As filed with the Securities and Exchange Commission on May 19, 1998
Registration No. 333-52031
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT
NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE FIRST AMERICAN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 6361 95-1068610
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation of Organization) Classification Code No.) Identification No.)
114 EAST FIFTH STREET
SANTA ANA, CALIFORNIA 92701-4642
(800) 854-3643
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
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(COPIES TO)
MARK R ARNESEN, ESQ. NEIL W. RUST, ESQ. BARBARA L. BORDEN, ESQ.
SECRETARY WHITE & CASE LLP COOLEY GODWARD LLP
THE FIRST AMERICAN FINANCIAL CORPORATION 633 WEST FIFTH STREET 4365 EXECUTIVE DRIVE
114 EAST FIFTH STREET LOS ANGELES, CALIFORNIA 90071 SAN DIEGO, CALIFORNIA 92121
SANTA ANA, CALIFORNIA 92701 (213) 620-7700 (619) 550-6000
(714) 558-3211
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent For Service)
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Approximate date of commencement of proposed sale to the public: with
respect to the offering being made by the Registrant, as soon as practicable
after this Registration Statement becomes effective and certain other conditions
under the Merger Agreement are met or waived and with respect to the offering
being made by the Selling Shareholders pursuant to Rule 415, on a delayed or
continuous basis after the Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box.( )
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.( )Registration No._____
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.( )Registration No._____
______________
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF EACH CLASS OF SECURITIES AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TO BE REGISTERED TO BE AGGREGATE PRICE AGGREGATE REGISTRATION
REGISTERED(1) PER UNIT(2) OFFERING PRICE(3) FEE(4)
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Common shares, $1.00 par value 838,095 shares $74.063 $62,071,830 $2,339.04(5)
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(1) Based upon the maximum number of Common shares of the Registrant issuable
in the Merger described herein.
(2) The proposed maximum offering price per unit is based on the last sale
price of the Registrant's Common shares on May 5, 1998. There can be no
assurance as to the actual price of Common shares of the Registrant prior
to, at or following the effective time of the Merger.
(3) Represents the maximum aggregate value of the Registrant's Common shares
issuable to security holders of Data Tree Corporation in connection with
the Merger.
(4) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(2) under the Securities Act of 1933, as
amended. The book value of the securities to be received by the Registrant
as of March 31, 1998 was $7,928,955.
(5) Previously paid.
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______________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
______________
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DATA TREE CORPORATION
550 WEST "C" STREET, SUITE 2040
SAN DIEGO, CALIFORNIA 92101
Dear Data Tree Shareholder:
You are cordially invited to attend a Special Meeting of the Shareholders
of Data Tree Corporation, a California corporation ("Data Tree"), which will be
held at 9:00 a.m. California Time on June 1, 1998 (the "Data Tree Special
Meeting") at the corporate offices of Data Tree at 550 West "C" Street, Suite
2040, San Diego, California 92101.
At the Data Tree Special Meeting, you will be asked to consider and vote
upon a proposal (the "Merger Proposal") to approve the principal terms of (i) an
Agreement and Plan of Merger dated as of March 27, 1998 by and among Data Tree,
Harish Chopra, the Chief Executive Officer of Data Tree, The First American
Financial Corporation, a California corporation (the "Company") and Image
Acquisition Corp., a California corporation and wholly-owned subsidiary of the
Company ("IAC"), whereby Data Tree will be merged with IAC (the "Merger") and
Data Tree will continue as the surviving corporation and a wholly owned
subsidiary of the Company and (ii) the related Agreement of Merger to be filed
with the office of the Secretary of State of the State of California to effect
the Merger. As a result of the Merger, the Company will issue that number of
shares of Common Stock of the Company equal in value to $43,113,373 less the
amount by which aggregate fees and expenses of counsel, accountants and
financial advisors to Data Tree and personal counsel to Mr. Chopra exceed
$1,000,000 (the net amount referred to herein as the "Purchase Price"). The
exact number of shares of Company Common Stock to be issued to the shareholders
of Data Tree (the "Merger Shares") will not be fixed until the end of the
trading day immediately preceding the day of the Data Tree Special Meeting as
such number is determined by dividing the Purchase Price by the average of the
last reported sales prices of one share of the Company's Common Stock for the
twenty consecutive trading days ending on the trading day immediately preceding
the Data Tree Special Meeting; provided, however, that in no circumstances will
the total Merger Shares be more than 838,095 shares of Company Common Stock.
Assuming an average price of $76.313 for one share of the Company's Stock (the
closing price of a share of Company Stock as reported on the New York Stock
Exchange on May 15, 1998) and a total Purchase Price of $43,013,373 (which
assumes $100,000 of aggregate expenses in excess of $1,000,000) the Data Tree
shareholders would be entitled to receive in the aggregate approximately 563,644
shares of the Company's Common Stock. Each share of Data Tree Common Stock
(other than Dissenting Shares, as defined in the attached Prospectus/Proxy
Statement) outstanding immediately prior to the consummation of the Merger will
be converted into the right to receive that fraction of a share of the Company's
Common Stock, equal to the Merger Shares divided by the total number of shares
of Data Tree Common Stock outstanding immediately prior to the consummation of
the Merger. Each Data Tree shareholder will receive in the Merger a whole number
of shares of the Company's Common Stock, plus cash in lieu of a fractional
share.
The Merger Proposal is described more fully in the accompanying Notice of
Special Meeting of the Shareholders of Data Tree and The First American
Financial Corporation Prospectus and Data Tree Corporation Proxy Statement (the
"Prospectus/Proxy Statement").
Among other things, as a condition to the closing of the Merger, the
Merger Proposal must be approved by the vote of 100% of the shareholders of Data
Tree. If the requisite approval of the shareholders of Data Tree is received and
all other conditions to the Merger are satisfied or waived, the Merger is
anticipated to close by June 1, 1998.
Holders of Data Tree Common Stock may, by complying with Chapter 13 of the
California General Corporation Law, be entitled to dissenters' rights and the
receipt of cash payment for their shares as set forth therein.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
THE MERGER AND BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS
OF, DATA TREE AND ITS SHAREHOLDERS. THE BOARD OF DIRECTORS RECOMMENDS THAT YOU
VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
You are urged to review carefully the information contained in the
accompanying Prospectus/Proxy Statement, including in particular the information
under the captions "Risk Factors" and "The Merger - Background Of The
Acquisition; Reasons for the Merger" prior to voting on the Merger and the
Merger Agreement.
Whether or not you expect to attend the Data Tree Special Meeting, please
complete, sign, date and return the enclosed proxy card in the postage-prepaid
envelope to assure that your shares will be represented at the Data Tree Special
Meeting. You may revoke your proxy at any time before it has been voted, and if
you attend the Data Tree Special Meeting you may vote in person even if you have
previously returned your proxy card.
Regardless of the number of shares you own, your vote for the approval and
adoption of the Merger Agreement is important. Your prompt attention to this
matter is appreciated.
Very truly yours,
/s/ Harish K. Chopra
Harish K. Chopra
President and Chairman of the Board of Directors
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DATA TREE CORPORATION
550 WEST "C" STREET, SUITE 2040
SAN DIEGO, CALIFORNIA 92101
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 1,1998
Dear Data Tree Shareholder:
PLEASE TAKE NOTICE that a Special Meeting of Shareholders (the "Data Tree
Special Meeting") of Data Tree Corporation, a California corporation ("Data
Tree"), will be held on June 1, 1998, commencing at 9:00 a.m., California Time,
at 550 West "C" Street, Suite 2040, San Diego, California 92101 for the
following purpose:
To consider and vote upon a proposal (the "Merger Proposal") to approve the
principal terms of (i) the Agreement and Plan of Merger dated as of March 27,
1998 (the "Merger Agreement"), by and among The First American Financial
Corporation, a California corporation (the "Company"), Image Acquisition Corp.,
a California corporation and wholly-owned subsidiary of the Company ("IAC"),
Data Tree and Harish Chopra, the President and Chairman of the Board of
Directors of Data Tree, pursuant to which, among other things, (a) IAC will
merge with and into Data Tree, with Data Tree continuing as the surviving
corporation and becoming a wholly-owned subsidiary of the Company (the "Merger")
and (b) each issued and outstanding share of Data Tree Common Stock, no par
value, will be converted into the right to receive a fraction of a share of
Common Stock of the Company, $1.00 par value per share, such fraction to be
determined in accordance with the Merger Agreement on the day prior to the Data
Tree Special Meeting and (ii) the related Agreement of Merger to be filed with
the office of the Secretary of State of the State of California to effect the
Merger. Each Data Tree shareholder will receive in the Merger a whole number of
shares of the Common Stock of the Company, plus cash in lieu of a fractional
share.
As a result of the Merger, the Company will issue that number of shares of
Common Stock of the Company equal in value to $43,113,373 less the amount by
which aggregate fees and expenses of counsel, accountants and financial advisors
to Data Tree and personal counsel to Mr. Chopra exceed $1,000,000 (the net
amount referred to herein as the "Purchase Price"). The exact number of shares
of Company Common Stock to be issued to the shareholders of Data Tree (the
"Merger Shares") will not be fixed until the end of the trading day immediately
preceding the day of the Data Tree Special Meeting as such number is determined
by dividing the Purchase Price by the average of the last reported sales prices
of one share of the Company's Common Stock for the twenty consecutive trading
days ending on the trading day immediately preceding the Data Tree Special
Meeting; provided, however, that in no circumstances will the total Merger
Shares be more than 838,095 shares of Company Common Stock. Assuming an average
price of $76.313 for the Company's Stock (the closing price of a share of
Company Stock as reported on the New York Stock Exchange on May 15, 1998) and a
total Purchase Price of $43,013,373 (which assumes $100,000 of aggregate
expenses in excess of $1,000,000) the Data Tree shareholders would be entitled
to receive in the aggregate approximately 563,644 shares of Stock. Each share of
Data Tree Common Stock (other than Dissenting Shares, as defined in the attached
Prospectus/Proxy Statement) outstanding immediately prior to the consummation of
the Merger will be converted into the right to receive that fraction of a share
of the Company's Common Stock, equal to the Merger Shares divided by the total
number of shares of Data Tree Common Stock outstanding immediately prior to the
consummation of the Merger.
The Merger Proposal and other related matters are described more fully in
the attached Prospectus of The First American Financial Corporation and the Data
Tree Corporation Proxy Statement (the "Prospectus/Proxy Statement") and the
Annexes thereto. A copy of the Merger Agreement is attached as Annex A to the
Prospectus/Proxy Statement and a copy of the Agreement of Merger to be filed
with the office of the Secretary of State of the State of California to effect
the Merger is attached as Annex B to the Prospectus/Proxy Statement.
The Board of Directors of Data Tree has fixed the close of business on May
15, 1998 as the record date for the determination of shareholders of Data Tree
entitled to notice of and to vote at the Data Tree Special Meeting and any
adjournments or postponements thereof. Only holders of record of Data Tree
Common Stock on the record date are entitled to vote at the Data Tree Special
Meeting.
Among other things, as a condition to the closing of the Merger, the Merger
Proposal must be approved by the vote of 100% of the shareholders of Data Tree.
If the requisite approval of the shareholders of Data Tree is received and all
other conditions to the Merger are satisfied or waived, the Merger is
anticipated to close by June 1, 1998.
Holders of Data Tree Common Stock may, by complying with Chapter 13 of the
California General Corporation Law (the "CGCL"), be entitled to dissenters'
rights and the receipt of cash payment for their shares as set forth therein. A
copy of Chapter 13 of the CGCL is attached as Annex C to this Prospectus/Proxy
Statement.
Your vote is important no matter how many shares you hold. You can ensure
that your shares are voted at the meeting by signing and dating the enclosed
proxy and returning it in the envelope provided. Sending in a signed proxy card
will not affect your right to attend the meeting and vote in person. You may
revoke your proxy at any time before it is voted by giving written notice to the
Secretary of Data Tree at Data Tree's corporate offices at 550 West "C" Street,
Suite 2040, San Diego, California 92101, by signing and returning a later dated
proxy or by voting in person at the Data Tree Special Meeting.
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WHETHER OR NOT YOU EXPECT TO ATTEND THE DATA TREE SPECIAL MEETING, WE URGE
YOU TO SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE
PROVIDED.
By Order of the Board of Directors
/s/ Michael D. Reynolds
Michael D. Reynolds
Secretary
San Diego, California
May 22, 1998
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THE FIRST AMERICAN FINANCIAL CORPORATION PROSPECTUS
DATA TREE CORPORATION PROXY STATEMENT
The First American Financial Corporation, a California corporation (the
"Company"), has filed a Registration Statement on Form S-4 (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission")
pursuant to the Securities Act of 1933, as amended (the "Securities Act"),
covering up to 838,095 of its Common shares, $1.00 par value (all Common shares
of the Company, including the 838,095 Common shares referenced herein, the
"Stock"), to be issued in connection with the proposed merger (the "Merger") of
Image Acquisition Corp., a California corporation and wholly-owned subsidiary of
the Company ("IAC"), with and into Data Tree Corporation, a California
corporation ("Data Tree"), pursuant to the terms set forth in the Agreement and
Plan of Merger, dated as of March 27, 1998 (the "Merger Agreement"), by and
among the Company, IAC, Data Tree and Harish Chopra, an individual residing in
Rancho Santa Fe, California ("Chopra").
This Prospectus/Proxy Statement is being furnished to the shareholders of
Data Tree on behalf of the Data Tree board of directors (the "Data Tree Board")
for use at the Data Tree Special Meeting to be held at 9:00 a.m., California
Time, on June 1, 1998 at the corporate offices of Data Tree at 550 West "C"
Street, Suite 2040, San Diego, California, and at any adjournments of
postponements thereof. The Data Tree Special Meeting is being called to solicit
the approval by the shareholders of Data Tree of the principal terms of the
Merger Agreement and the related Agreement of Merger, the proposed Merger and
the transactions contemplated thereby (the "Merger Proposal").
Pursuant to the Merger Agreement, upon the consummation of the Merger, Data
Tree will become a wholly-owned subsidiary of the Company and Data Tree Stock
(as defined below) will be converted into the right to receive shares of the
Stock and cash in lieu of fractional shares of Stock. As used herein, "Data Tree
Stock" means all issued and outstanding common shares of Data Tree. The Merger
Agreement contemplates that to acquire the Data Tree Stock the Company will
issue Stock in an amount equal in value to the difference between (x)
$43,113,373 and (y) such reasonable fees and expenses of the counsel,
accountants and financial advisors of Data Tree and personal counsel to Chopra
which exceed in the aggregate $1,000,000 (the net amount referred to herein as
the "Purchase Price"). Dissenting Shareholders (as defined below) will not
receive shares of Stock and the value of shares of Stock issued in the Merger
will be decreased by the value of the Stock that would have been issued to such
Dissenting Shareholder had such shareholder not dissented. It is a condition to
the Merger that there be no Dissenting Shareholders. The exact number of shares
of Stock to be issued by the Company pursuant to the Merger shall be determined
by dividing the Purchase Price by the average of the last reported sales price
on the New York Stock Exchange of one share of Stock for the twenty consecutive
Trading Days (as defined below) ending on the Trading Day immediately prior to
the date that the Data Tree shareholders meet to vote on the Merger (the "Data
Tree Special Meeting"). As used herein, a "Trading Day" is a day on which the
New York Stock Exchange is open for at least one-half of its normal business
hours. As of May 4, 1998 there were 7,039,830 shares of Data Tree Stock issued
and outstanding and warrants to acquire 110,136 shares of Data Tree Stock. See
"The Merger Agreement - Conversion of Securities."
This Prospectus/Proxy Statement ("Prospectus/Proxy Statement") constitutes
(a) the Prospectus of the Company filed as part of the Registration Statement
and (b) the Proxy Statement of Data Tree relating to the Data Tree Special
Meeting called to vote on the approval and adoption of the Merger Agreement.
All information herein with respect to Data Tree has been furnished by Data
Tree, all information herein with respect to Chopra has been furnished by Chopra
and all information herein with respect to the Company and IAC has been
furnished by the Company. This Prospectus/Proxy Statement is first being mailed
to shareholders of Data Tree on or about May 22, 1998.
Shares of Stock issued to Data Tree "affiliates," as used within the
meaning of Rule 145 promulgated under the Securities Act pursuant to this
Prospectus/Proxy Statement may be reoffered pursuant hereto by such holders
thereof (the "Selling Shareholders") from time to time in transactions on the
open market, in negotiated transactions, through the writing of options on such
shares of Stock or through a combination of such methods of sale, at negotiated
prices, fixed prices which may be changed, market prices prevailing at the time
of sale or prices relating to such prevailing market prices. See "Selling
Shareholders."
The Stock is traded on the New York Stock Exchange under the symbol "FAF."
On May 15, 1998, the last sales price of the Stock as reported on the New York
Stock Exchange was $76.313.
Holders of Data Tree Stock may, by complying with Chapter 13 of the
California General Corporation Law (the "CGCL"), be entitled to dissenters'
rights and the receipt of cash payment for their shares as set forth therein. A
copy of Chapter 13 of the CGCL is attached as Annex C to this Prospectus/Proxy
Statement. See "The Data Tree Special Meeting - Dissenters' Rights."
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED CAREFULLY BY DATA TREE SHAREHOLDERS BEFORE VOTING IN
FAVOR OF THE MERGER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS/PROXY STATEMENT IS MAY 19, 1998.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED HEREIN IN CONNECTION WITH THESE MATTERS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR DATA TREE. THIS
PROSPECTUS/PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE SHARES OF STOCK
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY OF THE STOCK OFFERED HEREBY BY ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL FOR ANY SUCH PERSON TO MAKE SUCH AN OFFER OR
SOLICITATION. THE DELIVERY OF THIS PROSPECTUS/PROXY STATEMENT AT ANY TIME DOES
NOT IMPLY THAT THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THE DATE OF THE DOCUMENT
CONTAINING SUCH INCORPORATED INFORMATION, AS THE CASE MAY BE.
Titlescape(R)and IDEA(TM)are trademarks of Data Tree. This Prospectus/Proxy
Statement may also include trademarks and trade names which are the property of
their respective owners.
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TABLE OF CONTENTS
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Available Information..................................................................................inside cover
Incorporation of Documents by Reference................................................................inside cover
Forward Looking Statements.............................................................................inside cover
Summary...........................................................................................................1
Risk Factors.....................................................................................................18
The Data Tree Special Meeting....................................................................................20
Beneficial Security Ownership of Certain Owners and Management of Data Tree......................................24
The Merger ......................................................................................................25
The Merger Agreement.............................................................................................33
Use of Proceeds..................................................................................................45
Selling Shareholders.............................................................................................45
Plan of Distribution.............................................................................................47
The First American Financial Corporation.........................................................................49
Image Acquisition Corp...........................................................................................53
Data Tree Corporation............................................................................................53
Management's Discussion and Analysis and Results of Operations of Data Tree......................................57
Comparison of Rights of Holders of Data Tree Stock and Company Stock.............................................62
Tax Matters......................................................................................................67
Description of the Stock.........................................................................................70
Legal Matters....................................................................................................73
Experts..........................................................................................................73
Index to Data Tree's Financial Statements........................................................................73
Financial Statements - Data Tree Corporation....................................................................F-1
Annex A - Agreement and Plan of Merger..........................................................................A-1
Annex B - Agreement of Merger...................................................................................B-1
Annex C - Chapter 13 of the CGCL................................................................................C-1
Annex D - The Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997..................D-1
Annex E - The Company's Quarterly Report on Form 10-Q for the Quarterly Period Ended March 31, 1998.............E-1
Annex F - The Company's Report on Form 8-K dated January 23, 1998...............................................F-1
Annex G - The Company's Report on Form 8-K dated January 27, 1998...............................................G-1
Annex H - The Company's Report on Form 8-K dated March 18, 1998.................................................H-1
Annex I - The Company's Report on Form 8-K dated March 31, 1998.................................................I-1
Annex J - The Company's Report on Form 8-K dated April 7, 1998..................................................J-1
Annex K - The Company's Registration Statement on Form 8-A dated November 7, 1997...............................K-1
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports and other information filed by the Company with the
Commission pursuant to the informational requirements of the Exchange Act can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549; and at the following Regional Offices of the Commission: New York
Regional Office, Seven World Trade Center, 13th Floor, Suite 1300, New York, New
York 10048; and Chicago Regional Office, Citicorp Center, 500 West Madison
Street, 14th Floor, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549. The Commission also maintains a Web site (http://www.sec.gov) that
contains reports, proxy statements and other information regarding the Company.
In addition, such reports, proxy statements and other information can also be
inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street,
New York, New York 10005, on which the shares of Stock of the Company are
listed.
Data Tree is not subject to the informational requirements of the Exchange
Act and, as a result, does not file reports, proxy or information statements or
other information with the Commission.
This Prospectus/Proxy Statement constitutes part of a Registration
Statement on Form S-4 (the "Registration Statement") filed by the Company with
the Commission under the Securities Act. In accordance with the rules and
regulations of the Commission, this Prospectus/Proxy Statement does not contain
all of the information contained in the Registration Statement and the exhibits
and schedules thereto. For further information concerning the Company and the
Stock offered hereby, reference is hereby made to the Registration Statement and
the exhibits and schedules filed therewith which may be obtained at the
Commission's offices whose addresses are listed above. The Registration
Statement has been filed electronically and may be obtained at the Commission's
Web site listed above. Any statements contained herein concerning the provisions
of any document are not necessarily complete, and, in each instance, reference
is made to the copy of such document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission. Each such statement is
qualified in its entirety by such reference.
INCORPORATION OF DOCUMENTS BY REFERENCE
The Company hereby states that all documents filed by the Company with the
Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act,
subsequent to the date of this Prospectus/Proxy Statement and prior to the
termination of any offering or resale of securities made by this
Prospectus/Proxy Statement, shall be deemed to be incorporated by reference in
this Prospectus/Proxy Statement and to be part hereof from the date of filing of
such documents. Any statement contained herein, or in a document all or a
portion of which is incorporated or deemed to be incorporated by reference
herein, shall be deemed to be modified or superseded for purposes of this
Prospectus/Proxy Statement to the extent that a statement contained herein or in
any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus/Proxy Statement.
THIS PROSPECTUS/PROXY STATEMENT INCORPORATES BY REFERENCE DOCUMENTS FILED
BY THE COMPANY WITH THE COMMISSION AFTER THE DATE OF THIS PROSPECTUS/PROXY
STATEMENT AND PRIOR TO THE TERMINATION OF OFFERING OR RESALE OF SECURITIES MADE
BY THIS PROSPECTUS/PROXY STATEMENT. SHOULD ANY DOCUMENT BE FILED WITH THE
COMMISSION DURING SUCH PERIOD, THESE DOCUMENTS WILL BE AVAILABLE WITHOUT CHARGE
TO ANY PERSON TO WHOM THIS PROSPECTUS/PROXY STATEMENT IS DELIVERED UPON FIVE
BUSINESS DAYS' WRITTEN OR ORAL REQUEST OF MARK R ARNESEN, VICE PRESIDENT AND
SECRETARY, THE FIRST AMERICAN FINANCIAL CORPORATION, 114 EAST FIFTH STREET,
SANTA ANA, CALIFORNIA 92701-4642; TELEPHONE NUMBER (714) 558-3211.
FORWARD-LOOKING STATEMENTS
Except for historical information contained in this Prospectus/Proxy
Statement and in any documents incorporated in this Prospectus/Proxy Statement
by reference, the matters discussed herein and therein contain forward-looking
statements that involve risks and uncertainties that could cause actual results
to differ materially from those suggested in the forward-looking statements,
including, without limitation, the effect of economic conditions, interest
rates, market demand, competition and other risks detailed herein and in the
Company's other filings with the Commission.
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus/Proxy Statement. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information contained in this
Prospectus/Proxy Statement and the Annexes hereto. Unless otherwise defined
herein, capitalized terms used in this summary have the respective meanings
ascribed to them elsewhere in this Prospectus/Proxy Statement. Data Tree
shareholders are urged to read this Prospectus/Proxy Statement and the Annexes
in their entirety.
THE COMPANIES
THE FIRST AMERICAN FINANCIAL CORPORATION.
The Company was organized in 1894 as Orange County Title Company,
succeeding to the business of two title abstract companies founded in 1889 and
operating in Orange County, California. In 1924, the Company commenced issuing
title insurance policies. In 1986, the Company began a diversification program
by acquiring and developing financial service businesses closely related to the
real estate transfer and closing process. The Company is a California
corporation.
The Company, through its subsidiaries, is engaged in the business of
providing real estate-related financial and information services to real
property buyers and mortgage lenders. The Company's products and services
include title insurance, tax monitoring, credit reporting, property data
services, flood certification, field inspection services, appraisal services,
mortgage loan servicing systems, mortgage document preparation and home warranty
services. The Company also provides investment, trust and thrift services.
Although industry-wide data for 1997 is not currently available, the Company
believes that First American Title Insurance Company ("FATICO") was the largest
title insurer in the United States, based on premiums written, and its wholly
owned subsidiary, First American Real Estate Information Services, Inc.,
("FAREISI") was the nation's largest provider of flood zone determinations,
based on the number of flood zone determinations issued, the nation's largest
mortgage credit reporting service, based on the number of credit reports issued,
and the nation's second largest provider of tax monitoring services, based on
the number of loans under service. The Company also believes that its majority
owned subsidiary, First American Home Buyers Protection Corporation, was one of
the largest providers of home warranties in the United States, based on the
number of home protection contracts under service. The title insurance and real
estate information segments operate through networks of offices nationwide. The
Company, through FATICO and its subsidiaries, transacts the business of title
insurance through a network of more than 300 branch offices and over 4,000
independent agents. The Company also offers its title services in Australia, the
Bahama Islands, Bermuda, Canada, Guam, Mexico, Puerto Rico, the U.S. Virgin
Islands and the United Kingdom. Home warranty services are available in certain
counties of Arizona, California, Nevada, North Carolina, South Carolina, Texas,
Utah and Washington. The trust, banking and thrift businesses operate in
Southern California only. See "The First American Financial Corporation."
The Company's executive offices are located at 114 East Fifth Street, Santa
Ana, California 92701, and its telephone number at that address is (714)
558-3211.
IMAGE ACQUISITION CORP.
IAC was incorporated in California in March 1998 for the purpose of
effecting the acquisition of Data Tree via the Merger. IAC has no material
assets and has not engaged in any activities except in connection with the
proposed acquisition of Data Tree. IAC's principal offices are located at 114
East Fifth Street, Santa Ana, California 92701, and its telephone number at that
address is (714) 558-3211. See "Image Acquisition Corp."
DATA TREE CORPORATION.
Data Tree, a California close corporation, was founded in 1987 by Chopra.
Today, Data Tree is a leading provider of document imaging and database
management systems and services to the title insurance industry and county
recorders and other government agencies. Data Tree believes it maintains one of
the largest proprietary image databases of recorded documents with over 400
million images. It offers its proprietary products and services through a
network of nine data centers in five states. Title customers access its database
via a PC-based image workstation.
Data Tree primarily offers two products: Titlescape(R)and IDEA(TM)(Indexing
Document Extraction Application). Titlescape(R) is a subscription-based, Windows
compliant software package that combines access to on-line historical databases
with integration software that enables customers to combine their title
processing applications into one system, either on one desktop PC or on a
complete network of PCs. IDEA(TM) is a turnkey imaging, indexing and document
management system designed for county recorders and other governmental agencies.
The system simplifies and expedites the maintenance of documents by allowing the
user to convert paper documents and other input media into electronic images and
then manage the storage, retrieval and routing of these images.
Data Tree's executive offices are located at 550 West "C" Street, Suite
2040, San Diego, California 92101, and its telephone number at that address is
(619) 231-3300.
THE MERGER
Upon consummation of the Merger pursuant to the Merger Agreement, IAC will
be merged with and into Data Tree, with Data Tree continuing as the surviving
corporation (the "Surviving Corporation") and becoming a wholly-owned subsidiary
of the Company. Each share of Data Tree Stock, other than Dissenting Shares
(defined below), which is issued and outstanding at the Effective Time (as
defined below) will be converted into the right to receive a fraction of a share
of Stock, which fraction will be determined after both the occurrence of the
Data Tree Special Meeting and the final determination of the fees of advisors to
Data Tree and Chopra. See "The Merger Agreement - Manner and Basis for
Converting Shares."
It is anticipated that the Merger will become effective as promptly as
practicable after the approval of the Data Tree shareholders has been obtained
and all other conditions to the Merger have been satisfied or waived. If the
Effective Time does not occur within one month of the closing of the Merger, the
parties to the Merger Agreement have the right to terminate the Merger
Agreement.
DATE AND PLACE OF THE MEETINGS
The Data Tree Special Meeting will be held on June 1, 1998 at 9:00 a.m.
California Time, at the corporate offices of Data Tree located at 550 West "C"
Street, Suite 2040, San Diego, California 92101. See "The Data Tree Special
Meeting."
RECORD DATE
Only holders of record on the close of business on May 15, 1998 (the
"Record Date") of issued and outstanding shares of Data Tree Stock are entitled
to notice of and to vote to approve the Merger Proposal. As of May 15, 1998
there were 27 shareholders of record and 7,039,830 shares of Data Tree Stock
issued and outstanding. See "The Data Tree Special Meeting - Record Date;
Quorum."
