12, 2001, by and between Ellie Mae and First American and by Amendment No. 2 to Services Agreement, dated as of June 10, 2002 by and between Ellie Mae and First American.
(g) except as required bySection 5.10 of the Master Transfer Agreement, all rights of Contributors under the following portal agreements (collectively, the “Retained Portal Agreements”):
(i) Portal Link Agreement, dated July 15, 2002, by and among FARES, First American Real Estate Solutions of Texas, First American Title Insurance Company, Inc. and Automated Mortgage Solutions LLC, as amended by the Addendum to Portal Link Agreement, dated July 15, 2002 by and between Automated Mortgage Solutions LLC and the Division;
(ii) Portal Link Agreement, dated February 1, 2001, by and among FARES, First American Real Estate Solutions of Texas, First American Title Insurance Company, Inc. and BestRate.com, d/b/a Myers Internet Services;
(iii) Portal/LOS Link Agreement, dated March 1, 2004, by and among FARES, First American Real Estate Solutions of Texas, First American Title Insurance Company, Inc., eAppraiseIT, LLC and EPN Solutions, LLC, as amended by the Addendum to Portal Link Agreement, dated March 1, 2004 by and between EPN Solutions LLC and the Division;
(iv) Portal Link Agreement, dated June 1, 2002, by and among FARES, First American Real Estate Solutions of Texas, First American Title Insurance Company, Inc. and Dexma, Inc., as amended by the Addendum to Portal Link Agreement, dated June 1, 2002, by and between Dexma, Inc. and the Division;
(v) Portal Link Agreement, dated July 15, 2003, by and among FARES, First American Real Estate Solutions of Texas, First American Title Insurance Company, Inc., eAppraiseIT LLC and Loansoft, Inc., as amended by the Addendum to Portal Link Agreement, dated July 15, 2003, by and between Loansoft, Inc. and the Division.
(vi) Platform/LOS Link Agreement, dated March 1, 2004, by and among FARES, First American Real Estate Solutions of Texas, First American Title Insurance Company, Inc. and MortgageFlex Systems, Inc.;
(vii) Portal/LOS Link Agreement, dated March 1, 2004, by and among FARES, First American Real Estate Solutions of Texas, First American Title Insurance Company, Inc., eAppraiseIT LLC and Portellus, Inc., as amended by the Addendum to Portal Link Agreement, dated March 1, 2004, by and between Portellus, Inc. and the Division;
(viii) Portal/LOS Link Agreement, dated January 15, 2005, by and among First American Real Estate Solutions of Texas, LP, eAppraiseIT LLC, First American Title Insurance Company, Inc. and 3t Systems;
(ix) Portal Link Agreement, dated July 1, 2003, by and between First American Real Estate Solutions of Texas LP and AMC Settlement Services;
(x) Portal Link Agreement, dated December 20, 2002, by and between First American Real Estate Solutions LLC, First American Real Estate Solutions of Texas LP, eAppraiseIT, LLC, First American Title Insurance Company, Inc. and Calyx Technology, Inc.
(xi) Portal Link Agreement, dated July 15, 2002, by and among FARES, First American Real Estate Solutions of Texas LP, First American Title Insurance Company, Inc. and Prime Alliance Solutions, Inc., as amended by the Addendum to Portal Link Agreement, dated July 15, 2002 by and between Prime Alliance Solutions, Inc. and the Division;
(xii) Portal Link Agreement, dated June 1, 2002, by and between FARES, First American Title Insurance Company, First American Real Estate Solutions of Texas LP and USA Loan Network, LLC., as amended by the Addendum to Portal Link Agreement, dated June 1, 2002 by and between USA Loan Network, LLC and the Division;
(xiii) Service Provider Agreement, dated October 1, 2004, by and among FARES, First American Real Estate Solutions of Texas LP, eAppraiseIT LLC and USA Loan Network, LLC;
(xiv) Portal Link Agreement, dated May 1, 2002, by and among FARES, First American Title Insurance Company, First American Real Estate Solutions of Texas LP and Geotrac of America, Inc., as amended by the Addendum to Agreement for Service (Internet), dated May 1, 2002, by and between Geotrac and the Division;
(xv) Portal Link Agreement, dated April 1, 2002, by and between FARES and First Lender’s Equity LP;
(xvi) Portal Link Agreement, dated July 16, 2001, by and among FARES, First American Title Insurance Company, First American Real Estate Solutions of Texas LP and XtraNet Lending Solutions, as amended by the Addendum to Portal Link Agreement, dated July 16, 2001, by and between XtraNet Lending Solutions and the Division;
(xvii) Portal/LOS Link Agreement, dated September 1, 2004, by and among FARES, First American Title Insurance Company, First American Real Estate Solutions of Texas LP, First American National Default Title Services and Harland Financial Solutions, Inc.;
(xviii) Development Agreement, dated July 21, 2003, by and among FARES First American Real Estate Solutions of Texas LP and CBC Companies, Inc.;
(xix) Portal/LOS Link Agreement, dated August 1, 2003, by and among FARES, eAppraiseIT, LLC, First American Real Estate Solutions of Texas, LP, First American Title Insurance Company, Inc. and PCLender.com, Inc.;
(xx) Integration Agreement, dated May 23, 2003, by and among FARES, First American Real Estate Solutions of Texas, LP, First American Title Insurance Company, Inc., eAppraiseIT LLC and Dynatek, Inc.;
(xxi) Portal Link Agreement, dated May 15, 2001, by and among FARES, First American Real Estate Solutions of Texas, First American Title Insurance Company, Inc. and REALTrans.com, Inc., as amended by the Addendum to Portal Link Agreement, dated May 15, 2001, by and between REAL Trans.com Inc. and the Division;
(xxii) Portal/LOS Link Agreement, dated August 1, 2003, by and among FARES, eAppraiseIT LLC, First American Real Estate Solutions of Texas, LP, First American Title Insurance Company, Inc., and PC Lender; and
(h) the RRS Services Agreement.
4.3Assumed Liabilities. Subject to the terms and conditions of this Agreement, in addition to the payment to Newco of the consideration set forth inSection 4.5, and as additional consideration for the Contributed Assets, FADV agrees that from and after the Closing, FADV shall assume and become responsible for, or shall cause its wholly-owned Subsidiary to assume and become responsible for, all liabilities and obligations of Contributors and their Affiliates to the extent relating to the Division and all liabilities and obligations of Contributors and their Affiliates arising out of or related to the Contributed Assets (collectively, the “Assumed Liabilities”), including the Assumed Liabilities (as defined in the XRES Purchase Agreement).
4.4Excluded Liabilities. Except for the Assumed Liabilities and subject to the terms and conditions of this Agreement, neither FADV nor any of its Subsidiaries shall assume any liabilities, obligations or commitments of Contributors (collectively, the “Excluded Liabilities”), including the following, which shall be retained by Contributors:
(a) all liabilities and obligations of Contributors under this Agreement and the Related Agreements to which either is a party;
(b) all liabilities and obligations of the Contributors for expenses or fees incident to or arising out of the negotiation, preparation, approval or authorization of this Agreement and the Related Agreements to which it is a party or its consummation of the transactions contemplated hereby or thereby (including attorneys’ and accountants’ fees and fees of investment banks or brokers);
(c) all liabilities and obligations in respect of any of the Excluded Assets (including under any Contracts, commitments or understandings related thereto);
(d) all liabilities and obligations of Contributors under the Service Bureau Agreement, effective as of November 1, 1998, between the Division and RELS;
(e) all liabilities and obligations of Contributors under the Marketing and Support Agreement, effective as of June 26, 2000, between the Division and RESdirect, LLC;
(f) except as required bySection 5.10 of the Master Transfer Agreement, all liabilities and obligations of Contributors under the Services Agreement, dated as of February 1, 2001, by and between Ellie Mae and First American, as amended by Amendment No. 1 to Services Agreement, dated as of October 12, 2001, by and between Ellie Mae and First American and by Amendment No. 2 to Services Agreement, dated as of June 10, 2002 by and between Ellie Mae and First American;
(g) all obligations of FARES in respect of any breach of a representation or warranty made by FARES or its Affiliate in the XRES Purchase Agreement and any covenant by FARES or its Affiliate in the XRES Purchase Agreement required by its terms to be performed prior to Closing;
(h) except as required bySection 5.10 of the Master Transfer Agreement, all liabilities and obligations of Contributors under the Retained Portal Agreements;
(i) all liabilities and obligations of FARES and Newco, if any, under the RRS Services Agreement; and
(j) except as required by the GE Sublease, all liabilities and obligations of FARES and Newco, if any, under the Master Lease.
4.5Consideration. In consideration for the contribution of the Contributed Assets to FADV or its wholly-owned Subsidiary, FADV shall, in addition to assuming the Assumed Liabilities, deliver to Newco on the Closing Date, in its name, a certificate representing 17,317,073 shares of Class B Common Stock.
4.6Closing. The closing of the contribution of the Contributed Assets, the assumption of the Assumed Liabilities, the issuance of the Class B Common Stock hereunder and the other transactions contemplated hereby shall take place at the Closing under and in accordance with the Master Transfer Agreement.
ARTICLE V.
CERTAIN COVENANTS
5.1Employees. FARES shall be responsible for payment of bonuses to employees of the Division for that portion of the 2005 calendar year occurring on and prior to the Closing Date. FADV shall be responsible for payment of bonuses to employees of the Division for that portion of the 2005 calendar year occurring after the Closing Date, and for all periods thereafter.
5.2Certain Benefits Relating to Acquisition Agreements. From and after the Closing, in the event that FARES is not permitted to assign to Newco or FADV, or Newco is not permitted to assign to FADV, any of the agreements by which FARES acquired the Company or any Contributed Assets from any third parties, whether by merger, purchase of equity securities, purchase of assets or otherwise, or the XRES Purchase Agreement (collectively, the “Acquisition Agreements”), FARES shall, subject toSection 5.3 hereof andSection 5.8 of the Master Transfer Agreement, collect indemnification or other amounts under, or reduce or offset against any payment obligations to third parties arising from or relating to, any of the Acquisition Agreements, including offsets or reductions against promissory notes to third parties, which promissory notes reflect payment obligations of FARES or any of its Affiliates pursuant to any of the Acquisition Agreements, and FARES shall pay an amount of cash equal to such indemnification, amount, reduction or offset to FADV within five (5) Business Days of the date on which FARES or its Affiliate collects such indemnification or amount or recognizes such reduction or offset, which recognition will be subject, for the avoidance of doubt, to the timing of any such reduced or offset payment obligation. From and after the Closing, in the event that FARES or any of its Affiliates is required to pay any earn-out amounts to third parties arising from or relating to, any Acquisition Agreement, FADV shall, and shall cause its Affiliates to, pay an amount of cash equal to such earn-out amounts to FARES within five (5) Business Days of the date on which FARES or its Affiliate is required to pay such earn-out amounts.
5.3Nonassignable Contracts. To the extent that the assignment by FARES to Newco or FADV, or by Newco to FADV, of any Assumed Contract is not permitted or is not permitted without the consent of any other party to such Assumed Contract, this Agreement shall not be deemed to constitute an assignment of any such Assumed Contract if such consent is not given and if such assignment otherwise would constitute a material breach of, or cause a loss of contractual benefits under, any such Assumed Contract, and FADV shall assume no direct obligations or liabilities under any such Assumed Contract until such consent is obtained. If any consent or waiver necessary for the sale, transfer, assignment and delivery of an Assumed Contract is not obtained or if such assignment is not permitted irrespective of consent and the Closing hereunder is consummated, FARES and Newco shall cooperate with FADV following the Closing Date in any reasonable arrangement designed to provide FADV with the rights and benefits under any such Assumed Contract, including enforcement for the
benefit of FADV and at FADV’s expense of any and all rights of FARES and Newco against any other party arising out of any breach or cancellation of any such Assumed Contract by such other party and, if requested by FADV, acting as an agent on behalf of FADV or as FADV shall otherwise reasonably require;provided that FADV shall bear FARES’ and Newco’s reasonable out-of-pocket expenses as such agent or agents and shall indemnify FARES and Newco for actions taken or not taken as such agent or agents;provided,further, that FADV shall cooperate with FARES and Newco following the Closing Date in any reasonable arrangement designed to require FADV to assume, be responsible for and otherwise meet the burdens and obligations under any such Assumed Contract.
5.4Method of Conveyance. The sale, transfer, conveyance and assignment by Newco of the Contributed Assets to FADV and the assumption of the Assumed Liabilities by FADV in accordance with this Agreement shall be effected on the Closing Date by the execution and delivery by Newco and FADV of instruments of transfer and assumption reasonably requested by FADV.
5.5Sublease. FARES covenants and agrees that it will, on or prior to December 31, 2005, exercise the purchase option under Section 9(c) of the Master Lease Financing Agreement, dated as of December 28, 2001, between General Electric Capital Corporation, as lessor, and the parties named therein as lessees (as amended or supplemented from time to time, the “Master Lease”), with respect to the equipment subject to the Sublease if permitted to do so by the terms of the Master Lease, and will transfer to FADV the title to such equipment that it receives following the exercise of such purchase option.
ARTICLE VI.
INDEMNIFICATION
6.1Survival of Representations. The representations and warranties of the Parties contained inArticles II andIII (and in any Schedule or Exhibit attached hereto or certificate delivered in connection with the Closing) are made only as of the Closing Date (unless a representation speaks as of a specific date, in which case as of such date). Such representations and warranties shall survive the Closing until the date in the eighteenth (18th) calendar month from and after the month in which the Closing Date occurs that corresponds with the Closing Date;provided,however, that (a) the representations and warranties contained inSections 2.2,2.18,2.24(c),2.26,3.2,3.3 and3.9 shall survive until the fifth (5th) anniversary of the Closing Date and (b) the representations and warranties contained inSections 2.12 and2.24(b) shall survive until thirty (30) days after the expiration of the applicable statute of limitations period (after giving effect to any waivers and extensions thereof).
6.2Indemnification.
(a) FARES agrees to indemnify and hold FADV and its Subsidiaries and Affiliates (including, after the Closing, the Company) and each of their respective directors, officers, members, managers, shareholders, employees and agents and any successors thereto (each, a “FADV Indemnified Party”) harmless, on an after-tax basis, from and against any and all claims, losses, liabilities, damages, costs, and reasonable out-of-pocket expenses (including reasonable attorney fees) (collectively, “Losses”) suffered, incurred or paid, directly or indirectly, as a result of or arising out of (i) the failure of any representation or warranty made by FARES inArticle II of this Agreement (or in any Schedule or Exhibit attached hereto or certificate delivered by FARES in connection with the Closing) to be true and correct in all respects as of the Closing Date (unless a representation speaks as of a specific date, in which case as of such date), (ii) any breach or nonperformance of any covenants or agreements made by Contributors in or pursuant to this Agreement or inSection 5.1 of the Master Transfer Agreement, and (iii) any Excluded Liabilities and (iv) any Excluded Assets.
(b) FADV agrees to indemnify and hold Contributors and their Affiliates and each of their respective directors, officers, members, managers, shareholders, employees and agents and any successors thereto (each, a “FARES Indemnified Party”) harmless, on an after-tax basis, from and against any and all Losses
suffered, incurred or paid, directly or indirectly, as a result of or arising out of (i) the failure of any representation or warranty made by FADV inArticle III of this Agreement (or in any Schedule or Exhibit attached hereto or certificate delivered by FADV in connection with the Closing) to be true and correct in all respects as of the Closing Date (unless a representation speaks as of a specific date, in which case as of such date), (ii) any breach or nonperformance of any covenants or agreements made by FADV in or pursuant to this Agreement, and (iii) any Assumed Liability.
(c) The sole recourse and remedy of each FADV Indemnified Party for any inaccuracy in any representation or warranty or alleged representation or warranty by or on behalf of FARES contained in or made pursuant to this Agreement shall be under the provisions of and to the extent provided in thisArticle VI. FADV shall comply with thisSection 6.2(c) and will not assert any such inaccuracy or seek any recourse or remedy in respect thereof other than under the provisions of thisArticle VI.
(d) The sole recourse and remedy of each FARES Indemnified Party for any inaccuracy in any representation or warranty or alleged representation or warranty by or on behalf of FADV contained in or made pursuant to this Agreement shall be under the provisions of and to the extent provided for in thisArticle VI. FARES shall comply with thisSection 6.2(d) and FARES will not assert any such inaccuracy or seek any recourse or remedy in respect thereof other than under the provisions of thisArticle VI.
(e) The obligations to indemnify and hold harmless pursuant to thisSection 6.2 shall survive the consummation of the transactions contemplated by this Agreement for the time periods set forth inSection 6.1, except for claims for indemnification asserted prior to the end of such periods, which claims shall survive until final resolution thereof.
(f) FARES shall not be required to indemnify and hold harmless for Losses pursuant toSection 6.2(a)(i) until the aggregate amount due in respect of such Losses exceeds $3,050,000, and thereafter FARES shall be required to indemnify and hold harmless for all Losses in excess of such amount;provided,however, that the maximum aggregate amount of Losses payable by FARES pursuant toSection 6.2(a)(i) shall not exceed $61,000,000;provided,further, that the limitations provided in thisSection 6.2(f) shall not apply to Losses that arise from (i) a breach of any of the representations and warranties contained inSections 2.2,2.18,2.24(c) and2.26 or (ii) the intentional breach or misrepresentation of any of the representations and warranties contained inArticle II where FADV can prove such intentional breach or misrepresentation was actually caused by the actions or inactions of Parker Kennedy, Anand Nallathambi or John Stancil, which Losses in (i) and (ii) of this proviso shall be limited to a maximum aggregate amount of $335,500,000.