PURPOSE OF THE MEETING
The purpose of the Data Tree Special Meeting is to consider and vote upon
the Merger Proposal. See "The Data Tree Special Meeting - Matters to Be
Considered at the Meeting."
MERGER APPROVAL
Under California law, approval of the Merger Proposal requires the
affirmative vote of holders of two-thirds of the outstanding shares of Data Tree
Stock entitled to vote; however, the Merger Agreement requires that no Data Tree
shareholders entitled to vote dissent from the Merger. Therefore, the terms of
the Merger Agreement effectively require the affirmative vote of 100% of the
outstanding shares of Data Tree Stock to approve the Merger Proposal. A vote of
the Company's shareholders is not required to approve the Merger. The approval
of the sole shareholder of IAC is required. Such approval has already been
obtained.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of May 1, 1998, certain directors and executive officers of Data Tree,
and their affiliates held or may be deemed to have held 975,000 shares of Data
Tree Stock directly or beneficially, representing 13.85% of the outstanding
shares of Data Tree Stock.
As of May 1, 1998, certain directors and executive officers of the
Company, and their affiliates held or may be deemed to have held 1,239,941
shares of Stock directly or beneficially, representing 6.9% of the outstanding
shares of the Company.
Two employees of Data Tree, Michael D. Reynolds and William P. Dow, will
receive certain benefits as a result of the Merger, including a bonus equal to
20% of their respective salaries. Certain other employees will also receive a
cash bonus between $10,000 and $25,000 each as a result of the Merger. See "The
Merger - Interests of Directors, Officers and Employees in the Merger."
Chopra, the Chief Executive Officer, a director and a shareholder of Data
Tree, will also receive certain benefits as a result of the Merger. Upon
consummation of the Merger, he will become subject to a five-year employment
agreement with the successor to the Surviving Corporation which will pay him a
salary equal to $250,000 and a bonus equal to 2% of the adjusted pre-tax
earnings of the successor to the Surviving Corporation. An entity established by
Chopra will also receive a 20% interest in the successor to the Surviving
Corporation in exchange for an $11,000,000 secured promissory note with a two
and one-half year term and a seven-year noncompetition agreement. This same
entity will enter into a supply agreement with the successor to the Surviving
Corporation pursuant to which that entity will receive during the two and
one-half year term of the agreement in excess of $11,000,000. See "The Merger -
Interests of Directors, Officers and Employees in the Merger."
Carl Strunk, a director and shareholder of Data Tree, is the Executive Vice
President, Finance of Fidelity National Financial, Inc. ("Fidelity") and a Vice
President of Cal West Service Corporation, a major shareholder of Data Tree and
a wholly-owned subsidiary of Fidelity.
REGULATORY REQUIREMENTS
The consummation of the Merger is subject to certain regulatory
requirements, including expiration of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"). The
Company's and Data Tree's request for early termination of the applicable 30-day
waiting period has been granted. See "The Merger - Regulatory Requirements."
DISSENTERS' RIGHTS
It is a condition precedent to the consummation of the Merger that no Data
Tree shareholder dissents from the Merger. However, in the event that this
condition is waived, holders of Data Tree Stock who do not vote in favor of the
Merger may, under certain circumstances and by following the procedures outlined
in the CGCL, exercise dissenters' rights and receive cash for their shares of
Data Tree Stock in an amount equal to the fair value of the Data Tree Stock as
determined pursuant to such procedure. Should a Data Tree shareholder attempt to
exercise dissenters' rights and fail to make a proper demand for payment or
otherwise loses his or her status as a dissenting shareholder, such Data Tree
shareholder shall be entitled to receive the same number of shares of Stock and
cash payment in lieu of any fractional share that he or she would have received
in the Merger if he or she had not attempted to exercise dissenters' rights. See
"The Data Tree Special Meeting - Dissenters' Rights."
EFFECT OF THE MERGER
Upon consummation of the Merger, pursuant to the Merger Agreement: (i) IAC
will be merged with and into Data Tree, Data Tree will become the surviving
corporation and, consequently, a wholly-owned subsidiary of the Company, (ii)
each issued and outstanding share of Data Tree Stock, other than Dissenting
Shares, will be converted into the right to receive that fraction of a share of
Stock equal to the Purchase Price divided by the total number of shares of Data
Tree Stock issued and outstanding immediately prior to the consummation of the
Merger. Each share of Data Tree Stock will be so converted by virtue of the
Merger and without any action on the part of the holder thereof. Fractional
shares of the Stock will not be issued in connection with the Merger; Data Tree
shareholders entitled to receive a fractional share of Stock will be paid the
value of such fractional share of Stock in cash.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is intended that the Merger be a tax-free reorganization, so that no
gain or loss would be recognized by the Company, Data Tree or the Data Tree
shareholders, except with respect to cash received by the Data Tree shareholders
in lieu of fractional shares or for dissenters' shares. It is a condition to the
Merger that Data Tree shall have received an opinion of its counsel to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code and that no gain or loss will be
recognized by Data Tree or Data Tree's shareholders as a result of the Merger.
See "Tax Matters."
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The selected historical consolidated financial data of the Company as of
and for the years ended December 31, 1995 through 1997 and for the quarterly
periods ended March 31, 1997 and 1998 have been derived from their respective
historical financial statements and should be read in conjunction with such
financial statements and notes thereto of the separate companies, which are
included elsewhere in this Prospectus/Proxy Statement or incorporated herein.
The selected historical financial information with respect to the Company's
statements of income for each of the two years ended December 31, 1993 and 1994
and with respect to the Company's balance sheets at December 31, 1993, 1994 and
1995 are derived from the audited financial statements of the Company which are
not included in this Prospectus/Proxy Statement.
The selected historical financial data set forth below with respect to Data
Tree's statement of income for the six months ended March 31, 1997 and 1998 and
with respect to its balance sheet at March 31, 1998, is derived from the
unaudited financial statements of Data Tree, included elsewhere in this
Prospectus/Proxy Statement. The selected historical financial information set
forth below with respect to Data Tree's statements of income for each of the
three years ended September 30, 1995 through 1997 and with respect to Data
Tree's balance sheets at September 30, 1997 and 1996 are derived from the
financial statements of Data Tree, which have been audited by Ernst & Young LLP,
independent auditors, included elsewhere in this Prospectus/Proxy Statement. The
selected historical financial information with respect to Data Tree's statements
of income for each of the two years ended September 30, 1993 and 1994 and with
respect to Data Tree's balance sheets at September 30, 1993, 1994 and 1995 are
derived from the audited financial statements of Data Tree which are not
included in this Prospectus/Proxy Statement.
In the opinion of Data Tree's management, the unaudited financial
statements include all adjustments consisting only of normal recurring accruals,
that Data Tree considers necessary for a fair presentation of the results of
operations and financial position of Data Tree for each of the periods
presented. Operating results for Data Tree for the six months ended March 31,
1998 are not necessarily indicative of the results that may be expected for the
year ending September 30, 1998.
The financial statement data set forth below should be read in conjunction
with, and are qualified in their entirety by reference to, the financial
statements and notes related thereto included elsewhere in this Prospectus/Proxy
Statement and "Data Tree's Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Company Selected Historical Consolidated Financial Data
The summary below should be read in connection with the financial
information included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, which is attached hereto as Annex D, and the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998,
which is attached hereto as Annex E.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
-----------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Operating revenues $1,379,781 $1,356,946 $1,227,185 $1,571,168 $1,860,205 $376,425 $561,614
Investment and other
income $18,645 $19,447 $23,031 $26,398 $27,256 $6,452 $43,435
---------- ---------- ---------- ---------- ---------- -------- --------
$1,398,426 $1,376,393 $1,250,216 $1,597,566 $1,887,461 $382,877 $605,049
---------- ---------- ---------- ---------- ---------- -------- --------
Expenses:
Salaries and other
personnel costs $397,902 $423,328 $431,984 $531,250 $647,750 $140,787 $199,122
Premiums retained by
agents $504,375 $533,598 $413,444 $516,593 $563,137 $122,193 $140,045
Other operating expenses $222,934 $232,532 $257,823 $322,709 $411,319 $82,347 $135,000
Provision for title
losses and other claims $125,588 $110,230 $90,387 $86,487 $90,323 $18,592 $27,328
Depreciation and
amortization $16,333 $19,796 $20,790 $27,242 $38,149 $8,598 $13,706
Interest $4,419 $6,267 $6,242 $4,796 $9,994 $1,122 $3,576
Minority interest $5,267 $2,944 $2,132 $2,624 $3,676 $311 $7,753
---------- ---------- ---------- ---------- ---------- -------- --------
$1,276,818 $1,328,695 $1,222,802 $1,491,701 $1,764,348 $373,950 $526,530
---------- ---------- ---------- ---------- ---------- -------- --------
Income before premium and
income taxes $121,608 $47,698 $27,414 $105,865 $123,113 $8,927 $78,519
Premium taxes $17,617 $15,453 $13,627 $16,676 $16,904 $4,161 $4,154
---------- ---------- ---------- ---------- ---------- -------- --------
Income before income taxes $103,991 $32,245 $13,787 $89,189 $106,209 $4,766 $74,365
Income taxes $41,900 $13,300 $6,200 $35,600 $41,500 $1,900 $29,400
---------- ---------- ---------- ---------- ---------- -------- --------
Income before cumulative
effect of a change in
accounting for income taxes $62,091 $18,945 $7,587 $53,589 $64,709 $2,866 $44,965
Cumulative effect of a
change in accounting for
income taxes $4,200 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- -------- --------
Net income $66,291 $18,945 $7,587 $53,589 $64,709 $2,866 $44,965
========== ========== ========== ========== ========== ======== ========
EARNINGS PER SHARE DATA:*
Basic $3.89 $1.10 $0.44 $3.12 $3.73 $0.17 $2.57
Diluted $3.89 $1.10 $0.44 $3.09 $3.64 $0.16 $2.49
===== ===== ===== ===== ===== ===== =====
</TABLE>
<TABLE>
December 31, March 31,
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and invested assets $359,127 $368,999 $340,089 $364,620 $411,014 $435,948
Total assets $786,448 $828,649 $873,778 $979,794 $1,168,144 $1,298,955
Notes and contracts payable $85,022 $89,600 $77,206 $71,257 $41,973 $39,149
Guaranteed preferred
beneficial interest in the
Company's junior
subordinated deferrable
interest debentures -- -- -- -- $100,000 $100,000
Total stockholders' equity $283,718 $292,110 $302,767 $352,465 $411,412 $463,349
OTHER DATA:
Loss ratio 9.1% 8.1% 7.4% 5.5% 4.9% 4.9%
Ratio of debt to total
capitalization** 21.5% 22.1% 19.1% 16.0% 7.3% 5.9%
Cash dividends per share $0.34 $0.40 $0.40 $0.46 $0.51 $0.15
<FN>
* Based upon the weighted average number of common shares outstanding.
** Capitalization includes minority interests and junior subordinated
deferrable interest debentures.
</FN>
</TABLE>
Data Tree Selected Historical Financial Data
The summary below should be read in connection with the financial
information beginning on page F-1 of this Prospectus/Proxy Statement.
<TABLE>
<CAPTION>
Year Ended September 30, Six Months Ended
March 31,
--------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
INCOME DATA:
Net Sales $1,930,647 $3,407,032 $4,564,818 $7,470,333 $8,375,982 $3,819,998 $4,626,394
Gross Profit $1,342,346 $2,685,532 $3,303,234 $5,486,108 $6,080,872 $2,815,273 $3,151,763
Income from
Operations $765,471 $824,029 $1,254,708 $2,771,283 $3,257,530 $1,522,724 $1,248,721
Net Income $413,505 $335,510 $529,251 $1,371,913 $1,770,402 $752,135 $637,427
EARNINGS PER SHARE
DATA:* $0.08 $0.07 $0.10 $0.21 $0.25 $0.11 $0.09
September 30, March 31,
-----------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash and cash
equivalents $727,067 $199,730 $478,098 $641,848 $1,746,777 $497,052
Total assets $4,059,547 $7,625,342 $11,178,507 $14,762,259 $21,257,627 $21,125,377
Notes payable, less
current portion $1,500,000 $4,500,000 $6,369,426 $6,895,373 $7,400,000 $6,250,000
Total shareholders'
equity $1,000,622 $1,335,932 $1,865,183 $3,937,096 $7,291,528 $7,928,955
<FN>
* Calculated based on the number of shares reported to be issued and
outstanding on the Data Tree Balance Sheet (5,125,000 in 1993; 5,125,000 in
1994; 5,125,000 in 1995; 6,406,250 in 1996; 7,039,830 in 1997; 7,039,830
for the six months ended March 31, 1998 and 1997).
</FN>
</TABLE>
Company, Experian and Data Tree
Unaudited Pro Forma Selected Combined Financial Data
The following pro forma combined financial data gives effect to the joint
venture with Experian Information Solutions, Inc. ("Experian") and the
acquisition of Data Tree. See "The First American Financial Corporation -
Business Segments." The pro forma combined financial data includes the effects
of the joint venture with Experian because immediately following consummation of
the Merger, the Data Tree business will be combined with the Digistar business
already owned as part of the joint venture between the Company and Experian and
certain balances on these statements would be different if Experian was not
included. The business combination with Experian and the acquisition of Data
Tree have been accounted for by the purchase method and reflect adjustments as
if the transaction occurred on January 1, 1997, for income statement purposes
and December 31, 1997, for balance sheet purposes.
The pro forma selected financial data is not intended to be indicative of
the financial condition or results of operations that would have been reported
if the transactions had occurred on the dates specified. The pro forma combined
income statement does not reflect cost savings related to economies of scale
that the Company's management believes will be realized as a result of the
transactions. The pro forma combined balance sheet includes all allocations of
the Purchase Price to certain acquired assets and liabilities based on their
fair values. Final allocation of the Purchase Price is subject to valuations and
other studies that are not yet complete.
<PAGE>
Pro Forma Combined Balance Sheet:
($ in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1997 1997 PRO FORMA PRO FORMA
FIRST AMERICAN EXPERIAN DATA TREE ADJUSTMENTS COMBINED
-------------- ----------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $181,531 $697 $1,747 - $183,975
Accounts and accrued income receivable $128,017 $15,362 $1,342 - $144,721
Investments
Deposits with savings and loan
associations and banks $29,029 - - - $29,029
Debt securities $151,503 - - - $151,503
Equity securities $13,904 - - - $13,904
Other long-term investments $35,047 - - - $35,047
---------- ----------
$229,483 - - - $229,483
Loans receivable $63,378 - - - $63,378
Property and equipment, net $200,377 $22,773 $3,587 (1)(2) $9,360 $236,097
Title plants and other indexes $100,626 $13,765 (1)(2)$71,331 $185,722
Assets acquired in connection with
claim settlements $21,119 - - - $21,119
Deferred income taxes $31,563 - ($2,568) - $28,995
Goodwill and other intangibles $132,361 - - - $132,361
Deferred policy acquisition costs $25,016 - - - $25,016
Other assets $54,673 $1,449 $817 - $56,939
---------- ------- ------- ----------
$1,168,144 $40,281 $18,690 $80,691 $1,307,806
========== ======= ======= ======= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits $62,475 - - - $62,475
Accounts payable and accrued
liabilities:
Accounts payable $12,220 $2,878 $490 $15,588
Salaries and other personnel costs $55,973 $2,035 - - $58,008
Pension costs $39,431 - - - $39,431
Other $60,509 $8,349 $1,090 - $69,948
---------- ------- ------- ----------
$168,133 $13,262 $1,580 - $182,975
Deferred revenue $104,124 $6,312 - - $110,436
Reserve for known and incurred but
not reported claims $250,826 - - - $250,826
Income taxes payable $3,987 - $218 - $4,205
Notes and contracts payable $41,973 $1,107 $9,600 - $52,680
Minority interests in consolidated
subsidiaries $25,214 - - (1)(2)$32,134 $57,348
Guaranteed preferred beneficial
interests in Company's junior
subordinated deferrable interest
debenture $100,000 - - - $100,000
Stockholders' equity:
Common Stock $17,374 - $2,421 (2) ($1,779) $18,016
Additional paid-in capital $43,953 - - (2) $42,358 $86,311
Retained earnings $344,645 $19,600 $4,871 (1)(2) $7,978 $ 377,094
Net unrealized gain on securities $5,440 $5,440
---------- ------- ------- ------- ----------
$411,412 $19,600 $7,292 $48,557 $486,861
---------- ------- ------- ------- ----------
$1,168,144 $40,281 $18,690 $80,691 $1,307,806
========== ======= ======= ======= ==========
<FN>
_____________________
(1) A pro forma adjustment has been made to reflect the joint venture with
Experian reflecting the allocation of the Purchase Price to certain
acquired assets and recognition of the minority interest liability
associated with the transaction. The pro forma adjusting entry is as
follows (in thousands):
Debit Credit
------- --------
Retained Earnings $19,600
Title Plant $40,000
Property and Equipment, net $ 3,525
Minority Interest Liability $30,676
Retained Earnings $32,449
(2) A pro forma adjustment has been made to reflect (i) the issuance of 641,791
shares of Stock (which assumes that the Purchase Price will equal
$43,000,000 and that the average of the last reported sales price on one
share of the Stock for the twenty consecutive Trading Days prior to the
Data Tree Special Meeting is $67.00) to acquire 7,039,830 shares of Data
Tree Stock and (ii) the 20% interest R. Squared Limited, an entity created
by Chopra, will receive in NEWCO (as defined below), to which the assets
and liabilities of Data Tree will be transferred after the Merger. The pro
forma adjusting entry is as follows (in thousands):
Debit Credit
------- --------
Title Plant $31,331
Property and Equipment, net $ 5,835
Common Stock $ 2,421 $ 642
Retained Earnings $ 4,871
Paid-in Capital $42,358
Minority Interest Liability $ 1,458
</FN>
</TABLE>
Pro Forma Combined Income Statement
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
12 MONTHS ENDED 12 MONTHS ENDED 12 MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1997 SEPTEMBER 30, 1997 PRO FORMA PRO FORMA
FIRST AMERICAN EXPERIAN DATA TREE ADJUSTMENTS COMBINED
----------------- ----------------- ------------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues
Operating Revenues $1,860,205 $92,687 $8,376 $1,961,268
Investment and other income $27,256 $61 $88 $27,405
---------- ------- ------ ----------
$1,887,461 $92,748 $8,464 $1,988,673
---------- ------- ------ ----------
Expenses
Salaries and other personnel costs $647,750 $6,411 $2,031 $656,192
Premiums retained by agents $563,137 $563,137
Other operating expenses $411,319 $79,872 $2,400 $493,591
Provision for title losses and
other claims $90,323 $90,323
Depreciation and amortization $38,149 $5,791 $696 (1) $2,340 $46,976
Interest $9,994 $30 $386 $10,410
Minority interest $3,676 (2)$12,711 $16,387
---------- ------- ------ ------- ----------
$1,764,348 $92,104 $5,513 $15,051 $1,877,016
---------- ------- ------ ------- ----------
Income before premium and income taxes $123,113 $644 $2,951 ($15,051) $111,657
Premium taxes $16,904 $16,904
---------- ------- ------ ------- ----------
Income before income taxes $106,209 $644 $2,951 ($15,051) $94,753
Income taxes $41,500 $1,180 (3)($5,945) $36,735
---------- ------- ------ ------- ----------
Net income $64,709 $644 $1,771 ($9,106) $58,018
========== ======= ====== ======= ==========
Pro forma earnings per share:
Basic $3.73 $3.22
===== =====
Diluted $3.64 $3.15
===== =====
Pro forma weighted average shares:
Basic 17,362,000 18,004,000
========== ==========
Diluted 17,785,000 18,427,000
========== ==========
<FN>
____________________________
(1) Pro forma adjustments have been made to the pro forma combined income
statement to reflect the joint venture arrangement with Experian and the
Merger as if both transactions had occurred as of January 1, 1997. This pro
forma adjustment includes recognition of amortization of capitalized
software related to the Experian joint venture and the Merger over an
estimated useful life of 4 years.
(2) Pro forma adjustments have been made to the pro forma combined income
statement to reflect the joint venture arrangement with Experian and the
Merger as if both transactions had occurred as of January 1, 1997. This pro
forma adjustment includes minority interest expense of $12,073,000 related
to the Experian joint venture and $638,000 related to the Merger.
(3) Pro forma adjustments have been made to the pro forma combined income
statement to reflect the joint venture arrangement with Experian and Merger
as if both transactions had occurred as of January 1, 1997. This pro forma
adjustment includes the related tax effects of the Merger.
</FN>
</TABLE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical and pro forma per share
data of the Company and Data Tree. This data should be read in conjunction with
the selected historical financial data and the separate historical consolidated
financial statements of the Company and Data Tree and the notes thereto included
elsewhere in this Prospectus/Proxy Statement or incorporated herein.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
1997 (1)
----
NET INCOME PER SHARE:
Company Basic $3.73
Company Diluted $3.64
Company Pro Forma Basic (Data Tree only) $3.62
Company Pro Forma Diluted (Data Tree only) $3.54
Company Pro Forma Basic (including Data Tree and Experian) $3.22
Company Pro Forma Diluted (including Data Tree and Experian) $3.15
Data Tree $0.25 (2)
Data Tree Equivalent Pro Forma $0.32 (6)
Data Tree Equivalent Pro Forma (including Experian) $0.29 (6)
CASH DIVIDENDS DECLARED PER SHARE:
Company $0.51
Data Tree $0.00
Data Tree Equivalent Pro Forma $0.05 (6)
BOOK VALUE PER SHARE:
Company $23.68 (3)
Company Pro Forma (Data Tree only) $25.24
Company Pro Forma (Data Tree and Experian) $27.04 (5)
Data Tree $1.04 (4)
Data Tree Equivalent Pro Forma $2.30 (6)
Data Tree Equivalent Pro Forma (including Experian) $2.47 (6)
<FN>
________________________
(1) Determined by using the twelve months or period ended December 31, 1997 for
the Company and Experian and the twelve months or period ended September
30, 1997 for Data Tree.
(2) Determined by dividing Data Tree's net income reported on its Statements of
Income by the number of shares of Data Tree Stock issued and outstanding on
September 30, 1997 (7,039,830).
(3) Determined by dividing the Company's total shareholders' equity reported on
its Balance Sheet (rounded to the nearest thousand) by the number of shares
of Stock issued and outstanding on December 31, 1997 (17,374,000).
(4) Determined by dividing Data Tree's total shareholders' equity reported on
its Balance Sheet by the number of shares of Data Tree Stock issued and
outstanding on September 30, 1997 (7,039,830).
(5) Determined by dividing the pro forma stockholders' equity reported above
($486,861,000) by the pro forma weighted average shares reported above
(18,004,000).
(6) The Data Tree equivalent pro forma combined per share amounts are
calculated by multiplying the Company pro forma combined per share amounts
by .0912, which represents the fraction of a share of Stock each Data Tree
shareholder will receive for each share of Data Tree Stock converted in the
Merger (assuming there are no Dissenting Shareholders (as defined below))
if the closing price of the Stock on April 28, 1998 ($67.00) is used to
determine the Purchase Price and Surplus Expenses equal $113,373; under
these assumptions the Purchase Price equals $43,000,000 and 641,791 shares
of the Stock would be issued in the Merger.
</FN>
</TABLE>
<PAGE>
MARKET PRICE INFORMATION
Shares of Data Tree Stock are not traded on an established public market.
Shares of the Stock have traded on the New York Stock Exchange under the
symbol "FAF" since December 3, 1993. The following table sets forth the range of
high and low sale prices reported on the New York Stock Exchange for the Stock
for the calendar quarters indicated (share prices have been adjusted to reflect
a three-for-two stock split, effective January 16, 1998):
HIGH LOW
1994
First Quarter $25.00 $20.67
Second Quarter $20.42 $15.42
Third Quarter $16.33 $13.50
Fourth Quarter $13.66 $10.67
1995
First Quarter $13.75 $11.17
Second Quarter $17.00 $12.75
Third Quarter $16.92 $15.17
Fourth Quarter $18.25 $14.50
1996
First Quarter $21.33 $16.75
Second Quarter $22.50 $16.59
Third Quarter $23.83 $19.50
Fourth Quarter $27.42 $22.42
1997
First Quarter $29.75 $25.08
Second Quarter $26.58 $20.92
Third Quarter $40.21 $26.00
Fourth Quarter $49.25 $39.83
1998
First Quarter $69.00 $48.25
On March 30, 1998, the last trading day prior to the public announcement by
the Company and Data Tree that they had reached an agreement concerning the
Merger, the closing price of a share of the Stock as reported by the New York
Stock Exchange was $62.94 per share. As of May 1, 1998 there were approximately
3,109 shareholders of record of the Stock. The Company pays cash dividends
quarterly and in each quarter for the previous five years has paid a cash
dividend. For the annual total of such cash dividends, see "Summary - Selected
Historical and Pro Forma Financial Data."
The total number of shares Stock to be received by the Data Tree
shareholders will not be fixed until the trading day immediately preceding the
Data Tree Special Meeting (the "Determination Date"), which is anticipated to be
one or two days prior to the Effective Time. Therefore, through the
Determination Date, changes in the market price of the Stock will affect the
fraction of a share of Stock to be received by the Data Tree shareholders in the
Merger. Once the exchange ratio is fixed, changes in the market price of the
Stock will affect the dollar value of the Stock to be received by the Data Tree
shareholders in the Merger. Following the Effective Time, the value of the Stock
received by the former Data Tree shareholders will be subject to market
fluctuations due to factors that may be outside the control of the Company. Data
Tree shareholders are urged to obtain current market quotations for the Stock
prior to the Data Tree Special Meeting.
Following the Merger, the Stock will continue to be traded on the New York
Stock Exchange under the symbol "FAF."
RISK FACTORS
In addition to the other information contained in this Prospectus/Proxy
Statement and incorporated by reference herein, Data Tree shareholders should
consider carefully the following risk factors in evaluating whether to approve
the Merger Proposal and thereby become holders of the Stock. To the extent any
of the information contained or incorporated by reference in this
Prospectus/Proxy Statement constitutes a "forward-looking statement" as defined
in Section 21E(i)(1) of the Exchange Act, the risk factors set forth below are
cautionary statements identifying important factors that could cause actual
results to differ materially from those in the forward-looking statement.
VOLATILITY OF STOCK PRICE
The market price of the Stock could be subject to significant fluctuations
in response to variations in financial results or announcements of material
events by the Company or its competitors. Regulatory changes, developments in
the real estate services industry or changes in general conditions in the
economy or the financial markets could also adversely affect the market price of
the Stock.
CYCLICAL NATURE OF REAL ESTATE MARKET
Substantially all of the Company's title insurance, tax monitoring, credit
reporting, flood zone determination and property information business results
from resales and refinancings of real estate, including residential and
commercial properties, and from the construction and sale of new properties. The
Company's home warranty business results from residential resales and does not
benefit from refinancings or commercial transactions. Resales and refinancings
of residential properties constitute the major source of the Company's revenues.
Real estate activity is cyclical in nature and is affected greatly by the cost
and availability of long-term mortgage funds. Real estate activity and, in turn,
the Company's revenue base, can be adversely affected during periods of high
interest rates and/or limited money supply. However, this adverse effect is
mitigated in part by the continuing diversification of the Company's operations
into areas outside of its traditional title insurance business.
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
As a key component of its growth strategy, the Company has pursued and is
pursuing acquisitions in the real estate-related financial services industry.
Certain risks are inherent in an acquisition strategy, such as increasing
leverage and debt service requirements and combining disparate company cultures
and facilities, which could adversely affect the Company's operating results.
The success of any completed acquisition will depend in part on the Company's
ability to integrate effectively the acquired businesses into the Company. This
process may involve unforeseen difficulties and may require a disproportionate
amount of management's attention and the Company's financial and other
resources. No assurance can be given that additional suitable acquisition
candidates will be identified, financed and purchased on acceptable terms, or
that recent acquisitions or future acquisitions, if completed, will be
successful.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent upon the continued services of the
Company's senior management, particularly its President, Parker S. Kennedy, its
Chairman and Director, D.P. Kennedy, and its Executive Vice President and Chief
Financial Officer, Thomas A. Klemens. The loss of the services of any of these
individuals could have a material adverse effect on the Company's financial
position and results of operations. The Company's success also depends on its
ability to attract and retain other highly qualified managerial personnel.
YEAR 2000 COSTS
Currently, many computer systems and software products are coded to accept
only two digit entries in the date code field. These date code fields will need
to accept four digit entries to distinguish 21st century dates from 20th century
dates. As a result, many companies' software and computer systems may need to be
upgraded or replaced in order to comply with such "Year 2000" requirements. The
Company and third parties with which the Company does business rely on numerous
computer programs in their day to day operations. The Company is evaluating the
Year 2000 issue as it relates to the Company's internal computer systems and
third party computer systems with which the Company interacts. The Company
expects to incur internal staff costs as well as consulting and other expenses
related to these issues; these costs will be expensed as incurred. In addition,
the appropriate course of action may include replacement or an upgrade of
certain systems or equipment at a substantial cost to the Company. There can be
no assurance that the Year 2000 issues will be resolved in 1998 or 1999. The
Company may incur significant costs in resolving its Year 2000 issues. If not
resolved, this issue could have a significant adverse impact on the Company's
operations.