(g) FADV shall not be required to indemnify and hold harmless for Losses pursuant toSection 6.2(b)(i) until the aggregate amount due in respect of such Losses exceeds $3,050,000, and thereafter FADV shall be required to indemnify and hold harmless for all Losses in excess of such amount;provided,however, that the maximum aggregate amount of Losses payable by FADV pursuant toSection 6.2(b)(i) shall not exceed $61,000,000;provided,further, that the limitations provided in thisSection 6.2(g) shall not apply to Losses that arise from (i) a breach of any of the representations and warranties contained inSections 3.2,3.3 and3.9 or (ii) the intentional breach or misrepresentation of any of the representations and warranties contained inArticle III where FARES can prove such intentional breach or misrepresentation was actually caused by the actions or inactions of John Long, John Lamson or Akshaya Mehta, which Losses in (i) and (ii) of this proviso shall be limited to a maximum aggregate amount of $335,500,000.
6.3Indemnification Procedure.
(a) Promptly after the incurring of Losses by any Party or other Person entitled to indemnification under thisArticle VI (each, an “Indemnified Party”), including any claim by a third party described inSections 6.3(c) and6.3(d) which might give rise to indemnification hereunder, the Indemnified Party shall promptly deliver a certificate containing the information described below (a “Certificate”) to the Party that is required to indemnify such Indemnified Party under thisArticle VI (such indemnifying party, the “Indemnifying Party”). Each Certificate shall:
(i) state that the Indemnified Party has paid or properly accrued Losses or reasonably anticipates that it will incur liability for Losses for which such Indemnified Party is entitled to indemnification pursuant to this Agreement; and
(ii) specify in reasonable detail each individual item of Loss included in the amount so stated, the date such item was paid, properly accrued or is estimated to be paid, the basis for any anticipated liability and the nature of the misrepresentation, inaccuracy or claim to which each such item is related and the computation of the amount to which such Indemnified Party claims to be entitled underSection 6.2 of this Agreement.
(b) In case the Indemnifying Party shall object to the indemnification of an Indemnified Party in respect of any claim or claims specified in any Certificate, the Indemnifying Party shall, within thirty (30) days after receipt by the Indemnifying Party of such Certificate, deliver to the Indemnified Party a written notice to such effect and the Indemnifying Party and the Indemnified Party shall, within the 30-day period beginning on the date of receipt by the Indemnified Party of such written objection, attempt in good faith to agree upon the rights of the respective parties with respect to each of such claims to which the Indemnifying Party shall have so objected. If the Indemnified Party and the Indemnifying Party shall succeed in reaching agreement on their respective rights with respect to any of such claims, the Indemnified Party and the Indemnifying Party shall promptly prepare and sign a memorandum setting forth such agreement. Should the Indemnified Party and the Indemnifying Party be unable to agree as to any particular item or items or amount or amounts, then such dispute shall be settled by arbitration in New York, New York, the borough of Manhattan, in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. There shall be three arbitrators, one to be chosen by each Indemnifying Party and the Indemnified Party directly at will, and the third arbitrator to be selected by the two arbitrators so chosen. Each arbitrator shall be an attorney (i) whose primary practice area comprises mergers and acquisitions, (ii) with at least fifteen years of practice experience and (iii) that is a partner of a law firm consisting of at least 200 attorneys. Each of the Indemnifying Party and the Indemnified Party shall pay the fees of the arbitrator it selects and of its own attorneys and the expenses of its witnesses, and all other fees and costs shall be borne equally by FADV on the one hand and FARES on the other. Judgment on any award rendered by the arbitrators may be entered in any court having jurisdiction and no Party shall object to the entry of such award.
(c) Promptly after the assertion by any third party of any claim against any Indemnified Party that, in the judgment of such Indemnified Party, may result in the incurring by such Indemnified Party of Losses for which such Indemnified Party would be entitled to indemnification pursuant to thisArticle VI, such Indemnified Party shall deliver to the Indemnifying Party a written notice describing in reasonable detail such claim and the Indemnifying Party may at its option assume the defense of the Indemnified Party against such claim (including the employment of counsel, who shall be reasonably satisfactory to the Indemnified Party) and the payment of expenses. An Indemnified Party shall have the right to employ separate counsel in any such action or claim and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the Indemnifying Party unless (x) the Indemnifying Party shall have failed, within a reasonable time after having been notified in writing by the Indemnified Party of the existence of such claim as provided in the preceding sentence, to assume the defense of such claim, (y) the employment of such counsel has been specifically authorized in writing by the Indemnifying Party or (z) the named parties to any such action (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party and such Indemnified Party shall have been advised in
writing by such counsel that there may be one or more legal defenses available to such Indemnified Party which are not available to the Indemnifying Party, or available to the Indemnified Party, but the assertion of which would be adverse to the interests of the Indemnifying Party. The Indemnifying Party shall not be liable to indemnify any Indemnified Party for any settlement of any such action or claim effected without the written consent of the Indemnifying Party, but if settled with the written consent of the Indemnifying Party, or if there be a final judgment for the plaintiff in any such action, the Indemnifying Party shall indemnify and hold harmless each Indemnified Party from and against any Losses by reason of such settlement or judgment subject toSection 6.2.
(d) Claims for Losses specified in any Certificate to which an Indemnifying Party shall not object in writing within thirty (30) days of receipt of such Certificate, claims for Losses covered by a memorandum of agreement of the nature described inSection 6.3(b), claims for Losses the validity and amount of which have been the subject of judicial determination as described inSection 6.3(b) and claims for Losses the validity and amount of which shall have been the subject of a final judicial determination, or shall have been settled with the consent of the Indemnifying party, as described inSection 6.3(c) are hereinafter referred to as “Agreed Claims”. Within ten (10) Business Days of the determination of the amount of any Agreed Claims, the Indemnifying Party shall pay to the Indemnified Party an amount equal to the Agreed Claim by wire transfer in immediately available funds to the bank account or accounts designated in writing by the Indemnified Party not less than three (3) Business Days prior to such payment.
(e) Notwithstanding anything else in this Agreement, concurrent with or prior to making a claim for indemnification under thisArticle VI, each Indemnified Party shall make a claim or claims under any available insurance policies potentially covering the subject matter of the claim for indemnification made or to be made under thisArticle VI and shall pursue such insurance claim or claims until paid or coverage is finally denied. To the extent there is an Agreed Claim hereunder and an Indemnified Party collects any amounts under such insurance policies, the Indemnified Party shall promptly pay the Indemnifying Party the amount so collected under such insurance policies up to the amount of the Agreed Claim.
(f) Notwithstanding anything herein to the contrary, no Indemnifying Party shall be required to indemnify any Indemnified Party for any special, consequential, punitive or indirect damages hereunder.
ARTICLE VII.
TAX MATTERS
7.1Tax Returns.
(a) FARES shall have the exclusive authority and obligation to prepare and timely file, or cause to be prepared and timely filed, all Returns (including amended Returns and claims for refunds) (i) of the Company or (ii) that relate to the Division and the Contributed Assets, that are due with respect to any taxable year or other taxable period ending on or prior to the Closing Date and shall pay any Taxes due in respect of such Returns. Such authority shall include, but not be limited to, the determination of the manner in which any items of income, gain, deduction, loss or credit arising out of the income, properties and operations of the Company, the Division and the Contributed Assets shall be reported or disclosed in such Returns.
(b) Except as provided inSection 7.1(a) above, FADV shall have the exclusive authority and obligation to prepare and timely file, or cause to be prepared and timely filed, all Returns (including amended Returns and claims for refunds) (i) of the Company or (ii) that relate to the Division and the Contributed Assets;provided,however, FADV shall provide FARES with draft Returns for the Company and that relate to the Division and the Contributed Assets required to be prepared by FADV pursuant to thisSection 7.1(b) that include any period or portion thereof ending on or prior to the Closing Date. FADV shall provide FARES with an opportunity to review and comment on such Returns that include any period or portion thereof ending on or prior to the Closing Date and FADV shall in good faith take into account such comments in its preparation of such Returns.
7.2Payment of Taxes.
(a) FARES shall be responsible and liable for the timely payment of any and all Taxes imposed on or with respect to the properties, income and operations of the Company and that relate to the Division and the Contributed Assets for all Pre-Closing Periods, including the portion of the taxable period beginning on or before the Closing Date and ending after the Closing Date (the “Overlap Period”) up to and including the Closing Date. In addition, FARES shall pay to FADV the amount of any Taxes allocated to FARES pursuant toSection 7.2(b) below (to the extent that FARES is liable therefor and to the extent not already paid by FARES on or before the Closing Date) on or prior to five (5) Business Days prior to the due date of such Taxes.
(b) All Taxes and Tax liabilities with respect to the income, property or operations of the Company and that relate to the Division and the Contributed Assets, that relate to the Overlap Period shall be apportioned between FARES and FADV as follows: (i) in the case of Taxes other than income, sales and use and withholding Taxes, on a per diem basis, and (ii) in the case of income, sales and use and withholding Taxes, as determined from the books and records of the Company and the Division as though the taxable year of the Company and the Division terminated at the close of business on the Closing Date. FARES shall be liable for Taxes of the Company and that relate to the Division and the Contributed Assets which are attributable to the portion of the Overlap Period ending on and including the Closing Date and FADV shall be liable for such Taxes which are attributable to the portion of the Overlap Period beginning on the day following the Closing Date.
7.3Transfer Taxes. All transfer, sales and use, value added, registration, documentary, stamp and similar Taxes imposed in connection with the sale of the stock of the Company and the transfer of the Contributed Assets and the assumption of the Assumed Liabilities or any other transaction that occurs pursuant to this Agreement shall be borne equally by FARES and FADV.
7.4Controversies.
(a) FADV shall promptly within thirty (30) days of receipt notify FARES in writing upon receipt by FADV or any Affiliate of FADV (including the Company after the Closing Date) of written notice of any inquiries, claims, assessments, audits or similar events with respect to Taxes relating to a taxable period ending on or prior to the Closing Date for which FARES may be liable under this Agreement (any such inquiry, claim, assessment, audit or similar event, a “Tax Matter”). FARES at its sole expense, shall have the authority to represent the interests of the Company and that relate to the Division and the Contributed Assets with respect to any Tax Matter before the IRS, any other taxing authority, any other governmental agency or authority or any court and shall have the sole right to control the defense, compromise or other resolution of any Tax Matter, including responding to inquiries, filing Returns and contesting, defending against and resolving any assessment for additional Taxes or notice of Tax deficiency or other adjustment of Taxes of, or relating to, a Tax Matter.
(b) Except as otherwise provided inSection 7.4(a) above, FADV shall have the sole right to control any audit or examination by any taxing authority, initiate any claim for refund or amend any Return, and contest, resolve and defend against any assessment for additional Taxes, notice of Tax deficiency or other adjustment of Taxes of, or relating to, the income, assets or operations of the Company and the Division for all taxable periods.
7.5Indemnification for Taxes. Notwithstanding any provision to the contrary contained in this Agreement, FARES agrees to indemnify, defend and hold harmless FADV Indemnified Parties on an after-tax basis against (a) all Taxes imposed on or asserted against the properties, income or operations of the Company and the Division or for which the Company and/or the Division may otherwise be liable, for all Pre-Closing Periods, but only to the extent (i) FARES has not otherwise indemnified FADV for such Taxes underSection 6.2(a) of this Agreement and (ii) the aggregate amount of such Taxes exceeds the aggregate accruals for Taxes made by FARES on the books and records of the Company and the Division as of the Closing Date, and (b) all Taxes imposed on the Company as a result of the provisions of Treasury Regulations Section 1.1502-6 or the analogous provisions of any state, local or foreign law.
7.6Allocation of Consideration. FARES, Newco and FADV agree to allocate the aggregate consideration to be paid for the Contributed Assets (other than the capital stock of the Company) in accordance with Section 1060 of the Code. FARES, Newco and FADV agree that FARES shall prepare and provide to FADV a draft allocation of such consideration among the Division, the Contributed Assets (other than the capital stock of the Company) and the Assumed Liabilities within ninety (90) days after the Closing Date. FADV shall notify FARES within thirty (30) days of receipt of such draft allocation of any objection FADV may have thereto. FARES and FADV agree to resolve any disagreement with respect to such allocation in good faith. In addition, FARES and the FADV hereby undertake and agree to file timely any information that may be required to be filed pursuant to Treasury Regulations promulgated under Section 1060(b) of the Code, and shall use the allocation determined pursuant to thisSection 7.6 in connection with the preparation of Internal Revenue Service Form 8594 as such form relates to the transactions contemplated by this Agreement. None of FARES, Newco or FADV shall file any Tax Return or other document or otherwise take any position which is inconsistent with the allocation determined pursuant to thisSection 7.6 except as may be adjusted by subsequent agreement following an audit by the IRS or by court decision.
7.7Post-Closing Access and Cooperation. FADV shall afford Contributors, upon reasonable notice and without undue interruption to the business of FADV or the Company, access during normal business hours to the books and records of FADV and its Subsidiaries (solely with respect to the Division, the Contributed Assets and the Assumed Liabilities) and the Company relating to the Company, the Division, the Contributed Assets and the Assumed Liabilities prior to the Closing Date for a period of seven (7) years following the Closing Date in connection with (a) preparation of the Returns specified inSection 7.1 above, (b) evaluation of any claim for indemnification underSection 7.5 above, and (c) investigation or contest of any Tax Matter which FARES has the authority to conduct underSection 7.4 above. FADV shall, and shall cause its Affiliates to, from and after the Closing Date, preserve all books and records of the Company and the Division relating to the Company, the Division, the Contributed Assets and the Assumed Liabilities prior to the Closing Date for such seven (7) year period, and, thereafter, not destroy or dispose of or allow the destruction or disposition of such books and records without first having offered in writing to deliver such books and records to Contributors at Contributors’ expense. If Contributors fail to request such books and records within ninety (90) days after receipt of the notice described in the preceding sentence, FADV may dispose of such books and records.
ARTICLE VIII.
MISCELLANEOUS
8.1Knowledge. Where any representation or warranty contained in this Agreement is expressly qualified by reference to (a) the knowledge of a Person, the Person making such representation or warranty confirms that the senior executive officers of such Person have made a reasonable inquiry of the managers reporting to them as to the matters that are the subject of such representations and warranties, (b) the actual knowledge of FARES, such representation or warranty is made to the actual knowledge of Parker S. Kennedy, Anand Nallathambi and John Stancil without, for the avoidance of doubt, any duty of inquiry, and (c) the actual knowledge of FADV, such representation or warranty is made to the actual knowledge of John Long, John Lamson and Akshaya Mehta without, for the avoidance of doubt, any duty of inquiry.
8.2Expenses. Except as expressly provided herein, each Party shall bear its own (a) costs incurred as a result of the transactions contemplated hereby, including payments to third parties, if any, to obtain their consent to such transactions and (b) professional fees and related costs and expenses (including fees, costs and expenses of accountants, attorneys, benefits specialists, investment banks, financial advisors, tax advisors and appraisers) incurred by it in connection with the preparation, execution and delivery of this Agreement and the transactions contemplated hereby.
8.3Publicity; Confidentiality. Except as otherwise required by law, neither FARES (and its Affiliates, including Newco) nor FADV (and its Affiliates) shall issue any press release or make any other public statement,
in each case relating to, connected with or arising out of this Agreement or the matters contained herein or therein, without obtaining the prior written consent of the other to the contents and the manner of presentation and publication thereof, which consent shall not be unreasonably or untimely withheld, delayed or conditioned;provided,however, that FARES, Parent or FADV may, without the prior written consent of the others, issue any such press release or other public statement as may, upon the advice of counsel, be required by law or the rules or regulations of the New York Stock Exchange or the Nasdaq National Market, as applicable, if it has used all reasonable efforts to consult with the other.
8.4Governing Law; Jurisdiction.
(a) The interpretation and construction of this Agreement, and all matters relating hereto, shall be governed by the laws of the State of New York (exclusive of conflict of laws principles) applicable to agreements executed and to be performed solely within such State.
(b) Each of the Parties hereby irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of any New York state court sitting in the borough of Manhattan, New York, or Federal court of the United States of America in the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, the agreements delivered in connection herewith, or the transactions contemplated hereby, or for recognition or enforcement of any judgment relating thereto, and each of the Parties hereby irrevocably and unconditionally (i) agrees not to commence any such action or proceeding except in such courts, (ii) agrees that any claim in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by law, in such Federal court, (iii) waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any such action or proceeding in any such New York State or Federal court and (iv) waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such New York State or Federal court. Each of the Parties agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Each Party irrevocably consents to service of process in the manner provided for notices inSection 8.5;provided that nothing in this Agreement will affect the right of any Party to serve process in any other manner permitted by law.
(c) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE IT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT AND ANY OF THE AGREEMENTS DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE EITHER OF SUCH WAIVERS, (ii) IT UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF SUCH WAIVERS, (iii) IT MAKES SUCH WAIVERS VOLUNTARILY AND (iv) IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 8.4.
8.5Notices. Any notice or other communication required or permitted under this Agreement shall be sufficiently given if delivered in person or sent by facsimile or by registered or certified mail, postage prepaid, addressed as follows:
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or such other address or number as shall be furnished in writing by any such Party. Except for a notice of a change of address, which shall be effective only upon receipt thereof, all such notices, requests, demands, waivers and communications properly addressed shall be effective: (i) if sent by U.S. mail, three (3) Business Days after deposit in the U.S. mail, postage prepaid; (ii) if sent by FedEx or other overnight delivery service, one (1) Business Day after delivery to such service; (iii) if sent by personal courier, upon receipt; and (iv) if sent by facsimile, upon receipt.