GOVERNMENT REGULATION
The title insurance industry is subject to extensive governmental
regulation. Applicable laws and their interpretation vary from state to state
and are enforced with broad discretion. There can be no assurance that any
review of the Company's operations and business relationships by courts or other
regulatory authorities will not result in determinations that could adversely
affect the Company or that the regulatory environment will not change to
restrict the Company's existing or future operations.
THE DATA TREE SPECIAL MEETING
This Prospectus/Proxy Statement contains certain information set forth more
fully in the Merger Agreement attached hereto as Annex A and is qualified in its
entirety by reference to the Merger Agreement, which is hereby incorporated by
reference. The Merger Agreement, including any schedule or exhibit thereto, and
this Prospectus/Proxy Statement should be read carefully by each Data Tree
shareholder in deciding whether to vote to approve the Merger Proposal.
GENERAL
This Prospectus/Proxy Statement is being furnished to holders of Data Tree
Stock in connection with the solicitation of proxies by the Data Tree board of
directors for use at the Data Tree Special Meeting to be held on June 1, 1998 at
550 West "C" Street, Suite 2040, San Diego, California 92101, commencing at 9:00
a.m., California Time, and at any adjournments or postponements thereof.
This Prospectus/Proxy Statement and the accompanying forms of proxies are
first being mailed to Data Tree shareholders on or about May 22, 1998.
MATTERS TO BE CONSIDERED AT THE MEETING
At the Data Tree Special Meeting, holders of Data Tree Stock will consider
and vote upon a proposal to approve and adopt the Merger Proposal and any motion
to adjourn the Data Tree Special Meeting to a later date to permit further
solicitation of proxies if necessary to establish a quorum or to obtain
additional votes, or any adjournments or postponements thereof.
RECOMMENDATION OF THE DATA TREE BOARD OF DIRECTORS
The Data Tree board of directors has unanimously approved the Merger
Agreement and the Merger and believes that the terms of the Merger Agreement are
fair to, and that the Merger is in the best interests of, Data Tree and its
shareholders. The Data Tree board of directors therefore recommends that the
holders of Data Tree Stock vote FOR approval of the Merger Proposal.
RECORD DATE; QUORUM
The Data Tree board of directors has fixed the close of business on May 15,
1998 as the record date for determining holders entitled to notice of and to
vote at the Data Tree Special Meeting. Only shareholders of record of Data Tree
on the Record Date will be entitled to notice of and to vote at the Data Tree
Special Meeting. On the Record Date, there were 27 Data Tree shareholders of
record and 7,039,830 shares of Data Tree Stock issued, outstanding and entitled
to one vote in person or by proxy. Each holder of record of shares of Data Tree
Stock on the Record Date is entitled to vote at the Data Tree Special Meeting.
The presence, in person or by a properly executed proxy, of a majority of
the issued and outstanding shares of Data Tree Stock is necessary to constitute
a quorum at the Data Tree Special Meeting.
Under California law, the approval and adoption of the Merger Agreement by
Data Tree shareholders requires the affirmative vote of at least two-thirds of
the issued and outstanding shares of Data Tree Stock entitled to vote at the
Data Tree Special Meeting. The Merger Agreement provides, however, that for the
Data Tree shareholders to approve the Merger Agreement, (i) no share of Data
Tree Stock may be voted against approval of the Merger Proposal and (ii) the
period during which any Data Tree shareholder who or which failed to vote in
favor of the Merger has the right to perfect dissenters' rights under California
law shall have expired or the shareholder shall have waived such right. If any
Data Tree shareholder fails to vote for the approval of the Merger Proposal, the
Effective Time may be delayed by more than 30 days to determine whether such
Data Tree shareholder will waive or perfect dissenters' rights.
EFFECTS OF ABSTENTIONS
At the Data Tree Special Meeting, in determining whether the proposal to
approve the Merger Proposal has received the requisite number of affirmative
votes, abstentions will have the same effect as a vote against such proposal.
Abstentions will be counted for purposes of determining the presence of a
quorum.
ADJOURNMENT OF THE DATA TREE SPECIAL MEETING
In the event that there are insufficient votes to approve the Merger
Proposal at the time of the Data Tree Special Meeting, such proposal could not
be approved unless the Data Tree Special Meeting were adjourned in order to
permit further solicitation of proxies from Data Tree shareholders. Proxies that
are being solicited by the Data Tree board of directors grant the discretionary
authority to vote for any such adjournment. If it is necessary to adjourn the
Data Tree Special Meeting, and such adjournment is for a period of less than 30
days, no notice of the time and place of the adjourned meeting is required to be
given to Data Tree shareholders other than an announcement of such time and
place at the Data Tree Special Meeting. A majority of the voting power
represented and voting at the Data Tree Special Meeting is required to approve
any such adjournment whether or not a quorum is present at the Data Tree Special
meeting.
DISSENTERS' RIGHTS
If the Merger Agreement is approved by the required vote of Data Tree
shareholders and is not abandoned or terminated, holders of Data Tree Stock who
did not vote in favor of the Merger may, by complying with Sections 1300 through
1312 of the CGCL, be entitled to dissenters' rights as described therein. The
record holders of the shares of Data Tree Stock that are eligible to, and do,
exercise their dissenters' rights with respect to the Merger are referred to
herein as "Dissenting Shareholders," and the shares of stock with respect to
which they exercise dissenters' rights are referred to herein as "Dissenting
Shares."
The following discussion is not a complete statement of the CGCL relating
to dissenters' rights, and is qualified in its entirety by reference to Sections
1300 through 1312 of the CGCL attached to this Prospectus/Proxy Statement as
Annex B hereto and incorporated herein by reference. This discussion and
Sections 1300 through 1312 of the CGCL should be reviewed carefully by any
holder who wishes to exercise statutory dissenters' rights or wishes to preserve
the right to do so, since failure to comply with the required procedures will
result in the loss of such rights.
Shares of Data Tree Stock must satisfy each of the following requirements
to qualify as Dissenting Shares under the CGCL: (i) the shares of Data Tree
Stock must have been outstanding on the Record Date; (ii) the shares of Data
Tree Stock must not have been voted in favor of the Merger; (iii) the holder of
such shares of Data Tree Stock must make a written demand that Data Tree
repurchase such shares of Data Tree Stock at fair market value (as described
below); and (iv) the holder of such shares of Data Tree Stock must submit
certificates for endorsement (as described below). A vote by proxy or in person
against the Merger does not in and of itself constitute a demand for appraisal
under the CGCL.
Pursuant to Sections 1300 through 1312 of the CGCL, holders of Dissenting
Shares may require Data Tree to repurchase their Dissenting Shares at a cash
price equal to the fair market value of such shares determined as of the day
before the first announcement of the terms of the Merger, excluding any
appreciation or depreciation as a consequence of the proposed Merger, but
adjusted for any stock split, reverse stock split or stock dividend that becomes
effective thereafter.
Within ten days following approval of the Merger by Data Tree shareholders,
Data Tree is required to mail to each holder of shares of Data Tree Stock not
voted in favor of the Merger a notice of the approval of the Merger, a statement
of the price determined by Data Tree to represent the fair market value of
Dissenting Shares (which shall constitute an offer by Data Tree to purchase such
Dissenting Shares at such stated price) and a description of the procedures for
such holders to exercise their rights as Dissenting Shareholders.
Within 30 days after the date on which the notice of the approval of the
Merger by the outstanding shares is mailed to Dissenting Shareholders, a
Dissenting Shareholder must demand that Data Tree repurchase such shareholder's
Dissenting Shares in a statement setting forth the number and class of
Dissenting Shares held of record by such Dissenting Shareholder that the
Dissenting Shareholder demands that Data Tree purchase, and a statement of what
the Dissenting Shareholder claims to be the fair market value of the Dissenting
Shares as of the day before the announcement of the proposed Merger. The
statement of fair market value in this demand constitutes an offer by the
Dissenting Shareholder to sell the Dissenting Shares at the specified price
within such 30-day period. In conjunction with such demand, the Dissenting
Shareholder must also submit to Data Tree or its transfer agent for endorsement
the certificate or certificates representing the Dissenting Shares that the
Dissenting Shareholder demands Data Tree purchase.
If upon the Dissenting Shareholder's surrender of the certificates
representing the Dissenting Shares, Data Tree and a Dissenting Shareholder agree
upon the price to be paid for the Dissenting Shares and agree that such shares
are Dissenting Shares, then the agreed price must be paid to the Dissenting
Shareholder within the later of 30 days after the date of such agreement or 30
days after any statutory or contractual conditions to the consummation of the
Merger are satisfied or waived.
If Data Tree and a Dissenting Shareholder disagree as to the price for such
Dissenting Shares or disagree as to whether such shares are entitled to be
classified as Dissenting Shares, such holder has the right to bring an action in
California Superior Court, within six months after the date on which the notice
of the approval of the Merger by Data Tree shareholders is mailed, to resolve
such dispute. In such action, the court will determine whether the shares of
Data Tree Stock held by such shareholder are Dissenting Shares, the fair market
value of such shares of Data Tree Common Stock, or both. The CGCL provides,
among other things, that a Dissenting Shareholder may not withdraw the demand
for payment of the fair market value of Dissenting Shares unless Data Tree
consents to such request for withdrawal.
PROXIES
This Prospectus/Proxy Statement is being furnished to Data Tree
shareholders in connection with the solicitation of proxies by and on behalf of
the Data Tree board of directors for use at the Data Tree Special Meeting. All
shares of Data Tree Stock which are entitled to vote and are represented at the
Data Tree Special Meeting by properly executed proxies received prior to or at
the Data Tree Special Meeting and before the occurrence of the vote, and not
revoked, will be voted at the Data Tree Special Meeting in accordance with the
instructions indicated on such proxies. If no instructions are indicated, such
proxies will be voted FOR approval and adoption of the Merger and the Merger
Agreement.
If any other matters are properly presented for consideration at the Data
Tree Special Meeting, including, among other things, consideration of a motion
to adjourn the Data Tree Special Meeting (including, without limitation, for
purposes of soliciting additional proxies) to another time and/or place, the
persons named in the enclosed form of proxy and acting thereunder will have
discretion to vote on such matters in accordance with their best judgment.
The person named as proxy is an officer of Data Tree. Any proxy given
pursuant to this Prospectus/Proxy Statement may be revoked by the person giving
it at any time before it is voted. Proxies may be revoked by (i) filing with the
Secretary of Data Tree, at or before the taking of the vote at the Data Tree
Special Meeting, a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a later dated proxy relating to the same shares and
delivering it to the Secretary of Data Tree before the taking of the vote at the
Data Tree Special Meeting or (iii) attending the Data Tree Special Meeting and
voting in person (although attendance at the Data Tree Special Meeting will not
in and of itself constitute a revocation of a proxy). Any written notice of
revocation or subsequent proxy should be sent to Data Tree Corporation, 550 West
"C" Street, Suite 2040, San Diego, California 92101, Attention: Secretary, or
hand delivered to the Secretary of Data Tree at or before the taking of the vote
at the Data Tree Special Meeting.
All expenses relating to this Prospectus/Proxy Statement, including the
cost of preparing and mailing this Prospectus/Proxy Statement, will be borne by
the Company. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of Data Tree in person or by
telephone, telegram or other means of communication. Such directors, officers
and employees will not be additionally compensated, but may be reimbursed for
reasonable out-of-pocket expenses in connection with such solicitation.
DATA TREE SHAREHOLDERS SHOULD NOT SEND ANY SHARE CERTIFICATES WITH THEIR
PROXY CARDS.
BENEFICIAL SECURITY OWNERSHIP OF
CERTAIN OWNERS AND MANAGEMENT OF DATA TREE
The following table sets forth certain information regarding the ownership
of Data Tree Stock as of May 15, 1998, by: (i) each person or entity who is
known by Data Tree to beneficially own five percent or more of the outstanding
Data Tree Stock, (ii) each director of Data Tree; (iii) the executive officers
of Data Tree named below; and (iv) all directors and executive officers of Data
Tree set forth below as a group.
<TABLE>
NUMBER OF PERCENT OF DATA TREE
NAME AND ADDRESS SHARES (1) STOCK OWNED (1) (2)
- ---------------- ---------- --------------------
<S> <C> <C>
R. Squared Limited..................................... 3,000,000 42.62%
Cal. West Service Corporation.......................... 1,964,830 27.91%
Harish K. Chopra (3)................................... 565,000 8.03%
Robert F. Rice......................................... 400,000 5.68%
Carl A. Strunk......................................... 10,000 *
Michael D. Reynolds.................................... 0 *
All Directors and Officers as a Group (4 people)....... 975,000 13.85%
<FN>
* Represents beneficial ownership of less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal shareholders. Unless otherwise indicated in the footnotes to this
table and subject to community property laws where applicable, Data Tree
believes that each of the shareholders named in this table has sole voting
and investment power with respect to the shares indicated as beneficially
owned. Applicable percentages are based on 7,039,830 shares outstanding on
May 15, 1998, adjusted as required by rules promulgated by the Commission.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission. Except as indicated in the footnotes to this table and pursuant
to applicable community property laws, each shareholder named in the table
has sole voting and investment power with respect to the shares set forth
opposite such shareholder's name.
(3) Includes 400,000 shares held by Harvindera Chopra, the mother of Harish
Chopra, 5,000 shares held by Ravinder K. Chopra, the brother of Harish
Chopra, 25,000 shares held by Seema Chopra Kapoor, the sister of Harish
Chopra, and 125,000 shares held by Harish K. and Karen Chopra and 10,000
shares of Inteq Software Development Corp. Chopra does not have the legal
right to vote or make investment decisions with respect to the shares held
by his mother, brother and sister and disclaims any beneficial interest
therein.
</FN>
</TABLE>
<PAGE>
THE MERGER
The following discussion of the parties' reasons for the Merger and the
background of the acquisition contains forward-looking statements which involve
risks and uncertainties. The actual results of the Company, Data Tree and the
Surviving Corporation could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus/Proxy Statement.
BACKGROUND OF THE ACQUISITION; REASONS FOR THE MERGER
In the third quarter of 1997, Data Tree began exploring ways to raise
capital to fund the growth of its business, including its planned expansion into
new geographic markets for its Titlescape(R) and IDEA(TM) products. In
connection with its growth objectives, Data Tree retained Salomon Smith Barney
as its financial adviser to assist in examining various strategic alternatives
available to Data Tree. ON September 26, 1997 at a meeting of the Data Tree
board of directors, Chopra, Data Tree's president, described the strategic
alternatives available for the growth of Data Tree and the advice of its
financial adviser, and recommended that Data Tree seek a strategic or financial
buyer to acquire Data Tree. Following discussion, the board of directors
unanimously approved a strategy to privately market Data Tree for sale.
During the fourth quarter of 1997, Data Tree, with Salomon Smith Barney,
prepared a Confidential Memorandum that was sent to potential investors
identified by Salomon Smith Barney. Investors who expressed an interest in
providing equity capital to acquire either a minority or majority interest in
Data Tree under the terms set forth by Data Tree were contacted, and Data Tree's
executive team gave formal management presentations to various potential
investors during December 1997 and January 1998. During the same period, Data
Tree's financial adviser contacted a board member of Experian Information
Solutions, Inc. ("Experian") to determine whether the Company and Experian would
be interested in acquiring Data Tree. Because Data Tree competes with certain
businesses of the Company and Experian, Data Tree did not send them the
Confidential Memorandum at that time.
In late January 1998, Salomon Smith Barney and Chopra contacted Parker S.
Kennedy ("Kennedy"), the Company's president, to discuss the Company's potential
interest in a transaction with Data Tree. Kennedy indicated that he and members
of his management team would be interested in an initial meeting with Chopra to
discuss Chopra's objectives and strategies for pursuing such a transaction.
In early February 1998, Chopra met with Kennedy and Thomas A. Klemens
("Klemens"), Executive Vice President and Chief Financial Officer of the
Company, to discuss the Company's possible acquisition of Data Tree. On February
4, 1998, Data Tree's executive team, led by Chopra, gave the Company's senior
management a formal management presentation at the Company's corporate
headquarters in Santa Ana, California.
On February 11, 1998, Kennedy and Klemens, along with Dennis Gilmore, an
officer of FARES (defined below), Chopra and a representative of Salomon Smith
Barney met at Data Tree's data center in San Bernardino, California to review
the facility and continue discussions regarding the potential acquisition of
Data Tree.
On February 13, 1998, Chopra and a representative of Salomon Smith Barney
met with Kennedy and Klemens. During the meeting, Kennedy and Klemens presented
proposed terms for the Company's acquisition of Data Tree.
After further discussions between Kennedy and Chopra, Kennedy and Chopra
jointly agreed that the Company would pursue the acquisition of Data Tree by
merger subject to agreement on terms and conditions and approval by each
company's board of directors and the Data Tree shareholders.
From February 20, 1998 through March 27, 1998, representatives of the
Company and Data Tree, along with respective legal counsel for the companies
negotiated the structure of the transaction and the terms and conditions of the
proposed Merger Agreement. During this time the Company and Chopra, together
with their respective legal advisors, negotiated the related party transactions.
On February 26, 1998, the board of directors of the Company, believing that
the Merger (i) would enhance and eliminate certain costs associated with its
existing recorded real estate document imaging and storage business and (ii) was
generally in the best interest of the Company's shareholders, authorized the
officers of the Company to pursue the Merger.
During March and April of 1998, the Company conducted due diligence.
On March 20, 1998, the board of directors of Data Tree, along with counsel
to Data Tree, met to discuss the principal terms and conditions of the proposed
Merger Agreement and the related party transactions; and on March 23, 1998, the
board of directors of Data Tree, along with counsel to Data Tree, again met to
discuss the Merger Agreement and related party transactions. Following extensive
discussion, at the March 23 meeting, the board of directors of Data Tree
unanimously approved the principal terms of the Merger Agreement and authorized
management to complete the negotiations and execute the Merger Agreement
consistent with the terms discussed at the meeting.
On March 27, 1998, Data Tree, Chopra, IAC and the Company entered into the
Merger Agreement.
RECOMMENDATION OF THE DATA TREE BOARD OF DIRECTORS
The board of directors of Data Tree has unanimously approved the Merger
Agreement and recommends that the Data Tree shareholders approve and adopt the
Merger Agreement and the Merger. See "-Background of the Acquisition; Reasons
for the Merger."
INTERESTS OF DIRECTORS, OFFICERS AND EMPLOYEES IN THE MERGER
As of May 1, 1998, certain directors and executive officers of Data Tree,
and their affiliates, held or may be deemed to have held 975,000 shares of Data
Tree Stock directly or beneficially, representing 13.85% of the outstanding
shares of Data Tree Stock.
As of May 1, 1998, certain directors and executive officers of the
Company, and their affiliates, held or may be deemed to have held 1,239,941
shares of Stock directly or beneficially, representing 6.9% of the outstanding
shares of the Company.
The Merger Agreement obligates Chopra to vote all Shares of Data Tree Stock
either owned or controlled by him in favor of the Merger. Chopra owns or
controls 565,000 shares of Data Tree Stock, representing approximately 8.03% of
the shares of Data Tree Stock issued and outstanding.
Carl Strunk, a director and shareholder of Data Tree, is the Executive Vice
President, Finance of Fidelity and a Vice President of Cal West Service
Corporation, a major shareholder of Data Tree and a wholly-owned subsidiary of
Fidelity.
General. As described below, one or more of the directors and the executive
officers of Data Tree have interests in the Merger and the transactions
contemplated following the Merger in addition to any interest they may have as
shareholders of Data Tree generally. These interests include, among others,
ownership interests in a joint venture to be created following the Merger, a
supply agreement, employee benefits and director and officer indemnification
agreements described below. Data Tree's board of directors was aware of the
interests of all such persons at the time it approved the Merger Agreement. For
a more complete description of these interests, refer to Exhibits A through H,
inclusive, of the Merger Agreement included in Annex A hereto.
Joint Venture; Noncompetition Agreement. Following the Merger, the Data
Tree business will be combined with the Digistar business already owned by an
affiliate of the Company and will be conducted through a joint venture which
will use the name "Data Tree LLC." Like Data Tree, Digistar is engaged in the
business of imaging real estate records and delivering images to its customers.
The Digistar business is valued at approximately $3,500,000. R. Squared
Limited, an Irish company ("R2"), will own 20% of the membership interests of
the joint venture. R2, which owns 42.6% of the Data Tree Stock as of the Record
Date, was established by Chopra, who serves as Data Tree's President and
Chairman of the Board. Chopra disclaims any beneficial interest in R2.
Immediately following consummation of the Merger, pursuant to the
Contribution and Joint Venture Agreement (filed as Exhibit C to the Merger
Agreement and incorporated herein by reference) (i) the Company has agreed to
contribute all of the Surviving Corporation's capital stock to FAREISI, (ii)
FAREISI has agreed to cause the Surviving Corporation to contribute all of its
assets and liabilities to First American Real Estate Solutions LLC ("FARES"), a
joint venture limited liability company, 80% of the membership interests of
which are owned by FAREISI and certain of FAREISI's subsidiaries and 20% of the
membership interests of which are owned by Experian and (iii) FARES has agreed
to contribute all of the assets and liabilities of the Surviving Corporation and
certain assets and liabilities of the Digistar business to Data Tree LLC, a
newly formed California limited liability company ("NEWCO"). In addition, prior
to the Merger, the Company will contribute cash in an amount equal to the sum of
the Surplus Expenses (as defined in the Merger Agreement) and $486,627 to IAC.
Following the Merger, such cash will form part of the Surviving Corporation's
assets.
R2 will be credited with a 1.893% membership interest in NEWCO (valued at
$1,150,000) in exchange for R2 and Harish Chopra entering into a Noncompetition
Agreement immediately following the consummation of the Merger. Under the
Noncompetition Agreement (filed as Exhibit F to the Merger Agreement and
incorporated herein by reference), R2 and Chopra have agreed for a period of
seven years not to engage in any activity in and substantially competitive with
the Data Tree or Digistar businesses, including the automation and
digitalization of any public records of county recorders or the official
recordkeeper for any county or equivalent political subdivision and the
providing of digitized information to any person or entity.
R2 also will purchase an 18.107% membership interest in NEWCO in exchange
for a promissory note in the principal amount of $11,000,000, bearing interest
at 8% per annum. The promissory note is payable in ten equal quarterly payments
of $1,224,592 each, and is secured by 90% of R2's membership interests in NEWCO.
R2 has the right to offset payments due to R2 under the Supply Agreement
described below against R2's payment obligations under the note. Pursuant to the
Employment Agreement described below, Chopra will serve as the President of
NEWCO.
Under the terms of the Contribution and Joint Venture Agreement, R2 may
sell or be required to sell its membership interests in NEWCO at a formula price
based upon an amount equal to 15 times NEWCO's adjusted earnings, as defined
in the agreement. During the period from
March 31, 2001 until March 30, 2002, R2 shall have the right to put, and the
Company shall have the right to call, 33-1/3% of R2's membership interests in
NEWCO for the formula exercise price described above. If during the first
put/call period, no membership interests are sold, then R2 shall have the right
to put, and the Company shall have the right to call, 66-2/3% of R2's membership
interests during the period from March 31, 2002 to March 30, 2003. However, if
during the first put/call period, R2 has sold 33-1/3% of its membership
interests, then R2 shall have the right to put, and the Company shall have the
right to call, 50% of R2's remaining membership interests during the second
put/call period. During the period from March 31 2003 until March 31, 2005, R2
shall have the right to put, and the Company shall have the right to call, 100%
of R2's membership interests. If the put or call option is not fully exercised
by the last business day immediately preceding March 31, 2005, then the call
shall be deemed to be exercised on March 31, 2005 and the Company shall purchase
any remaining membership interests owned by R2.
The Company may not exercise the first call if the call exercise price for
33-1/3% of R2's membership interests would be less than $3,300,000. The Company
may not exercise the second call option if the call exercise price for 66-2/3%
of R2's membership interest would be less than $6,600,000 or, if R2 previously
sold to the Company 33-1/3% of its membership interests, then the call exercise
price would be less than $3,300,000 for 50% of R2's remaining membership
interests. The Company may not exercise the third call option if the call
exercise price for 100% of R2's membership interests would be less than
$9,900,000 or, if R2 previously sold to the Company 66-2/3% of its membership
interests, the call exercise price would be less than $3,300,000 for R2's
remaining membership interests.
The put/call exercise price is the percentage of total membership interests
being sold multiplied by the Enterprise Value of NEWCO, subject to certain
minimums if Chopra is no longer employed by NEWCO prior to the exercise of the
option. For purposes of the put/call option, the Enterprise Value is an amount
in dollars equal to the product of (a) 15 and (b) the adjusted earnings of NEWCO
for the 12 consecutive complete calendar month period ended prior to the option
exercise (assuming an effective tax rate of 40% and excluding the effect, if
any, on the profits of NEWCO of any amortization of goodwill resulting from the
acquisition of Data Tree in accordance with the Merger Agreement and excluding
interest paid or accrued on working capital debt of NEWCO in excess of
$2,000,000 to which R2 has objected). The Company is expected to provide to
NEWCO centralized administrative and other services for a fee equal to one
percent of NEWCO's monthly operating revenues. If Chopra's employment with NEWCO
or its affiliates is terminated by NEWCO "without cause" (as defined in the
Employment Agreement) prior to the option exercise, then the minimum put/call
exercise price is the product of $5,000,000 and the percentage membership
interest sold by R2. If Chopra's employment is terminated for "cause" (as
defined in the Employment Agreement) or if Chopra resigns, retires, is
permanently disabled or dies prior to the option exercise, then the minimum
put/call exercise price is the lesser of the product of $5,000,000 and the
percentage membership interest sold by R2 and the product of the Enterprise
Value of NEWCO on the date Chopra's employment was terminated and the percentage
membership interest sold by R2.
The Company, at its sole election, may pay the put exercise price in cash,
an unsecured promissory note of the Company, with interest at prime, payable
quarterly and maturing in three years or by the issuance of unrestricted
registered shares of Stock or a combination of cash, promissory notes and Stock.
In the case of the exercise of a call option, the Company may use cash or its
registered Stock or a combination of cash and Stock.
Under the Operating Agreement for NEWCO (filed as Exhibit D to the Merger
Agreement and incorporated herein by reference), FARES will have the full,
complete and exclusive authority, power and discretion to manage and control the
business, property and affairs of NEWCO. R2's consent, however, is required in
order for NEWCO to take certain actions, including, among others, engaging in
any business other than the Data Tree and Digistar business; incurring any debt
for working capital purposes in excess of $2,000,000 or any other debt in excess
of $250,000; the sale, lease, transfer or encumbrance of any substantial portion
of the assets of the Company except in the ordinary course of business; and the
acquisition of any real property or any leasehold or other interest therein
other than in the ordinary course of business for a purchase price of not less
than $250,000.
Supply Agreement. Data Tree (India) Corporation, an Indian proprietorship
that is owned by Chopra ("Data Tree India"), has provided image scanning
services to Data Tree since mid-1994. For the twelve months ended March 31,
1998, Data Tree has purchased 66,590,345 real estate title records from Data
Tree India at a cost of $197,000. Data Tree has provided Data Tree India the
rent-free use of approximately $500,000 in scanning equipment and software owned
or leased by Data Tree.
Following the Merger, NEWCO will enter into a Supply Agreement with R2
(filed as Exhibit G to the Merger Agreement and incorporated herein by
reference) pursuant to which R2 shall scan or cause to be scanned not less than
235,000,000 real estate title records in the aggregate and 23,500,000 real
estate title records per calendar quarter into a database owned by NEWCO. NEWCO
will pay R2 a cost of $0.055 per image, with a minimum quarterly payment of
$1,292,500. The Supply Agreement has a term of two and one-half years and may be
terminated only with the mutual consent of the parties. R2 is expected to
contract with Data Tree India for the scanning of images at the same contract
rate paid by Data Tree prior to the Merger.
Option to Acquire Data Tree India. Under the Contribution and Joint Venture
Agreement, NEWCO has the option to acquire Data Tree (India) Private Limited, an
Indian corporation into which the assets and liabilities of Data Tree India will
be placed and of which Chopra owns 95% of the capital stock, for a purchase
price of $200,000 during the period beginning after the date on which NEWCO has
purchased 235,000,000 images under the Supply Agreement to and ending six months
thereafter. If Chopra is employed by NEWCO at the time the option becomes
exercisable, then in lieu of acquiring Data Tree India or its assets, NEWCO may
enter into a supply agreement with Data Tree India for the purchase of all of
Data Tree India's output at cost during its term.
Employment Agreement. The Company has required as a condition to the
consummation of the Merger that Chopra enter into a five year Employment
Agreement (filed as Exhibit E to the Merger Agreement and incorporated herein by
reference) with NEWCO. The Employment Agreement provides that Chopra will serve
as the President of NEWCO. Chopra will be paid a base salary of $250,000 per
year plus an annual formula bonus equal to two percent of NEWCO's pre-tax
earnings for each fiscal year, payable in quarterly installments. During the
first fiscal year, Chopra will receive a minimum annual bonus of $250,000,
payable in minimum quarterly installments of $62,500 each. Pre-tax earnings will
be calculated without taking into account any amortization of goodwill arising
in connection with the Merger and the payment or accrual of interest on any
working capital debt in excess of $2,000,000 to which R2 has objected in
accordance with the Operating Agreement. If Chopra's employment is terminated by
NEWCO "without cause," then Chopra will be entitled to be paid base salary and
bonus until the earlier of Chopra's death, permanent disability or the end of
the five year term of the Employment Agreement.
Change in Control Payments and Employee Retention Program. Michael D.
Reynolds ("Reynolds"), Chief Financial Officer and a vice-president of Data Tree
and William P. Dow ("Dow"), Data Tree's corporate controller, are each parties
to an Executive Compensation and Benefits Continuation Agreement each dated
December 15, 1997 and a Contingent Bonus Agreement each dated December 15, 1997.
Under the Contingent Bonus Agreements, Reynolds and Dow, upon consummation of
the Merger, will be entitled to receive a bonus equal to 20% of their respective
salaries. Based upon their salaries as of March 27, 1998, Reynolds would be
entitled to receive a bonus equal to approximately $24,000 and Dow will be
entitled to receive a bonus equal to approximately $14,000. Under the Executive
Compensation and Benefits Continuation Agreements, upon the consummation of the
Merger Reynolds and Dow each will become subject to an agreement providing that
should their employment with the Surviving Corporation be terminated without
cause or should they voluntarily end their employment with the Surviving
Corporation for good reason, they each will be entitled to receive twelve
months' salary, payable in twelve equal installments, among other benefits. The
Executive Compensation and Benefits Continuation Agreements remain in effect so
long as Dow and Reynolds are employed by the Surviving Corporation.
Prior to execution of the Merger Agreement, Data Tree set aside $200,000 to
pay retention bonuses to certain Data Tree employees (other than Chopra,
Reynolds and Dow) who remain employed by NEWCO until December 31, 1998. The
Company is indirectly contributing cash in the amount of these bonuses to NEWCO
and NEWCO is assuming this obligation.
INDEMNIFICATION
The Company has agreed to keep in effect and to cause NEWCO to keep in
effect the provisions of Data Tree's articles of incorporation and bylaws
providing for exculpation of director liability and the indemnification of the
directors, officers and agents of Data Tree for actions or omissions while
serving as a director, officer or agent of Data Tree to the fullest extent
permitted by the CGCL. The Company has also agreed to keep in effect and to
cause NEWCO to keep in effect and comply with the terms and conditions of
indemnification agreements between Data Tree and its directors in effect as of
the date of the Merger Agreement.
Prior to the execution of the Merger Agreement, Data Tree proposed to amend
its articles of incorporation to provide certain indemnification protection to
Data Tree's agents and to enter into indemnification agreements with its
directors and executive officer providing, to the maximum extent permissible
under the law, the directors, officers and agents of Data Tree protection from
liability for actions or omissions while serving as a director, officer or agent
of Data Tree. The amendment to the articles of incorporation and the
indemnification agreements explicitly exclude the right of a Data Tree director,
officer or agent to indemnification for any liability of such director, officer
or agent arising as a result of any breach of duty in connection with the Merger
Agreement or transactions contemplated by the Merger Agreement.
ACCOUNTING TREATMENT
For financial reporting purposes, the Company will account for the Merger
using the purchase method under generally accepted accounting principles.
REGULATORY REQUIREMENTS
Under the HSR Act and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Merger may not be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
specified waiting period requirements have been satisfied. The Company on March
30, 1998 and Data Tree on April 1, 1998 filed notification and report forms
under the HSR Act with the FTC and the Antitrust Division, together with a
request for early termination of the applicable 30-day waiting period. Effective
April 13, 1998, this 30-day waiting period was terminated.
At any time before or after the Effective Time, the Antitrust Division or
the FTC could take such action under the antitrust laws as it deems necessary or
desirable in the public interest, including seeking to enjoin the consummation
of the Merger or seeking divestiture of substantial assets of the Company or
Data Tree. At any time before or after the Effective Time, and notwithstanding
that the HSR Act waiting period has expired, any state could take such action
under the antitrust laws as it deems necessary or desirable in the public
interest. Such action could include seeking to enjoin the consummation of the
Merger or seeking divestiture of Data Tree or businesses of the Company or Data
Tree. Private parties also may seek to take legal action under the antitrust
laws under certain circumstances.
Based on information available to them, the Company and Data Tree believe
that the Merger can be effected in compliance with federal and state antitrust
laws. However, there can be no assurance that a challenge to the consummation of
the Merger on antitrust grounds will not be made or that, if such a challenge
were made, the Company and Data Tree would prevail or would not be required to
accept certain conditions, including certain divestitures, in order to
consummate the Merger. In this regard, it is a condition to the obligation of
the parties to consummate the Merger that no injunction shall have been issued
prohibiting the Merger or other legal or regulatory restraint or prohibition
preventing the consummation of the Merger.
<PAGE>
THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, a copy of which is attached as Annex A to this Prospectus/Proxy
Statement and incorporated herein by reference. The discussion in this
Prospectus of the Merger and the Merger Agreement is qualified in its entirety
by reference to the Merger Agreement. Shareholders of Data Tree are urged to
read the Merger Agreement in its entirety for a more complete description of the
Merger. The Merger Agreement rather than the summary set forth herein, will
control the terms of the Merger and the rights of the parties and the
shareholders of Data Tree. All shareholders of Data Tree are urged to read the
Merger Agreement in its entirety.
EFFECTIVE TIME
The Merger Agreement provides that the Merger will be consummated following
the approval of the Merger Agreement by the Data Tree shareholders and the
satisfaction or waiver of all other conditions to the consummation of the
Merger.
If all conditions to the Merger are satisfied or waived, the Merger will
become effective at the time (the "Effective Time") that all documents required
to be filed with the California Secretary of State to effect the Merger are so
filed. At the Effective Time, IAC will merge with and into Data Tree, with Data
Tree continuing as the Surviving Corporation. Data Tree, thereby, will become a
wholly-owned subsidiary of the Company. As a result of the Merger, the Data Tree
shareholders will become shareholders of the Company and their rights will be
governed by the articles of incorporation and bylaws of the Company and
California law. See "Comparison of Rights of Holders of Data Tree Stock and
Company Stock."
MANNER AND BASIS FOR CONVERTING SHARES
Merger Consideration. At the Effective Time, the shares of Data Tree Stock
(other than any shares of Data Tree Stock owned by the Company or any of its
subsidiaries or owned by dissenting shareholders, if any) held by each Data Tree
shareholder will be converted into the right to receive shares of the Stock (the
"Merger Consideration") in accordance with the following formula:
(PSI)
Merger Consideration = -----(x)
(AP)
where (i) "PSI" equals the quotient resulting from the division of the Purchase
Price by the number of shares of Data Tree Stock issued and outstanding as of
the Effective Time (the "Number of Shares Outstanding"), (ii) "AP" equals the
average of the last reported sales price (the "Average Price") of one share of
the Stock as reported on the New York Stock Exchange for the twenty consecutive
Trading Days ending on the Trading Day immediately prior to the Data Tree
Special Meeting and (iii) "x" equals the number of shares of Data Tree Stock
held by the such Data Tree shareholder. In lieu of a fractional share of Stock,
Data Tree shareholders will receive cash in the form of a check in an amount
equal to the product of the Average Price and the fractional interest.
In no event will the total Merger Consideration paid to all Data Tree
shareholders exceed 838,095 shares of Stock, less the aggregate number of shares
of Stock that any dissenting shareholders would be entitled to receive under the
preceding formula had such dissenting shareholders not so dissented.
Shares of Data Tree Stock owned by the Company or any of its subsidiaries
or owned by Dissenting Shareholders, if any, immediately prior to the Effective
Time will be canceled and extinguished without any conversion thereof.
At the Effective Time the Purchase Price is expected to be less than
$43,113,373 and the Number of Shares Outstanding is expected to be 7,039,830.
The exact Purchase Price cannot be ascertained until the fees and expenses of
the legal counsel, accountants and financial advisors of Data Tree and legal
counsel to Chopra are determined. The first $1,000,000 of the aggregate amount
of these fees will be paid by Data Tree; to the extent that these fees exceed
$1,000,000 (the "Surplus Expenses"), the amount is subtracted from $43,113,373
to arrive at the Purchase Price.
As suggested above, the Merger Consideration payable to each Data Tree
shareholder cannot be fixed until the date of the Data Tree Special Meeting and
the amount of the Surplus Expenses are determined. Fluctuations in the market
price of shares of Stock and the ultimate determination of the amount of the
Surplus Expenses, therefore, will impact the number of shares of Stock each Data
Tree shareholder will receive in the Merger. Once the Merger Consideration is
fixed, changes in the market price of a share of the Stock will affect the
dollar value of the Stock to be received by the Data Tree Shareholders in the
Merger. Factors affecting the value of a share of Stock received by Data Tree
shareholders may differ from factors that affected the value of a share of Data
Tree Stock. Data Tree shareholders are urged to obtain current quotations for
the Stock prior to the Data Tree Special Meeting.
Upon the consummation of the Merger, each share of IAC issued and
outstanding prior to the Effective Time will be converted into one common share
of the Surviving Corporation.
Exchange Agent. First American Trust Company has been appointed exchange
agent (the "Exchange Agent") under the Merger Agreement. Each Data Tree
shareholder shall have received from the Exchange Agent a notice and letter of
transmittal detailing the procedure by which each Data Tree shareholder will
surrender the certificates representing shares of Data Tree Stock and receive in
return certificates representing shares of Stock. Upon each Data Tree
shareholder's surrendering of shares of Data Tree Stock and compliance with the
instructions in the notice and letter of transmittal, the Exchange Agent will
transfer certificates representing the Merger Consideration to such person.
CERTIFICATES REPRESENTING SHARES OF DATA TREE STOCK SHOULD NOT BE SURRENDERED
UNTIL SUCH HOLDERS RECEIVE THE NOTICE AND LETTER OF TRANSMITTAL FROM THE
EXCHANGE AGENT, AND THEN ONLY IN ACCORDANCE WITH THE TERMS OF SUCH NOTICE AND
LETTER OF TRANSMITTAL.
Questions and requests for assistance and requests for additional copies of
the notice and letter of transmittal should be directed to the Exchange Agent
addressed as follows:
First American Trust Company
421 North Main Street
Santa Ana, California 92701-4642
Telephone: 800-854-3643
Facsimile: 714-972-1368
EFFECT OF THE MERGER
Once the Merger is consummated, IAC will cease to exist as a corporation;
Data Tree will continue to exist as the Surviving Corporation.
Pursuant to the Merger Agreement, the articles of incorporation and the
bylaws of Data Tree in effect immediately prior to the Effective Time will
become the articles of incorporation and the bylaws of the Surviving Corporation
immediately following the Merger. The directors of IAC prior to the Effective
Time will become the directors of the Surviving Corporation. The officers of
Data Tree prior to the Effective Time shall become the officers of the Surviving
Corporation.
REPRESENTATIONS AND WARRANTIES
Data Tree and Chopra have made a number of representations and warranties
in the Merger Agreement, including representations and warranties regarding the
organization, existence, good standing and capital structure of Data Tree, its
ownership of subsidiaries and investments, financial statements and material
changes, tax matters, books and records, title to properties, encumbrances, real
property, leases, material contracts, restrictive documents, employee benefit
plans, litigation, compliance with laws, intellectual property, governmental
licenses, interests in clients and suppliers, bank accounts, powers of attorney,
compensation of employees, labor matters, disclosure, consents and approvals,
broker's and finder's fees, copies of documents and other matters, including
Data Tree's authority to enter into the Merger Agreement and to consummate the
Merger. The Company and IAC have also made a number of representations and
warranties, including representations and warranties regarding the existence,
good standing and capital structure of the Company and IAC, consents and
approvals, restrictive documents, broker's and finder's fees, the Stock,
financial statements and SEC reports, material changes, litigation, compliance
with laws, disclosure and other matters, including the authority of the Company
and IAC to enter into the Merger Agreement and to consummate the Merger.
Each of the representations and warranties made by Data Tree and Chopra on
the one hand and the Company and IAC on the other hand survive for a period of
six months after the Effective Time and will serve as the basis for
indemnification of any damages suffered by any of the parties as a result of a
breach or inaccuracy of such representations and warranties. See "The Merger
Agreement -- Indemnification."
CERTAIN COVENANTS AND AGREEMENTS
Operation of Data Tree Prior to the Merger. Pursuant to the Merger
Agreement, Data Tree has agreed that during the period from the date of the
Merger Agreement to the Effective Time (the "Pre-Closing Period"), subject to
certain exceptions, it will conduct its operations in the ordinary and usual
course of business, use its reasonable efforts to preserve intact its business
organization, keep available the services of its officers and employees,
maintain its relations with all licensors, suppliers, distributors, customers,
landlords, employees, agents and others with which it has business
relationships, confer with the Company concerning operational matters of a
material nature and report periodically to the Company concerning its business,
operations and finances. Under the Merger Agreement, Data Tree also agreed to
permit the Company and its authorized representatives to review and have access
to, during the Pre-Closing Period, the properties, books and records of Data
Tree and information concerning its financial and legal condition.
In addition, except as permitted by the terms of the Merger Agreement, and
subject to certain exceptions, during the Pre-Closing Period, each of Data Tree
and Chopra have agreed not to do or permit, as the case may be, any of the
following without the prior written consent of the Company or as otherwise
permitted or required by the Merger Agreement:
(a) amend or modify Data Tree's articles of incorporation or bylaws;
(b) increase any bonuses, salaries, or other compensation to any director,
officer, employee, or shareholder or enter into any employment severance, or
similar agreement with any director, officer, or employee (subject to certain
exceptions);
(c) adopt or increase any profit sharing, bonus, deferred compensation,
savings, insurance, pension, retirement, or other employee benefit plan for or
with any of its employees;
(d) enter into any contract or commitment except in the ordinary course of
business;
(e) increase its indebtedness for borrowed money, except current borrowings
in the ordinary course of business;
(f) cancel or waive any claim or right of substantial value which
individually or in the aggregate is material;
(g) declare or pay any dividends in respect of its capital stock or redeem,
purchase or otherwise acquire any of its capital stock;
(h) make any material change in accounting methods or practices, except as
required by generally accepted accounting principles;
(i) issue or sell any shares of capital stock or any other securities, or
issue any securities convertible into, or options, warrants or rights to
purchase or subscribe to, or enter into any arrangement or contract with respect
to the issue and sale of, any shares of its capital stock or any other
securities, or make any other changes to its capital structure, except such
issuances or sales of securities which Data Tree is already obligated to make as
of the date of the Merger Agreement and which are disclosed to the Company;
(j) sell, lease or otherwise dispose of any material asset or property
other than sales of inventory in the ordinary course of business;
(k) make any capital expenditure or commitment therefor, except in the
ordinary course of business;
(l) write off as uncollectible any notes or accounts receivable, except
write offs in the ordinary course of business charged to applicable reserves,
none of which individually or in the aggregate is material;
(m) to the extent not included in clauses (a) through (l) above, take any
of the actions which constitute changes to the balance sheet of Data Tree as
described in Section 3.22 of the Merger Agreement;
(n) agree in writing to do any of the foregoing; and
(o) as it relates to Data Tree, file any amended tax returns.
No Solicitation. Data Tree and Chopra have each agreed, through the closing
of the Merger, that they shall not take any action to, directly or indirectly,
encourage, initiate or engage in discussions or negotiations with, or provide
any information to, any person other than the Company concerning any purchase of
the shares of Data Tree Stock or any merger, sale of substantially all of the
assets of Data Tree or similar transaction involving Data Tree.
Consents. Under the Merger Agreement, the Company, IAC, Data Tree and
Chopra have agreed to use their best efforts to take, or cause to be taken, all
appropriate action, and to make, or cause to be made, all filings necessary,
proper or advisable under the applicable laws and regulations to consummate and
make effective the transactions contemplated by the Merger Agreement, including,
without limitation, their respective best efforts to obtain, prior to the
Effective Time, all licenses, permits, consents, approvals, authorizations,
qualifications and orders of governmental authorities and parties to contracts
with Data Tree, the Company and IAC as are necessary for consummation of the
transactions contemplated by the Merger Agreement and to fulfill the conditions
of the Merger; provided, however, that no loan agreement or contract for
borrowed money shall be repaid except as currently required by its terms, in
whole or in part, and no contract shall be amended to increase the amount
payable thereunder or otherwise to be more burdensome to Data Tree, the Company
or IAC in order to obtain any such consent, approval or authorization without
first obtaining the written approval of the parties.
Shareholder Approval. Data Tree shall seek the adoption and approval of the
Merger Agreement by its shareholders at a duly called meeting and in accordance
with applicable laws. Chopra has agreed to cause any Data Tree Stock owned or
controlled by him to be voted in favor of the Merger. As of the Record Date,
Chopra owned or controlled (through relationships with immediate family or
through ownership of shareholders) approximately 8.03% of the Data Tree Stock.
The Company has caused all shares of IAC to be voted in favor of the Merger.
Securities Matters. The Merger Agreement required the Company to make a
filing with the Securities and Exchange Commission (the "SEC") covering the
issuing of the shares of Stock to be used in the Merger as well as the resale of
shares of Stock (the "Rule 145 Shares") received by Data Tree shareholders who
are subject to Rule 145 of the Securities Act . The Company has agreed to
maintain and keep effective that portion of the SEC filing relating to the Rule
145 Shares until the earlier of (i) one year from the Effective Time and (ii)
the time at which each holder of Rule 145 Shares can sell all shares of Stock
held by such shareholder in a 90 day period pursuant to the resale restrictions
imposed by Rule 145 under the Securities Act.
Indemnification. The Company has agreed to cause the Surviving Corporation
to keep in effect (i) provisions of Data Tree's articles of incorporation and
bylaws providing for the exculpation and indemnification of directors, officers
and agents to the fullest extent permitted by the California Corporations Code,
and (ii) the indemnification agreements between Data Tree and each of its
directors.
Tax Matters. Data Tree, the Company and IAC have each acknowledged and
agreed that (i) it intends the Merger to constitute a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code") and (ii) it will report the Merger as such a reorganization in any and
all tax returns filed by it. At or prior to the closing of the Merger, the
Company, together with IAC and Data Tree will execute tax representation letters
for the purpose of (A) the preparation and rendering of a tax opinion in
accordance with the Merger Agreement by Cooley Godward LLP, and (B) the
preparation of the discussion of the tax consequences of the Merger to be
included in this Prospectus/Proxy Statement.
Employee Matters. After the Effective Time, the employees of Data Tree
shall participate in the Company's employee benefit plans, and such employees
shall receive credit for accrued and unused sick leave, vacation and holiday
time and accumulated deductibles.
CONDITIONS TO THE MERGER
The respective obligations of each party to the Merger Agreement to effect
the Merger are subject to the satisfaction or waiver of each of the following
conditions: (i) the Merger Agreement and the Merger shall have been approved and
by the requisite vote or consent of the Data Tree Shareholders in accordance
with applicable law and the articles of incorporation and bylaws of Data Tree;
(ii) the SEC shall have declared effective a registration statement covering the
(a) issuance by the Company of the shares of Stock to be delivered to the Data
Tree shareholders and (b) resale of the Stock to be received by any Data Tree
shareholder subject to Rule 145 and all applicable time periods under the
Securities Act shall have expired and no stop order shall have been issued by
the SEC with respect to such registration statement; (iii) as of the Effective
Time, no action or proceedings shall have been instituted before a court or
other governmental body or any public authority to restrain or prohibit the
consummation of the Merger and consummation of the transactions contemplated by
the agreements attached as Exhibits C through H to the Merger Agreement (the
"Related Agreements"); (iv) any waiting periods under the HSR Act relating to
the Merger will have expired or terminated; (v) no preliminary or permanent
injunction or other order shall have been issued by any court or by any
governmental or regulatory agency, body or authority which prohibits the
consummation of the Merger and the transactions contemplated by the Merger
Agreement and which is in effect at the closing of the Merger; (vi) the Related
Agreements shall have been duly executed on or before the closing of the Merger;
(vii) the shares of Stock issuable to shareholders of Data Tree in the Merger
shall have been listed on the New York Stock Exchange upon official notice of
issuance; (viii) no statute, rule, regulation, executive order, decree or order
of any kind shall have been enacted, entered, promulgated or enforced by any
court or governmental authority which prohibits the consummation of the Merger;
all governmental and other consents and approvals, if any, disclosed on any
schedule to the Merger Agreement or necessary to permit consummation of the
transactions contemplated by the Merger Agreement shall have been received,
except where the failure to obtain a consent will not have a material adverse
effect on Data Tree or the Company; and (ix) there shall be no dissenting
shareholder of Data Tree and the period during which any Data Tree shareholder
who or which failed to vote in favor of the Merger has the right to perfect
dissenter's rights shall have expired or each shareholder shall have waived such
right.
In addition, the obligation of Data Tree and Chopra to consummate and
effect the Merger are subject to the satisfaction or waiver, at the specified
time, of each of the following conditions:
(a) On the date of the closing of the Merger, Data Tree shall have received
(i) an opinion of White & Case LLP, counsel to the Company and IAC and (ii) a
tax opinion of Cooley Godward LLP to the effect that the Merger will constitute
a reorganization within the meaning of Section 368(a) of the Code and no gain or
loss will be recognized by Data Tree or its shareholders as a result of the
transactions contemplated by the Merger Agreement;
(b) As of the closing of the Merger, the Company and IAC shall have
delivered to Data Tree and Chopra (i) copies of the articles of incorporation of
the Company and IAC, respectively, including all amendments thereto, certified
by the Secretary of State of the State of California and (ii) a certificate from
the Secretary of the State of California to the effect that the Company and IAC,
respectively, are in good standing and listing all charter documents of the
Company and IAC on file;
(c) The representations and warranties of the Company and IAC contained in
the Merger Agreement that are qualified as to materiality shall be true and
accurate, and those not so qualified shall be true and accurate in all material
respects, in each case at and as of the date of the Merger Agreement and as of
the date of the closing of the Merger (except to the extent a representation or
warranty speaks specifically as of an earlier date or as contemplated in the
Merger Agreement), and the Company shall have delivered to Data Tree and Chopra
a certificate to such effect (subject to certain exceptions);
(d) All of the agreements of the Company and IAC to be performed prior to
the closing of the Merger pursuant to the terms of the Merger Agreement shall
have been duly performed in all material respects and the Company and IAC shall
have delivered to Data Tree and Chopra a certificate to such effect;
(e) As of the closing of the Merger, all proceedings to be taken in
connection with the transactions contemplated by the Merger Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Data Tree, Chopra and their respective counsel, and Data Tree and
Chopra shall have received copies of all such documents and other evidences as
they or their counsel may reasonably request in order to establish the
consummation of such transactions and the taking of all proceedings in
connection therewith;
(f) As of the closing of the Merger there shall have been no material
adverse effect on the Company and there shall not have occurred any change or
development that would reasonably be expected to have a material adverse effect
on the Company; and
(g) On each Trading Day between the date of the Data Tree Special Meeting
and the closing of the Merger the average closing sales price of a share of
Stock for the preceding five Trading Days shall have been equal to or greater
than $42.525.
The obligations of the Company and IAC to consummate and effect the Merger
are also subject to the satisfaction or waiver, at the specified time, of each
of the following conditions:
(a) The representations and warranties of Data Tree and Chopra contained in
the Merger Agreement that are qualified as to materiality shall be true and
accurate, and those not so qualified shall be true and accurate in all material
respects, in each case at and as of the date of the Merger Agreement and as of
the closing of the Merger (except to the extent a representation or warranty
speaks specifically as of an earlier date or as contemplated in the Merger
Agreement), and Data Tree and Chopra shall have delivered to the Company to such
effect (subject to certain exceptions);
(b) All of the agreements of Data Tree and Chopra to be performed prior to
the closing of the Merger pursuant to the terms of the Merger Agreement shall
have been duly performed in all material respects, and Data Tree and Chopra
shall have delivered to the Company a certificate to such effect;
(c) On the date of the closing of the Merger, the Company shall have
received an opinion (i) from Cooley Godward LLP, counsel to Data Tree and (ii)
from counsel to R2;
(d) As of the closing of the Merger, Data Tree shall have delivered to the
Company (i) copies of Data Tree's articles of incorporation including all
amendments thereto, certified by the Secretary of State or other appropriate
official of its jurisdiction of incorporation, (ii) a certificate from the
Secretary of State or other appropriate official of Data Tree's jurisdiction of
incorporation to the effect that Data Tree is in good standing in such
jurisdiction and listing all charter documents of Data Tree on file, (iii) a
certificate from the secretary of state or other appropriate official in each
state in which Data Tree is qualified to do business to the effect that Data
Tree is in good standing in such state, (iv) a certificate as to the tax status
of Data Tree from the appropriate official in its jurisdiction of incorporation
and each state in which Data Tree is qualified to do business and (v) a copy of
the bylaws of Data Tree, certified by the Secretary of Data Tree as being true
and correct and in effect on the date of the closing of the Merger;
(e) As of the closing of the Merger (i) there shall have been no material
adverse effect on Data Tree and there shall not have occurred any change or
development that would reasonably be expected to have a material adverse effect
on Data Tree, (ii) the Related Agreements shall be in full force and effect, and
no event shall have occurred and no condition shall exist which has, or could
reasonably be expected to have, a material adverse effect upon (A) the validity
or enforceability of any Related Agreement or (B) the ability of any party
(other than the Company) to any Related Document to perform its obligations
under any such Related Agreement and (iii) no party (other than the Company) to
any Related Agreement shall have breached any material covenant of such party
thereunder or failed to perform any material obligation of such party
thereunder;
(f) As of the Closing Date, Imperial Bank shall have either required Data
Tree to repurchase its warrants in accordance with the terms of such warrants or
exercised its warrants to purchase shares of Data Tree Stock and, if exercised,
Imperial Bank shall have voted its shares of Data Tree Stock in favor of the
Merger;
(g) As of the closing of the Merger, all indebtedness, other than travel
and similar advances, of Chopra, any Data Tree shareholder or the directors,
officers and employees of Data Tree to Data Tree shall have been repaid in full,
except for approximately the $170,000 owed the Company by Kumar Corporation, a
company owned by Chopra;
(h) As of the closing of the Merger, all corporate proceedings to be taken
in connection with the transactions contemplated by the Merger Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to the Company and its counsel, and the Company shall have received
copies of all such documents and other evidences as it or its counsel may
reasonably request in order to establish the consummation of such transactions
and the taking of all corporate proceedings in connection therewith;
(i) Data Tree shall furnish the Company a copy of a statement, dated not
more than 30 days prior to the closing of the Merger, issued by Data Tree
pursuant to Section 1.897-2(h) of the Code, certifying that the shares of Data
Tree Stock delivered pursuant to the Merger are not a U.S. real property
interest as defined in Section 897 of the Code; and
(j) On or before the closing of the Merger, all agreements and/or
arrangements between Data Tree on the one hand and any shareholder (or any
person controlling, controlled or under common control with any shareholder)
(any such shareholder or other person, a "Related Party") on the other hand,
entered into on or before the date of the Merger Agreement, shall have been
reduced to written agreements in form and substance reasonably satisfactory to
the Company.
TERMINATION
The Merger Agreement provides that it may be terminated at any time as
follows:
(a) by mutual written consent of the Company, IAC, Data Tree and Chopra;
(b) by the Company if certain conditions to the Merger (other than the
execution and delivery by the Company of the Related Agreements) shall not have
been materially complied with or performed on or prior to the 90th day from the
date of the Merger Agreement and the Company shall not have materially breached
any of its representations, warranties, covenants or agreements in the Merger
Agreement;
(c) by the Company if the board of directors of Data Tree withdraws or
modifies in any manner adverse to the Company or IAC its approval or
recommendation of, the Merger;
(d) by Data Tree and/or Chopra if certain conditions precedent to the
Merger, subject to certain exceptions, have not been materially complied with or
performed by the 90th day from the date of the Merger Agreement and Data Tree or
Chopra have not materially breached any of their representations, warranties,
covenants or agreements contained in the Merger Agreement;
(e) by Data Tree and/or Chopra if the Average Price is less than (but not
equal to) $44.525;
(f) by any one of the parties to the Merger Agreement if the Effective Time
shall not have occurred within one month after the closing of the Merger; or
(g) subject to certain limitations, by the Company by written notice to
Data Tree and Chopra, received no later than April 10, 1998, if the Company is
not satisfied with its due diligence review of the Related Parties.
The parties may agree in writing to extend the time for the performance of
the obligations described in clauses (b) and (d) above.
EFFECT OF TERMINATION
If the Merger Agreement is terminated by the parties as described above,
the Merger Agreement will be of no further force or effect, except that certain
provisions with regard to confidentiality, publicity and expenses will survive
such termination, and the Company, Data Tree, Chopra and IAC will remain liable
for certain breaches of the Merger Agreement.
AMENDMENT
The Merger Agreement may not be amended or modified orally, but only by
written agreement signed by the Company, Data Tree, and Chopra. Except as
otherwise provided by California law or as approved by the Data Tree
shareholders, the Merger Agreement may not be amended subsequent to the approval
of the Data Tree shareholders.
INDEMNIFICATION
Each of the representations and warranties made by Data Tree and Chopra on
the one hand and by the Company and IAC on the other hand, survive for a period
of six months after the date of the consummation of the Merger and serve as the
basis for indemnification as discussed below.