8.6Parties in Interest. This Agreement may not be transferred, assigned, pledged or hypothecated by any Party hereto, other than by operation of law, except that FADV may assign any of its rights and benefits (but not its obligations) hereunder to any of its wholly-owned subsidiaries. This Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective successors and permitted assigns.
8.7Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one instrument.
8.8Entire Agreement. This Agreement, including the other documents referred to herein and in the Exhibits and Schedules hereto which form a part hereof, contains the entire understanding of the Parties hereto with respect to the subject matter contained herein and therein. This Agreement supersedes all prior agreements and understandings between the Parties with respect to such subject matter.
8.9Amendments. This Agreement may not be amended or modified orally, but only by an agreement in writing signed by the Parties and consented to by the Independent Committee.
8.10Severability. If any term, provision, agreement, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other competent authority to be invalid, void or unenforceable, the remainder of the terms, provisions, agreements, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any Party. Upon such a determination, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in a reasonably acceptable manner in order that the transactions contemplated hereby may be consummated as originally contemplated to the fullest extent possible.
8.11Extension; Waiver. At any time prior to the Closing, the Parties may, to the extent legally allowed, but shall not be obligated to, (a) extend the time for performance of any of the obligations or other acts of the other Parties, (b) waive any inaccuracies in the representations and warranties of the other Parties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions of the other Parties contained herein;provided that, except as otherwise permitted by this Agreement, any extension or waiver granted by FADV shall require the consent of the Independent Committee to be effective. Any agreement on the part of a Party to any such extension or waiver shall be valid only if and to the extent set forth in a written instrument signed by such Party.
8.12No Other Representations or Warranties. Except for the representations and warranties contained inArticle II of this Agreement or as expressly provided in the agreements contemplated hereby, if FARES is a party thereto, neither Contributor makes any express or implied representation or warranty with respect to the Contributed Assets, the Assumed Liabilities, the Company, or the transactions contemplated by this Agreement, and each Contributor expressly disclaims any other representations or warranties, whether made by either Contributor or any of its respective Affiliates, officers, directors, employees, agents or representatives. Except for the representations and warranties contained inArticle III of this Agreement or as expressly provided in the agreements contemplated hereby, if FADV is a party thereto, FADV makes no express or implied representation or warranty with respect to FADV’s business, and FADV expressly disclaims any other representations or warranties, whether made by FADV or any of its respective Affiliates, officers, directors, employees, agents or representatives. Notwithstanding anything else in this Agreement or the other Related Agreements, neither Contributor makes any representation or warranty with regard to the assets or business purchased or liabilities assumed under the XRES Purchase Agreement except as provided inSection 2.24 or the effect of the assets or business purchased or liabilities assumed under the XRES Purchase Agreement on the Division or the Business (for purposes of the representations and warranties inArticle II (excludingSection 2.24) or otherwise); and the business, assets and liabilities under the XRES Purchase Agreement are being transferred and assumed hereunder to and by FADV on an “as is where is” basis, subject only toSection 5.2.
8.13Third Party Beneficiaries. Each Party hereto intends that this Agreement shall not benefit or create any right or cause of action in or on behalf of any Person other than the Parties hereto.
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IN WITNESS WHEREOF, each Party has caused its name to be hereunto subscribed by its duly authorized signatory as of the day and year first above written.
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C-34
-Siganture Page-
FARES Contribution Agreement
Annex D
AMENDED AND RESTATED
SERVICES AGREEMENT
This AMENDED AND RESTATED SERVICES AGREEMENT is entered into as of [ ], 2005 (this “Agreement”), between THE FIRST AMERICAN CORPORATION, a California corporation (“First American”), and FIRST ADVANTAGE CORPORATION, a Delaware corporation (the “Company”; First American and the Company are each referred to herein as a “Party” and collectively, as the “Parties”).
W I T N E S S E T H:
WHEREAS, the Parties are parties to that certain Amended and Restated Services Agreement, dated as of January 1, 2004 (the “Amended Services Agreement”), which amended and restated that certain Services Agreement, dated as of June 5, 2003, by and among the Parties;
WHEREAS, the Parties believe it is in their respective best interests to amend and restate the Amended Services Agreement as provided in this Agreement;
WHEREAS, the Amended Services Agreement requires that a majority of Disinterested Directors (as defined below) resolve to amend the Amended Services Agreement;
WHEREAS, the Disinterested Directors have unanimously resolved to authorize this Agreement.
NOW, THEREFORE, in consideration of these premises and the terms and conditions set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, First American and the Company agree as follows:
ARTICLE I.
DEFINITIONS AND CONSTRUCTION
1.1.Definitions. Capitalized terms used herein but not defined herein shall have the meanings assigned to them in the Merger Agreement. For purposes of this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural terms defined):
“Affiliate” shall mean, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with such Person;provided that, for the purposes of this definition, “control” (including, with correlative meanings, the terms “controlled by” and “under common control with”), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise;provided,further, that, for the purposes of this definition, the Company and its Subsidiaries shall not be deemed to be Affiliates of First American;provided,further, that, for the purposes of this definition, First American and its Affiliates (excluding the Company and its Subsidiaries) shall not be deemed to be Affiliates of the Company.
“Bundled Reports Fee” shall have the meaning provided inSection 3.1(c) hereof.
“Business Services” shall mean those services described in Column A ofSchedule I, which services exclude, for the avoidance of doubt, any services provided outside of the United States of America and Puerto Rico or by First Indian Corporation or the First Indian division of the Property and Information Services Group of First American.
“Business Services Fee” shall mean, with respect to each of the Business Services set forth in Column A ofSchedule I, the fees or the method of determining the fees set forth opposite such Business Services in Column B ofSchedule I.
“Company” shall have the meaning provided in the introductory paragraph.
“Company Common Stock” shall have the meaning provided in the Standstill Agreement.
“Company Members” shall have the meaning provided inSection 2.4(c) hereof.
“Company Services” shall have the meaning provided inSection 2.2(a) hereof.
“Communications Hub” shall have the meaning provided inSection 2.4(f) hereof.
“Confidential Company Information” shall mean any information derived by the First American Entities in connection with the provision of Business Services, except such information which (a) was previously known by First American or its Affiliates and not considered confidential, and/or (b) is or becomes generally available to the public other than as a result of disclosure by First American, its Affiliates or their directors, officers, employees, agents or representatives, and/or (c) is or becomes available to First American or its Affiliates on a non-confidential basis from a source other than the Company and its Subsidiaries.
“Confidential FAF Information” shall mean any information derived by the Company or its Affiliates from any of the First American Entities in connection with the provision of Company Services, except such information which (a) was previously known by the Company or US SEARCH and not considered confidential, and/or (b) is or becomes generally available to the public other than as a result of disclosure by the Company or its Affiliates or their directors, officers, employees, agents or representatives, and/or (c) is or becomes available to the Company or its Affiliates on a non-confidential basis from a source other than First American or its Affiliates.
“Control” means, with respect to any Person, the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise.
“Cure Period” shall have the meaning provided inSection 2.4(a)(ii) hereof.
“Disinterested Director” shall mean, on any date of determination, any member of the Company’s board of directors who is not as of such date (a) an officer or employee of the Company, (b) an officer, director or employee of First American or any Affiliate thereof, (c) a Person who Controls or is under common Control with First American or any Affiliate thereof, or (d) a Person who otherwise would fail to qualify as an “independent director” under the applicable rules of the Nasdaq National Market as then in effect;provided, however, that a Person designated by Pequot Private Equity Fund II, L.P. in accordance with the Stockholders Agreement dated as of December 13, 2002, among First American, Pequot Private Equity Fund II, L.P. and the Company shall not be deemed to be disqualified as a Disinterested Director by application of section (d) of this definition.
“Entity” shall mean any Person that is not a natural Person.
“FAF Members” shall have the meaning provided inSection 2.4(c) hereof.
“FARES” shall mean First American Real Estate Solutions LLC, a California limited liability company and Subsidiary of First American.
“First American” shall have the meaning provided in the introductory paragraph.
“First American Entity” and “First American Entities” shall mean one or more, as applicable, of First American and any Affiliate of First American.
“Merged Reports” shall have the meaning provided inSection 2.4(a)(i) hereof.
“Merger Agreement” means that certain Agreement and Plan of Merger, dated as of December 13, 2002, to which First American, US SEARCH, the Company and Stockholm Seven Merger Corp., a Delaware corporation, are parties.
“Mortgage Credit Reports” shall have the meaning provided inSection 2.4(a)(i) hereof.
“Mortgage Credit Reports Fees” shall have the meaning provided inSection 3.1(c) hereof.
“Mortgage Customers” shall have the meaning provided inSection 2.4(a)(i) hereof.
“Mortgage Marketing Services” shall have the meaning provided inSection 2.4(b) hereof.
“Mortgage Services” shall have the meaning provided inSection 2.4(a)(i) hereof.
“Non-Bundled Reports Fee” shall have the meaning provided inSection 3.1(c) hereof.
“Notice of Deficiency” shall have the meaning provided inSection 2.4(a)(ii) hereof.
“Operating Committee” shall have the meaning provided inSection 2.4(c) hereof.
“Party” and “Parties” shall have the meaning provided in the introductory paragraph.
“Person” shall mean and include a partnership, a joint venture, a corporation, a limited liability company, a limited liability partnership, an incorporated organization, a group and a government or other department, agency or political subdivision thereof.
“Requisite Service Levels” shall have the meaning provided inSection 2.4(a)(ii) hereof.
“Reset Date” shall have the meaning provided inSection 4.1(c) hereof.
“Standstill Agreement” shall mean the Standstill Agreement, dated as of June 5, 2003, between First American and the Company.
“Subsidiary” and “Subsidiaries” shall mean, with respect to any Person, (a) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person and/or one or more Subsidiaries of such Person and (b) any Entity (other than a corporation) in which such Person and/or one more Subsidiaries of such Person has more than a 50% equity interest at the time or otherwise controls the management and affairs of such Entity (including the power to veto any material act or decision).
“Term” shall have the meaning provided inSection 4.1 hereof.
“Termination Date” shall have the meaning provided inSection 4.1 hereof.
“US SEARCH” means US SEARCH.com Inc., a Delaware corporation.
“ZapApp Services” shall mean those services described inSchedule II.
“ZapApp Services Fee” shall mean the actual cost to ZapApp India Private Limited of providing the ZapApp Services.
1.2.Principles of Construction.
(a) The words “hereof”, “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement.
(b) In the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including”; the words “to” and “until” each mean “to but excluding”; and the word “through” means “to and including.”
(c) The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”, unless already expressly followed by such phrase or the phrase “but not limited to”.
(d) Article and Section headings and captions used herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement.
(e) All words importing any gender shall be deemed to include the other gender and the neuter.
(f) In the event that the final day of any time period provided herein does not fall on a business day, such time period shall be extended such that the final day of such period shall fall on the next business day thereafter.
(g) Unless otherwise specified, references to agreements and other contractual instruments shall be deemed to include all subsequent amendments, modifications and supplements thereto.
(h) Each Party has reviewed and commented upon this Agreement and, therefore, any rule of construction requiring that any ambiguity be resolved against the drafting party shall not be employed in the interpretation of this Agreement.
ARTICLE II.
SERVICES
2.1.Business Services. During the applicable Term, First American shall, or shall cause one or more of the other First American Entities to, provide the Company and/or its Affiliates with the Business Services. First American shall, and shall cause the First American Entities to, allocate resources with regard to the Business Services in a manner that is consistent with the allocation of such resources by First American and/or the First American Entities prior to the transfer of First American’s CREDCO Division to the Company or its Affiliate.
2.2.Company Services.
(a) During the applicable Term, the Company shall, and shall cause its Affiliates to, provide First American and/or its Affiliates with products and services offered by or through the Company or its Affiliates from time to time (collectively (but excluding the ZapApp Services and the Mortgage Services), the “Company Services”) at rates and on terms no less favorable than those generally offered by the Company and its Affiliates to third parties.
(b) During the applicable Term, the Company shall, and shall cause its Affiliates to, provide First American and/or its Affiliates with the ZapApp Services. The Company shall, and shall cause its Affiliates to, allocate resources with regard to the ZapApp Services in a manner that is consistent with the allocation of such resources by the Company and its Affiliates prior to the transfer of First American’s CREDCO Division to the Company or its Affiliate.
2.3.Additional First American Services. During the applicable Term, First American may, and may cause the other First American Entities to, offer to provide the Company and/or its Affiliates, and the Company and/or its Affiliates may purchase, products and services offered by or through the First American Entities from time to time during the applicable Term in the ordinary course of business at rates and on terms then offered by the First American Entities to comparable third parties. Nothing in this Agreement shall change or affect the terms and
conditions of any agreement or understanding listed on Schedules 4.9, 4.10, 4.20 and 4.27 to the Merger Agreement. The Company and/or its Affiliates on the one hand, and any First American Entity on the other hand, may renew any such agreement or understanding on terms substantially similar to those in such agreements or understanding.
2.4.Mortgage Services.
(a)Mortgage Credit Reports.
(i) During the applicable Term, the Company shall, and shall cause its Affiliates to, provide First American and its Affiliates with merged, multiple-source or single-source credit reports created by accessing one or more of the national credit database repositories and other information sources, which credit reports shall include basic, partial and fully verified Instant Merge Reports (including Merge Plus Reports and Residential Mortgage Credit Reports), Instant Merge Reports (such three-bureau merged credit reports, together with other three-bureau merged credit reports, the “Merged Reports”), and other credit reports incorporating credit scores, fraud check products, products which list creditor addresses and phone numbers, and other related information and enhancements that the Company and/or its Affiliates may offer from time to time (collectively, “Mortgage Credit Reports”), for resale to mortgage lenders, mortgage servicers, mortgage brokers, underwriters, and other users of information in the mortgage lending process and their respective customers (collectively, “Mortgage Customers”). The provision of Mortgage Credit Reports by the Company and its Affiliates hereunder to First American and its Affiliates for resale to Mortgage Customers is referred to herein as the “Mortgage Services”.
(ii) During the applicable Term, in providing Mortgage Services hereunder, the Company shall, and shall cause its Affiliates to, meet certain baseline performance metrics, as set forth in the following table (the “Requisite Service Levels”):
Metrics | Service Level | |||||||||||
1. | Hours of system (DataHQ) availability | Monday – Friday: Saturday: Sunday: | 4:00 AM 5:00 AM 7:00 AM | – – – | 11:00 PM 10:00 PM 11:00 PM | (Pacific Time) (Pacific Time) (Pacific Time) | ||||||
2. | System (DataHQ) uptime | 99.5% | ||||||||||
3. | Turn time for Instant Merge Reports | 95% of transactions in under 20 seconds, or such other better service level required from time to time by Fannie Mae | ||||||||||
4. | Customer service metrics for developed mortgage reports | Merge Plus: 24 hours Residential Mortgage Credit Report (RMCR): 48 hours | ||||||||||
5. | Average speed of answer (ASA) | 80% or greater of calls to be answered within 30 seconds | ||||||||||
6. | Abandonment rate | Less than 5% | ||||||||||
7. | Consumer disputes | To be handled per Federal requirements for service time in accordance with the Fair Credit Report Act, the Fair and Accurate Credit Transactions Act and other applicable law |
Within 10 business days following the end of each calendar quarter, the Company will submit to First American a written quarterly report of actual performance measured against the Requisite Service Levels. In the event that the Company or its Affiliates does not meet the Requisite Service Levels at any time during the applicable Term, First American shall provide the Company with a written notice of deficiency (each, a “Notice of Deficiency”). Following receipt of a Notice of Deficiency, the Company shall, and shall cause its Affiliates to, (i) provide within five (5) days of receipt of such
Notice of Deficiency to First American a written plan to cure the deficiency identified therein, which plan shall be subject to revision as First American may reasonably request within five (5) days of receipt thereof, and (ii) cure the deficiency identified such Notice of Deficiency in accordance with the foregoing written plan within thirty (30) calendar days from receipt of the Notice of Deficiency (such thirty (30) day period, the “Cure Period”). The Company shall be solely responsible for the implementation of remedial actions (including any and all fees, costs and expenses incurred in connection therewith) to cure all deficiencies noted in any Notice of Deficiency. If the Company does not cure or cause to be cured any deficiency identified in any Notice of Deficiency within the applicable Cure Period, First American shall have the right (but not the obligation) to assume control of the implementation of remedial action to cure such deficiency (including hiring third party service providers), and the Company shall promptly reimburse First American for any fees, costs and expenses incurred in connection therewith.
(b)Exclusive Reseller. During the applicable Term, the Company appoints, and the Company shall cause its Affiliates to appoint, First American and its Affiliates as, and First American hereby accepts for itself and for its Affiliates appointment as, the exclusive providers of Mortgage Credit Reports to Mortgage Customers. During the applicable Term, except as provided in this Agreement, the Company will not, and will not permit any of its Affiliates to, directly or indirectly market, sell or provide Mortgage Credit Reports to Mortgage Customers. In furtherance of the foregoing, First American shall be solely responsible for all sales, marketing, delivery, pricing and collections with regard to the sale of Mortgage Credit Reports to Mortgage Customers, and First American shall have the right and sole discretion to decide upon and implement strategies to carry out sales, marketing, delivery, pricing and collections with regard to the sale of Mortgage Credit Reports to Mortgage Customers (the “Mortgage Marketing Services”). The Company shall, and shall cause its Affiliates to, cooperate with First American and its Affiliates in the marketing and sale of Mortgage Credit Reports to Mortgage Customers and provide reasonable technical assistance to First American and its Affiliates for such purpose, including responding in a timely fashion to service requests that arise from time to time, training and telephone assistance regarding the Company’s or its Affiliates service options, delivery systems, service practices, software installation and use, systems interface, and other applicable policies and procedures.