Chopra has agreed to indemnify and hold the Company and its officers,
directors, shareholders, employees, agents and any successors (the "FAFCO
Parties") harmless from damages arising out of the failure of any representation
or warranty made by Chopra or Data Tree to be true and correct in all material
respects as of the date of the Merger Agreement or the closing of the Merger, as
the case may be. Chopra's indemnification obligation becomes effective when the
aggregate amount of damages suffered by the FAFCO Parties exceeds $250,000 (at
which time the FAFCO Parties shall be entitled to indemnification for all such
damages). Chopra's indemnification liability cannot exceed $2,000,000.
Similarly, the Company has agreed to indemnify and hold each Data Tree
shareholder and Data Tree itself (the "Data Tree Parties") harmless from damages
suffered as a result of the failure of any representation or warranty made by
the Company or IAC to be true and correct in all material respects as of the
date of the Merger Agreement or the closing of the Merger, as the case may be.
The Company's indemnification obligation becomes effective when the aggregate
amount of damages suffered by the Data Tree Parties exceeds $250,000 (at which
time the Data Tree Parties shall be entitled to indemnification for all such
damages). The Company's indemnification liability cannot exceed $2,000,000.
The aforementioned rights of indemnification shall be the sole recourse for
the Company, the Data Tree shareholders and Data Tree for any inaccuracy in or
breach of any representation or warranty made by the parties pursuant to the
Merger Agreement or any certificate, instrument or document delivered pursuant
to the Merger Agreement.
MERGER EXPENSES AND FEES AND OTHER COSTS
Except as described above, all fees and expenses incurred in connection
with the Merger Agreement and the transactions contemplated by the Merger
Agreement shall be paid by the party incurring such expenses (except that Data
Tree shall pay the reasonable fees and expenses of counsel to Chopra), whether
or not the Merger is consummated. To the extent that the expenses of Data Tree
and counsel to Chopra exceed $1,000,000, the excess expenses will be deducted
from the $43,113,373 to determine the purchase price used to calculate the
Merger Consideration and will have the effect of reducing the Merger
Consideration payable to each Data Tree shareholder. Data Tree is obligated to
pay Salomon Smith Barney investment banking fees of $900,000 plus expenses in
connection with the Merger. In addition, as of May 15, 1998, in connection with
the Merger, Data Tree has incurred legal and accounting fees in the amount of
approximately $149,000 and Chopra has incurred legal fees in the amount of
approximately $15,000.
RESALES BY SELLING SHAREHOLDERS
The shares of Stock to be issued to the Data Tree shareholders in the
Merger have been registered for issuance by the Company under the Securities
Act. In addition, the shares of Stock to be issued to Selling Shareholders have
been registered under the Securities Act for resale by such Selling Shareholders
(the "Resale Registration Statement"). Such Selling Shareholders include the
directors and executive officers of Data Tree and certain other Data Tree
shareholders. Each Selling Shareholder who desires to resell the Stock received
in the Merger must sell such Stock either (i) pursuant to the effective Resale
Registration Statement, or (ii) in accordance with the applicable provisions of
Rule 145 under the Securities Act ("Rule 145"). While the Resale Registration
Statement is effective, the restrictions on resale imposed by Rule 145 are not
applicable to the Selling Shareholders.
Pursuant to the Merger Agreement, the Company has agreed to keep the Resale
Registration Statement effective until the earlier of (i) one year from the
Effective Time and the time at which each Selling Shareholder can sell all
shares of Stock held by such Selling Shareholder in a 90 day period pursuant to
the resale restrictions imposed by Rule 145.
After the one year period to which the Company has agreed to keep the
Resale Registration Statement effective, the Selling Shareholders may sell their
shares of Stock received in the Merger as provided by Rule 145, or as otherwise
permitted. In general, under Rule 145, a Selling Shareholder who receives shares
of the Stock in the Merger will be entitled, during the one-year period from the
date of receipt of such shares, to sell in any three-month period a number of
shares of Stock that is the greater of (i) 1% of the then outstanding shares of
the Stock and (ii) the average weekly trading volume of the Stock on the New
York Stock Exchange during the four calendar weeks immediately preceding the
date on which the notice of sale is filed with the Commission. In addition,
during such one-year period, sales of the Stock by the Selling Shareholders
pursuant to Rule 145 will be subject to certain other requirements relating to
manner of sale and availability of current public information about the Company.
Generally, after one year from the issuance of the Stock in the Merger, a
Selling Shareholder, if such person is not an affiliate of the Company at the
time of sale and the Company is current in the filing of its periodic reports
pursuant to the Exchange Act, may freely resell the Stock received by such
Selling Shareholder in the Merger without limitation. After two years from the
issuance of the Stock in the Merger, a former Selling Shareholder, if such
person is not an affiliate of the Company and has not been an affiliate of the
Company for at least three months prior to such sale, may freely resell such
Stock, without limitation, regardless of the status of the Company's filings of
its periodic reports.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the resale by the
Selling Shareholders of any shares of Stock resold pursuant hereto. All proceeds
from such sale of shares of Stock offered hereby will be for the account of the
Selling Shareholders. The Company will bear all expenses (other than selling
discounts and commissions and fees and expenses of the Selling Shareholders) in
connection with the registration of the shares of Stock being reoffered by the
Selling Shareholders.
SELLING SHAREHOLDERS
Assuming there are no dissenting shareholders of Data Tree, the following
table sets forth the name of each Selling Shareholder, the number of shares of
Stock that each Selling Shareholder owned prior to the offering for sale (the
"Offering") of shares of Stock held by the Selling Shareholder, as of such date,
the maximum number of shares of Stock that can be offered for the account of
each Selling Shareholder pursuant to this Prospectus/Proxy Statement and the
amount of the shares of Stock to be owned by each Selling Shareholder after the
Offering (assuming each Selling Shareholder offers all of such shares of Stock
for sale and such shares of Stock are sold). With the exception of Cal West
Service Corporation and R. Squared Limited no Selling Shareholder will own more
than one percent of the total number of shares of Stock issued and outstanding.
After the Merger, Cal West Service Corporation will own approximately 1.3% of
the shares of Stock issued and outstanding and R. Squared Limited (see the
footnote (2), below) will own approximately 1.9% of the total shares of Stock
issued and outstanding. All other Data Tree shareholders will own less than 1%
of the total shares of Stock issued and outstanding subsequent to the Merger.
<TABLE>
NAME OF SELLING SHAREHOLDER SHARES OWNED OF RECORD MAXIMUM SHARES OWNED OF RECORD
PRIOR TO THE NUMBER OF SHARES TO BE AFTER COMPLETION OF
OFFERING(3) OFFERED FOR THE THE OFFERING(5)
SELLING SHAREHOLDER'S
ACCOUNT(4)
<S> <C> <C> <C>
Harvindera Chopra(1) 47,620 47,620 0
Robert F. Rice 47,620 47,620 0
Ravinder K. Chopra(1) 595 595 0
Cal West Service Corporation 233,913 233,913 0
Carl A. Strunk 1,190 1,190 0
R. Squared Limited(2) 357,151 357,151 0
Harish K. & Karen Chopra(1) 14,881 14,881 0
Inteq Software Development Corp.(1) 1,190 1,190 0
<FN>
_______________________
(1) Chopra affiliate.
(2) R. Squared Limited, an Irish company, was established by Chopra. Chopra,
however, disclaims any beneficial interest in it.
(3) No Selling Shareholder owned shares of Stock prior to the Merger. The
shares of Stock represented in this column are those shares of Stock each
Selling Shareholder will receive in the Merger (assuming that each Selling
Shareholder receives the maximum possible number of shares of Stock
issuable to such Selling Shareholder in the Merger).
(4) Assuming that the maximum number of shares of Stock that can be offered for
the account of each Selling Shareholder pursuant to this Prospectus/Proxy
Statement is so offered.
(5) Assuming that the maximum number of shares of Stock that can be offered for
the account of each Selling Shareholder pursuant to this Prospectus/Proxy
Statement is sold.
</FN>
</TABLE>
None of the Selling Shareholders has held any position or office or had any
material relationship with the Company during the past three years.
PLAN OF DISTRIBUTION
The shares of Stock covered by this Prospectus/Proxy Statement may be
offered and sold from time to time by the Selling Shareholders. The Selling
Shareholders will act independently of the Company in making decisions with
respect to the timing, manner and size of each sale. The Selling Shareholders
may sell the shares of Stock being offered hereby on the New York Stock
Exchange, or otherwise, at prices and under terms then prevailing or at prices
related to the then current market price, at varying prices or at negotiated
prices. The shares of Stock may be sold, without limitation, by one or more of
the following means of distribution: (a) a block trade in which the
broker-dealer so engaged will attempt to sell shares of Stock as agent, but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker-dealer as principal and resale by such
broker-dealer for its own account pursuant to this Prospectus; (c) a
distribution in accordance with the rules of the New York Stock Exchange; (d)
ordinary brokerage transactions and transactions in which the broker solicits
purchasers; and (e) in privately negotiated transactions. To the extent
required, this Prospectus may be amended and supplemented from time to time to
describe a specific plan of distribution.
In connection with distributions of the shares of Stock or otherwise, the
Selling Shareholders may enter into hedging transactions with broker-dealers or
other financial institutions. In connection with such transactions,
broker-dealers or other financial institutions may engage in short sales of the
shares of Stock in the course of hedging the positions they assume with Selling
Shareholders. The Selling Shareholders may also sell the shares of Stock short
and deliver the shares of Stock offered hereby to close out such short
positions. The Selling Shareholders may also enter into option or other
transactions with broker-dealers or other financial institutions which require
the delivery to such broker-dealer or other financial institution of shares of
Stock offered hereby, which shares of Stock such broker-dealer or other
financial institution may resell pursuant to this Prospectus/Proxy Statement (as
supplemented or amended to reflect such transaction). The Selling Shareholders
may also pledge shares of Stock to a broker-dealer or other financial
institution, and, upon a default, such broker-dealer or other financial
institution, may effect sales of the pledged shares of Stock pursuant to this
Prospectus (as supplemented or amended to reflect such transaction). In
addition, any shares of Stock that qualify for sale pursuant to Rule 144 may, at
the option of the holder thereof, be sold under Rule 144 rather than pursuant to
this Prospectus.
Any broker-dealer participating in such transactions as agent may receive
commissions from the Selling Shareholder and/or purchasers of the shares of
Stock offered hereby (and, if it acts as agent for the purchaser of such shares
of Stock, from such purchaser). Usual and customary brokerage fees will be paid
by the Selling Shareholder. Broker-dealers may agree with the Selling
Shareholder to sell a specified number of shares of Stock at a stipulated price
per share, and, to the extent such a broker-dealer is unable to do so acting as
agent for the Selling Shareholder, to purchase as principal any unsold shares of
Stock at the price required to fulfill the broker-dealer commitment to the
Selling Shareholder. Broker-dealers who acquire shares of Stock as principal may
thereafter resell such shares of Stock from time to time in transactions (which
may involve cross and block transactions and which may involve sales to and
through other broker-dealers, including transactions of the nature described
above) in the market, in negotiated transactions or otherwise at market prices
prevailing at the time of sale or at negotiated prices, and in connection with
such resales may pay to, or receive from the purchasers of such shares of Stock
commissions computed as described above.
In order to comply with the securities laws of certain states, if
applicable, the shares of Stock will be sold in such jurisdictions only though
registered or licensed brokers or dealers. In addition, in certain states the
shares of Stock may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
The Company has advised the Selling Shareholders that the anti-manipulation
rules of Regulation M under the Exchange Act may apply to sales of shares of
Stock in the market and to the activities of the Selling Shareholders and their
affiliates. In addition, the Company will make copies of this Prospectus/Proxy
Statement available to the Selling Shareholders and has informed them of the
need for delivery of copies of this Prospectus/Proxy Statement to purchasers at
or prior to the time of any sale of the shares of Stock offered hereby. The
Selling Shareholders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares of Stock against certain
liabilities, including liabilities arising under the Securities Act.
At the time a particular offer of shares of Stock is made, if required, a
Prospectus Supplement will be distributed that will set forth the number of
shares of Stock being offered and the terms of the offering, including the name
of any underwriter, dealer or agent, the purchase price paid by any underwriter,
any discount, commission and other item constituting compensation, any discount,
commission or concession allowed or reallowed or paid to any dealer, and the
proposed selling price to the public.
The Company has agreed with the Selling Shareholders to keep the
Registration Statement of which this Prospectus constitutes a part effective
until the first to occur of (i) the one year anniversary of the Effective Time,
as that term is defined in the Merger Agreement and (ii) such time as each
Selling Shareholder can sell all shares of Stock held by such Selling
Shareholder in a 90 day period pursuant to the resale restrictions imposed by
Rule 145. The Company intends to deregister any of the shares of Stock not sold
by the Selling Shareholders by such date.
THE FIRST AMERICAN FINANCIAL CORPORATION
OVERVIEW
The Company was organized in 1894 as Orange County Title Company,
succeeding to the business of two title abstract companies founded in 1889 and
operating in Orange County, California. In 1924, the Company commenced issuing
title insurance policies. In 1986, the Company began a diversification program
by acquiring and developing financial service businesses closely related to the
real estate transfer and closing process. The Company is a California
corporation whose executive offices are located at 114 East Fifth Street, Santa
Ana, California 92701-4642, and its telephone number is (714) 558-3211.
The Company, through its subsidiaries, is engaged in the business of
providing real estate-related financial and informational services to real
property buyers and mortgage lenders. The Company's products and services
include title insurance, tax monitoring, credit reporting, property data
services, flood certification, field inspection services, appraisal services,
mortgage loan servicing systems, mortgage document preparation and home warranty
services. The Company also provides investment, trust and thrift services.
Through growth and acquisitions, the Company believes it has become the
United States' largest provider of real estate-related financial and
informational services. The Company has assembled an array of companies which,
together, provide comprehensive services to the mortgage industry, commercial
and residential real estate developers, home buyers and other customers.
BUSINESS SEGMENTS
TITLE INSURANCE
Title insurance policies are insured statements of the condition of title
to real property, showing priority of ownership as indicated by public records,
as well as outstanding liens, encumbrances and other matters of record, and
certain other matters not of public record. Policies are issued based on a title
report prepared after a search of public records, maps, and documents and are
typically issued when a title is transferred.
Before issuing title policies, title insurers seek to limit their risk of
loss by accurately performing title searches and examinations. The major
expenses of a title company relate to such searches and examinations, the
preparation of preliminary reports or commitments and the maintenance of title
plants, and not from claim losses as in the case of property and casualty
insurers.
The Company, through FATICO and its other subsidiaries, transacts its title
insurance business through a network of more than 300 branch offices and more
than 4,000 independent agents. In 1997, the Company's title insurance operations
generated $1.46 billion in operating revenues.
REAL ESTATE INFORMATION SERVICES
In recent years management has developed a strategy to be a "one-stop" real
estate information service company. To this end, in 1991 the Company acquired
what was believed to be the second largest tax service company, and in 1995
acquired what were believed to be, in each case, the largest mortgage credit
reporting company and the largest flood zone determination company, in the
United States.
In general, the Company's real estate information service products generate
higher margins than its title insurance products. The majority of pre-tax
profits generated by the Company from non-title business is derived from the
real estate services business, which generated $45.3 million in pre-tax profits
in 1997 and $331.4 million in operating revenues. Approximately 29% of the
Company's pre-tax profits in 1997 were derived from its real estate information
services businesses. These businesses are not regulated and hence not
constrained by dividend statutes enforceable by the states in which the Company
operates its title business or by constraints imposed by California on the
Company's trust and banking business.
FAREISI has grown from its tax service origins into a diversified mortgage
services company. FAREISI and its subsidiaries now serve mortgage originators,
mortgage servicers, title companies, real estate attorneys, consumers as well as
non-lending entities. The business was initially established in 1987 to advise
mortgage lenders as to the status of tax payments on real property securing
their loans. The Company's real estate information services also includes
mortgage and other credit reporting services, flood zone determinations,
mortgage loan servicing systems, property inspections, appraisal services and
mortgage document preparation.
The tax service business includes both real estate tax reporting as well as
tax outsourcing and tax certification. The Company's tax service business
reports on 11 million properties annually and is believed to be the second
largest provider of tax services to the real estate market. The Company works
with over 22,000 taxing authorities nationwide.
First American CREDCO, Inc. ("CREDCO"), the Company's mortgage credit
reporting entity, is believed by the Company to be the largest provider of these
services in the United States and processes over 600,000 credit reports per
month. CREDCO provides residential mortgage credit reports, prequalifying
reports, merged credit data, resident screening services, business reports,
credit scoring tools and personal credit reports. CREDCO has recently branched
into the consumer lending and risk scoring areas, providing credit reporting and
information management services to automobile dealers, consumers and home equity
lenders nationwide. Approximately 25% of CREDCO's 1997 revenues were from
non-real estate related sources.
The Company is the leading provider of flood zone determinations. Flood
reporting services consist of a broad range of information required by
regulatory agencies regarding properties in relation to flood zones. This
business currently processes over 400,000 flood determinations per month.
The property/field services business consists of processing single family
home inspections, conducting field interviews with delinquent mortgagors,
monitoring the condition of properties and assuring timely property
preservation. The Company's acquisition in December 1996 of Ward Associates
places the Company among the leaders in this business.
The appraisal services business utilizes leading technology to provide
national mortgage lenders with property-relative value assessments. The
appraisal services business operates throughout the United States. Electronic
appraisals are supplemented with qualified local appraisers.
In April 1996, the Company acquired the Excelis Mortgage Loan Servicing
System ("Excelis MLS"), now known as Excelis, Inc. Excelis MLS is the only
commercially available real-time on-line servicing system that has been
developed since 1990 to meet increasingly sophisticated market demands. The
software employs rules-based technology which enables the user to customize the
system to fit its individual servicing criteria and policies.
In May 1997, the Company purchased all of the operations of Strategic
Mortgage Services, Inc. ("SMS"), other than SMS' flood zone determination
business. SMS is a leading provider of real estate information services to the
U.S. mortgage and title insurance industries. The acquired businesses include
SMS' credit division, which the Company believes is the third largest provider
of U.S. mortgage credit information; SMS' property appraisal division, which the
Company believes is the second largest provider of U.S. appraisal services; SMS'
title division, which provides title and closing services throughout the United
States, servicing primarily second mortgage originators; SMS' settlement
services business, which provides title plant systems and accounting services,
as well as escrow closing software, to the title industry; and a controlling
interest in what is believed by the Company to be the largest mortgage document
preparation firm.
On January 1, 1998, the Company and its real estate information service
subsidiaries (other than Excelis Inc.) (the "Real Estate Information
Subsidiaries") consummated a joint venture with Experian, pursuant to which
FARES was established. Under the joint venture, the Real Estate Information
Subsidiaries contributed substantially all of their assets and liabilities to
FARES in exchange for an 80% ownership interest and Experian transferred
substantially all of the assets and liabilities of its Real Estate Solutions
division ("RES") to FARES in exchange for a 20% ownership interest. The Company
believes that RES is the nation's foremost supplier of core real estate data,
providing, among other things, property valuation information, title
information, tax information and imaged title documents. As a result of this
joint venture, the Company believes that FARES is the nation's largest and most
diverse provider of information technology and decision support solutions for
the mortgage and real estate industries. See the Company's Report on Form 8-K
dated January 27, 1998, which is attached hereto as Annex G.
HOME WARRANTY
The Company currently owns 79% of its home warranty business, First
American Home Buyers Protection Corporation ("Home Buyers"), with the remaining
balance owned by current and former management of this subsidiary. Pursuant to a
pending exchange offer, the Company likely will acquire an additional 10.6%
ownership interest in Home Buyers. The home warranty business issues one-year
warranties which protect homeowners against defects in household systems and
appliances such as plumbing, water heaters, and furnaces. The warranties issued
are for household systems and appliances only, not for the homes themselves. The
Company's home warranty business currently operates in certain counties of
Arizona, California, Nevada, North Carolina, South Carolina, Texas, Utah and
Washington. The Company's home warranty business is one of the largest in the
United States based on contracts under service, with $46.9 million in operating
revenues in 1997.
TRUST AND THRIFT
Since 1960, the Company has conducted a general trust business in
California. In 1985, the Company formed a banking subsidiary into which its
subsidiary trust operation was merged. As of December 31, 1997, the trust
operations were administering fiduciary and custodial assets having a market
value in excess of $1.3 billion.
During 1988, the Company, through a majority owned subsidiary, acquired an
industrial loan corporation (the "Thrift") that accepts thrift deposits and uses
deposited funds to originate and purchase loans secured by commercial properties
in Southern California. The loans made by the Thrift currently range in amount
from $20,000 to $1,105,000, with an average loan balance of $270,500. Loans are
made only on a secured basis, at loan-to-value percentages no greater than 75%.
The Thrift specializes in making commercial real estate loans and financing
commercial equipment leases. In excess of 93% of the Thrift's loans are made on
a variable rate basis. The average yield on the Thrift's loan portfolio as of
December 31, 1997, was 11%. The Thrift's average loan is 60 months in duration.
Current deposits total $62.5 million and the loan portfolio totals $65.5
million.
RECENT DEVELOPMENTS
On March 18, 1998, the Company announced a definitive agreement to acquire
Contour Software, the largest supplier of mortgage origination software to the
mortgage loan industry. See the Company's Report on Form 8-K dated March 18,
1998, which is attached hereto as Annex H.
On April 7, 1998, the Company announced the issuance of $100,000,000
aggregate principal amount of its 7.55% senior debentures due 2028. The terms of
the senior debentures are defined under an indenture dated as of April 7, 1998
between the Company and The Wilmington Trust Company, as trustee. See the
Company's Report on Form 8-K dated April 7, 1998, which is attached hereto as
Annex J.
IMAGE ACQUISITION CORP.
IAC was incorporated in California in March 1998 exclusively for the
purpose of effecting the acquisition of Data Tree via the Merger. IAC has no
material assets and has not engaged in any activities except in connection with
the proposed acquisition of Data Tree. IAC's principal offices are located at
114 East Fifth Street, Santa Ana, California 92701, and its telephone number at
that address is (714) 558-3211.
DATA TREE CORPORATION
The following discussion of the Data Tree Corporation contains forward-looking
statements that involve risks and uncertainties. The actual results of Data Tree
and the Surviving Corporation could differ materially from those anticipated in
these forward-looking statements as a result of certain factors.
OVERVIEW OF TITLE INSURANCE INDUSTRY
The majority of Data Tree's revenues are generated from providing document
imaging and database management systems to the title insurance industry and to
county recorder offices. Title insurance companies issue insurance policies in
connection with the purchase or refinancing of commercial and residential real
estate, providing protection to the purchaser or lender against loss or damage
resulting from existing liens and claims and other defects in the ownership
chain of real property. Typically, every mortgage lender requires a title
insurance policy as a precondition of funding. Prior to issuing a policy, a
title insurance company conducts a search of public documents to ensure a
property is free of any such liens and encumbrances. The public records are
typically available for review on microfiche at the county recorder's office.
For a transaction fee, Data Tree provides title insurance companies on-line
access to Data Tree's image database of title records and software. Data Tree's
Titlescape(R) software allows on-line access to and from a users' PC.
County recorder's offices are the official record keeping body for all
documentation related to residential, commercial and industrial real
estate-related transactions, including ownership and title transfers, liens and
encumbrances. On any given day each recorder's office receives these documents
which are then indexed and stored. The recorder's offices also fulfill public
requests for copies of these documents. In order to manage these significant
inflow, storage and outflow requirements, many recorder's offices have automated
their processes. To this end, Data Tree sells to county recorders its IDEA(TM)
product, which offers an in-house, turnkey automation solution.
COMPANY OVERVIEW
Data Tree is a leading provider of document imaging and database management
systems to the title insurance industry and county recorders and other
governmental agencies. Data Tree believes it offers one of the largest image
databases of recorded documents and maps with over 400 million images, through a
network of nine data centers in five states.
Data Tree was founded in 1987 by Chopra and is organized as a California
close corporation. Since its founding, Data Tree has built and continues to
build an electronic database of scanned microfilm images of official records and
recorded documents (liens, trust deeds) and maps and electronically recorded
documents on a county by county basis to build its customer base for such
services. As of the date of this Prospectus/Proxy Statement, Data Tree's
database consists of images from 38 counties in Arizona, California, Nevada,
Florida and Texas. Data Tree maintains data centers that assist in the timely
production of Data Tree's database.
As of March 31, 1998, Data Tree employed 139 individuals in the United
States.
PRODUCTS AND SERVICES
[OBJECT OMITTED] [OBJECT OMITTED] [OBJECT OMITTED]
Database Access and Document Retrieval. Titlescape(R) is Data Tree's
primary product offering and is licensed to and used by local and regional
offices of title insurance companies. Introduced in 1997, Titlescape(R) is a
Windows-based document retrieval and integration software product that provides
an integrated, open-architecture system for title workflow processing. The
software package combines database access with the capability to integrate all
other functions associated with title policy processing and issuance,
effectively creating a "one-stop shop" at the users desktop. Titlescape(R)
allows each subscriber to customize the capabilities integrated into the system,
and is designed for individual workstations or client-server based systems in
order to allow for access from remote locations.
Titlescape(R) is licensed for a fixed license fee per user and installed on
either the customer's PCs or on hardware sold by Data Tree. Customers contract
for access to Data Tree's database, paying a fixed transaction fee for each
document retrieved. Volume discounts are applied to the standard access charge
to encourage large commitments from customers. Typically, user access fees
exceed customer contract guarantees.
Data Tree's hardware product line includes communication and scanning
hardware, workstations and laser printers. These products are normally sold at
market prices and in any event not discounted more than 10%. Data Tree's pricing
on hardware has stayed relatively steady over the past two to three years.
Turnkey Imaging, Storage and Retrieval. Data Tree's other major product
line, known as IDEA(TM) (Indexing Document Extraction Application), is Data
Tree's turnkey imaging system and represents a family of products sold to county
recorders who require a full in-house scanning, storage and retrieval system.
This system enables a county to convert its backfiles of microfilm stored
official records into electronic images and record and store new records in
electronic form. The IDEA(TM) system provides the following functions: (1)
document capture performs the initial scanning and indexing of paper or
film-based documents; (2) optical storage is used for permanent storage of the
scanned digital images; and (3) retrieval and display software allows users to
query the system and display and print stored images. The system is designed to
integrate with other existing systems such as accounting, personnel, and file
management that are particular to each county recorder's office. The IDEA(TM)
set of modules which can be individually developed, customized and molded to
meet the specific needs of each county recorder.
The IDEA(TM) system typically is sold under multiple contracts and includes
hardware, proprietary software and software licenses, technical assistance, and
on-going maintenance. In addition, as county recorders expand to integrate with
other systems, additional software modules and technical assistance is provided
on a follow-on basis.
As of March 31, 1998, Data Tree has sold its IDEA(TM) system to Orange
County and San Bernardino County, California. The IDEA(TM) system is compatible
with Data Tree's Titlescape(R) software, and to the extent counties adopt the
IDEA(TM) systems as its operating platform for images, certain title companies
have begun using Titlescape(R) electronic recording software in order to
electronically file documents with the county recorder.
Customer Service. Data Tree emphasizes ongoing customer service and
training. Generally, Data Tree's representatives visit existing customers at
least once a month to assess customer needs and satisfaction and provide
additional training. Data Tree provides telephonic customer support during
business hours.
PRODUCTION
Data Tree maintains imaging facilities at two locations in California and
contracts with Data Tree India in India for the conversion of microfilm, fiche,
and paper to Data Tree's image database. The activities at these facilities
consist of scanning, indexing, assembling and testing all the components that
integrate into the finished database.
Data Tree expands and updates its database continually through its main
imaging plant facilities and regional data centers. Document images, either in
microfilm, microfiche, or paper form, are sent to any of the above facilities
for scanning and recording onto hard disk or CD. Typically most backplant
activity is handled by the three imaging centers, while daily go-forward imaging
is handled by the appropriate regional facility. The images themselves are
either purchased, borrowed or bartered from county recorder's offices, title
insurance companies, or third party vendors. The stored data at each of the
facilities is linked together via dedicated T-1 communication lines, providing
Data Tree with an integrated image database.
When customers place a request through their local workstation, the request
is sent via dedicated lines to one of Data Tree's central servers, which
accesses the relevant information and sends it back to the requesting site where
it can be viewed, manipulated and printed. The document retrieval time typically
takes between a few seconds and a couple of minutes.
Data Tree leases all of its imaging facilities. Data Tree has two
facilities in California. The Sacramento, California facility has approximately
4,506 square feet and is on a 63 month lease expiring March 15, 1999. In
addition to film conversion and imaging, this facility houses the operations and
field service for Northern California. The facility in San Bernardino,
California has 5,846 square feet and is on a 60 month lease expiring February
28, 1999.
Equipment. Data Tree's production facilities house state-of-the-art
microfiche, microfilm, and paper scanners, as well as extensive communication
equipment. The California facilities contain sophisticated computer equipment,
optical systems, CDs and CD jukeboxes.
MARKETING AND SALES
Data Tree's marketing strategy is to develop new business opportunities by
creating new databases in additional counties to sell to new and existing
customers, and by leveraging its success with its products and services into new
markets. Data Tree markets its products and services directly to its end-users
through its internal sales force. Data Tree presently employs seven sales
professionals, including a Vice President of Sales and six regional sales
representatives, most of whom have extensive computer industry experience.