(c)Operating Committee. The Parties shall collectively appoint four (4) individuals to serve on a committee (the “Operating Committee”) which shall be responsible for managing the provision of the Mortgage Services, except where the management thereof has been given to a Party hereunder, in the following manner: (i) First American shall be entitled to appoint two (2) members (the “FAF Members”) and (ii) the Company shall be entitled to appoint two (2) members (the “Company Members”). The initial FAF Members shall be Craig DeRoy and Bill Sherakas and the initial Company Members shall be Anand Nallathambi and Kathy Manzione. The Party that appoints a member of the Operating Committee may remove such member at any time, with or without cause, and such Party shall have the authority to name a replacement member to the Operating Committee.
(d)Allocation of Project Resources. The Company shall, and shall cause its Affiliates to, allocate information technology and project resources with regard to Mortgage Services in a manner that is consistent with the allocation of such resources by First American’s CREDCO Division prior to the transfer of that division to the Company or its Affiliate, and that equals or exceeds the allocation of such resources to other businesses of the Company and its Affiliates, and the Company shall not, and shall not permit its Affiliates to, discriminate against the provision of Mortgage Services in the allocation of information technology and project resources when measured against the allocation of such resources to other businesses of the Company and its Affiliates. In addition, the Company recognizes that Mortgage Credit Reports prepared for certain Mortgage Customers that have key client relationships with First American and its Affiliates require certain superior service levels and the Company shall, and shall cause its Affiliates to, dedicate appropriate and sufficient resources as may be reasonably necessary to meet such superior service levels with regard to such key Mortgage Customers identified by First American.
(e)Technology Support Services. In providing the technology support services contemplated in Item 7 of Schedule I hereto, First American shall, or shall cause its Affiliates to, meet certain baseline performance metrics, as set forth in the following table:
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(f)Anaheim Communications Hub. During the applicable Term, First American will cause FARES to provide the Company with reasonable access to its voice communications hub (the “Communications Hub”) for the purpose of routing customer service calls to and the monitoring of personnel at the Company’s operations in India.
2.5.Personnel.
(a) During the applicable Term, First American or the other First American Entities shall continue to employ all personnel performing the Business Services directly and shall be solely responsible for and pay all of their salary, benefits, workers’ compensation premiums, unemployment insurance premiums, and all other compensation, insurance and benefits, including participation in employee benefit plans, if applicable. First American and the other First American Entities shall be solely responsible for timely payment, withholding and reporting of all applicable Federal, state, foreign and local withholding, employment and payroll taxes with respect to the personnel that perform the Business Services. First American or the other First American Entities shall maintain workers’ compensation and employers’ liability insurance, in accordance with applicable law, covering the personnel that perform the Business Services.
(b) During the applicable Term, the Company or its Affiliates shall continue to employ all personnel performing the Company Services, the ZapApp Services and the Mortgage Services directly and shall be solely responsible for and pay all of their salary, benefits, workers’ compensation premiums, unemployment insurance premiums, and all other compensation, insurance and benefits, including participation in employee benefit plans, if applicable. The Company and its Affiliates shall be solely responsible for timely payment, withholding and reporting of all applicable Federal, state, foreign and local withholding, employment and payroll taxes with respect to the personnel that perform the Company Services, the ZapApp Services and the Mortgage Services. The Company and its Affiliates shall maintain workers’ compensation and employers’ liability insurance, in accordance with applicable law, covering the personnel that perform the Company Services, the ZapApp Services and the Mortgage Services.
ARTICLE III.
FEES; PAYMENT
3.1.Fees.
(a)Business Services Fee. The Company shall pay First American (i) the Business Services Fee in consideration for the Business Services and (ii) such fees as may be negotiated from time to time with respect to the services described inSection 2.3.
(b)ZapApp Services Fee; Company Services Fees. First American shall pay the Company (i) the ZapApp Services Fee in consideration for the ZapApp Services and (ii) such fees as may be negotiated from time to time with respect to Company Services.
(c)Mortgage Credit Report Fees. First American shall pay the Company a fee of $12.60 for each of the Merged Reports provided to First American or its Affiliates that is bundled with other products or services sold by First American or its Affiliates (the “Bundled Reports Fee”). Fees paid by First American and its Affiliates to the Company in consideration for Mortgage Credit Reports that are not bundled with other First American products or services shall be negotiated by the Parties on a case-by-case basis (the “Non-Bundled Reports Fee” and collectively with the Bundled Reports Fee, the “Mortgage Credit Reports Fees”).
(d)Communications Hub Fees. The Company shall pay FARES its pro rata share (based on actual usage by the Company and its Subsidiaries) of the total actual cost to FARES of the Communications Hub.
3.2.Payment.
(a)Business Services. First American shall deliver to the Company an invoice containing a description of the Business Services covered by such invoice and provided during the relevant period and the amount of the Business Services Fee for such period. Each invoice shall be due and payable immediately upon receipt, and payment shall be made no later thirty (30) calendar days after receipt of such invoice. The Business Services Fee shall, where appropriate, accrue during any month (or portion thereof) during the applicable Term.
(b)ZapApp Services. The Company shall deliver to First American an invoice on a quarterly basis containing a description of the ZapApp Services provided during the relevant period and the amount of the ZapApp Services Fee for such period. Each invoice shall be due and payable immediately upon receipt, and payment shall be made no later than thirty (30) calendar days after receipt of such invoice.
(c)Mortgage Services. The Company may deliver to First American an invoice for Mortgage Credit Report Fees upon delivery of the underlying Mortgage Credit Reports to First American or its Affiliates, or at such later intervals as the Company determines. Each such invoice shall contain a description of the Mortgage Credit Reports provided during the relevant period and the amount of the Mortgage Credit Reports Fees for such period. Each such invoice shall be due and payable immediately upon receipt, and payment shall be made no later than ninety (90) calendar days after receipt of such invoice.
(d)Communications Hub. First American shall cause FARES to deliver to the Company an invoice containing a reasonable description of the fees payable by the Company pursuant to Section 3.1(d). Each invoice shall be due and payable immediately upon receipt, and payment shall be made no later than thirty (30) calendar days after receipt of such invoice.
ARTICLE IV.
TERM
4.1.Term. The term of this Agreement (the “Term”) with respect to each applicable service or Section hereof shall commence on the date hereof and terminate on the date set forth below with respect to the applicable service or Section hereof (each such date with respect to the applicable service or Section hereof, the “Termination Date”):
(a) Business Services described in Item 7 ofSchedule I hereto shall be provided hereunder until the second (2nd) anniversary of the date hereof.
(b) The covenants and agreements set forth inSections 2.4(a), (b) and (d) shall remain in effect until the second (2nd) anniversary of the date hereof, and thereafter the Term with respect to such covenants and agreements will be automatically extended for additional successive two (2) year terms unless terminated by First American upon sixty (60) days’ prior written notice to the Company;provided,however, the Parties shall renegotiate in good faith the amount of the Bundled Reports Fee on or before the second (2nd) anniversary of the date hereof, and on or before the last day of each two (2) year period thereafter, provided the Term respect to the covenants and agreements set forth inSection 2.4 is then still in effect.
(c) All other services not covered by subparagraphs (a) and (b) above (including Business Services (other than Business Services described in Item 7 ofSchedule I hereto), ZapApp Services and Company Services) shall be provided hereunder until the first (1st) anniversary of the date hereof, unless renewed in accordance with the following sentence. The Term with respect to such services will continue, and this Agreement shall be automatically extended with respect to such services, for successive 180-calendar day periods commencing on the first day immediately following the first (1st) anniversary of the date hereof (such day, and the last day of each 180-calendar day period thereafter, a “Reset Date”), unless either Party advises the other in writing, no later than thirty (30) calendar days prior to a Reset Date, that the Term with respect to such services shall not be so extended. If the Term with respect to such services shall be so extended, the “Termination Date” with respect to such services shall mean the then applicable extended “Termination Date”, and the “Term” with respect to such services shall mean the period commencing on the date hereof and ending on the then applicable extended “Termination Date”.
4.2.Termination. In the event of termination of this Agreement with respect to any service or Section hereof, all outstanding unpaid fees owed by the Company and First American with respect to such service or Section hereof shall become immediately due and payable. The termination of this Agreement with respect to any service or Section hereof as to any Party shall be without prejudice to any rights or liabilities of the other
Party hereunder which shall have accrued prior to such termination and shall not affect any provisions of this Agreement that are expressly or by necessary implication intended to survive such termination. This Agreement shall continue in full force and effect with respect to any services and/or Section hereof that has not been terminated in accordance herewith until terminated in accordance herewith.
ARTICLE V.
MISCELLANEOUS
5.1.Cooperation. The Parties will cooperate in good faith to carry out the purposes of this Agreement. Without limiting the generality of the foregoing, each Party will assist the other Party and furnish the other Party with such information and documentation as the other Party may reasonably request.
5.2.No Liability.
(a) In providing the Business Services hereunder, neither First American nor any of its Affiliates shall be liable to the Company or its Affiliates for any error or omission except to the extent that such error or omission results from the gross negligence or willful misconduct of First American or such Affiliate to perform the Business Services required by it hereunder. In no event shall First American or any of its Affiliates be liable to the Company or any of its Affiliates or any third party for any special or consequential damages, including, without limitation, lost profits or injury to the goodwill of the Company or any of its Affiliates, in connection with the performance, misfeasance or nonfeasance hereunder of First American or any of its Affiliates.
(b) In providing the ZapApp Services hereunder, neither the Company nor any of its Affiliates shall be liable to First American or its Affiliates for any error or omission except to the extent that such error or omission results from the gross negligence or willful misconduct of the Company or such Affiliate to perform the ZapApp Services required by it hereunder. In no event shall the Company or any of its Affiliates be liable to First American or any of its Affiliates or any third party for any special or consequential damages, including, without limitation, lost profits or injury to the goodwill of First American or any of its Affiliates, in connection with the performance, misfeasance or nonfeasance hereunder of the Company or any of its Affiliates.
(c) In providing the Mortgage Services hereunder, the Company shall, and shall cause its Affiliates to, promptly reimburse First American and its Affiliates for any amounts First American or its Affiliates are required to pay as a result of the failure of the Company or one of its Affiliates to meet the standard of care required by the agreements pursuant to which Mortgage Credit Reports are provided to Mortgage Customers.
5.3.Notices. All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered in person, by mail, postage prepaid, or sent by facsimile, to the Parties, at the following addresses and facsimile numbers:
(a) If to First American, to:
Name(1) | Class A Common | Class B Common | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Number of Shares Beneficially Owned | Percent of Class(2) | Number of Shares Beneficially Owned | Percent of Class(2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Holders of 5% or More | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
FADV Holdings LLC(3)(4) The First American Corporation First American Real Estate Information Services, Inc. First American Real Estate Solutions LLC 1 First American Way Santa Ana, California
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Baron Capital Group, Inc.(6)
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Experian Information Solutions, Inc.(4)(7)
475 Anton Boulevard
Costa Mesa, California 92626 | 3,784,642 | 6.5 | % | 0 | 6.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Directors | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Parker Kennedy(8) | 27,666 | * | 0 | * | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
John Long(11) | 400,719 | * | 0 | * | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
J. David Chatham(9)(10) | 7,500 | * | 0 | * | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Barry Connelly(9) | 5,000 | * | 0 | * | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Lawrence Lenihan, Jr.(5) | 2,166,360 | 22 | % | 0 | * | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Frank McMahon | 0 | * | 0 | * | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Donald Nickelson(9) | 5,000 | * | 0 | * | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Donald Robert(9) | 10,000 | * | 0 | * | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Adelaide Sink(9) | 9,000 | * | 0 | * | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
D. Van Skilling | 0 | * | 0 | * | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
David Walker(9) | 8,000 | * | 0 | * | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Named Executive Officers Who Are Not Directors | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Akshaya Mehta(12) | 119,761 | * | 0 | * | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
John Lamson(13) | 102,286 | * | 0 | * | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Evan Barnett(14) | 62,191 | * | 0 | * | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Anand Nallathambi | 9,000 | * | 0 | * | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
All Directors and
| 2,932,483 | 30 | % | 0 | * |
* | Represents holdings of
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20
Annex F
OUTSOURCING AGREEMENT
This OUTSOURCING AGREEMENT (this “Agreement”) is entered into as of [ ] 2005 between FIRST AMERICAN REAL ESTATE SOLUTIONS, LLC, a California limited liability company (including, for the avoidance of doubt, the Division (as defined below), “FARES”), and FIRST ADVANTAGE CORPORATION, a Delaware corporation (“FADV”).
W I T N E S S E T H :
WHEREAS, First American CREDCO, a division of FARES (the “Division”), has previously entered into that certain Marketing and Support Agreement, effective as of June 26, 2000, with RESdirect LLC, a wholly-owned subsidiary of the RELS companies (“RESdirect”), attached hereto asExhibit A (as amended, supplemented or restated from time to time, the “Support Agreement”), whereby FARES agreed to sell credit reports to customers of RESdirect and provide certain other services described therein to RESdirect;
WHEREAS, the Division has previously entered into that certain Service Bureau Agreement, effective as of November 1, 1998, with RELS, LLC, a Delaware limited liability company (“RELS”), attached hereto asExhibit B (as amended, supplemented or restated from time to time, the “Service Bureau Agreement”), whereby FARES agreed to provide certain services described therein to RELS;
WHEREAS, the Division and RELS Reporting Services LLC, a wholly-owned subsidiary of RELS (“RRS”), are parties to an oral agreement (the “RRS Services Agreement”) which provides that (a) the Division will manage the business operations of RRS, including, without limitation, daily operation and financial reporting and the activities described onExhibit C, (b) the Division will, through its networks and systems (electronic or otherwise) order credit reports and related products and services from the credit report repositories and other entities involved in assessing the credit worthiness of individuals (including, without limitation, Fair Isaac Corporation) on behalf of RRS and its customers using the subscriber codes of Foothill Capital or one of its affiliates, including, without limitation, Wells Fargo Bank N.A. (collectively, the “Wells Entities”), (c) the Division, if required, will format and/or merge such credit reports and related products and services (based on requirements of the Wells Entities or their respective customers) using the Division’s systems, (d) the Division will deliver the merged and/or formatted credit reports and related products and services, or, if required, the unmerged and/or unformatted credit report and related products and services (the credit report and related products and services required to be delivered by the Division, the “CREDCO Report”), to the Wells Entity requesting such CREDCO Report, or its customer or designee, using the Division’s networks and systems (electronic or otherwise), (e) CREDCO Reports delivered by the Division may be private labeled in RRS’ name or the name of an RRS designee or a Wells Entity designee, (f) the Division will provide customer support services in connection with the CREDCO Reports, (g) the Division will provide technical support in connection with the CREDCO Reports, (h) the Division will provide product development services and product enhancements, whether requested by RRS, RELS, the Wells Entities or otherwise, (i) RRS will pay the Division $3.45 for each CREDCO Report which only involves the merging of credit reports pulled from at least two credit bureau repositories and $2.00 for each CREDCO Report which involves only the formatting and processing of a single credit report pulled from one of the three credit bureau repositories, (j) and $0.50 per report for batch or bulk servicing transactions, (k) the Division will bill RRS’ customers on behalf of RRS, collect payment from RRS’ customers, deduct therefrom any amounts owed the Division by RRS under the RRS Services Agreement and remit to RRS and/or RELS the balance, (l) RRS will pay the Division the allocations and direct charges described onExhibit C and (m) RRS can terminate the RRS Services Agreement at any time.
WHEREAS, FARES and FADV (each, a “Party” and collectively, the “Parties”) have entered into that certain Contribution Agreement, dated as of the date hereof (the “Contribution Agreement”), whereby FARES has agreed to contribute the Division to FADV (the “Transaction”); and
WHEREAS, in connection with the consummation of the Transaction, FARES desires to outsource performance of all of its obligations, covenants and agreements under the Support Agreement, the Service Bureau Agreement and the RRS Services Agreement to FADV, and FADV is willing to perform all obligations, covenants and agreements of FARES under the Support Agreement, the Service Bureau Agreement and the RRS Services Agreement.
NOW, THEREFORE, in consideration of these premises and the terms and conditions set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, FARES and FADV agree as follows:
First Advantage, Functions $ Applied: Rels Doe, Jane General Ledger Functions Totals Doe, John Balance Sheet Certification Sales Tax Reports Repository Relationships Totals Blow, Joe Management Reporting Totals Total Total Percent of Accounting Allocation: Functions % Applied: Rels A/R Generated Statements Totals Functions % Applied: Rels Research Calls Status Updates Adding New Customer Call Totals Percent of Account Setup Expenses Allocated to Joint Venture: Functions Rels Disputes % Applied: Rels Faxed Disputes Mailed Disputes Telephoned Disputes Totals Percent of Consumer Disputes Expenses Allocated to Joint Venture: Functions % Applied: Rels Research Calls Status Updates Miscellaneous Calls Totals Functions $ Applied: Rels Doe, Jane Sales/Retention Totals Doe, John Repository Relations Strategic Planning General Admin. Functions Totals Blow, Joe Management of Operations Totals Total Total Percent of Credco CIG Administration Allocation: Functions % Applied: Rels Credco & JV Transactions Totals Percent of Sales Expenses Allocated to Joint Venture: Lease Years Monthly Base Rent Annual Rent Rental Rate 1-5 As reported in an Amendment No. 3 to Schedule 13G dated February 14, 2006, filed with the SEC. Baron Capital Group, Inc. (“BCG”), BAMCO, Inc. (“BAMCO”), Baron Small Cap Fund (“BSC”) and Ronald Baron filed an Amendment No. 3 to 211.Defined Terms. (1) Unless otherwise defined herein, capitalized terms used herein shall haveindicated, the meanings assigned in the Contribution Agreement.2.Services. From and after the date hereof (the “Effective Date”), FADV shall, and shall cause its Affiliates to, on behalf of FARES, (a) fully perform all obligations, covenants and agreements of FARES under the Support Agreement for so long as the Support Agreement remains in effect (the “RESdirect Services”), (b) fully perform all obligations, covenants and agreements of FARES under the Service Bureau Agreement for so long as the Service Bureau Agreement remains in effect (the “RELS Services”) and (c) fully perform all obligations, covenants and agreements of FARES under the RRS Services Agreement (the “RRS Services” and collectively with the RESdirect Services and the RELS Services, the “Services”).3.Performance. In providing Services hereunder, FADV shall, and shall cause its Affiliates to, (a) comply with applicable laws and regulations and the terms of the Support Agreement, the Service Bureau Agreement and the RRS Services Agreement, as applicable, and (b) act in a good faith commercially reasonable manner and at least in accordance with the standards for the provision of the Services used by FARES in the performance of the Services prior to the Effective Date. With respect to its obligation to prepare the financial statements of the credit division of RELS and its subsidiaries under the RRS Services Agreement, FADV agrees to deliver such financial statements to RELS within 6 Business Days of the end of each calendar month and within 8 Business Days of the end of each calendar year, which financial statements will be prepared in accordance with GAAP.4.Payment. From and after the Effective Date and until the earlier to occur of the date (a) RELS dissolves or ceases to exist and (b) FARES or one or more of its Affiliates is no longer a member of RELS (such earlier date, the “Termination Date”), FARES shall, as full consideration for the performance of the Services, pay to FADV:(i) within (1) 40 days following the end of each of the first, second and third calendar quarters of each year prior to the Termination Date and within 70 days following the end of the fourth calendar quarter of each year prior to the Termination Date if FADV or one of its Subsidiaries is not preparing the financial statements of the credit report division of RELS and its Subsidiaries (whether pursuant to the RRS Services Agreement or otherwise) or (2) 10 Business Days following the date on which FADV delivers to RELS the financial statementsaddress for each of the first, second and third calendar quarters and the full calendar year if FADV or one of Subsidiaries is preparing the financial statements of the credit report division of RELS and its Subsidiaries (whether pursuant to the RRS Services Agreement or otherwise), an amount in cash equal to the product of (A) the pre-tax income of RELS (as defined in accordance with GAAP, but excluding the effects of any depreciation or amortization of any asset purchased in connection with a Capital Expenditure (as defined below)) derived from the sale during the applicable calendar quarter (or, with respect to the first calendar quarter during which this Agreement is effective, the period between the Effective Date and the end of the calendar quarter in which the Effective Date occurs) of CREDCO Reports, less the amount of any capital expenditures made during the applicable calendar quarter (or, with respect to the first calendar quarter during which this Agreement is effective, the period between the Effective Date and the end of the calendar quarter in which the Effective Date occurs) by RELS in connection with the sale of CREDCO Reports acquired by RELS from FADV and/or its Subsidiaries (each such capital expenditure, a “Capital Expenditures”), and (B) the percentage interest in RELS collectively owned by FARES and/or its Affiliates as of the end of the applicable calendar quarter, and(ii) within five Business Days of receipt thereof all amounts paid to FARES pursuant to the Support Agreement, the Service Bureau Agreement and the RRS Services Agreement for services provided by FADV and/or its Affiliates thereunder after the Effective Date.5.Term. The term of this Agreement shall begin on the Effective Date and shall terminate (a) with respect to the performance of the RESdirect Services by FADV hereunder, on the earlier to occur of (i) the date the Support Agreement is terminated or is otherwise no longer in full force and effect in accordance with its terms and (ii) the Termination Date, (b) with respect to the performance of the RELS Services by FADV hereunder, on the earlier to occur of (i) the date the Service Bureau Agreement is terminated or is otherwise no longer in full force and effect in accordance with its terms and (ii) the Termination Date, and (c) with respect to the performance of the RRS Services by FADV hereunder, on the earlier to occur of (i) the date the RRS Services Agreement is terminated or is otherwise no longer in full force and effect in accordance with its terms and (ii) the Termination Date.6.Enforcement of Rights. FARES shall use reasonable efforts to provide FADV with the rights and benefits under the Support Agreement, the Service Bureau Agreement and the RRS Services Agreement, including enforcement for the benefit of FADV and at FADV’s sole expense of any and all rights of FARES against RESdirect, RELS and RRS, respectively, arising out of any breach of the Support Agreement, the Service Bureau Agreement and/or the RRS Services Agreement by RESdirect, RELS and/or RRS, respectively, and if requested by FADV, acting as an agent on behalf of FADV or as FADV shall otherwise reasonably require;provided that FADV shall bear FARES’ reasonable out-of-pocket expenses and costs as such agent and shall indemnify FARES for actions taken or not taken as such agent. FARES for itself only (and not, for the avoidance of doubt, for any Affiliate, including, without limitation, RESdirect, RELS and RRS) will not agree to amend or modify, or agree to any waiver of any provision of, the Support Agreement, the Service Bureau Agreement or the RRS Services Agreement without the prior written consent of FADV.7.Indemnity. FADV agrees to indemnify and hold FARES and its Subsidiaries, each of their Affiliates, and each of their respective officers, managers, employees, agents and any assignees and successors thereto, harmless, from and against any and all claims, losses, liabilities, damages, costs, disbursements, interest, and reasonable out-of-pocket expenses (including reasonable attorney fees) suffered, incurred or paid, directly or indirectly, as a result of or arising out of FADV’s or its Affiliates’ performance of FADV’s obligations under this Agreement. FARES agrees to indemnify and hold FADV and its Subsidiaries, each of their Affiliates, and each of their respective officers, managers, employees, agents and any assignees and successors thereto, harmless, from and against any and all claims, losses, liabilities, damages, costs, disbursements, interest, and reasonable out-of-pocket expenses (including reasonable attorney fees) suffered, incurred or paid, directly or indirectly, as a result of or arising out of FARES or its Affiliates’ performance of FARES’s obligations under this Agreement.8.Cooperation; Assignment of Agreements; Financials.(a) The Parties will cooperate in good faith to carry out the purposes of this Agreement. Without limiting the generality of the foregoing, each Party will assist the other Party and furnish the other Party with such information and documentation as the other Party may reasonably request.(b) In the event FARES desires to exercise its right, if any, to terminate the Support Agreement, the Service Bureau Agreement or the RRS Services Agreement, FARES shall no less than five Business Days prior to the date of such desired termination (the “Intended Termination Date”) provide FADV with notice of its desire to terminate such agreement, which notice shall specify the Intended Termination Date. FADV, by written notice to FARES delivered no later than one Business Day prior to the Intended Termination Date, may cause FARES to delay such termination for a period of 45 calendar days during which time FARES will use commercially reasonable best efforts (which efforts shall not require FARES to make any payment or forgo any right) to obtain the consent of the other parties to such agreement and any other necessary consents (including, without limitation, any consent of a Wells Entity required under RELS operating agreement or otherwise) to the assignment of such agreement to FADV. If such consent isobtained during such 45 calendar day period (or such longer period as FARES and FADV shall mutually agree), FARES shall assign to FADV (or its designee) all of FADV’s right, title and interest in and to such agreement and FADV shall assume and become responsible for all liabilities and obligations related thereto.(c) At any time during the Term of this Agreement, FARES shall have the right to assign to FADV (and FADV shall assume FARES’s obligations under) the Support Agreement, the Service Bureau Agreement and/or the RRS Services Agreement,provided FARES has obtained the consent of the other parties thereto and any other necessary consents (including, without limitation, any consent of a Wells Entity required under RELS operating agreement or otherwise). FADV shall cooperatepersons set forth in the executiontable is care of any reasonably necessary documentation (including, without limitation, the execution of any assumption agreement) to effect any assignment contemplated by this Section 8(c).(d) For any calendar month or calendar year during the Term during which FADV or one of its Subsidiaries does not prepare the financial statements of the credit report division of RELS and its Subsidiaries (whether pursuant to the RRS Services Agreement or otherwise), FARES will deliver to FADV an income statement for the credit report division of RELS, which income statement will describe, in accordance with GAAP, the revenues, expenses and income of RELS derived from, or incurred in connection with, the sale of CREDCO Reports by RELS and its Subsidiaries. FARES will deliver such income statement within 8 Business Days following the end of each such calendar month or 10 Business Days following the end of each such calendar year.9.Notices. Any notice or other communication required or permitted under this Agreement shall be sufficiently given if delivered in person or sent by facsimile or by registered or certified mail, postage prepaid, addressed as follows:(a) If to FADV, to: CorporationOne Progress PlazaSuite 2400St. Petersburg, Florida 33701Facsimile: (727) 214-3401Attention: John Long Julie Waters(b) If to FARES, to:First American Real Estate Solutions, LLCc/o The First American Corporation1 First American WaySanta Ana, California 92707Facsimile: (714) 800-3325Attention: Parker S. Kennedy Kenneth D. DeGiorgioor such other address or number as shall be furnished in writing by any such Party. Except for a notice of a change of address, which shall be effective only upon receipt thereof, all such notices, requests, demands, waivers and communications properly addressed shall be effective: (i) if sent by U.S. mail, three (3) Business Days after deposit in the U.S. mail, postage prepaid; (ii) if sent by FedEx or other overnight delivery service, one (1) Business Day after delivery to such service; (iii) if sent by personal courier, upon receipt; and (iv) if sent by facsimile, upon receipt.10.Parties in Interest. This Agreement may not be transferred, assigned, pledged or hypothecated by any Party hereto, other than by operation of law, except that FADV may assign any of its rights and benefits (but not its obligations) hereunder to any of its wholly-owned Subsidiaries. This Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective successors and permitted assigns.11.Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one instrument.12.Entire Agreement. This Agreement contains the entire understanding of the Parties with respect to the subject matter contained herein. This Agreement supersedes all prior oral and written agreements and understandings between the Parties with respect to such subject matter.13.Severability. If any term, provision, agreement, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other competent authority to be invalid, void or unenforceable, the remainder of the terms, provisions, agreements, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any Party. Upon such a determination, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in a reasonably acceptable manner in order that the transactions contemplated hereby may be consummated as originally contemplated to the fullest extent possible.14.Extension; Waiver. This Agreement may not be amended, and none of its provisions may be modified, except expressly by a written instrument signed by the Parties. No failure or delay of a Party in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right, or any abandonment or discontinuance of steps to enforce such a power or right, preclude any other or further exercise thereof or the exercise of any other power or right. No waiver by a Party of any provision of this Agreement or consent to any departure therefrom shall in any event be effective unless the same shall be in writing and signed by such Party, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given.15.Third Party Beneficiaries. Each Party hereto intends that this Agreement shall not benefit or create any right or cause of action in or on behalf of any Person other than the Parties.16.Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO THE CONFLICT OF LAWS RULES THEREOF.17.Representations and Warranties. FARES represents and warrants as of the date hereof that (a) the agreements set forth on Exhibit A and Exhibit B are true, correct and complete copies of the Support Agreement and the Services Bureau Agreement, respectively, (b) that to its knowledge the third recital hereto is a true and correct summary of the RRS Services Agreement and (c) that the third recital hereto truly and accurately summarizes all of the pricing provision of the RRS Services Agreement.* * *IN WITNESS WHEREOF, the Parties have caused their duly authorized officers to execute this Agreement, effective as of the Effective Date.FIRST AMERICAN REAL ESTATESOLUTIONS, LLCBy:Name:Title:FIRST ADVANTAGE CORPORATIONBy:Name:Title:F-6-Signature Page-Outsourcing AgreementEXHIBIT CJOINT VENTURE ALLOCATIONSThe attached reflects the methodology employed to allocate common costs between First American Credco and the Joint Venture. Utilizing the nine common activity groups will result in greater efficiencies than would be realized by employing separate groups for Credco and the Joint Venture. These allocated costs are in addition to the direct costs incurred by the Joint Venture such as credit data, dedicated customer service/processing etc. The activity groups below are described in the following pages:ACCOUNTING/FINANCE DEPARTMENTACCOUNTS RECEIVABLE DEPARTMENTACCOUNT SETUP DEPARTMENTDATA MANAGEMENT DEPARTMENTCONSUMER DISPUTES DEPARTMENTCONSUMER SUPPORT DEPARTMENTCIG ADMINISTRATION DEPARTMENTMARKETING DEPARTMENTINFORMATION SYSTEMS DEPARTMENTSTRATEGIC ARCHITECTURE INITIATIVESSALES DEPARTMENTPORTLAND PRODUCTION CENTER COSTSJOINT VENTURE ALLOCATIONSAccounting/Finance Allocation:The Accounting Allocation is based upon the percent of employees’ actual time dedicated to each business unit. Each employee completes a schedule showing the distribution of tasks they complete on a monthly basis and the percent of time involved for each division. Based on actual employee salaries, the various tasks completed are distributed into allocated dollars. The total monthly expense for the accounting department is allocated out to the various divisions based upon the total calculated percentages (95.00% and 5.00% in the example). Salaries Percent of
Task Credco Rels $ Applied:
Credco Task Total $ 2,000.00 100 % 100 % 0 % 2,000.00 0.00 2,000.00 100 % 100 % 0 % 2,000.00 0.00 2,000.00 $ 2,500.00 45 % 95 % 5 % 1,068.75 56.25 1,125.00 30 % 90 % 10 % 675.00 75.00 750.00 25 % 96 % 4 % 601.25 23.75 625.00 100 % 94 % 6 % 2,345.00 155.00 2,500.00 $ 3,500.00 100 % 93 % 7 % 3,255.00 245.00 3,500.00 100 % 93 % 7 % 3,255.00 245.00 3,500.00 $ 8,000.00 7,600.00 400.00 95.00 % 5.00 % Accounts Receivable Allocation:The basis for the Accounts Receivable Allocation is the number of statements generated monthly. Individual operation centers have invoices generated for each account that they service. If the customer has a master summary bill, all branch invoices are accounted for in this total (Master Bill + Branch Invoices = Total). It is assumed that each statement receives the same amount of service (Billing, Collections and Customer Service) which are functions of the accounts receivable department, therefore, each business unit is assigned a percentage of the total statements according to their individual total. The total monthly expense incurred by Accounts Receivable is allocated to the various divisions based upon their percent of the total billings. Total
Statements Credco
Statements Rels
Statements % Applied:
Credco Task Total 10,000 9,500 500 95.00 % 5.00 % 100.00 % 95.00 % 5.00 % 100.00 % Percent of Accounts Receivable Expenses Allocated to Joint Venture: 5.00 % Account Setup Allocation:Call volume is the methodology used to calculate the Account Setup Allocation. After the initial setup of new accounts, any questions pertaining to Account Setup will be logged into the Compliance Database. When entering an account into the database for a research call, update or adding a new customer, Account Setup goes into the Compliance Productivity Log. This contains a drop down box that has a list of cost centers with the names of each office. From there, Account Setup would select the appropriate cost center. At the end of the month a Metric Report is run, which provides the total number of calls (Research, Updates and Setup Calls) toAccount Setup for the month. Each business unit is applied their percentage of the total volume. The total monthly expense incurred by Account Setup is allocated to the various divisions based upon their percent of the total calls. Total
Calls Credco
Calls Rels
Calls % Applied:
Credco Task Total 920 870 50 94.57 % 5.43 % 100.00 % 965 895 71 92.69 % 7.31 % 100.00 % 1,790 1,690 100 94.41 % 5.59 % 100.00 % 3,675 3,455 221 94.00 % 6.00 % 100.00 % 6.00 % Consumer Disputes Allocation:Based upon the number of disputes received during the month, each business unit is assigned their portion of the total amount of disputes. Disputes received by fax, mail or by telephone are all included in the total number of disputes. The individual dispute is entered into the Disputes System and assigned a cost center based upon where the file originated. On a monthly basis, each cost center is assigned a percentage of the total disputes, which is used for the Consumer Disputes Allocation. Total
Disputes Credco
Disputes % Applied:
Credco Task Total 105 98 7 93.33 % 6.67 % 100.00 % 147 137 10 93.20 % 6.80 % 100.00 % 168 150 18 89.29 % 10.71 % 100.00 % 420 385 35 91.67 % 8.33 % 100.00 % 8.33 % Consumer Support Allocation:The Consumer Support Allocation methodology is based upon call volume from consumers pertaining to their credit report. When accessing a report for research, status update or other questions, Consumer Support logs the cost center associated with the consumer’s report. At the end of the month, a report is run to provide the total number of calls to Consumer Support for the month. Each business unit is applied their percentage of the total volume. Total