The typical sales cycle for Data Tree's products and service requires an
investment of time and effort to determine the individual customer's needs and
workflow requirements. Data Tree emphasizes building a business partnership
rather than maintaining merely a vendor relationship. The process for title
insurance companies from initial sales call to installation can take anywhere
from 2 to 12 months. For county recorders this process is slightly longer,
typically taking just over one year to complete.
RESEARCH AND DEVELOPMENT
Data Tree believes that the continued and timely development of new
products and enhancements to its existing technology is necessary for it to
maintain its competitive position. Data Tree's originating research and
development spending during fiscal 1995, 1996 and 1997 was approximately
$285,008, $651,290 and $764,939, respectively, and represented 6.3% , 8.7% and
9.1% of total revenue, respectively.
COMPETITION
With its Titlescape(R) product, Data Tree primarily competes with title
insurance companies' existing manual processes and secondarily with other
database management providers, including Security Union and the Digistar
business owned by FARES. With its turnkey IDEA(TM) product, Data Tree directly
competes with other companies with similar product offerings, including FileNet,
IBM, Eagle Systems, and Atpac.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF DATA TREE
The following discussion contains forward looking statements that involve risks
and uncertainties. Data Tree's and the Surviving Corporation's actual results
could differ materially from those discussed here. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the sections entitled "Risk Factors" and "Data Tree Corporation" as well as
those discussed elsewhere in this Prospectus/Proxy Statement.
GENERAL
Revenues. Data Tree's revenue associated with title insurance related
products consists primarily of title document fees which are generated on a
daily and monthly basis as customers access Data Tree's database. Additionally,
Data Tree sells equipment and offers maintenance agreements. Data Tree
recognizes revenue associated with title insurance products upon the monthly
delivery of the images and upon the shipment of equipment.
Revenue associated with county recorder related products consists of
software, hardware, maintenance and services, and may also include title
document images. In accordance with SOP 91-1, Data Tree recognizes revenue for
the software component when the software is delivered, when there are no
remaining significant Data Tree obligations to the customer, and when the
collection of the related receivable is deemed probable. Data Tree recognizes
revenue on hardware when the hardware is shipped. Maintenance revenue is
recognized ratably over the maintenance period, and title document image revenue
is recognized upon delivery.
On October 27, 1997, the Accounting Standards Executive committee (AcSEC)
of the AICPA issued Statement of Position 97-2 (SOP 97-2), Software Revenue
Recognition, that supersedes SOP 91-1. Data Tree will be required to adopt SOP
97-2 effective October 1, 1998. SOP 97-2 replaces the SOP 91-1 method of
distinguishing between significant and insignificant vendor obligations as a
basis for recording revenue with a requirement that each element of a software
licensing arrangement (e.g., postcontract customer support (PCS), specified
upgrades and enhancements - even on a when-and-if available basis, additional
software products and services) be separately identified and accounted for based
on relative fair values of each element. Data Tree is evaluating the impact that
the adoption of SOP 97-2 may have on future reported results of operations.
Title Plant. In accordance with SFAS 61, both the direct and indirect costs
of building title plant are capitalized and are not amortized. The cost of title
plant maintenance is charged to income in the period incurred. Direct costs
which are capitalized include, but are not limited to, direct labor and
associated benefits, film, shipping, compact disks, and production related
depreciation. Additionally, Data Tree capitalizes a portion of certain indirect
costs to title plant based primarily upon the ratio of title plant images to
total images (including maintenance images). These indirect costs include, but
are not limited to, indirect salaries and associated benefits, rent,
depreciation, occupancy, insurance, and supplies. Further, Data Tree allocates a
portion of originating interest expense to title plant.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from Data Tree's statements of income, expressed as a percentage of
revenue. There can be no assurance that the trends in revenue growth or
operating results shown below will continue in the future.
<TABLE>
<CAPTION>
PERCENT OF NET SALES
------------------------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED
March 31,
------------------------------------------------------------------
1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Revenues 100.0% 100.0% 100.0% 100.0% 100% 100.0%
Cost of Revenue 25.9 27.6 26.6 27.4 26.3 31.9
Gross Profit 74.1 72.4 73.4 72.6 73.7 68.1
Selling, general and
administrative expenses 50.5 44.9 36.3 33.7 32.8 34.9
Research and development __ __ __ __ 1.1 6.2
Income from operations 23.6 27.5 37.1 38.9 39.9 27.0
Interest expense, net 5.7 10.2 7.3 3.7 7.1 4.0
Provision for income taxes 8.3 5.7 11.4 14.1 13.1 9.2
Net income 9.6 11.6 18.4 21.1 19.7 13.8
</TABLE>
Six Months Ended March 31, 1998 Compared to Six Months Ended March 31, 1997
Revenues. For the six months ended March 31, 1998, Data Tree's revenue
increased $806,000, or 21.1%, to $4,626,000 from $3,820,000 during the same
period in the prior year. The increase in revenue is primarily a result of
increased revenue related to Data Tree's Titlescape(R) product offset by a
decrease in revenue from its IDEA(TM) product. During the six months ended March
31, 1998, the IDEA(TM) product comprised 12.6% of total revenue compared to
21.3% of total revenue for the same period in the prior year. The increase in
Titlescape(R) revenue is a result of increased penetration and sales volume in
Data Tree's existing markets as well as the entry into new geographic markets.
The decrease in IDEA(TM) revenues is largely due to the completion of existing
contracts originated in prior years.
Gross Profit. Gross profit as a percentage of total revenue decreased to
68.1% for the six months ended March 31, 1998 from 73.7% during the same period
in 1997. The decrease in gross margin is primarily due to a change in revenue
mix from higher gross profit IDEA(TM) revenue to lower gross profit
Titlescape(R) revenue.
Selling, General, and Administrative. Selling, general, and administrative
expenses for the six months ended March 31, 1998 increased $323,000, or 25%, to
$1,616,000 compared to $1,293,000 for the same period during 1997. This increase
is primarily a result of increased salaries associated with an increase in
executive and sales headcount, as well as increases in professional fees,
commissions, and general infrastructure costs to support the growth of Data
Tree.
Research and Development. Research and development expenses for the six
months ended March 31, 1998 increased $246,000, or 600.6%, to $287,000 compared
to $41,000 for the same period in the prior year, which amount is not separately
presented due to lack of materiality. This significant increase is primarily a
result of Data Tree ceasing the capitalization of certain software programming
costs, since the related products were available for general release during the
first quarter of 1998. During the first six months of 1998, these software
programming costs were expensed as incurred. Additionally, during the first six
months of 1998, Data Tree increased its software programming staff headcount,
resulting in increased research and development expenses.
Interest Expense, Net. Interest expense, net, decreased $83,000 to $186,000
for the six months ended March 31, 1998, compared to $269,000 for the same
period in the prior year. This decrease is primarily due to an increase in the
percentage of interest expense allocated to title plant during 1998 when
compared to 1997. This decrease was offset by increased interest expense
associated with an increase in Data Tree's bank borrowings during 1998 compared
to 1997.
Provision for Income Taxes. The provision for income taxes decreased
approximately 15% to $425,000 for the six months ended March 31, 1998 compared
to $501,000 for the same period in the prior year. While the amount decreased in
absolute dollars due to a decrease in income before income taxes, the effective
income tax rate remained unchanged at 40%.
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
Revenues. For the year ended September 30, 1997, Data Tree's revenue
increased $906,000, or 12.1%, to $8.4 million from $7.5 million. The increase in
revenue was primarily due to the addition of two new data centers and the
expansion of the number of counties with records in Data Tree's database.
Gross Profit. Gross profit as a percentage of revenue remained consistent
from 1996 to 1997 at approximately 73.0%.
Selling, General and Administrative. Selling, general, and administrative
costs increased approximately $110,000, or 4.0%, for 1997 as compared to 1996.
These costs increased primarily due to increased salaries associated with
additional headcount. These costs as a percentage of revenue decreased
approximately 2.6% to 33.7% from 36.3%. This decrease is primarily due to
revenue increasing at a faster rate then selling, general, and administrative
spending.
Interest Expense, Net. Interest expense decreased approximately $240,000,
or 43.9%, from $546,000 during 1996 to $307,000 during 1997. This decrease is
due primarily to an increase in the percentage of interest expense allocated to
title plant during 1997. This decrease was offset by the increased interest
expense associated with higher average borrowing during 1997.
Provision for Income Taxes. The provision for income taxes increased during
1997 when compared to the prior year due to the increase in income before income
taxes as compared to the prior year. Data Tree's effective tax rate during 1997
was 40% as compared to 38.3% during 1996.
Year Ended September 30, 1996 Compared to Year Ended September 30, 1995
Revenues. For the year ended September 30, 1996, Data Tree's revenue
increased $2.9 million, or 63.7% to approximately $7.5 million from $4.6
million. The increase in revenue is due to a significant increase in revenue
from Data Tree's IDEA(TM) product, two new data centers that were opened in
fiscal 1995, and increased market penetration in certain existing markets during
1996.
Gross Profit. Gross profit as a percentage of revenue increased slightly in
1996 to 73.4% from 72.4% in 1995. This increase in gross margin was due
primarily to increased revenue associated with Data Tree's IDEA(TM) product,
which commands higher gross margins than Data Tree's Titlescape(R) product.
Selling, General and Administrative. Selling, general, and administrative
costs increased to approximately $670,000 or 32.5%, during 1996 when compared to
1995. These costs increased primarily due to increased salaries associated with
increased headcount, increased costs associated with a complete year of office
costs related to two data centers opened in 1995, and increased general and
administrative costs to support Data Tree's growth. Selling, general, and
administrative costs as a percentage of revenue decreased 8.6% to 36.3% from
44.9%. This decrease is primarily due to revenues increasing at a more rapid
rate than selling, general, and administrative costs.
Interest Expense, Net. Interest expense increased approximately $81,000, or
17.4%, from $465,000 during 1995 to $546,000 during 1996. This increase is due
largely to an increase in outstanding debt during 1996 as compared to 1995.
Provision for Income Taxes. Data Tree's effective income tax rate during
1996 increased to 38.3% as compared to approximately 32.9% in the prior year.
The effective income tax rate was less than the Federal statutory rate in 1995
primarily due to the utilization of loss carryforwards and tax credit
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Data Tree's cash needs are primarily for working capital, capital
expenditures, and the building of title plant to support Data Tree's current and
projected growth. Data Tree has financed its operations to date primarily
through cash generated from operations, bank debt, long-term equipment
financing, and, to a lesser extent, the issuance of common stock. In addition to
its term notes payable with a commercial bank, Data Tree may borrow up to $1
million under a line of credit, secured by eligible accounts receivable. As of
March 31, 1998, Data Tree had no amount outstanding under this credit facility.
The line of credit expires in June 1998.
For the six months ended March 31, 1998, operating activities provided net
cash of $1,349,000 as a result of net income, depreciation and amortization and
an increase in income taxes payable of $637,000, $474,000, and $421,000,
respectively. This was offset by a $186,000 decrease in accounts payable. Data
Tree used $1,410,000 in investing activities, primarily for building title
plant. Data Tree used $1,189,000 in financing activities, largely for the
payment of notes payable to a commercial bank.
As of March 31, 1998, Data Tree had $497,000 in cash and negative working
capital of $1,682,000, compared to $1,747,000 in cash and $164,000 in negative
working capital as of September 30, 1997. The negative working capital is
primarily due to the current portion of notes payable of $2,200,000. In April
1998, Data Tree secured a $3 million revolving credit facility with a commercial
bank, guaranteed by the Company, which expires in March 1999. Data Tree believes
that its current cash balances, available credit facilities and cash flow from
operations will be sufficient to meet its working capital, debt service, and
capital expenditure requirements for at least the next 12 months.
YEAR 2000
Data Tree believes its proprietary and third party software is Year 2000
compliant and Data Tree does not anticipate expending any resources in
connection with any Year 2000 issues.
COMPARISON OF RIGHTS OF HOLDERS OF
DATA TREE STOCK AND COMPANY STOCK
The Company and Data Tree are both organized under the laws of the State of
California. Any differences, therefore, between the rights of shareholders of
the Company and the rights of shareholders of Data Tree arise solely from
differences between the respective articles of incorporation and bylaws of the
two corporations and the fact that Data Tree is organized as a close corporation
within the meaning of Section 158 of the CGCL.
The following summary sets forth certain material differences between the
rights of Company shareholders and the rights of Data Tree shareholders and is
qualified in its entirety by reference to the Company's Restated Articles of
Incorporation (the "Articles"), the Company's Bylaws (the "Bylaws"), Data Tree's
Articles of Incorporation (the "Data Tree Articles") and Data Tree's Bylaws (the
"Data Tree Bylaws").
AUTHORIZED AND ISSUED CAPITAL STOCK
The authorized capital stock of the Company currently consists of
36,000,000 shares of Stock and 500,000 Preferred shares, $1.00 par value, (the
"Preferred Shares") of which 1,000 of such shares have been designated Series A
Junior Participating Preferred Shares (the "Series A Preferred Shares"). As of
March 27, 1998, 17,850,189 shares of Stock were issued and outstanding and no
Preferred Shares were issued and outstanding. The authorized capital stock of
Data Tree currently consists of 10,000,000 shares of Data Tree Stock. As of May
__, 1998, 7,039,830 shares of Data Tree Stock were issued and outstanding and
warrants (the "Warrants") to acquire 110,136 shares of Data Tree Stock were
issued and outstanding. Based upon the maximum Merger Consideration, the
Warrants are not expected to be exercised and will be purchased from their
holder prior to the Merger.
VOTING RIGHTS
Each share of Stock entitles its holder to one vote on all matters
submitted to a vote of the Company's shareholders. Each Preferred Share would
entitle its holder to 100,000 votes on all matters submitted to a vote of the
Company's shareholders. Each share of Data Tree Stock entitles its holder to one
vote on all matters submitted to a vote of Data Tree shareholders.
PREEMPTIVE RIGHTS; CUMULATIVE VOTING
Neither the Articles nor the Data Tree Articles grants any preemptive
rights to shareholders. Subject to certain conditions, both the Bylaws and the
Data Tree Bylaws provide for cumulative voting during the election of directors.
ACTION BY WRITTEN CONSENT OF SHAREHOLDERS
Both the Bylaws and the Data Tree Bylaws provide that actions which may be
taken at an annual or special meeting of shareholders may be taken without such
meeting and without prior notice, if a consent in writing setting forth the
action so taken is signed by the holders of outstanding shares having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
SPECIAL MEETINGS OF SHAREHOLDERS
Both the Bylaws and the Data Tree Bylaws state that a special meeting of
the shareholders may be called at any time by the board of directors, the
chairman of the board, the president, or by one or more shareholders holding
shares in the aggregate entitled to cast not less than 10% of the votes at that
meeting.
QUORUM AND VOTING REQUIREMENTS FOR SHAREHOLDER MEETINGS
Both the Bylaws and the Data Tree Bylaws state that a majority of the
shares entitled to vote at a meeting shall constitute a quorum for the
transaction of business at such meeting. If a quorum is present, the affirmative
vote of the majority of shares represented at the meeting and entitled to vote
on any matter (other than the election of directors) is required to take action,
unless the vote of a greater number or voting by classes is required by the
CGCL. Directors are elected by a plurality of shares entitled to vote at the
meeting subject to cumulative voting described above.
BOARD OF DIRECTORS
The Company board of directors currently consists of 16 directors who serve
for one-year terms. The number of directors on the Company board of directors is
subject to change by action of the Company's board of directors or by the
Company's shareholders, but cannot be less than nine (9) nor more than seventeen
(17). The Data Tree board of directors consists of 3 directors who serve for
one-year terms. The number of directors on the Data Tree board of directors is
subject to change by action of the Data Tree board of directors or by Data
Tree's shareholders but cannot be less than three (3) nor more than five (5).
The number of Data Tree directors is currently set at three.
VACANCIES
Subject to identical conditions, both the Bylaws and the Data Tree Bylaws
provide that vacancies in the board of directors may be filled by a majority of
the remaining directors, though less than a quorum, or by a sole remaining
director.
LIMITATION ON DIRECTORS' LIABILITY
The Articles and the Data Tree Articles provide that the liability of
directors of the Company for monetary damages be eliminated to the fullest
extent permissible under law.
REMOVAL OF DIRECTORS
Neither the Articles nor the Bylaws contain provisions relating to the
removal of directors. The Data Tree Bylaws provide that, subject to certain
limitations, the Data Tree shareholders may remove a director upon the
affirmative vote or the consent of a majority of shares of Data Tree Stock.
Moreover, under certain circumstances the board of directors may remove a
director or shareholders holding at least 10% of the shares of Data Tree Stock
outstanding may petition the superior court to remove a director.
INDEMNIFICATION
The Bylaws provide that (i) the Company indemnify its Officers and
Directors to the fullest extent permitted by law, including those circumstances
in which indemnification would otherwise be discretionary; (ii) the Company is
required to advance expenses to its Officers and Directors as incurred,
including expenses relating to obtaining a determination that such Officers and
Directors are entitled to indemnification, provided that they undertake to repay
the amount advanced if it is ultimately determined that they are not entitled to
indemnification; (iii) an Officer or Director may bring suit against the
corporation if a claim for indemnification is not timely paid; (iv) the Company
may not retroactively amend the indemnification provisions in the Bylaws in a
way which is adverse to its Officers and Directors; (v) the provisions of
subsections (i) through (iv) above shall apply to all past and present Officers
and Directors of the corporation.
Indemnification of Agents of the corporation who are not its Officers and
Directors shall be in accordance with the provisions of Section 317 of the CGCL.
The Company may enter into indemnification agreements with its Directors,
Officers and other Agents upon such terms and conditions as are deemed to be in
the best interests of the Company by its board of directors.
The other provisions of the Bylaws to the contrary notwithstanding, the
Company is not obligated:
(a) to indemnify or advance expenses to an Officer, Director or Agent
with respect to proceedings or claims initiated or brought voluntarily by
such Officer, Director or Agent and not by way of defense, except with
respect to proceedings brought to establish or enforce a right to
indemnification under an indemnification agreement or any statute or law or
otherwise as required under Section 317 of the CGCL, but such
indemnification or advancement of expenses may be provided by the
corporation in specific cases if the board of directors has approved the
bringing of such suit;
(b) to indemnify an Officer, Director or Agent for any expenses
incurred with respect to any proceeding instituted by such Officer,
Director or Agent to enforce or interpret provisions of an indemnity
agreement or this Section of the Bylaws, if a court of competent
jurisdiction determines that each of the material assertions made by the
Officer, Director or Agent in such proceeding was not made in good faith or
was frivolous;
(c) to indemnify an Officer, Director or Agent for expenses or
liabilities of any type whatsoever (including, but not limited to,
judgments, fines, ERISA excise taxes or penalties, and amounts paid in
settlement) which have been paid or satisfied by an insurance carrier under
a policy of officers' and directors' liability insurance maintained by the
corporation; provided that the corporation shall be obligated to remit to
the Officer, Director or Agent any insurance proceeds received in respect
of expenses or liabilities previously paid or satisfied by such Officer,
Director or Agent;
(d) to indemnify an Officer, Director or Agent for expenses,
judgments, fines or penalties sustained, or for an accounting of profits
made from, the purchase and sale by such Officer, Director or Agent of
securities of the corporation in violation of the provisions of Section
16(b) of the Exchange Act, the rules and regulations promulgated
thereunder, any amendments thereto or any similar provisions of any
federal, state or local statutory law; or
(e) in the event a court of competent jurisdiction finally determines
that such indemnification is unlawful.
The term "Officer" as used herein is defined as each person who is, or was,
appointed to the office of Chairman of the Board, President, Vice President,
Secretary, Assistant Secretary, Chief Financial Officer, Treasurer, Assistant
Treasurer and such other office of the Company as the board shall designate from
time to time. The term "Director" as used herein is defined as any person who
is, or was, appointed to serve on the board of directors either by the
shareholders or the remaining board members. The term "Agent" as used herein is
defined as having the same meaning as that set forth in Section 317(a) of the
CGCL, except that it shall not include Officers and Directors.
The Data Tree Articles provide that the liability of directors of Data Tree
for monetary damages shall be eliminated to the fullest extent permitted under
California law. In addition, Data Tree is authorized to provide indemnification
to agents of Data Tree for breach of duty to Data Tree and its shareholders in
excess of that otherwise provided under California law, except that such agents
shall not be entitled to any such indemnification for matters related to claims
arising out of or occurring in connection with the transactions contemplated by
the Merger Agreement.
In addition to the foregoing right to indemnity provided to the agents of
Data Tree under the Data Tree Articles, Data Tree has entered into
indemnification agreements with its directors and executive officer (the "Data
Tree Indemnitees"). Under such indemnity agreements, other than with respect to
any liability or expense of a Data Tree Indemnitee for a breach of duty to Data
Tree and its shareholders related to any claims arising out of or occurring in
connection with the transactions contemplated by the Merger Agreement, Data Tree
is obligated to hold harmless and indemnify the Data Tree Indemnitees against
any and all expenses and damages to which such persons become subject by reason
of the fact that such persons were acting in the capacity of directors or
executive officers of Data Tree. Notwithstanding the foregoing, under the
indemnity agreements, Data Tree shall not be obligated to indemnify the Data
Tree Indemnitees for expenses or damages arising out of, among other things, (i)
a claim against a Data Tree Indemnitee for an accounting of profits made from
the purchase or sale by such person of securities of Data Tree, (ii) a Data Tree
Indemnitee's conduct from which such person (A) derived an improper personal
benefit, (B) believed to be contrary to the best interests of Data Tree and its
shareholders, (C) showed reckless disregard for his or her duty to Data Tree and
its shareholders,(D) engaged in an execused pattern of inattention that amounted
to an abdication of such person's duty to Data Tree or its shareholders, (iii)
any action by or in the right of Data Tree under certain circumstances, (iv) any
proceeding initiated by a Data Tree Indemnitee under certain circumstances.
Under the indemnification agreements, Data Tree is obligated to advance,
prior to the final disposition of any proceeding, all expenses incurred by a
Data Tree Indemnitee in connection with such proceeding upon receipt of an
undertaking by such Data Tree Indemnitee to repay such amounts advanced it is
ultimately determined that such Data Tree Indemnitee is not entitled to
indemnification under the indemnification agreement, the Data Tree charter
documents or California law.
AMENDMENTS TO ARTICLES OF INCORPORATION OR BYLAWS
Neither the Articles nor the Data Tree Articles specifies the approvals
necessary to amend the Articles and the Data Tree Articles, respectively.
Therefore, under the California General Corporation Law, any amendment to the
Articles or the Data Tree Articles must be approved by a majority of the
outstanding shares of Stock or shares of Data Tree Stock, respectively. Both the
Bylaws and the Data Tree Bylaws provide for adoption of new bylaws, and for
their respective amendment or repeal by the vote or written consent of holders
of a majority of the outstanding shares entitled to vote; provided, however,
that the authorized number of directors may be changed only by an amendment to
the relevant articles of incorporation. Both the Bylaws and the Data Tree Bylaws
provide for adoption of new bylaws, and for their respective amendment or appeal
by the board of directors, provided, however, that the board of directors may
adopt a bylaw or amendment thereof changing the authorized number of directors
only for the purpose of fixing the exact number of directors within the limits
specified in the relevant articles or bylaws.
RIGHTS TO PURCHASE PREFERRED STOCK
Each share of Stock has attached to it a right which, subject to the terms
and conditions of the Rights Agreement (the "Rights Agreement") between the
Company and Wilmington Trust Company, dated October 23, 1997, entitles the
holder to purchase a fraction of a Preferred Share upon the occurrence of
certain events which are defined in the Rights Agreement. As of the date of this
Prospectus/Proxy Statement, such rights are not exerciseable. Shares of Data
Tree Stock do not have any such rights. See "Description of the Stock" and the
description of Rights to Purchase Series A Junior Participating Preferred Shares
contained in the Company's Registration Statement on Form 8-A, dated November 7,
1997, which is attached as Annex K hereto.
TAX MATTERS
The following is a general discussion of the material U.S. Federal income
tax consequences of the receipt of the Stock by a holder of Data Tree Stock
pursuant to the Merger contemplated by this Prospectus/Proxy Statement and is
not intended to constitute advice regarding the federal income tax consequences
of the Merger to any such holder. Except as specifically noted, this discussion
applies only to a U.S. Holder (as hereinafter defined). This summary applies
only to U.S. Holders who hold Data Tree Stock as capital assets and does not
address aspects of U.S. Federal income tax that may be applicable to holders
that are subject to special tax rules, including, without limitation, insurance
companies, tax-exempt organizations, financial institutions, dealers in
securities, foreign persons, persons with a "functional currency" other than the
U.S. dollar, persons who acquired shares of Data Tree Stock pursuant to an
exercise of employee stock options or rights or otherwise as compensation and
persons who hold shares of Data Tree Stock as part of a "straddle," "hedging" or
"conversion" transaction. Also, the summary does not address state, local or
foreign income tax consequences of the Merger. Consequently, each holder should
consult such holder's own tax advisor as to the specific tax consequences of the
Merger to such holder.
For purposes of this discussion, a "U.S. Holder" means a beneficial owner
of shares of Data Tree Stock that is (i) a citizen or resident of the U.S., (ii)
a corporation or partnership organized in or under the laws of the U.S. or any
political subdivision thereof or therein, (iii) an estate the income of which is
subject to U.S. Federal income taxation regardless of its source or (iv) a trust
if (x) a U.S. court can exercise primary supervision over the administration of
such trust and (y) one or more U.S. fiduciaries have the authority to control
all of the substantial decisions of such trust. Notwithstanding the preceding
sentence, to the extent provided in United States Treasury Regulations, certain
trusts in existence on August 20, 1996, and treated as U.S. persons also will be
U.S. Holders. A "Non-U.S. Holder" is a beneficial owner of Data Tree Stock other
than a U.S. Holder.
General. The transaction contemplated in this Prospectus/Proxy Statement is
structured as a merger of IAC with and into Data Tree. Except with respect to
the fractional shares to be issued in connection with such Merger, consideration
paid for Data Tree Stock is solely voting stock of the Company. For purposes of
this discussion, the continuity of stockholder interest requirement applicable
to corporate reorganizations (which requires a continuing equity interest in the
Company by holders owning a significant percentage of the Data Tree Stock prior
to the consummation of the Merger) is assumed.
In addition, substantially contemporaneous with such Merger, indirect
subsidiaries of the Company will enter into the following four agreements with
one or more shareholders of Data Tree: an Operating Agreement for NEWCO between
FARES and R2; a Supply Agreement between NEWCO and R2; an Employment Agreement
between NEWCO and Chopra; and a Noncompetition Agreement among NEWCO, R2 and
Chopra. The description of the federal income tax consequences of the merger set
forth below assumes that all payments made in connection with such agreements
constitute payments solely in exchange for such future services, property or
cash.
Tax Consequences to Holders of Data Tree Stock. If the Merger is
consummated as contemplated by this Prospectus/Proxy Statement and based on the
above assumptions, the material U.S. Federal income tax consequences to U.S.
Holders who hold Data Tree Stock as capital assets and who exchange such Data
Tree Stock pursuant to the Merger will be as follows:
(i) no gain or loss will be recognized by a U.S. Holder on the
exchange of Data Tree Stock for the Stock, except as described below with
respect to the receipt of cash in lieu of fractional shares of the Stock;
(ii) the aggregate adjusted tax basis of shares of the Stock received
by a U.S. Holder (including fractional shares of the Stock deemed received
and redeemed as described below) will be the same as the aggregate adjusted
tax basis of the Data Tree Stock exchanged therefor;
(iii) the holding period of shares of the Stock (including the holding
period of fractional shares of the Stock) received by a U.S. Holder will
include the holding period of the Data Tree Stock exchanged therefor; and
(iv) a U.S. Holder of Data Tree Stock who receives cash in lieu of
fractional shares of the Stock will be treated as having received such
fractional shares and then as having received such cash in redemption of
such fractional shares. Under Section 302 of the Code, provided that such
deemed distribution is "substantially disproportionate" with respect to
such U.S. Holder or is "not essentially equivalent to a dividend" after
giving effect to the constructive ownership rules of the Code, the U.S.
Holder will generally recognize capital gain or loss on such deemed
redemption equal to the difference between the amount of cash received and
the U.S. Holder's adjusted tax basis in the fractional share interest in
the Stock. Such capital gain or loss will be long-term capital gain or loss
if the U.S. Holder's holding period in the fractional shares is more than
eighteen months.
Consequences of Holding First American Financial Corporation Common Stock.
Distributions of cash or property (other than shares of the Stock, if any,
distributed pro rata to all shareholders of the Company) generally will be
includible in ordinary income by a U.S. Holder in accordance with such U.S.
Holder's method of tax accounting, to the extent such distributions are made
from the current or accumulated earnings and profits of the Company. Such
dividends will be eligible for the dividends received deduction generally
allowed to corporate U.S. Holders. The dividends received deduction is subject
to certain limitations, though, and the benefit of such deduction may be reduced
by the corporate alternative minimum tax. Corporate U.S. Holders should consult
their own tax advisors regarding the availability of, and limitations on, the
dividends received deduction. To the extent, if any, that the amount of any
distribution by the Company exceeds the Company's current and accumulated
earnings and profits, it will be treated first as a tax-free return of the U.S.