Calls Credco
Calls Rels
Calls % Applied:
Credco Task Total 5,125 4,575 550 89.27 % 10.73 % 100.00 % 7,175 6,525 650 90.94 % 9.06 % 100.00 % 8,200 8,170 30 99.63 % 0.37 % 100.00 % 20,500 19,270 1,230 94.00 % 6.00 % 100.00 % Percent of Consumer Support Expenses Allocated to Joint Venture: 6.00 % CIG Administration Allocation:The Credco CIG Administration Allocation is based upon the percent of executive’s and their support staff actual time dedicated to each business unit. These units are CIG Administration, Data Management, Compliance, Corporate Development and Rels/Credco Administration. Each employee completes a schedule showing the distribution of tasks they complete and the percent of time dedicated to each division. Based on salaryinformation, the various tasks completed are distributed into allocated dollars for each of the employees. The total monthly expense is allocated out to the various divisions based upon the calculated percentages (93.00% and 7.00% in the example). The total administration allocation is determined from combining the result of the business unit allocations. Salaries Percent of
Task Credco Rels $ Applied:
Credco Task Total $ 11,000.00 100 % 93 % 7 % 10,230.00 770.00 11,000.00 100 % 93 % 7 % 10,230.00 770.00 11,000.00 $ 13,000.00 35 % 96 % 4 % 4,361.20 188.80 4,550.00 35 % 94 % 6 % 4,277.00 273.00 4,550.00 30 % 96 % 4 % 3751.80 148.20 3,900.00 100 % 95 % 5 % 12,390.00 610.00 13,000.00 $ 10,000.00 100 % 90 % 10 % 9,000.00 1,000.00 10,000.00 100 % 90 % 10 % 9,000.00 1,000.00 10,000.00 $ 34,000.00 31,620.00 2,380.00 93.00 % 7.00 % Marketing Allocation:The Credco Marketing Allocation is based upon the actual hours worked by employees within the Marketing department multiplied by the hourly rate.Information Systems Allocation:The IS Allocation includes the IS Department and the Strategic Architecture Initiatives Department.- Information Systems DepartmentThe IS Department Allocation is driven by the total number of transactions, including re-accessed files, run through the system. The purpose of this allocation is to distribute the costs associated with the labor and hardware that the IS department provides. Rels is charged $.50 per transaction.- SAI AllocationThe SAI Allocation allocates costs relating to various software upgrades. These include:1. DataHQ Front End Project which is a complete rewrite of the Instant Merge software program.2. DataHQ Back End Project which consists of enhancements to the current Mach 30+ system. There are three main modules:a. Filenet Imaging is a comprehensive software solution for storing, managing and retrieving information of all types from many sources.b. Customer Service Module will act as a collaborator to automate and improve the business processes between applications.c. Product Fulfillment Module will replace the existing Mach30+ system and Instant Merge support.4ge application and enhance DataHQ’s Customer Support application used in the production centers.3. Disaster Recovery consists of computer hardware purchases for a back up system.Sales Expense Allocation:The Sales Expense Allocation is derived by the total number of transactions for Credco and the Joint Venture combined. Eg: The Joint Venture has 11% of the total transaction volume and is therefore subjected to 11% of the field sales support, internal sales support and administrative sales support expenses. (There is a cap of 11% on this allocation). Our sales department acts as a liaison between Joint Venture Field Offices and CREDCO. They provide answers for specific credit questions, industry questions and other technical services needed by the branch offices. Total
Transactions Credco
Transactions Rels
Transactions % Applied:
Credco Task Total 330,000 310,200 19,800 89.00 % 11.00 % 100.00 % 89.00 % 11.00 % 100.00 % 11.00 % The sales department provides both internal and localized field based support at the branch level. Their responsibilities include customer account set-up of new branches, training on all credit related products and services including compliance and adherence to the FCRA, participation in credit and new home buyers seminars and general day to day support of the branch relationship with QCS. Support provided is constant and ongoing. Dedicated concentrated time is provided to support the training of new hires and loan officers at the branch level who require personal one on one training on basic credit reporting orientation. In addition, training includes the functional process of ordering, receiving and understanding the content of the credit report, risk scores and fraud messages. These activities are substantially increased during peak times of activity or turnover and when new products, formats and options are released. This group will also be the key driving force responsible for activation of all potential credit reporting business not currently directed to Credco.Portland Operations Center Costs (Order Processing & Customer Service Center)A portion of the costs incurred in the Portland Operations Center are specifically identifiable to Credco and a portion are specifically identifiable to the JV. The remaining costs are allocated between Credco and the JV based on factors such as head count, square footage, revenue or transaction volume. Accounting cost centers are set up to record the direct and allocated expenses of Credco and the JV.Specifically Identifiable CostsCertain costs specifically identifiable to either Credco or the JV:Credit Data (by specific subscriber code)Salaries (100% of dedicated employees)Incentives (100% of dedicated employees)Payroll Taxes and Benefits (100% of dedicated employees)Temporary Services (specific invoices)Consulting ServicesTravel (expense report for dedicated employees)Marketing & PromotionalCourier & PostageDues—Service/social/technicalLegal feesLicensesOther expenses of lesser amounts which can be tied directly to Credco or the JV (specific invoices)Allocated CostsSpecific costs allocated based on Portland Operations Revenue include:Salaries (shared employees)Incentives (shared employees)Payroll Taxes (shared employees)Benefits (shared employees)Travel and Lodging (shared employees)Dues Memberships (shared employees)Shared costs allocated based on headcount include:Depreciation—Furniture & ComputersEquipment & Parts expensedRepairs and maintenanceLeased equipmentAmortization of Software & Software DevelopmentProperty TaxesCafeteria/LunchroomEducation and TrainingInsuranceStaff MealsConventions/conferencesOffice SuppliesMisc services and expensesShared costs allocated based on square footage include:Rent—OfficeStorage Unit RentDepreciation Leasehold Improv.Clean/Janitorial SuppliesInterior Plant ExpenseUtilitiesShared costs allocated based on transaction volume:TelecommunicationPrintingAnnex GOFFICE LEASEBY AND BETWEENFIRST AMERICAN TITLE INSURANCE COMPANY,a California corporation(“LANDLORD”)andFIRST ADVANTAGE CORPORATION,a Delaware corporation(“TENANT”)Property Address:12385 and 12395 First American WayPoway, CaliforniaDated , 2005OFFICE LEASETABLE OF CONTENTSSUMMARY OF BASIC LEASE TERMS AND DEFINITIONSG-3ARTICLE 1.PROPERTY AND COMMON AREASG-5ARTICLE 2.TERMG-5ARTICLE 3.LANDLORD’S WORK AND TENANT IMPROVEMENTSG-5ARTICLE 4.MONTHLY BASE RENT AND OPERATING EXPENSESG-6ARTICLE 5.USE, COMPLIANCE WITH LAW, CONDITION OF PREMISES, PARKING SIGNSG-6ARTICLE 6.ASSIGNMENT AND SUBLETTINGG-8ARTICLE 7.TENANT’S REPAIR AND MAINTENANCE RESPONSIBILITIESG-8ARTICLE 8.LANDLORD’S REPAIR AND MAINTENANCE RESPONSIBILITIESG-9ARTICLE 9.TENANT’S INSURANCE, LANDLORD’S INSURANCE, MUTUAL RELEASE/ WAIVER OF SUBROGATION, AND INDEMNITIESG-9ARTICLE 10.DEFAULTS/REMEDIESG-10ARTICLE 11.UTILITIES AND SERVICESG-13ARTICLE 12.TAXES: REAL PROPERTY; PERSONAL PROPERTY TAXESG-14ARTICLE 13.DAMAGE OR DESTRUCTIONG-14ARTICLE 14.CONDEMNATIONG-15ARTICLE 15.NOTICESG-15ARTICLE 16.QUIET ENJOYMENTG-16ARTICLE 17.ALTERATIONS AND TRADE FIXTURESG-16ARTICLE 18.MECHANICS’ LIENSG-16ARTICLE 19.LANDLORD’S RIGHT OF ENTRYG-16ARTICLE 20.SURRENDER OF PREMISESG-17ARTICLE 21.HOLDING OVERG-17ARTICLE 22.SUBORDINATION, NON-DISTURBANCE AND ATTORNMENTG-17ARTICLE 23.ESTOPPEL CERTIFICATESG-19ARTICLE 24.RULES AND REGULATIONSG-19ARTICLE 25.ENVIRONMENTAL MATTERSG-19ARTICLE 26.LIMITATION OF LANDLORD’S LIABILITYG-20ARTICLE 27.ROOF-TOP ANTENNAG-20ARTICLE 28.MISCELLANEOUSG-21ARTICLE 29.DELIVERY OF LEASEG-24ARTICLE 30.TERMINATION OF EXISTING LEASEG-24ARTICLE 31.FINANCIAL STATEMENTSG-24ARTICLE 32.FORCE MAJEURE DELAYSG-24ARTICLE 33.NOTICE OF DELAYG-24ARTICLE 34.STORAGE SPACEG-24LIST OF EXHIBITSExhibit AReal Property DescriptionExhibit BPremisesExhibit CCommencement Date AgreementExhibit DWire Transfer InstructionsExhibit ECleaning SpecificationsOFFICE LEASESummary of Basic Lease Terms and Definitions.This Summary of Basic Lease Terms and Definitions is attached to and made a part of that certain Office Lease (“Lease”) made and entered into as of the day of , 2005, by and between FIRST AMERICAN TITLE INSURANCE COMPANY, a California corporation (“Landlord”), whose principal place of business is 1 First American Way, Santa Ana, California, and FIRST ADVANTAGE CORPORATION, a Delaware corporation whose principal place of business for the purpose of this Lease is One Progress Plaza, Suite 2400, St. Petersburg, Florida 3370 (“Tenant”). For purposes33701, attention: Ken Chin, secretary.(2) Percentage ownership of each class is calculated based on 9,792,111 shares of Class A common stock and 47,726,521 shares of Class B common stock outstanding, in each case as of March 31, 2006, plus, in the case of percentage ownership of Class A common stock with respect to First American, the number of Class A common shares First American may acquire within 60 days of March 31, 2006 upon full conversion of the Lease,Class B common stock owned by it on such date into Class A common stock on a one-for-one basis.(3) The number of shares of Class A common stock reported includes 47,726,521 shares of Class A common stock that may be acquired upon full conversion of 47,726,521 shares of Class B common stock within 60 days of March 31, 2006. (4) As reported in Amendment No. 1 to Schedule 13D by The First American Corporation (“First American”); FADV Holdings LLC, a Delaware limited liability company (“Holdings”); First American Real Estate Solutions LLC, a California limited liability company (“FARES”); and First American Real Estate Information Services, Inc., a California corporation (“FAREISI”), filed jointly as a “group” within the following terms havemeaning of Section 13(d)(3) of the following definitionsSecurities and meanings:(a) Landlord’s Address (For Notices):With a copy to:First American Title Insurance Company.1 First American WaySanta Ana, California 92702Attention: President or CFOFirst American Title Insurance Company1 First American WaySanta Ana, California 92702Attention: National Facilities Group(b)Tenant’s Address (For Notices):With a copyExchange Act of 1934, as amended, Holdings currently is the record owner of 47,726,521 shares of Class B common stock, which are convertible on a one to one basis into Class A common stock at the option of Holdings and upon the occurrence of all notices to:First Advantage—CREDCO12385 First American WayPoway, CaliforniaAttention: President or CFOFirst Advantage CorporationOne Progress Plaza, Suite 2400St. Petersburg, Florida 33701Attention: Corporate Counsel(c)Land: That certain parcel of land (the “Land”), as described onExhibit A.(d)Buildings: Two two-(2) story office buildings located in the City of Poway (the “City”), County of San Diego (the “County”), State of California (“State”), as shown on the site plan attachedevents. Subject to the Lease asExhibit A, which Landlord representsHoldings’ operating agreement and the parties agree contains one hundred fifty three thousand two hundred sixty two (153,262) rentable square feetOmnibus Agreement (defined below) with the street addresses of 12385Experian Information Solutions, Inc., an Ohio corporation (“Experian”), Holdings and 12395 First American Way, Poway, California (collectivelyshare voting and dispositive power with respect to 47,726,521 Class B shares because Holdings is the “Building”).(e)Parking Lot Areadirect owner of such shares and Structure: That certain Parking Lot AreaFirst American holds a controlling interest in Holdings (61.2518%); with FARES and Structure (the “Parking Lot Area”)FAREISI, as holders of 37.5837% and 1.1645%, located on the Land.(f)Property: Collectively, the Land, Building and Parking Structure, together with all other improvements now or hereinafter situated on the Land—intended and identified herein as Assessors Parcel Numbers (“APN”) as follows:APN 889-544-50-68, Parcel 2; APN 889-544-50-88, Parcel 3 and APN 889-544-50-08, Parcel 4.(g)Initial Term: Five (5) Lease Years.(h)Commencement Date: The date on which the Term of this Lease will commence on the commencement date as set forth herein as , 2005, (the “Commencement Date”), or as otherwise mutually agreed by the Parties hereto. Notwithstanding the later Commencement Daterespectively, of the Termoutstanding equity of this Lease, this Lease shall be a binding and enforceable lease agreement from and after the date this Lease is executed by both parties.(i)Initial Monthly Base Rent: $168,588.20 ($13.20/RSF/yr.), subjectHoldings. According to adjustment as provided in Subparagraph (j) below.(j)AdjustmentAmendment No 1 to Monthly Base Rent: Monthly Base Rent will be adjusted in accordance with the following: $168,588.20 $2,023,058.40 ($13.20/RSF/yr.) (k)Absolute Triple Net Lease: This Lease shall be construed as an absolute “triple net” Lease, and Tenant shall have the obligation to pay all costs and expenses related to the Property, including but notlimited to, any operating expenses, real estate property taxes and assessments, maintenance, repair to the structure (including but not limited to the roof, structural and support bearing walls and foundation) and parking lot and other management costs associated with the Property except as otherwise expressly provided in the Lease.(l)Security Deposit: Intentionally omitted.(m)Construction and Tenant Improvements: By taking possession and accepting the Premises for the conduct of business, Tenant shall conclusively accept the Premises in its “AS-IN”, “WHERE-AS” condition and Landlord shall not be obligated to make any improvements nor shall Landlord incur any cost for repair or maintenance pertaining to the Property or Premises prior to the Commencement Date or date of Possession by Tenant for the conduct of its business. Tenant shall further take Possession of the Buildings with all existing tenant improvements having previously been installed including completion of the Building, Parking Lot Area and Common Areas. Tenant shall acknowledge receipt and possession of all architectural, tenant improvement and landscaping plans, as modified, in existence as of the Commencement Date.(n)Permitted Use: General office use including offices, a computer data center, and employee cafeteria and associated uses thereto and any other lawful use.(o)Tenant Improvement Allowance: Landlord shall not be obligated to make any improvements or to construct any space within the Premises prior to, or subsequent to the Commencement Date.(p)Parking: Subject to the terms of Paragraph 5(d), all parking shall be available exclusively to Tenant at no cost throughout the Lease Term and any extension or renewal hereof, which shall be located in the area shown onExhibit A. Tenant shall manage all parking and have the discretionary right to designate reserved and unreserved parking spaces and locations within the Parking Lot Area.(q)Brokers: Not applicable.(r)Interest Rate: Shall mean two percent (2%) in excess of the Prime Rate as stated in the Wall Street Journal as the base rate on corporate loans posted by at least 75% of the nation’s largest banks on the twenty-fifth (25th) day of the calendar month immediately prior to the event giving rise to the Interest Rate imposition; provided, however, the Interest Rate will in no event exceed the maximum interest rate permitted to be charged by applicable law.(s)Lease Month: For purposes of this Lease, a “Lease Month” shall be defined as each calendar month period occurring during the Initial Term or any Extension Term commencing on the Commencement Date or the annual anniversary thereof, as may be applicable; provided, however, that if the Commencement Date is a day other than the first day of a calendar month, then the first Lease Month shall include that period of time from the Commencement Date up to the first day of the next calendar month, and any subsequent Lease Month shall be the calendar month period beginning on the first day of each such subsequent month.(t)Lease Year: For purposes of this Lease, a “Lease Year” shall be defined as each twelve (12) month period during the initial Term or any Renewal Term (as hereinafter defined) commencing on the Commencement Date or the annual anniversary thereof, as may be applicable; provided, however, that if the Commencement Date is a day other than the first day of a calendar month, then the first Lease Year shall include that period of time from the Commencement Date up to the first day of the next calendar month, and any subsequent Lease Year shall be the twelve (12) month period beginning on the first day of such next calendar month.(u)Termination of Existing CREDCO Lease: The existing CREDCO Lease dated March 1, 1999 together with the First Amendment to Office Lease dated April 1, 2004, (collectively the “Existing Lease”) shall terminateSchedule 13D, pursuant to the terms of Article 30, “Termination of Existing Lease.”THE FOREGOING REPRESENTS A SUMMARY OF THE BASIC TERMS AND DEFINITIONS OF THE LEASE. IN THE EVENT OF ANY INCONSISTENCY BETWEEN THE TERMS CONTAINED IN THIS SUMMARY AND ANY SPECIFIC PROVISION OF THE LEASE, THE TERMS OF THE MORE SPECIFIC PROVISION SHALL PREVAIL.OFFICE LEASEThis Leasethe Amended and Restated Omnibus Agreement (“Lease”Omnibus Agreement”) is made and entered into as of the first (1st) day of , 2005, by and between FIRST AMERICAN TITLE INSURANCE COMPANY, a California corporation (“Landlord”), whose principal place of business is 1 First American Way, Santa Ana, California, and FIRST ADVANTAGE CORPORATION, a Delaware corporation whose principal place of business for the purpose of this Lease is One Progress Plaza, Suite 2400, St. Petersburg, Florida 3370 (“Tenant”). The informationExperian, and definitions contained in the preceding section, “Summary of Basic Lease Terms and Definitions” (the “Summary”) are hereby incorporated by this reference and made a part hereof.Article 1.Property and Common Areas.(a)Property. Landlord leases to Tenant and Tenant leases from Landlord the Property upon and subjectpursuant to the termsoperating agreement of this Lease. The parties mutually agree the Building has been measured to the satisfaction of the Landlord’s A.I.A. architectHoldings, First American and based on the architect’s certification, agree the rentable square feet of the Building for the purposes of this Lease is 153,262 rentable square feet.(b)Common Areas. Landlord grants to Tenant and Tenant’s employees, agents, contractors, suppliers, shippers, customers and invitees, the exclusive right throughout the Term to use and manage the Common Areas. The term “Common Areas” is defined as all areas and facilities located within the Building, and all areas and facilities located on the Land upon which the Building and Parking Lot Area are situated. The Common Areas shall at all times include at a minimum, but not be limited to, the parking areas, loading and unloading areas, trash areas, driveways, sidewalks, walkways, parkways, landscaped areas, common or public restrooms and washrooms, elevators, corridors, stairways, passageways, lobbies, common entrances and other similar public areas and access ways. Tenant shallExperian have the right from time to time to: (i) make cosmetic changescause Holdings to distribute shares of the Class B common stock to First American, FAREISI and improvementsExperian, resulting in 43,726,521 shares of Class A common stock being held by First American; 536,585 shares of Class A common being held by FAREISI; and 3,463,415 shares of Class A common stock being held by Experian, immediately following the distribution. The distribution of 3,463,415 shares of Class A common stock to Experian is based upon Experian’s pro rata portion membership interest in FARES (20 %), as more fully described in footnote 7 below.(5) Consists of 2,105,130 shares of Class A common stock, warrants convertible into 50,402 shares of Class A common stock, and options to purchase up to 6,662 shares of Class A common stock exercisable within 60 days of March 31, 2006 held of record by Pequot Private Equity Fund II, L.P. Pequot Capital Management, Inc., the investment manager of Pequot Private Equity Fund II, L.P., holds voting and dispositive power of the shares held of record by Pequot Private Equity Fund II, L.P. Lawrence D. Lenihan, Jr. is a Senior Managing Director of Pequot Capital Management, Inc. and may be deemed to beneficially own the securities held of record by Pequot Private Equity Fund II, L.P. Mr. Lenihan expressly disclaims beneficial ownership of these shares except to the Buildingextent of his pecuniary interest therein. This footnote is based on information provided by Pequot Capital Management, Inc.(6) install, use, maintain, repair, replace and relocate pipes, ducts, conduits, wires and appurtenant meters and equipment aboveSchedule 13G with the ceiling surfaces, below the floor surfaces, within the walls and in the central core areas of the Building; (ii) make changes to the design and layout of the Common Areas, and (iii) use or close temporarily all or a portion of the Common Areas while engaged in making improvements, repairs or alterations to the Property as set forth herein. However, any alterations to the Property shall be subject to the other relevant provisions in this Lease regarding alterations made by Tenant to the Property. The roof of the Building is specifically includedSEC on February 14, 2006 as a partgroup with respect to 1,200,000 shares. These shares are owned by various individual and institutional investors for which BAMCO serves as an investment advisor. The advisory clients of the Building and is to be maintained and repaired by Tenant as provided in Article 7. Subject to the terms of Article 27, Landlord reservesBAMCO have the right (and maintainsto receive or the right throughoutpower to direct the Termreceipt of this Lease) to usedividends from, or the roof for any purpose, including, without limitation, forproceeds from the installation and operationsale of, satellite dishes, antennas or other medium of communication, provided such use does not (i) interfere with the Communication System installed or to be installed by Tenant on the roof, or (ii) materially interfere with Tenant’s use of any other portions of the Building; provided, however, neither party shall place signage on the roof; provided, further, however, (i) Tenant may enter upon the roof to perform normal maintenance to the Building such as window cleaning and Tenant shall indemnify and hold Landlord harmless from any damage to the roof caused by Tenant, and (ii) Landlord shall be entitled to access to the roof through the Buildingthese shares in order to use the roof for the purposes and subject to the restrictions set forth above.Article 2.Term.Initial Term. The Initial Term of this Lease shall commence on the Commencement Date (as defined in Paragraph (h) of the Summary above) and shall expire on the expiration of the Term specified in Paragraph (g) of the Summary, unless sooner terminated or extended pursuant to any provision hereof. Except as otherwise provided in this Lease, “Term” shall mean the Initial Term.Article 3.Landlord’s Work and Tenant Improvements.Landlord shall not be required to perform any work to the Property or Building (including previously installed Tenant Improvements) prior to the Commencement Date of the Lease; Tenant shall take position of the Property and Building in its “AS, WHEREAS” condition as of the Commencement Date.Article 4.Monthly Base Rent and Operating Expenses.(a)Monthly Base Rent. Tenant shall pay to Landlord, as Monthly Base Rent for the Building, commencing on the Commencement Date and on the first day of each month of the Term hereof, the Monthly Base Rent in the amounts stated in Paragraph (j) of the Summary without offset or deduction, except as specifically set forth herein. Monthly Base Rent for any period during the Term hereof which is for less than one month shall be a prorata portion of the Monthly Base Rent. Monthly Base Rent shall be payable in lawful money of the United States to Landlord at the address stated herein or to such other persons or at such other places as Landlord may designate in writing.(b)Real Estate Taxes, Insurance, and Operating Expenses. Tenant shall pay all the Real Estate Taxes pursuant to Article 12; and Insurance Expenses (as defined in Article 9, Paragraph (c) and (d). Except for Landlord’s responsibility to cause the Property to be in compliance with law as of the Commencement Date pursuant to Article 5 (b). It is the intent of the parties that this Lease is intended to be an absolute “triple net” lease such that Tenant shall have all responsibility to pay for and maintain, operate, manage, repair and replace the Building, together with the responsibility for the Property and Building as defined in the Lease to pay all the Real Estate and Personal Property Taxes pursuant to Article 12 and the Insurance Expenses pursuant to Article 9(b); provided, however, Tenant shall not be required to reimburse any costs incurred by Landlord in connection with the transfer or disposition of Landlord’s interest in the Property.(c)Payment of Rent. Tenant shall remit and deliver Monthly Base Rent and any additional rent required under the Lease on the first day of each month of the Term of the Lease by wire transfer pursuant to instructions set forth in Exhibit D.In the event direct payment shall be required, Tenant shall remit and deliver Monthly Base Rent and any additional rent required under the Lease on the first day of each month of the Term of the Lease to the address set forth below:First American Title Insurance Company1 First American WaySanta Ana, California 92707Attention: Controller—First American Title Insurance CompanyLandlord may, in its sole discretion change the location or modify the wiring instruction upon written notice to Tenant as provided under this Lease.Article 5.Use, Compliance with Law, Condition of Premises, Parking, Signs.(a)Use. Tenant may use the Property for the uses described in Paragraph (o) of the Summary and for no other use. Tenant shall not do or permit anything to be done on the Property or with the Building which will in any way unreasonably interfere with, or allow the Property to be used for any unlawful purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Property.their accounts. To the best of the actualgroup’s knowledge, of Landlord, the Property may be used for general office purposes asno such person has such interest relating to more than 5% of the date this Lease is executed.(b)Complianceoutstanding class of securities. By virtue of investment advisory agreements with Law. Landlord warrants, represents and covenants that only asits clients, BAMCO has been given the discretion to dispose or the disposition of the Commencement Datesecurities in the Building and the Common Areas shall not violate any covenants and restrictions of record (if any), laws, statutes, building and zoning codes, ordinances, and governmental orders, conditions of approval, rules and regulations (including, but not limited to, Title III of The Americans With Disabilities Act of 1990, but excluding all “Environmental Law” which is covered under Article 25 below), as alladvisory accounts. All such discretionary agreements, are however, revocable. For purposes of the same mayreporting requirements of the Exchange Act, the group is deemed to be amendeda beneficial owner of such securities. BCG and supplemented from time to time (collectively “Legal Requirements”) including, without limitation, all Legal Requirements that pertainRonald Baron disclaim beneficial ownership of shares held by their controlled entities (or the
investment advisory clients thereof) to the |
(7) | As reported in
|
(8) | Includes options to |
(9) | Includes options to purchase up to 5,000 shares of |
(10)
| Includes 1,500 Class A common stock held by |
(11) | Includes 19,483 shares that are
|
(12) | Includes options to |
(13) | Includes options to
|
(14) | Includes options to purchase up to 59,999 shares of
|
The following table sets forth as of March 31, 2006 the total number of First American common shares beneficially owned and the percentage of the outstanding shares so owned, based on 95,797,949 shares of First American common stock outstanding on that date, by:
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Unless otherwise indicated in the notes following the table, those listed are the beneficial owners of the listed shares of First American with sole voting and investment power (or, in the case of individual shareholders, shared power with such individual’s spouse) over the shares listed. First American common shares subject to rights exercisable within 60 days of March 31, 2006 are treated as outstanding when determining the amount and percentage beneficially owned by a person or entity.
Name | Number of First American Common Shares | Percent of Class | |||
Directors | |||||
Parker Kennedy(1)(2) | 3,440,515 | 3.6 | % | ||
John Long(3) | 985 | * | |||
J. David Chatham(4) | 34,133 | * | |||
Frank McMahon | 48,334 | * | |||
Donald Robert | 0 | * | |||
D. Van Skilling(5) | 27,239 | ||||
Named Executive Officers Who Are Not Directors | |||||
Akshaya Mehta(6) | 8,600 | * | |||
John Lamson(7) | 38,175 | * | |||
Evan Barnett | 12,400 | * | |||
Anand Nallathambi(8) | 74,176 | * | |||
All Directors and Executive Officers as a group (8 persons) | 3,678,552 | 3. | 8% |
* | Represents holdings of |
(1) | Of the shares credited to Parker S. Kennedy, chairman of the board and chief executive officer of First American, 5,200 shares are owned directly and 3,186,566 shares are held by Kennedy Enterprises, L.P., a California limited partnership of which Parker S. Kennedy is the sole general partner and D. P. Kennedy, Parker S. Kennedy’s father, is one of the limited partners. The limited partnership agreement pursuant to which the partnership was formed provides that the general partner has all powers of a general partner as
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(2) | Includes options to purchase up to 258,000 shares exercisable within 60 days of March 31, 2006 and |
(3) | Includes 985 shares that are allocated to Mr. Long’s employee stock ownership sub-account under the “ESOP” portion of First American’s 401(k) Savings Plan. |
(4) | Includes options to purchase up to 13,500 shares exercisable within 60 days of March 31, 2006. |
(5) | Includes options to purchase up to 13,500 shares exercisable within 60 days of March 31, 2006. |
(6) | These shares are held for the benefit of Mr. Mehta by the trustee of the First Advantage 401(k) Savings Plan, and includes options to purchase 8,000 shares exercisable within sixty days of March 31, 2006. |
(7) | Includes options to purchase up to 36,000 shares exercisable within 60 days of March 31, 2006 and 1,375 shares held for the benefit of Mr. Lamson by the trustee of the First Advantage 401(k) Savings Plan. |
(8) | Includes options to purchase up to 63,000 shares exercisable within 60 days of March 31, 2006. |
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act, as amended, requires our directors and executive officers, as well as persons who own ten percent or more of our outstanding Class A and Class B common stock, to file an initial report of beneficial ownership of company stock and reports of changes in beneficial ownership thereafter with the SEC. Section 16(a) requires these insiders to deliver copies of all reports filed under Section 16(a) to our company. Based solely on a review of these copies available to us, we believe that insiders have complied with all applicable Section 16(a) filing requirements for fiscal 2005, with the exception of Messrs. Missen and MacDonald, who reported stock option grants late.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our company effectively commenced operations on June 5, 2003 with our acquisition of First American’s screening technology division and US SEARCH. As consideration for the acquisitions, we issued on or about June 5, 2003 100% of our outstanding Class B common stock to First American and 100% of our Class A common stock to former stockholders of US SEARCH. Each share of our Class B common stock entitles the holder to ten votes in any meeting of stockholders. As a result, First American received approximately 80% of the outstanding capital stock of our company and approximately 97% of the voting power in our company. Former stockholders of US SEARCH received the remaining approximately 20% of our outstanding capital stock. Pequot Capital Management, Inc., formerly a stockholder of US SEARCH, received approximately 10% of our Class A common stock in the transaction. First American and Pequot Capital Management, Inc. entered into a stockholders agreement concurrently with the acquisitions that grants Pequot Capital Management, Inc. certain registration rights and the right to sell shares of our Class A common stock at the same time First American sells any of our shares under certain circumstances, and generally requires First American to vote for one nominee for director designated by Pequot Capital Management, Inc.
In connection with the June 2003 acquisitions discussed above, First Advantage and First American entered into a services agreement pursuant to which First American agreed to provide certain financial, administrative and managerial support services to First Advantage. On January 1, 2004, First Advantage and First American amended and restated the services agreement to eliminate most of the services and fees covered by the original agreement. Under the amended and restated agreement, First American will continue to provide certain business services to First Advantage at actual cost or on pricing at the same rate provided to similarly situated affiliates of First American. First American will also provide certain human resources systems, payroll systems and financial systems to First Advantage at a cost of $300,000 per year under the terms of the amended and restated service agreement.
First Advantage provides certain business services in India to First American at actual cost.
On July 31, 2003, First Advantage entered into a promissory note with First American. The loan evidenced by the promissory note is a $10 million uncollateralized revolving loan, with interest payable monthly. The principal balance of the promissory note is payable on July 31, 2006. The promissory note is subordinated to the $20 million bank debt and bears interest at the rate payable under the $20 million bank debt plus 0.5% per annum.
On April 27, 2004, First Advantage entered into a promissory note with First American. The loan evidenced by the promissory note is a $20 million uncollateralized revolving loan, with interest payable monthly. In connection with the acquisition of CIG, this promissory note was paid off by First Advantage in September 2005.
On September 14, 2005, the company completed the acquisition of CIG from First American under the terms of the master transfer agreement. First Advantage purchased CIG and related businesses with 29,073,170 shares of its Class B common stock.
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On March 23, 2006, our company issued an additional 1,650,455 shares of its Class B common stock to First American under the terms of the master transfer agreement, requiring the issuance of additional shares in the event Dealertrack, a company acquired as part of CIG, conducted an initial public offering resulting in proceeds in excess of $50,000,000.
First American and certain affiliates provided sales and marketing, legal, financial, technology, leased facilities, leased equipment and other administrative services to CIG. As part of the acquisition of CIG, an amended and restated services agreement was entered into on September 14, 2005. Under the terms of the new agreement, human resources systems and payroll systems and support, network services and financial systems are provided at an annual cost of approximately $4,800,000. In addition, certain other services including pension and 401(k) expenses, corporate and medical insurance, personal property leasing and company car programs are provided at actual cost. The initial term of the agreement is for one year, and self renews every six months. The company also entered into an agreement with First American to lease the CIG office space in Poway, California. The lease is for an initial lease term of five years to commence on the closing date with a one-time option to renew the term for an additional five years. The rent payable under the lease is approximately $169,000 a month and the Company is obligated to pay all costs and expenses related to the property, including operating expenses, maintenance and taxes. CIG recognized approximately $13,702,000, $11,664,000 and $11,627,000 in selling, general and administrative expense in 2005, 2004 and 2003, respectively, relating to these services. The amounts allocated to CIG are based on management’s assumptions (primarily usage, time incurred and number of employees) as to the proportion of the services used by CIG in relation to the actual costs incurred by First American and affiliates in providing the services.
Effective January 1, 2003, our company and a subsidiary of First American entered into an agreement whereby the company will act as an agent in selling renters insurance. The company receives a commission of 12% of the insurance premiums and 20% of the profits (as defined in the agreement) of the insurance premiums written. Commissions earned in 2005, 2004, and 2003 were approximately $333,000, $87,000, and $11,000 respectively.
Our company performs employment screening services for First American. Total revenue from First American was approximately $700,000, $422,000 and $353,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
First American Real Estate Solutions, LLC (“FARES”), a joint venture between First American and Experian Information Solutions, Inc. (“Experian”), owns 50% of a joint venture that provides mortgage credit reports and operations support to a nationwide mortgage lender. In accordance with the terms of the joint venture operating agreement, the mortgage and consumer credit reporting operation of FARES receives a merge fee per credit report issued and is reimbursed for certain operating costs. In addition, FARES records the 50% share of the earnings of the joint venture using the equity method of accounting. In connection with the acquisition of CIG, FARES entered into an outsourcing agreement where the company continues to provide these services to the nationwide mortgage lender. These earnings are included in service revenue in the accompanying combined statements of income and totaled $5,724,000, $6,672,000, and $8,062,000, for the years ended December 31, 2005, 2004 and 2003, respectively. Total merge fees were $7,092,000, $7,379,000, and $9,056,000 for the years ended December 31, 2005, 2004 and 2003, respectively and are included in service revenue in the accompanying combined statement of income. Total reimbursement for operating costs were $7,289,000, $7,476,000, and $8,471,000, for the years ended December 31, 2005, 2004 and 2003, respectively.
First Advantage and First American Real Estate Information Services, Inc. (“FAREISI”), entered into an operating agreement on November 7, 2005, which provides for the formation of a limited liability company, Leadclick Holding Company, LLC, that was used to purchase their majority ownership interest in Leadclick Media, Inc (“Leadclick”). Pursuant to the terms of the operating agreement, First Advantage and FAREISI have agreed to an allocation of the profits from Leadclick.
First Advantage and First American entered into a reimbursement agreement whereby First Advantage reimburses First American for the actual expenses incurred by it in connection with certain First Advantage employees’ participation in the First American supplemental benefit plan.
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Experian Information Solutions, Inc., as part of its joint venture with First American in FARES, owns approximately 65% of a combination of First Advantage’s Class A and Class B common shares and is considered a related party. First Advantage entered into a registration rights agreement with Experian, which requires First Advantage to register any shares of First Advantage Class A common stock that Experian may receive upon a distribution by FARES. First Advantage entered into an amended registration agreement with Experian, which requires First Advantage to register any shares of First Advantage Class A common stock that it may receive in the future.
First Advantage and certain of its subsidiaries purchases credit reports from Experian. The cost of credit reports purchased by First Advantage from Experian was $27,431,000, $20,020,000, and $19,399,000 for the years ended December 31, 2005, 2004 and 2003, respectively. First Advantage sells background and lead generation services to Experian. Total revenue from these sales was $263,000, $62,000 and $53,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
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STOCK PERFORMANCE GRAPH
Set forth below is a line graph comparing change in the cumulative total stockholder return on First Advantage’s Class A common stock to the cumulative total stockholder return on the S&P SmallCap 600, and the publicly traded common stock of ChoicePoint Inc. ChoicePoint is a company with business lines substantially similar to First Advantage’s business lines. The period presented begins June 6, 2003, the first day our Class A common stock was quoted on the Nasdaq National Market, and ends December 31, 2005.