Holder's tax basis in the shares of Stock and thereafter as capital gain. Upon
the sale, exchange or redemption of Shares, a U.S. Holder generally will
recognize taxable gain or loss equal to the difference between the amount
realized and such holder's adjusted tax basis. Such gain or loss will be capital
gain or loss, provided that the U.S. Holder holds such shares of Stock as a
capital asset. In the case of a noncorporate U.S. Holder, the maximum marginal
U.S. federal income tax rate applicable to such gain will be lower than the
maximum marginal U.S. federal income tax rate applicable to ordinary income if
such U.S. Holder's holding period for such shares of Stock exceeds one year and
will be further reduced if such shares of Stock were held for more than 18
months.
Information Reporting and Backup Withholding Tax. United States information
reporting requirements and backup withholding tax generally will apply to
certain payments to certain non-corporate holders of the Stock. Information
reporting will generally apply to payments of proceeds from the sale or
redemption of the Stock by a payor within the United States to a holder of the
Stock (other than an "exempt recipient," which includes corporations, Non-U.S.
Holders that provide an appropriate certification and certain other persons). A
payor within the United States will be required to withhold 31% of any payment
of proceeds from the sale or redemption of the Stock within the United States to
a holder (other than a corporation or an "exempt recipient") if such holder
fails to furnish its correct taxpayer identification number or otherwise fails
to comply with such backup withholding requirements. Any amounts withheld under
the backup withholding rules from a payment to a holder will be refunded (or
credited against such holder's U.S. federal income tax liability, if any),
provided the required information is furnished to the U.S. Internal Revenue
Service.
Treasury Regulations issued on October 6, 1997, and an IRS notice
announcing revisions to such regulations, would modify certain of the rules
discussed above generally with respect to payments on the Stock made after
December 31, 1998. In particular, a payor within the United States will be
required to withhold 31% of any payment of dividends on, or proceeds from the
sale of, the Stock within the United States to a Non-U.S. Holder if such holder
fails to provide an appropriate certification. In the case of such payments by a
payor within the United States to a foreign partnership (other than payments to
a foreign partnership that qualifies as a "withholding foreign partnership"
within the meaning of such Treasury Regulations and payments to a foreign
partnership that are effectively connected with the conduct of a trade or
business in the United States), the partners of such partnership will be
required to provide the certification discussed above in order to establish an
exemption from backup withholding tax and information reporting requirements.
Moreover, a payor may rely on a certification provided by a Non-U.S. Holder only
if such payor does not have actual knowledge or a reason to know that any
information or certification stated in such certificates is unreliable.
THE FOREGOING IS A GENERAL DISCUSSION OF CERTAIN FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER AND IS INCLUDED FOR GENERAL INFORMATION ONLY. THE
FOREGOING DISCUSSION DOES NOT TAKE INTO ACCOUNT THE PARTICULAR FACTS AND
CIRCUMSTANCES OF EACH HOLDER'S TAX STATUS AND ATTRIBUTES. AS A RESULT, THE
FEDERAL INCOME TAX CONSEQUENCES ADDRESSED IN THE FOREGOING DISCUSSION MAY NOT
APPLY TO EACH HOLDER. IN VIEW OF THE INDIVIDUAL NATURE OF INCOME TAX
CONSEQUENCES, EACH HOLDER IS URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISOR TO
DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH HOLDER, INCLUDING
THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES IN FEDERAL AND OTHER TAX LAWS.
DESCRIPTION OF THE STOCK
The authorized capital stock of the Company consists of 36,000,000 Common
shares, $1.00 par value (defined above as the "Stock") and 500,000 Preferred
shares, $1.00 par value (defined above as "Preferred Shares"), of which 1,000 of
such shares have been designated Series A Preferred Shares.
Common Shares. As of May 1, 1998, there were approximately 17,899,902
shares of the Stock outstanding and held of record by approximately 3,109
shareholders.
The holders of the Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Accordingly, holders
of a majority of the shares of Stock entitled to vote in any election of
directors may elect all of the directors standing for election. Subject to
preferences that may be applicable to any outstanding Preferred Shares, holders
of the Stock are entitled to receive ratably such dividends as may be declared
by the Company's board of directors our of funds legally available therefor. In
the event of a liquidation, dissolution or winding up of the Company, holders of
the Stock are entitled to share ratably in the assets remaining after payment of
liabilities and the liquidation preference of any outstanding preferred stock.
Holders of the Stock have no preemptive, conversion or redemption rights. All of
the outstanding shares of Stock are, and the shares to be issued in connection
with the Merger when issued will be, fully paid and non-assessable.
Preferred Shares. On October 23, 1997, the Company declared a dividend
distribution of one right (the "Right") for each share of Stock , to
shareholders of record at the close of business on November 15, 1997 (the
"Preferred Record Date"). Each Right entitles the record holder to purchase from
the Company one one hundred-thousandth of a Preferred Share ("Preferred Share
Fraction") at a price of $265 (the "Purchase Price"), subject to adjustment in
certain circumstances.
Initially, the Rights will be attached to the certificates representing
outstanding shares of Stock, and no certificates evidencing such rights will be
issued. The Rights, however, will separate from the shares of Stock and a
"Distribution Date" will occur upon the earlier of (i) the close of business on
the tenth day after the date (the "Share Acquisition Date") of a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired, or obtained the right to acquire, beneficial
ownership of 15% or more of the outstanding shares of Stock, or (ii) the close
of business on the tenth business day (or such later date as may be determined
by the Company prior to such time as any person becomes an Acquiring Person)
after the commencement of a tender offer or exchange offer if, upon consummation
thereof, the person or group making such offer would be the beneficial owner of
15% or more of the outstanding shares of Stock. Until the Distribution Date, (i)
the Rights will be evidenced by the Stock certificates and will be transferred
with and only with such Stock certificates, (ii) new Stock certificates issued
after the Preferred Record Date will bear a legend incorporating the agreement
evidencing the Rights by reference and (iii) the surrender for transfer of any
certificates for shares of Stock outstanding will also constitute the transfer
of the Rights associated with the shares of Stock represented by such
certificate. As soon as practicable following the Distribution Date,
certificates evidencing the Rights will be mailed to holders of record of shares
of the Stock as of the close of business on the Distribution Date and,
thereafter, such separate certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on October 23, 2007 unless earlier redeemed by the
Company as described below.
Except in the circumstances described below, after the Distribution Date
each Right will be exercisable into a Preferred Share Fraction. Each Preferred
Share Fraction carries voting and dividend rights that are intended to produce
the equivalent of one share of Stock. The voting and dividend rights of the
Series A Preferred Shares are subject to adjustment in the event of dividends,
subdivisions and combinations with respect to the shares of the Stock. In lieu
of issuing certificates for fractions of Series A Preferred Shares (other than
fractions which are integral multiples of Preferred Share Fractions), the
Company may pay cash.
In the event that, at any time following the Distribution Date, a person
becomes an Acquiring Person (other than pursuant to an offer for all outstanding
shares of Stock at a price and on terms which the majority of the independent
directors of the Company determine to be fair to, and otherwise in the best
interests of, shareholders), proper provision shall be made so that each holder
of a Right will thereafter have the right to receive, upon the exercise thereof,
shares of Stock (or, in certain circumstances, cash, property or other
securities, including Preferred Share Fractions, of the Company) having a value
equal to two times the exercise price of the Right. In lieu of requiring payment
of the Purchase Price upon exercise of the Rights following any such event, the
Company may provide that each Right be exchanged for one share of Stock (or
cash, property or other securities, as the case may be). Following the
occurrence of any of the events set forth in this paragraph, any Rights that
are, or (under certain other circumstances) were, beneficially owned by an
Acquiring Person shall immediately become null and void.
In the event that, at any time following the Share Acquisition Date, (i)
the Company engages in a merger or consolidation in which the Company is not the
surviving corporation, (ii) the Company engages in a merger or consolidation
with another person in which the Company is the surviving corporation, but in
which all or part of its shares of Stock are changed or exchanged, or (iii) 50%
or more of the Company's assets or earning power is sold or transferred (except
with respect to clauses (i) and (ii), a merger or consolidation (a) which
follows an offer described in the second preceding paragraph and (b) in which
the amount and form of consideration is the same as was paid in such offer),
proper provision shall be made so that each holder of a Right (except Rights
which previously have been voided as set forth above) shall thereafter have the
right to receive, upon the exercise thereof, common stock of the acquiring
company having a value equal to two times the exercise price of the Right. The
events set forth in this paragraph and in the second preceding paragraph are
referred to as the "Triggering Events."
The Purchase Price payable, and the number of Preferred Share Fractions or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on the Series A Preferred Shares or other capital shares, or a
subdivision, combination or reclassification of the Series A Preferred Shares,
(ii) upon the grant to holders of the Series A Preferred Shares of certain
rights or warrants to subscribe for Series A Preferred Shares or securities
convertible into Series A Preferred Shares at less than the current market price
of the Series A Preferred Shares, or (iii) upon the distribution to holders of
the Series A Preferred Shares of evidences of indebtedness or assets (excluding
regular quarterly cash dividends or dividends payable in Series A Preferred
Shares) or of subscription rights or warrants (other than those referred to
above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Series A Preferred Shares (other than
fractions which are integral multiples of Preferred Share Fractions) will be
issued upon exercise of the Rights and, in lieu thereof, a cash payment will be
made based on the market price of the Series A Preferred Shares on the last
trading date prior to the date of exercise.
At any time prior to the earlier of (i) the date on which a person becomes
an Acquiring Person and (ii) the Final Expiration Date, the board of directors
of the Company may redeem the Rights in whole, but not in part, at a price of
$.001 per Right, payable in cash or securities or both (the "Redemption Price").
Immediately upon the action of the board of directors of the Company ordering
redemption of the Rights, the Rights will terminate and the only right of the
holders of Rights will be to receive the Redemption Price.
Issuance of Common Shares upon exercise of Rights is subject to regulatory
approval. Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
be taxable to shareholders or to the Company, shareholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Shares (or other consideration) of the Company or for
common stock of the acquiring company as set forth above.
Any of the provisions of the Rights Agreement, other than certain
provisions relating to the principal economic terms of the Rights, may be
amended by the board of directors of the Company prior to the Distribution Date.
Thereafter, the provisions, other than certain provisions relating to the
principal economic terms of the Rights, of the Rights Agreement may be amended
by the Board in order: to cure any ambiguity, defect or inconsistency; to
shorten or lengthen any time period under the agreement evidencing the Rights;
or in any other respect that will not adversely affect the interests of holders
of Rights (excluding the interests of any Acquiring Person); provided that no
amendment to adjust the time period governing redemption shall be made at such
time as the Rights are not redeemable.
As long as the Rights are attached to the shares of Stock and in certain
other limited circumstances, the Company will issue one Right with each new
Common Share so that all such shares will have attached Rights.
As of March 27, 1998, there were no Series A Preferred Shares outstanding.
LEGAL MATTERS
The validity of the shares of Stock offered hereby will be passed upon for
the Company by White & Case LLP, Los Angeles, California.
EXPERTS
The financial statements of the Company incorporated in this
Prospectus/Proxy Statement by reference have been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The financial statements of Data Tree as of September 30, 1997 and 1996,
and for each of the three years in the period ended September 30, 1997, included
in the Proxy Statement of Data Tree Corporation, which is referred to and made a
part of this Prospectus and Registration Statement, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
<PAGE>
INDEX TO DATA TREE'S FINANCIAL STATEMENTS
DATA TREE CORPORATION
Report of Ernst & Young LLP, Independent Auditors F-1
Balance Sheets as of September 30, 1996 and 1997 F-2
Statements of Income for the Years Ended
September 30, 1995, 1996 and 1997 F-3
Statements of Shareholders' Equity for the Years
Ended September 30, 1995, 1996 and 1997 F-4
Statements of Cash Flows for the Years Ended
September 30, 1995, 1996 and 1997 F-5
Notes to Financial Statements F-6
Balance Sheet as of March 31, 1998 (Unaudited) F-13
Statements of Income for the Six Months Ended
March 31, 1997 and 1998 (Unaudited) F-14
Statement of Shareholders' Equity for the Six Months Ended
March 31, 1998 (Unaudited) F-15
Statements of Cash Flows for the Six Months Ended
March 31, 1997 and 1998 (Unaudited) F-16
Notes to Financial Statements (Unaudited) F-17
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders Data Tree Corporation
We have audited the accompanying balance sheets of Data Tree Corporation as of
September 30, 1997 and 1996, and the related statements of income, shareholders'
equity and cash flows for each of the three years in the period ended September
30, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Data Tree Corporation at
September 30, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
December 3, 1997
<PAGE>
<TABLE>
<CAPTION>
Data Tree Corporation
Balance Sheets
September 30
1997 1996
--------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 1,746,777 $641,848
Accounts receivable, net of allowance for doubtful
accounts of $32,000 and $30,000 in 1997 and 1996,
respectively 1,341,977 764,914
Prepaid expenses and other current assets 570,603 114,638
------------------ -------------------
Total current assets 3,659,357 1,521,400
Property and equipment, net 3,587,239 3,030,817
Title plant and computer software technology, net 13,764,707 9,956,450
Note receivable from related party 143,392 143,392
Other assets 102,932 110,200
------------------ -------------------
$21,257,627 $14,762,259
================== ===================
Liabilities and shareholders' equity Current liabilities:
Accounts payable $ 490,512 $ 175,227
Accrued expenses and other current liabilities 660,775 342,527
Income taxes payable 217,610 206,650
Deferred income taxes 131,554 156,000
Current portion of notes payable to bank 2,200,000 1,060,877
Current portion of capital lease obligations 122,482 102,293
------------------ -------------------
Total current liabilities 3,822,933 2,043,574
Notes payable to bank, less current portion 7,400,000 6,895,373
Capital lease obligations, less current portion 307,606 246,216
Deferred income taxes 2,435,560 1,640,000
Commitments
Shareholders' equity:
Common shares, no par value:
Authorized shares - 10,000,000
Issued and outstanding shares - 7,039,830 in 1997
and 6,406,250 in 1996 2,420,800 836,850
Retained earnings 4,870,728 3,100,246
------------------ -------------------
Total shareholders' equity 7,291,528 3,937,096
------------------ -------------------
$21,257,627 $14,762,259
================== ===================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Data Tree Corporation
Statements of Income
Years ended September 30
1997 1996 1995
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $8,375,982 $7,470,333 $4,564,818
Cost of sales 2,295,110 1,984,225 1,261,584
------------------------------ ----------------------------- ----------------------
Gross profit 6,080,872 5,486,108 3,303,234
Selling, general and
administrative expenses 2,823,342 2,714,825 2,048,526
------------------------------ ----------------------------- ----------------------
Income from operations 3,257,530 2,771,283 1,254,708
Interest expense, net 306,724 546,370 465,457
------------------------------ ----------------------------- ----------------------
Income before provision for
income taxes 2,950,806 2,224,913 789,251
Provision for income taxes 1,180,324 853,000 260,000
============================== ============================= ======================
Net income $1,770,482 $1,371,913 $ 529,251
============================== ============================= ======================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Data Tree Corporation
Statements of Shareholders' Equity
Common Stock Retained
Shares Amount Earnings Total
---------------------------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Balance at September 30, 1995 5,125,000 $136,850 $1,728,333 $1,865,183
Issuance of common shares on
conversion of $700,000 of
convertible notes payable 1,281,250 700,000 -- 700,000
Net income -- -- 1,371,913 1,371,913
-------------------- ------------------- ------------------- -----------------
Balance at September 30, 1996 6,406,250 836,850 3,100,246 3,937,096
Exercise of common shares on
exercise of stock purchase right 633,580 1,583,950 -- 1,583,950
Net income -- -- 1,770,482 1,770,482
-------------------- ------------------- ------------------- -----------------
Balance at September 30, 1997 7,039,830 $2,420,800 $4,870,728 $7,291,528
==================== =================== =================== =================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Data Tree Corporation
Statements of Cash Flows
Years Ended September 30
1997 1996 1995
-------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $1,770,482 $1,371,913 $ 529,251
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 695,601 431,207 275,850
Deferred income taxes 771,114 583,000 290,000
Repayment of note receivable -- -- 102,590
Changes in operating assets and liabilities:
Accounts receivable (577,063) (17,053) (255,811)
Inventory -- 8,870 59,302
Prepaid expenses and other current assets (448,697) (127,667) 113,492
Accounts payable 315,285 (100,047) (46,494)
Accrued expenses and other current liabilities 318,248 80,741 24,593
Income taxes payable 10,960 206,650 --
------------------------- --------------------- -------------------
Net cash provided by operating activities 2,855,930 2,437,614 1,092,773
Investing activities
Purchases of property and equipment (1,159,194) (746,014) (915,673)
Title plant (3,080,716) (2,289,832) (2,517,036)
Computer software technology (608,302) (441,617) (137,511)
Note receivable from related party -- 106,608 --
------------------------- --------------------- -------------------
Net cash used by investing activities (4,848,212) (3,370,855) (3,570,220)
Financing activities
Net proceeds of notes payable to bank 11,000,000 -- --
Payments on notes payable to bank (4,356,250) -- --
Net proceeds of convertible notes payable -- 4,300,000 3,000,000
Payments on convertible notes payable (5,000,000) (3,046,528) (97,222)
Proceeds from exercise of common stock purchase right 1,583,950 -- --
Payments on capital lease obligations (130,489) (156,481) (146,963)
------------------------- --------------------- -------------------
Net cash provided by financing activities 3,097,211 1,096,991 2,755,815
Increase in cash and cash equivalents 1,104,929 163,750 278,368
Cash and cash equivalents at beginning of year 641,848 478,098 199,730
========================= ===================== ===================
Cash and cash equivalents at end of year $1,746,777 $ 641,848 $ 478,098
========================= ===================== ===================
Supplemental disclosure of cash flow information
Interest paid $ 995,000 $ 865,000 $ 762,000
========================= ===================== ===================
Income taxes paid $ 397,659 $ 63,000 $ --
========================= ===================== ===================
Supplemental disclosure of non-cash investing and financing
activities
Capital lease obligations entered into for equipment $ 212,068 $ 309,570 $ --
========================= ===================== ===================
Conversion of convertible notes payable into common stock
$ -- $ 700,000 $ --
========================= ===================== ===================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Data Tree Corporation
Notes to Financial Statements
September 30, 1997
1. Summary of Significant Accounting Policies
Description of Business
Data Tree Corporation (the "Company") is engaged in the business of providing
large databases of high quality digitized real estate title documents and
turnkey systems consisting of hardware and software to title insurance companies
and governmental agencies, respectively. The Company has two product lines. The
first, Titlescape(R), consists of a software package and title document database
marketed to title insurance companies whereby the customer remotely accesses the
Company's database to obtain specific recorded title documents. The second,
IDEA(TM), is a turnkey imaging, indexing, and document management system
consisting of hardware and software that allows county recorder offices to
streamline and automate office workflow.
Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments purchased with
a maturity date of three months or less. Cash equivalents are stated at cost,
which approximates market value.
Concentration of Credit Risk
Credit is extended based on an evaluation of the customer's financial condition
and collateral is generally not required. Credit losses have traditionally been
minimal and such losses have been within management's expectations.
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and equipment
is provided using the straight-line method over the estimated useful lives of
the assets ranging from five to ten years.
Leased property meeting certain criteria is capitalized and the present value of
the related lease payments is recorded as an obligation. Amortization of
capitalized leased assets is provided over the shorter of the lease term or the
estimated useful lives of the assets.
Title Plant
The Company capitalizes certain costs associated with constructing title plant
in accordance with Financial Accounting Standards Board Statement 61, Accounting
for Title Plant ("Statement 61"). Pursuant to Statement 61, capitalized costs of
title plant are not amortized. Both direct costs, consisting primarily of
salaries, benefits, and depreciation, and certain indirect costs are capitalized
as title plant until the title plant begins generating revenue. Indirect costs
consist of certain salaries and benefits, depreciation, interest, and office
related costs and are allocated to title plant based upon certain production
ratios. Costs incurred to maintain the title plant subsequent to initial revenue
generation are expensed as incurred.
In accordance with Financial Accounting Standards Board Statement 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, the Company annually reviews title plant for changes in
circumstances that could indicate the carrying amount of the asset may be
impaired. If the sum of the estimated future cash flows of a regional title
plant database is less than its carrying value, an impairment loss would be
recognized. Based on management's analysis at September 30, 1997, the title
plant is not impaired.
Computer Software Technology
In accordance with Financial Accounting Standards Board Statement 86, Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed,
the Company capitalizes the cost of computer software technology purchased or
incurred in the development of specific products after technological feasibility
has been established. Capitalization of costs ceases when the product is
available for general release to the Company's customers. The capitalized
software technology costs are amortized using the straight-line method over the
estimated economic life of the product.
Revenue Recognition
Revenues from the Titlescape(R) product are recognized when the customer
accesses the Company's proprietary database. Revenues from computer hardware
sales are recognized when the hardware is shipped. Revenues from software
licenses are recognized when the software has been delivered, all significant
Company obligations have been completed, and collectability is probable.
Revenues from maintenance agreements are recognized ratably over the maintenance
contract term.
Basis of Presentation
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting contemplates
the recovery of the Company's assets and the satisfaction of its liabilities in
the normal course of conducting business. The Company anticipates that it will
require additional funds to continue the expansion of its Titlescape(R) product
line into new counties and to complete the development of its IDEA(TM) product
line. Management believes that the funds necessary to meet these requirements
for the next twelve months will be raised through a combination of debt or
equity financing or a modification or expansion of its bank borrowing
relationship. Without such additional or modified financing, the Company will be
required to delay, reduce the scope of, or eliminate the aforementioned
expansion of its business.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and disclosures made in
the accompanying notes to the financial statements. Actual results could differ
from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to be consistent with the
current year's presentation.
2. Property and Equipment
Property and equipment consist of the following at September 30:
1997 1996
--------------------------------
Furniture and fixtures $ 459,372 $ 405,885
Machinery and equipment 5,988,693 4,670,918
--------------------------------
6,448,065 5,076,803
Less accumulated depreciation 2,860,826 2,045,986
================================
$3,587,239 $3,030,817
=================================
The Company has recorded at cost approximately $1,184,000 and $975,000 of
equipment under capital leases at September 30, 1997 and 1996, respectively.
Accumulated depreciation on the leased equipment totaled approximately $766,000
and $625,000 at September 30, 1997 and 1996, respectively.
3. Title Plant and Computer Software Technology
Title plant and computer software technology consist of the following at
September 30:
1997 1996
--------------------------------------
Title plant $13,022,622 $ 9,597,768
Computer software technology 1,531,334 923,032
--------------------------------------
14,553,956 10,520,800
Less accumulated amortization
of software technology 789,249 564,350
======================================
$13,764,707 $ 9,956,450
======================================
Approximately $344,000 and $413,000 of property and equipment depreciation was
capitalized to the title plant during 1997 and 1996, respectively. Additionally,
approximately $544,000 and $311,000 of interest expense was capitalized to title
plant during 1997 and 1996, respectively.
4. Related Party Transactions
The Company sells Titlescape(R) related products consisting primarily of real
estate title documents and hardware to a customer that has a representative on
the Company's Board of Directors. These related party revenues, which
approximated $1,362,000, $1,699,000 and $716,000 in fiscal 1997, 1996 and 1995,
respectively, are earned and recognized under the same pricing, payment, and
other terms as with the Company's other customers.
The sole owner of Kumar Corporation is the president, CEO and majority
shareholder of Data Tree Corporation. During fiscal 1995, the Company loaned
$250,000 to Kumar Corporation under an unsecured note that bears interest at
prime plus 2 1/2%. Terms of the loan require payment of interest only for the
first thirty-six months followed by thirty-six equal payments of principal and
interest, with all unpaid principal and interest due August 1, 2000. The Company
pays a $5,000 monthly management fee to Kumar Corporation for management of the
Company's affiliated business in India. Effective October 1, 1997, the
management fee was terminated.
During 1997 and 1996, the Company engaged Datatree India Private Limited
("Datatree India") and Inteq Software Development Corporation ("Inteq") to
construct title plant database and develop software used in title plant
production. The Company paid approximately $212,000 and $149,000 to Datatree
India in fiscal 1997 and 1996, respectively, and $126,000 and $197,000 to Inteq
in fiscal 1997 and 1996, respectively, for such services. The sole owner of
Datatree India and the majority shareholder of Inteq is the president, CEO and
majority shareholder of Data Tree Corporation.
5. Notes Payable
In April 1997, the Company entered into a $3.0 million term note agreement with
a bank. The term note bears interest at prime plus 2.0% (10.50% at September 30,
1997) and requires monthly principal payments of $50,000 plus interest for 60
months beginning May 1997. Also in April 1997, the Company renewed its bank line
of credit through March 1998. The line of credit provides for up to $1.0 million
in borrowings at prime plus 2.0% (10.50% at September 30, 1997). At September
30, 1997, there were no borrowings outstanding under the line of credit. In
connection with these financings, the Company issued the bank a warrant to
purchase 31,000 shares of the Company's common stock at $10.50 per share. The
warrant expires in April 2004.
In November 1996, the Company entered into a $8.0 million term note agreement
with a bank. The term note bears interest at prime plus 1.75% (10.25% at
September 30, 1997) and requires monthly principal payments of $133,333 plus
interest for 60 months beginning December 1996. The Company used the proceeds of
this financing to repay the balance of $7.8 million outstanding under an
existing convertible note agreement and bank term note agreements. In connection
with this financing, the Company issued the bank a warrant to purchase 37,684
shares of the Company's common stock at $7.96 per share. The warrant expires in
November 2003.
During fiscal 1993 and 1994 the Company borrowed amounts totaling $7,500,000
under two variable rate convertible note agreements (the "Notes"). The terms of
one Note gave the holder the right to purchase up to 20% of the outstanding
common stock of the Company for $700,000 in cash or through the conversion of a
portion of the Note principal. During 1996, the Note holder elected to exercise
this conversion option on the first Note, and upon conversion, was issued
1,281,250 shares of the Company's common stock. The terms of the second Note
gave the holder the right to purchase up to 9% of the outstanding common stock
of the Company for up to $2.50 per share in cash or through the conversion of an
equivalent amount of Note principal. During 1997, the Company repaid the
outstanding amount on the second note and the holder elected to exercise its
purchase right and received 633,580 shares of common stock for cash of
$1,583,950. In connection with the execution of the first convertible note
agreement, the holder was given representation on the Company's Board of
Directors. During 1997, the Company repaid the $5.0 million balance outstanding
under the second Note.
In 1996, the Company entered into a $2 million line of credit and a $3,300,000,
48 month term note agreement with a bank. The line of credit expired in February
1997. The balance outstanding under the $3.3 million term note of approximately
$2.8 million was repaid during fiscal 1997. In connection with this financing,
the Company issued to the bank a warrant to purchase 41,452 shares of the
Company's common stock at $7.96 per share. The warrant expires in March 2001.
The bank term notes are secured by substantially all of the Company's assets.
The line of credit and term note agreements require the Company to comply with
certain covenants (measured quarterly), including maintaining a minimum level of
net worth as well as a ratio for liabilities to net worth and a fixed charge
coverage ratio. During 1997, the Company was in violation of certain quarterly
covenants which have been waived by the bank. These loans are secured by all
assets of the Company and limit other outside indebtedness of the Company.
Aggregate maturities of the bank term notes payable for the years ending
subsequent to September 30, 1997 are as
follows:
1998 $2,200,000
1999 2,200,000
2000 2,200,000
2001 2,200,000
2002 800,000
----------
$9,600,000
==========
Interest expense on the notes payable to bank totaled $907,000 and $844,000 in
fiscal 1997 and 1996, respectively, of which $544,000 and $311,000,
respectively, was capitalized as part of the cost of the Company's title plant.
6. Commitments
The Company is obligated under various noncancellable operating leases for
office space through fiscal 2002. Certain leases provide that the Company pay
all or a portion of taxes, maintenance, insurance and other operating expenses.
Rent expense is recognized on a straight-line basis over the terms of the
leases. Accordingly, rent expense incurred in excess of rent paid is reflected
as deferred rent, which is included in accrued expenses in the accompanying
balance sheets. Aggregate rent expense was approximately $489,000, $429,000 and
$423,000 in fiscal 1997, 1996 and 1995, respectively, of which approximately
$247,000, $193,000 and $178,000 was allocated to title plant in fiscal 1997,
1996 and 1995.
The Company has also entered into various capital leases for machinery and
equipment.
Future minimum lease payments under noncancellable operating and capital leases
are as follows for fiscal years ending September 30:
<TABLE>
<CAPTION>
Operating Leases Capital Leases
Years ending September 30,
<S> <C> <C>
1998 $ 482,596 $163,391
1999 401,674 136,821
2000 69,082 136,821
2001 57,674 86,344
2002 21,887 16,841
Thereafter -- --
------------------------------------------
Total minimum lease payments $1,032,913 540,218
================
Less amount representing interest 110,130
--------------
Present value of minimum lease payments 430,088
Less current portion of capital lease obligations 122,482
--------------
Capital lease obligations, excluding current portion $307,606
==============
</TABLE>
7. Shareholders' Equity
On June 20, 1997, the Company's Board of Directors authorized a ten-for-one
stock split to shareholders of record on June 20, 1997. All references in the
financial statements and notes thereto to the number of shares and per share
amounts of the Company's common stock have been retroactively restated to
reflect the increased number of common shares outstanding.