COMPARISON OF 31 MONTH CUMULATIVE TOTAL RETURN*
AMONG FIRST ADVANTAGE CORPORATION, CHOICEPOINT INC.
AND THE S & P SMALLCAP 600 INDEX
* | $100 invested on 6/6/03 in stock or on 5/31/03 in index-including reinvestment of dividends. Fiscal year ending December 31. |
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PRINCIPAL ACCOUNTANT FEES AND SERVICES
The firm of PricewaterhouseCoopers LLP has been selected by the audit committee of our board as independent registered certified public accounting firm to audit the books and accounts of our company and its subsidiaries for the fiscal year ending December 31, 2005. This firm has served as independent accountants for our company since 2003. A representative of PricewaterhouseCoopers LLP is expected to be present at the annual meeting and will have an opportunity to make any desired statement and to answer any appropriate questions by stockholders.
Audit Firm Fee Summary
Our company retained PricewaterhouseCoopers LLP as its independent public accountants to provide services in the following categories and amounts during the relevant periods:
Service | Fees | ||
Audit | $ | 1,431,880 | |
Audit-Related | $ | 516,974 | |
Tax Fees | $ | 0 | |
All Other Fees | $ | 0 | |
Total | $ | 1,948,854 |
Audit Fees. This category includes the aggregate fees billed for professional services rendered for the audits of our company’s consolidated financial statements for fiscal year 2005, for the reviews of the financial statements included in our quarterly reports on Form 10-Q during fiscal 2005, and for services that are normally provided by PricewaterhouseCoopers LLP in connection with statutory and regulatory filings or engagements for the relevant fiscal year.
Audit-Related Fees. This category includes the aggregate fees billed during the period from January 1, 2005 to December 31, 2005 for assurance and related services by PricewaterhouseCoopers LLP that are reasonably related to the performance of the audits or reviews of the financial statements and are not reported above under “Audit Fees,” and generally consist of fees for due diligence accounting consultation with respect to our registration statements and agreed-upon procedure reports.
Tax Fees. This category includes the aggregate fees billed during the period from January 1, 2005 to December 31, 2005 for professional services rendered by the independent accountants for tax advice and tax planning. First Advantage was not billed any fees in this category during such period.
All Other Fees. This category includes the aggregate fees billed during the period from January 1, 2005 to December 31, 2005 for products and services provided by the independent accountants that are not reported above under “Audit Fees,” “Audit-Related Fees,” or “Tax Fees.” First Advantage was not billed any fees in this category during such period.
The audit committee has considered the compatibility of the non-audit services performed by and fees paid to PricewaterhouseCoopers LLP in fiscal 2005 and determined that such services and fees were compatible with the independence of the accountants. During fiscal year 2005, PricewaterhouseCoopers LLP did not utilize any personnel in connection with the audit other than its full-time, permanent employees.
Policy for Approval of Audit and Non-audit Services. The audit committee has adopted an approval policy regarding the approval of audit and non-audit services provided by the independent accountants, which approval policy describes the procedures and the conditions pursuant to which the audit committee may grant general pre-approval for services proposed to be performed by our independent accountants. All services provided by our
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independent accountants, both audit and non-audit, must be pre-approved by the audit committee. Our audit committee has delegated to the chairman of the audit committee the authority to grant pre-approvals of non-audit services provided by PricewaterhouseCoopers LLP. The decisions of the chairman of the audit committee to pre-approve such a service are required to be reported to the audit committee at its regularly scheduled meetings.
In determining whether to approve a particular audit or permitted non-audit service, the audit committee will consider, among other things, whether such service is consistent with maintaining the independence of the independent accountant. The audit committee will also consider whether the independent accountant is best positioned to provide the most effective and efficient service to our company and whether the service might be expected to enhance our ability to manage or control risk or improve audit quality.
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GENERAL INFORMATION
Stockholder Proposals
In order for a proposal by a stockholder to be included in the proxy statement and proxy for the annual meeting to be held in 2007, such proposal must be received by First Advantage at its principal executive office, to the attention of the secretary, no later than December 31, 2006 (which is not more than 120 days prior to the anniversary of the mailing date of this proxy statement), assuming that the date of the annual meeting to be held in 2006 is not changed by more than 30 days from the date of this annual meeting. In such event, we will provide notice of the date by which such proposals must be received in order to be included. The determination by First Advantage of whether it will oppose inclusion of any proposal in its proxy statement and proxy will be made on a case-by-case basis in accordance with its judgment and the rules and regulations promulgated by the SEC. Proposals received after December 31, 2006 will not be considered for inclusion in our proxy materials for the annual meeting in 2007.
Pursuant to the rules and regulations promulgated by the SEC, any stockholder who intends to present a proposal at the annual meeting to be held in 2007 without requesting that we include such proposal in our company’s proxy statement should be aware that he or she must notify our company at its principal executive office, attention secretary, not later than March 1, 2007 (which is 45 days prior to the anniversary of the mailing date of this proxy statement) of the intention to present the proposal. Otherwise, we may exercise discretionary voting with respect to such stockholder proposal pursuant to authority conferred by proxies to be solicited by our board and delivered in connection with the meeting.
As of the date of this proxy statement, the board is not aware of any matters to come before the annual meeting other than those set forth on the notice accompanying this proxy statement. If any other matters come before the annual meeting, the proxy card, if executed and returned, gives discretionary voting authority to the persons named as proxy holders, John Long and Julie Waters, our chief executive officer and general counsel, respectively, with respect to such matters.
Annual Report
All stockholders of record as of the Record Date have been sent, or are concurrently herewith being sent, a copy of our annual report for the fiscal year ended December 31, 2005. Such report contains certified consolidated financial statements of First Advantage and its subsidiaries for the fiscal year ended December 31, 2005.
No Incorporation by Reference
The report of the compensation committee of the board on executive compensation and the audit committee report, and the Stock Performance Graph above are not deemed to be “filed” with the SEC, and shall not be incorporated by reference into any prior or future filings made by First Advantage under the Securities Act or the Exchange Act, except to the extent that First Advantage specifically incorporates such information by reference.
Additional Information
Under the Delaware General Corporation Law, you will not have any appraisal rights in connection with the actions to be taken at the annual meeting.
Beginning on April 11, 2006 a list of holders of record of our Class A and Class B common stock as of the Record Date will be available at our principal executive office during ordinary business hours for examination by any stockholder holding any class of our common stock on the Record Date for any purpose germane to the annual meeting.
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Our company will pay the cost of preparing, assembling and mailing the attached letter from our chief executive officer, notice of annual meeting, this proxy statement, the enclosed proxy card, and the solicitation of proxies. Directors, officers and other regular employees of First Advantage may solicit proxies. None of them will receive any additional compensation for such solicitation. People soliciting proxies may contact you in person, by telephone, via e-mail or by facsimile. First Advantage will pay brokers or other persons holding stock in their names or the names of their nominees for the expenses of forwarding soliciting material to their principals.
Our company will, upon the written request of any person who is a beneficial owner of our Class A or Class B common shares on the Record Date, furnish without charge a copy of our annual report on Form 10-K for the year 2005, together with the accompanying financial statements. We will also furnish a copy of the exhibits to the annual report, if requested. Such requests should contain a representation that the person requesting this material was a beneficial owner of the our Class A common stock or Class B common stock on the Record Date and be sent to the secretary of our company at the address indicated on the first page of this proxy statement.
By Order of the Board of Directors
/s/ JULIE WATERS
Julie Waters
Vice President,
General Counsel
St. Petersburg, Florida
April 11, 2006
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APPENDIX A
AUDIT COMMITTEE CHARTER
PURPOSE
The primary purposes of the Audit Committee (the “Committee”) are (1) to assist the Board of Directors in fulfilling its oversight of the accounting and financial reporting processes of the Company and the audits of the Company’s financial statements; and (2) to prepare the “Report of the Committee” to be included in the Company’s annual proxy statement.
While the Committee has the responsibilities and powers set forth in the charter, it is not the duty of the Committee to plan or conduct audits or to determine that the Company’s financial statements are complete and accurate and are in accordance with generally accepted accounting principles. Management is responsible for the preparation, presentation and integrity of the Company’s financial statements. Management and the internal auditing department are responsible for maintaining appropriate accounting and financial reporting principles and policies and internal controls and procedures that provide for compliance with accounting standards and applicable laws and regulations. The independent accountants are responsible for planning and carrying out a proper audit of the Company’s annual financial statements, and reviewing the Company’s quarterly financial statements prior to the filing of each quarterly report.
In meeting its responsibilities, other than as set forth herein, the Committee’s policies and procedures shall be flexible so that it may react to any change in circumstances or conditions.
COMPOSITION
The Committee shall be comprised of three or more directors who shall be appointed by the Board of Directors. The Chairperson of the Committee shall be appointed by the Board of Directors.
Each member of the Committee shall qualify as an “independent director” under applicable law and the Nasdaq National Market listing requirements (the “Nasdaq Rules”) and shall be able to read and understand fundamental financial statements, including the Company’s balance sheet, income statement and cash flow statement. In addition one member of the Committee shall have past employment experience in finance or accounting, requisite personal certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities, as determined in accordance with the Nasdaq Rules by the Board in its business judgment. When and as required by the Nasdaq Rules, applicable law or the rules of the Securities and Exchange Commission (the “SEC”), one member of the Committee shall be a “financial expert,” as determined by the Board of Directors in accordance with such law or rules in its business judgment.
COMPENSATION
No member of the Committee shall receive any compensation from the Company other than (i) director’s fees for service as a director of the Company, including reasonable compensation for serving on the Committee and regular benefits that other directors receive and (ii) a pension or similar deferred compensation for past performance, provided that such compensation is not conditioned on continued or future service to the Company.
MEETINGS
The Committee shall meet at least once every fiscal quarter or more frequently as circumstances require. Members of the Committee may participate in a meeting of the Committee by means of conference call or similar communications equipment by means of which all persons participating in the meeting can hear each other. The
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Committee may ask members of management or others to attend meetings and provide pertinent information, as necessary. The Committee shall meet separately periodically at such times as it deems appropriate with management, the director of the internal auditing department, the independent accountants and the Company’s general or outside counsel to discuss any matters that the Committee or any of these persons or firms believe should be discussed privately or as is necessary to fulfill the Committee’s duties hereunder.
RESOURCES AND AUTHORITY
The Committee shall be granted unrestricted access to all information and all employees of the Company as requested by members of the Committee. The Committee shall have the power to conduct or authorize investigations into any matters within its scope of responsibilities and shall be empowered to retain, at the Company’s expense, independent counsel, accountants, or others to assist it in the conduct of any investigation, or to otherwise assist it in fulfilling its responsibilities and duties, without seeking approval of the Board of Directors or management.
The Committee shall have the sole authority to:
(i) select, retain and terminate the Company’s independent accountants (subject, if applicable, to shareholder ratification);
(ii) approve in advance all auditing services and related fees and terms; and
(iii) approve in advance all non-audit services permitted to be provided to the Company by the independent accountants under applicable law and SEC rules, and related fees and terms; provided, however
a. that non-audit services that were not recognized at the time of the engagement to be non-audit services and otherwise fall within the pre-approval exception provided in Section 10A of the Securities Exchange Act of 1934 (“de minimus non-audit services”) may be approved by the Committee prior to completion of the audit, and
b. that the Committee may delegate to one or more members of the Committee the authority to pre-approve services to be provided by the independent accountants, provided that any such pre-approval by one or more members of the Committee shall be reported to the full Committee at its next scheduled meeting.
RESPONSIBILITIES AND DUTIES
The Committee, to the extent it deems necessary or appropriate in fulfilling its purposes, shall:
1. Obtain and review a written report by the independent accountants describing (i) the firm’s internal quality-control procedures, and (ii) any material issues raised by the most recent internal quality-control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues.
2. Obtain and review with the independent accountants a written statement as required by Independence Standards Board (ISB) Standard No. 1, as may be modified or supplemented, discuss with the independent accountants any disclosed relationships or services that may impact their objectivity and independence, and recommend any appropriate actions to be taken.
3. Set clear hiring policies for employees or former employees of the independent accountants.
4. Discuss with management the timing and process for implementing the rotation of audit partners as required by applicable law and SEC rules.
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Financial Reporting
1. Prior to the annual audit, review the scope of the independent accountant’s audit plan, including the scope, procedures and timing of the audit, the experience and qualifications of the senior members of the independent accountant’s team and the quality control procedures of the independent accountant.
2. Review with management and the independent accountants the financial information included in the Company’s Quarterly Report on Form 10-Q and management’s discussion and analysis of the financial condition and results of operations prior to its filing.
3. Review with management and the independent accountants at the completion of the annual audit the Company’s consolidated financial statements included in the Annual Report on Form 10-K and management’s discussion and analysis of the financial condition and results of operations prior to its filing.
4. Discuss with management generally the types of information (including financial information and earnings guidance) to be disclosed in earnings press releases and earnings calls, as well as to analysts and rating agencies (paying particular attention to any use of “pro forma,” or “adjusted” non-GAAP information).
5. Review legal and regulatory matters that may have a material impact on the Company’s consolidated financial statements, related compliance policies and programs, and reports received from regulators.
6. Establish procedures for (i) the receipt, retention, and treatment of complaints received by the Company regarding accounting, internal accounting controls, or auditing matters, and (ii) the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters.
7. Discuss with the Company’s general counsel and/or outside counsel any significant legal, compliance or regulatory matters that may have a material effect on the Company’s business, financial statements or compliance policies, including material notices to or inquiries received from governmental agencies.
Internal Auditing Department, Financial Controls and Risk Management
1. Review and concur in the appointment or dismissal of the director of the internal auditing department.
2. Review in consultation with the independent accountants and the director of the internal auditing department the integrity of the Company’s financial reporting processes and system of internal control including controls over quarterly financial reporting, computerized information systems and security.
3. Review with the director of the internal auditing department the qualifications and staffing of the internal audit department, the scope of the proposed audit plan for the following year and the coordination of the plan with the independent accountants.
4. Receive from the director of the internal auditing department summaries of and, as appropriate, the significant reports to management prepared by the internal auditing department and management’s responses thereto.
5. Review with management, the director of the internal auditing department and the independent accountants (i) the Company’s policies with respect to risk assessment and risk management, (ii) the Company’s major financial risks exposures, and (iii) the steps management has taken to monitor and control such exposures.
Reporting and Recommendations
1. Prepare the Report of the Committee for inclusion in the annual stockholders’ meeting proxy statement. The Report of the Committee must state whether the Committee: (i) has reviewed and discussed the audited consolidated financial statements with management, (ii) has discussed with the independent accountants the
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matters required to be discussed by SAS 61, as may be modified, supplemented or replaced, (iii) has received the written disclosures from the independent accountants required by ISB Standard No. 1, as may be modified or supplemented, and has discussed with the accountants their independence, and (iv) has recommended to the Board of Directors, based on the review and discussions referred to in above items (i) through (iii), that the Company’s consolidated financial statements be included in the Annual Report on Form 10-K for the last fiscal year for filing with the SEC.
OTHER DUTIES
The Committee shall review and reassess the adequacy of this Audit Committee Charter on an annual basis and submit any proposed revisions to the Board of Directors for consideration and approval.
The Committee shall report regularly to the Board of Directors concerning significant developments in the course of performing the above responsibilities and duties, including reviewing with the full Board any issues that arise with respect to the quality or integrity of the Company’s compliance with legal or regulatory requirements, the performance and independence of the Company’s independent accountants, or the performance of the internal audit function.
The Committee shall perform such functions (whether or not described herein) as necessary or appropriate under applicable law, the Company’s charter or Bylaws, and the resolutions and other directives of the Board of Directors.
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FIRST ADVANTAGE CORPORATION
ANNUAL MEETING OF STOCKHOLDERS
To Be Held
Thursday, May 11, 2006, 9:00 a.m.
at the
RENAISSANCE VINOY RESORT
501 FIFTH AVENUE NE
ST. PETERSBURG, FLORIDA 33701
First Advantage Corporation | proxy | |
100 Carillon Parkway | ||
St. Petersburg, FL 33716 |
This proxy is solicited by the Board of Directors of First Advantage Corporation for use at the Annual Meeting on May 11, 2006.
The shares of First Advantage Class A or Class B common stock you hold of record as of March 31, 2006 will be voted as you specify on the reverse side.
By signing and dating this proxy, you revoke all prior proxies and appoint John Long and Julie Waters, and each of them, with full power of substitution, to vote your shares as directed on the matters shown on the reverse side.
If no choice is specified, the proxy will be voted “FOR” the nominees for director listed herein and at the discretion of the proxy holders on other matters that may come before the Annual Meeting and all adjournments.
See reverse for voting instructions.
¨ Please detach here ¨
The Board of Directors Recommends a Vote FOR all nominees listed below.
1. Election of directors: | 01 02 03 04 05 06 | Parker Kennedy John Long J. David Chatham Barry Connelly Lawrence Lenihan, Jr. Frank McMahon | 07 08 09 10 11 | Donald Nickelson Donald Robert Adelaide Sink D. Van Skilling David Walker | ¨ Vote FOR all nominees (except as marked) | ¨ Vote WITHHELD from all nominees |
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE VOTEDFOR EACH NOMINEE LISTED HEREIN. Address change? Mark Box ¨ Indicate changes below: Dated: ___________
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