Additionally, the Company's Board of Directors approved a stock option plan (the
"Plan") that provides for the granting of either incentive stock options or
non-qualified stock options to key employees, directors, and consultants of the
Company. The Plan provides for the granting of the option to purchase 500,000
shares of common stock. The options granted under the Plan are to purchase
common stock at not less than 85% of fair market value at the date of grant. The
options are generally exercisable one year from the date of grant and vest
monthly thereafter up to 48 months with a term of ten years. To date, no stock
options have been granted.
8. Income Taxes
The Company's provision for income taxes consists of the following:
Years ended September 30
1997 1996 1995
-----------------------------------------------
Current:
Federal $ 323,300 $200,000 $ --
State 94,310 70,000 1,000
-----------------------------------------------
417,610 270,000 1,000
Deferred:
Federal 589,424 465,000 185,000
State 173,290 118,000 74,000
-----------------------------------------------
762,714 583,000 259,000
-----------------------------------------------
$1,180,324 $853,000 $260,000
======================================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred income taxes
have been recognized for capitalized title plant costs that have been amortized
for tax purposes.
Significant components of the Company's deferred tax liabilities are as follows:
September 30
1997 1996
-----------------------------
Deferred tax liabilities:
Capitalized title plant costs $1,883,000 $1,316,000
Capitalized computer software technology 268,000 136,000
Accrual to cash adjustment 156,000 156,000
Depreciation and amortization 130,000 85,000
Other, net 130,000 103,000
-----------------------------
Deferred tax liability $2,567,000 $1,796,000
=============================
9. Employee Benefit Plan
The Company maintains a deferred savings plan for its employees, which allow
participants to make contributions by salary reductions pursuant to Section
410(k) of the Internal Revenue Code. Additionally, the plan provides for an
employer contribution in such amounts as the Board of Directors may annually
determine. The Company made no employer contributions to the plan during fiscal
1997, 1996 and 1995.
<TABLE>
<CAPTION>
<PAGE>
Data Tree Corporation
Balance Sheet
March 31, 1998
(Unaudited)
March 31, 1998
<S> <C>
Assets
Current Assets
Cash $497,052
Accounts Receivable, net of allowance for doubtful
accounts of $42,000 1,375,904
Other Current Assets 519,047
----------
Total Current Assets 2,392,003
Property and Equipment
Title Plant 14,504,431
Equipment 6,271,752
Furniture and Fixtures 487,304
Capitalized Software 1,395,572
Purchased Software 143,103
----------
22,802,162
Accumulated Depreciation (3,354,077)
Accumulated Amortization (947,300)
----------
Net Property and Equipment 18,500,783
Other Assets 232,589
-----------
Total Assets $21,125,377
===========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable $304,402
Accrued Expenses and Other Current Liabilities 631,931
Income Taxes Payable 638,860
Deferred Taxes 131,554
Notes Payable - Current Portion 2,200,000
Current Portion of Obligations under Capital Leases 167,514
----------
Total Current Liabilities 4,074,261
Notes Payable 6,250,000
Obligations under Capital Leases 436,601
Deferred Taxes 2,435,560
Stockholders' Equity
Common Shares, no par value, Authorized Shares - 10,000,000
Issued and Outstanding Shares - 7,039,830 34,350
Additional Paid in Capital 2,368,450
Retained Earnings 5,508,155
----------
Total Stockholders' Equity 7,928,955
Total Liabilities and Stockholders' Equity $21,125,377
-----------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Data Tree Corporation
Statements of Income
(Unaudited)
SIX MONTHS ENDED
MARCH 31
1998 1997
------------------------
Net sales $4,626,394 $3,819,998
Cost of sales 1,474,631 1,004,725
------------------------
Gross Profit 3,151,763 2,815,273
Selling, general and administrative expenses 1,616,161 1,292,549
Research and development 286,881 -
------------------------
Income from operations 1,248,721 1,522,724
Interest expense, net 186,343 269,163
------------------------
Income before provision for income taxes 1,062,378 1,253,561
Provision for income taxes 424,951 501,426
------------------------
Net income $ 637,427 $ 752,135
========================
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Data Tree Corporation
Statements of Shareholders' Equity
(Unaudited)
SIX MONTHS ENDED MARCH 31, 1998
COMMON STOCK RETAINED
SHARES AMOUNT EARNINGS TOTAL
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1997 7,039,830 $ 2,420,800 $4,870,728 $7,291,528
Net income - - 637,427 637,427
------------------------------------------------------------------------
Balance at March 31, 1998 7,039,830 $ 2,420,800 $5,508,155 $7,928,955
========================================================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Data Tree Corporation
Statements of Cash Flows
(Unaudited)
Six Months Ended
March 31,
1998 1997
-----------------------------------------
<S> <C> <C>
OPERATING ACTIVITES
Net Income $637,427 $752,137
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 474,069 335,150
Changes in operating assets and liabilities:
Accounts receivable (33,927) (412,219)
Prepaid expenses and other current assets 65,291 (78,427)
Accounts payable (186,110) (85,476)
Accrued expenses and other current liabiliteis (28,844) (87,589)
Income taxes payable 421,250 304,736
----------------------------------------
Net cash provided by operating activities 1,349,156 728,310
INVESTING ACTIVITIES
Purchases of property and equipment (105,791) (426,115)
Computer Software technology -- (281,058)
Title plant (1,304,576) (1,110,011)
----------------------------------------
Net cash used by investing activities (1,410,367) (1,817,184)
FINANCING ACTIVITIES
Payments on notes payable to bank (1,150,000) (489,583)
Payments on capital lease obligatins (38,514) (67,863)
Proceeds from exercise of common stock purchase right -- 1,583,950
----------------------------------------
Net cash used by financing activities (1,188,514) 1,026,504
Decrease in cash and cash equivalents (1,249,725) (62,370)
Cash and cash equivalents at beginning of year 1,746,777 641,848
----------------------------------------
Cash and cash equivalents at end of period $ 497,052 $ 579,478
========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 534,973 $ 414,056
Income taxes paid $ -- $ 197,659
========================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Capital lease obligations entered into for equipment $ 212,541 $ 212,068
========================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Data Tree Corporation
Notes to Financial Statements
March 31, 1998
(Unaudited)
Note 1 - Basis of Presentation
The unaudited interim financial statements presented do not include all of the
information and note disclosures required by generally accepted accounting
principles. In the opinion of management, all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation have been
included. The statement of operations for the six months ended March 31, 1998
may not be indicative of the expected results for the year ended September 30,
1998.
Note 2 - Subsequent Event
In April 1998, Data Tree obtained a $3 million revolving credit facility from a
commercial bank. The credit facility accrues interest at the bank's prime rate
of interest, expires in March 1999 and is guaranteed by The First American
Financial Corporation ("FAFCO").
On March 27, 1998, Data Tree entered into an Agreement and Plan of Merger with
FAFCO under which all of the outstanding shares of Data Tree would be acquired
by FAFCO. Completion of the merger is subject to approval of the shareholders of
Data Tree and certain other terms and conditions.
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
THE FIRST AMERICAN FINANCIAL CORPORATION,
IMAGE ACQUISITION CORP.,
DATA TREE CORPORATION,
AND
HARISH CHOPRA
Dated as of March 27, 1998
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1....................................................................-2-
DEFINITIONS AND INTERPRETATIONS.........................................-2-
1.1 Defined Terms.............................................-2-
1.2 Principles of Construction................................-7-
SECTION 2....................................................................-8-
THE MERGER AND RELATED MATTERS..........................................-8-
2.1 The Merger................................................-8-
2.2 Company Actions...........................................-8-
2.3 Conversion of Shares......................................-8-
2.4 Dissenting Shares.........................................-9-
2.5 Surrender of Certificates................................-10-
2.6 No Further Rights of Transfers...........................-11-
2.7 Stock Option and Other Plans.............................-11-
2.8 Articles of Incorporation of the Surviving
Corporation..............................................-11-
2.9 By-Laws of the Surviving Corporation.....................-12-
2.10 Directors and Officers of the Surviving
Corporation..............................................-12-
2.11 Closing..................................................-12-
SECTION 3...................................................................-12-
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
MAJOR SHAREHOLDER......................................................-12-
3.1 Existence and Good Standing..............................-12-
3.2 Binding Effect...........................................-13-
3.3 Capitalization...........................................-13-
3.4 Subsidiaries and Investments.............................-13-
3.5 Financial Statements and No Material Changes.............-13-
3.6 Books and Records........................................-14-
3.7 Title to Properties; Encumbrances........................-14-
3.8 Real Property............................................-15-
3.9 Leases...................................................-15-
3.10 Material Contracts.......................................-15-
3.11 Restrictive Documents....................................-16-
3.12 Litigation...............................................-16-
3.13 Taxes....................................................-16-
3.14 Insurance................................................-18-
3.15 Intellectual Properties..................................-18-
3.16 Compliance with Laws.....................................-18-
3.17 Governmental Licenses....................................-18-
3.18 Labor Matters............................................-18-
3.19 Employee Benefit Plans...................................-19-
3.20 Interests in Clients, Suppliers, Etc.....................-23-
3.21 Bank Accounts, Powers of Attorney and Compensation
of Employees.............................................-23-
3.22 No Changes Since Balance Sheet Date......................-24-
3.23 Consents and Approvals; No Violations....................-24-
3.24 Disclosure...............................................-25-
3.25 Broker's or Finder's Fees................................-25-
3.26 Copies of Documents......................................-25-
SECTION 4...................................................................-25-
REPRESENTATIONS AND WARRANTIES OF FAFCO AND FAFCOSUB...................-25-
4.1 Existence and Good Standing; Power and Authority.........-25-
4.2 Consents and Approvals; No Violations....................-26-
4.3 Restrictive Documents....................................-26-
4.4 Broker's or Finder's Fees................................-26-
4.5 FAFCO Common Shares......................................-27-
SECTION 5...................................................................-29-
TRANSACTIONS PRIOR TO THE EFFECTIVE TIME...............................-29-
5.1 Conduct of the Business of the Company Prior to
Closing..................................................-29-
5.2 Review of the Company....................................-30-
5.3 Exclusive Dealing........................................-30-
5.4 Shareholder Approval.....................................-31-
5.5 Best Efforts.............................................-31-
5.6 HSR Act..................................................-31-
SECTION 6...................................................................-32-
CONDITIONS PRECEDENT TO MERGER.........................................-32-
6.1 Conditions Precedent to Obligations of FAFCO,
FAFCOSUB, and the Company and the Major
Shareholder..............................................-32-
6.2 Conditions Precedent to Obligations of FAFCO and
FAFCOSUB.................................................-33-
6.3 Conditions Precedent to Obligation of the Company and
the Major Shareholder....................................-35-
SECTION 7...................................................................-36-
COVENANTS RELATING TO SECURITIES MATTERS...............................-36-
7.1 Prospectus Supplement....................................-36-
7.2 Listing..................................................-37-
SECTION 8...................................................................-38-
OTHER COVENANTS........................................................-38-
8.1 Amended Returns..........................................-38-
8.2 Tax Free Reorganization..................................-38-
8.3 Continuity of Interest...................................-38-
8.4 Continuity of Business Enterprise........................-38-
8.5 Directors and Officers Indemnification...................-38-
8.6 Employee Matters.........................................-39-
SECTION 9...................................................................-39-
TERMINATION............................................................-39-
9.1 Events of Termination....................................-39-
9.2 Effect of Termination....................................-40-
SECTION 10..................................................................-40-
SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION...........................-40-
10.1 Survival of Representations..............................-40-
10.2 Indemnification..........................................-41-
10.3 Indemnification Procedure................................-42-
SECTION 11..................................................................-44-
MISCELLANEOUS..........................................................-44-
11.1 Knowledge................................................-44-
11.2 Expenses.................................................-45-
11.3 Governing Law............................................-45-
11.4 Jurisdiction; Agents for Service of Process..............-45-
11.5 Publicity................................................-45-
11.6 Notices..................................................-46-
11.7 Parties in Interest......................................-47-
11.8 Counterparts.............................................-47-
11.9 Entire Agreement.........................................-47-
11.10 Amendments...............................................-47-
11.11 Severability.............................................-47-
11.12 Third Party Beneficiaries................................-48-
SCHEDULES
3.1 Jurisdiction Where Qualified
3.3 List of Shareholders, Options, Warrants and Other Rights
to Capital Stock as of the Date of the Merger Agreement
3.6 Records, Systems, Controls, etc. in Control of Third Parties
3.7 Encumbrances
3.9 Leases
3.10 Material Contracts
3.12 Litigation
3.13 Tax Matters
3.14 List of Insurance Policies
3.15 Intellectual Properties
3.19 Employee Benefit Plans
3.20 Interests in Clients, Suppliers, etc.
3.21 Bank Accounts, Powers of Attorney and Compensation of Employees
3.22 Changes Since Balance Sheet Date
3.23 Consents and Approvals
3.25 Broker's or Finder's Fees
4.6 Registration and Other Rights
EXHIBITS
Exhibit A Article of Incorporation of the Company
Exhibit B Bylaws of the Company
Exhibit C Contribution and Joint Venture Agreement
Exhibit D Operating Agreement
Exhibit E Employment Agreement
Exhibit F Noncompetition Agreement
Exhibit G Supply Agreement
Exhibit H Secured Promissory Note
Exhibit I Form of Cooley Godward LLP Opinion
Exhibit J Form of Opinion of Counsel for R2
Exhibit K Form of White & Case LLP Opinion
Exhibit L Form of FAFCO and FAFCOSUB Tax Representation Letter
Exhibit M Form of the Company's Tax Representation Letter
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of March 27, 1998 (this
"Agreement"), by and among The First American Financial Corporation, a
California corporation ("FAFCO"), Image Acquisition Corp., a California
corporation and a wholly-owned subsidiary of FAFCO ("FAFCOSUB"), Data Tree
Corporation, a California corporation (the "Company"; the Company together with
FAFCOSUB, the "Constituent Corporations") and Harish Chopra, an individual
residing in Rancho Santa Fe, California (the "Major Shareholder").
W I T N E S S E T H:
WHEREAS, FAFCO and FAFCOSUB are corporations duly organized and existing
under the laws of the State of California and FAFCOSUB is a wholly-owned
subsidiary of FAFCO;
WHEREAS, the Company is a corporation duly organized and existing under the
laws of the State of California with an authorized capitalization as set forth
in Section 3.3 hereof;
WHEREAS, the Board of Directors of the Company has approved and declared
fair to, and in the best interests of, the Company and its shareholders, and the
board of directors of FAFCOSUB and FAFCO, as the sole shareholder of FAFCOSUB,
has approved, the merger of FAFCOSUB with and into the Company (the "Merger")
upon the terms and subject to the conditions set forth herein, whereby each
issued and outstanding Share (as defined below) will be cancelled and converted
into the right to receive the Merger Consideration (as defined below) to which
each such Share is entitled;
WHEREAS, the Parties (as defined below) desire to make certain
representations, warranties and agreements in connection with the Merger
and also to prescribe various conditions to the Merger;
WHEREAS, in order to effectuate and facilitate the Merger, each Party has
independently determined that its in its best interest to enter into this
Agreement and to consummate the transactions contemplated hereby;
WHEREAS, by executing this Agreement the Parties intend to adopt a plan of
reorganization within the meaning of Section 368 of the Code (as defined below);
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, representations, warranties and agreements herein contained, the
parties hereto agree as follows:
<PAGE>
SECTION 1
DEFINITIONS AND INTERPRETATIONS
1.1 Defined 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):
"Agreed Claims" shall have the meaning provided in Section 10.3(d);
"Agreement" shall have the meaning provided in the first paragraph of this
Agreement;
"Antitrust Division" means the Antitrust Division of the Department of
Justice;
"Articles of Incorporation" shall have the meaning provided in Section 2.8;
"Average Price" means the arithmetic average of the last reported sales
price of one FAFCO Common Share as reported on the New York Stock Exchange for
the twenty consecutive Trading Days ending on the Trading Day immediately prior
to the Data Tree Shareholder Meeting;
"Balance Sheet" shall have the meaning provided in Section 3.5(a);
"Balance Sheet Date" shall have the meaning provided in Section 3.5(a);
"Business Day" shall mean any day, excluding Saturday, Sunday or any
day which shall be a legal holiday in the State of California;
"By-Laws" shall have the meaning provided in Section 2.9;
"Certificate" shall mean the certificate referenced in Section 10.3 of this
Agreement which shall:
(i) state that the Indemnified Party has paid or properly accrued
Damages or reasonably anticipates that it will incur liability for Damages
for which such Indemnified Party is entitled to indemnification pursuant to
this Agreement; and
(ii) specify in reasonable detail each individual item of Damage
included in the amount so stated, the date such item was paid or properly
accrued, the basis for any anticipated liability and the nature of the
misrepresentation, breach of warranty, breach of covenant or claim to which
each such item is related and the computation of the amount to which such
Indemnified Party claims to be entitled under Section 10.3 of this
Agreement;
"Closing" shall have the meaning provided in Section 2.11;
"Closing Date" shall have the meaning provided in Section 2.11;
"Code" shall have the meaning provided in Section 3.19(a);
"Company" shall have the meaning provided in the first paragraph of this
Agreement;
"Constituent Corporations" shall have the meaning provided in the first
paragraph of this Agreement;
"Corporations Code" shall mean the California Corporations Code;
"Damages" shall have the meaning provided in Section 10.2(a);
"Data Tree Common Certificate" shall have the meaning provided in Section
2.5(a);
"Data Tree Shareholder Meeting" shall have the meaning provided in Section
5.4;
"Dissenting Shareholders" shall have the meaning provided in Section 2.4;
"Effective Time" shall have the meaning provided in Section 2.1(a);
"Employee Benefit Plans" shall have the meaning provided in Section
3.19(a);
"ERISA" shall have the meaning provided in Section 3.19(a);
"Excepted Shares" means (i) any Shares which are held by any subsidiary of
the Company or in the treasury of the Company, or which are held, directly or
indirectly, by FAFCO or any direct or indirect subsidiary of FAFCO (including
FAFCOSUB) and (ii) Shares held by Dissenting Shareholders;
"Exchange Agent" shall have the meaning provided in Section 2.5(a);
"FAFCO" shall have the meaning provided in the first paragraph of this
Agreement;
"FAFCO Common Certificates" shall have the meaning provided in Section
2.5(a);
"FAFCO Common Shares" means the common shares, par value $1.00, of The
First American Financial Corporation;
"FAFCO Parties" shall have the meaning provided in Section 10.2(a);
"FAFCOSUB" shall have the meaning provided in the first paragraph of this
Agreement;
"FAFCOSUB Common Shares" means the common shares, no par value, of
FAFCOSUB;
"FTC" means the Federal Trade Commission;
"HSR Act" shall have the meaning provided in Section 3.23;
"Imperial Warrants" means each of Imperial Warrant I, Imperial Warrant II
and Imperial Warrant III, or all of them, as the case may be;
"Imperial Warrant I" means the warrant, expiring March 3, 2003, giving
Imperial Bank the right to purchase 41,452 Shares at $7.96 per Share;
"Imperial Warrant II" means the warrant, expiring November 27, 2003, giving
Imperial Bank the right to purchase 37,684 Shares at $7.96 per share;
"Imperial Warrant III" means the warrant, expiring April 22, 2004, giving
Imperial Bank the right to purchase 31,000 Shares at $10.50 per share;
"Indemnified Party" has the meaning provided in Section 10.3;
"Indemnifying Party" has the meaning provided in Section 10.3;
"Intellectual Property" means all domestic and foreign patents, patent
applications, registered and unregistered trade marks and service marks,
registered and unregistered copyrights, computer programs, databases, trade
secrets and proprietary information;
"IRS" shall have the meaning provided in Section 3.19(c);
"Key Employee Bonuses" means an amount not to exceed $200,000;
"Licenses" shall have the meaning provided in Section 3.17;
"Major Shareholder" shall have the meaning provided in the first paragraph
of this Agreement;
"Material Adverse Effect" means, with respect to any Person, a material
adverse effect on (i) the validity or enforceability of this Agreement, (ii) the
ability of such Person to perform its obligations under this Agreement (iii) the
business, assets, conditions or results of operations of the Person and its
subsidiaries, taken as a whole; provided however, that any adverse change, event
or effect that is proximately caused by (i) conditions affecting the United
States economy generally or the economy of the regions in which the Person
conducts a material part of its business, (ii) by conditions affecting the
industry in which the Person competes, (iii) by the announcement of the Merger
or by virtue of this Agreement, including without limitation, compliance by such
Person with its covenants hereunder or thereunder or (iv) the breach by any
other Person of any covenant or obligation set forth in this Agreement shall not
be taken into account in determining whether there has been a Material Adverse
Effect;
"Merger" shall have the meaning provided in third WHEREAS clause hereto;
"Merger Consideration" means, with respect to each Shareholder, the number
of FAFCO Common Shares to be received by such Shareholder at the Effective Time
which shall equal the product of (a) the quotient resulting from the division of
the Per Share Interest by the Average Price, expressed as a decimal to the
thousandths place and (b) the number of Shares set forth opposite such
Shareholder's name on Schedule 3.3 hereto; provided, however that (i) if the
aggregate number of FAFCO Common Shares to be received by all Shareholders at
the Effective Time as determined in accordance with the preceding formula
exceeds 838,095 less the aggregate number of FAFCO Common Shares that the
Dissenting Shareholders would be entitled to under the preceding formula had
such Dissenting Shareholders not so dissented, the number of FAFCO Common Shares
to be received by such Shareholder at the Effective Time shall equal the product
of 838,095 and such Shareholder's Percentage Interest as of the Effective Time,
and (ii) in lieu of a fractional FAFCO Common Share, such Shareholder shall
receive cash in the form of a check (rounded to the nearest cent) drawn against
FAFCO in an amount equal to the product of (x) the Average Price and (y) the
fractional interest;
"Merger Documents" means those documents required to be filed with the
California Secretary of State in accordance with section 1103 of the
Corporations Code;
"Multiemployer Plan" shall have the meaning provided in Section 3.19(c);
"Number of Shares Outstanding" is the number 7,039,830 plus 41,452 if
Imperial Warrant I is exercised, plus 37,684 Imperial Warrant II is exercised
plus 31,000 if Imperial Warrant III is exercised;
"Operating Agreement" shall have the meaning provided in Section
6.1(f)(ii);
"Party" or "Parties" each of FAFCO, FAFCOSUB, the Company and the Major
Shareholder or all of them, as the case may be;
"PBGC" shall have the meaning provided in Section 3.19(c);
"Percentage Interest" shall mean, with respect to any Shareholder on any
date, the quotient resulting from the division of the number of Shares held by
such Shareholder on such date by the total number of Shares issued and
outstanding on such date;
"Permitted Liens" shall have the meaning provided in Section 3.7;
"Per Share Interest" means the quotient resulting from the division of the
Purchase Price by the Number of Shares Outstanding;
"Person" shall mean and include 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;
"Prospectus Supplement" shall have the meaning provided in Section 7.1(a);
"Purchase Price" means $43,113,373 less Surplus Expenses;
"Registration Statement" shall have the meaning provided in Section 7.1(a);
"Related Documents" shall mean all of the documents and agreements
described in Section 6.1(f);
"Related Party" shall have the meaning provided in Section 6.2(j);
"Returns" shall have the meaning provided in Section 3.13(a);
"SEC" means the Securities and Exchange Commission;
"SEC Reports" shall have the meaning provided in Section 4.7;
"Securities Act" shall mean the Securities Act of 1933, as amended;
"Share" or "Shares" means one or more of the 7,039,830 (plus 41,452 if
Imperial Warrant I is exercised, plus 37,684 if Imperial Warrant II is exercised
plus 31,000 if Imperial Warrant III is exercised) issued and outstanding common
shares, no par value, of the Company;
"Shareholder" means those Persons listed on Schedule 3.3 as owning Shares;
"Surplus Expenses" shall have the meaning provided in Section 11.2;
"Surviving Corporation" shall have the meaning provided in Section 2.1(b);
"Taxes" means all taxes, assessments, charges, duties, fees, levies or
other governmental charges, including, without limitation, all Federal, state,
local, foreign and other income, franchise, profits, capital gains, capital
stock, transfer, sales, use, occupation, property, excise, severance, windfall
profits, stamp, license, payroll, 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 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 or other entity;
"Trading Day" means a day on which the New York Stock Exchange is open for
at least one-half of its normal business hours; and
"US GAAP" means United States generally accepted accounting principles
applied on a consistent basis.
1.2 Principles of Construction.
(a) All references to Sections, subsections, Schedules and Exhibits are to
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 US GAAP.
(c) 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."
(d) The Table of Contents hereto and the Section headings herein are for
convenience only and shall not affect the construction hereof.
(e) 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.
SECTION 2
THE MERGER AND RELATED MATTERS
2.1 The Merger.
(a) Subject to the terms and conditions of this Agreement, the Merger
Documents shall be duly prepared, executed and acknowledged by the Constituent
Corporations and shall be filed with the California Secretary of State on the
Closing Date. The Merger shall become effective upon the filing of the Merger
Documents with the California Secretary of State in accordance with the
provisions and requirements of the Corporations Code (the "Effective Time").
(b) At the Effective Time, FAFCOSUB shall be merged with and into the
Company and the separate corporate existence of FAFCOSUB shall cease, and the
Company shall continue as the surviving corporation under the laws of the State
of California (the "Surviving Corporation") and shall continue to use the name
of the Company (which, for the avoidance of doubt, is "Data Tree Corporation").
(c) From and after the Effective Time, the Merger shall have the effects
provided for in section 1107 of the Corporations Code.
2.2 Company Actions. The Company hereby consents to the Merger and
represents, together with the Major Shareholder, that its Board of Directors (at
a meeting duly called and held) has (i) determined by the unanimous vote of the
Directors that the Merger is fair to, and in the best interests of, the
Shareholders, (ii) approved the Merger and (iii) recommended approval and
adoption of the Merger to the Shareholders.
2.3 Conversion of Shares. At the Effective Time, by virtue of the Merger
and without any action on the part of FAFCO, FAFCOSUB, the Company or any of
their respective shareholders (including, without limitation, the Major
Shareholder):
(a) Each Share then issued and outstanding, other than Excepted Shares,
shall be converted into the Merger Consideration. All such Shares, when so
converted, shall no longer be outstanding and shall automatically be cancelled
and retired and each holder of a Data Tree Common Certificate representing any
such Shares shall cease to have any rights with respect thereto. All FAFCO
Common Shares to be received by holders of Shares pursuant to the Merger shall
be duly authorized, validly issued and outstanding, fully paid and
nonassessable, free of preemptive rights, and will not be liable to any further
call, nor shall the holder thereof be liable for any further payments with
respect thereto. All FAFCO Common Shares to be received by holders of Shares
pursuant to the Merger shall have been registered by FAFCO under the Securities
Act and shall have been issued in compliance with all federal securities laws,
California securities laws and the securities laws of any other state within the
United States in which any Shareholder is domiciled (provided that FAFCO is
provided with a list of such states at least ten days prior to the Closing
Date);
(b) Excepted Shares shall be cancelled at the Effective Time and shall not
receive the Merger Consideration or any cash payment with respect to a
fractional share; and
(c) Each FAFCOSUB Common Share shall be converted into one common share, no
par value, of the Surviving Corporation.
2.4 Dissenting Shares. Notwithstanding anything in this Agreement to the
contrary, but only to the extent required by California law, Shares issued and
outstanding immediately prior to the Effective Time and held by holders of
Shares that were not voted in favor of the Merger and who comply with all the
provisions of Chapter 13 of the Corporations Code concerning the right of
holders of Shares to dissent from the Merger and require appraisal of their
Shares ("Dissenting Shareholders") shall not be converted into or represent the
right to receive the Merger Consideration but shall become the right to receive
such consideration as may be determined to be due such Dissenting Shareholder
pursuant to the law of the State of California. From and after the Effective
Time, Dissenting Shareholders shall not have and shall not be entitled to
exercise any of the voting rights or other rights of a shareholder of the
Surviving Corporation. If any Dissenting Shareholder shall fail to assert or
perfect, or shall waive, rescind, withdraw or otherwise lose, such holder's
right to dissent and obtain payment under Chapter 13 of the Corporations Code,
then such Shares shall automatically be converted into and represent only the
right to receive (upon surrender of a Data Tree Common Certificate previously
representing such Shares) FAFCO Common Shares in accordance with Section 2.3(a)
(and cash in lieu of any fractional share in accordance with the terms of this
Agreement). The Company shall give FAFCO and FAFCOSUB (i) prompt notice of any
written demands for appraisal, withdrawals of demands for appraisal and any
other related instruments received by the Company and (ii) the opportunity to
direct all negotiations and proceedings with respect to demands for appraisal.
The Company will not voluntarily make any payment with respect to any demands
for appraisal and will not, except with the prior written consent of FAFCO,
settle or offer to settle any demand for appraisal.
2.5 Surrender of Certificates.
(a) Exchange of Data Tree Common Certificate; Other Purchase Price. At or
prior to the Effective Time, or as soon as practicable thereafter, FAFCO shall
deposit with First American Trust Company (the "Exchange Agent") in trust for
the holders of certificates which immediately prior to the Effective Time
represented Shares (each such certificate a "Data Tree Common Certificate"), and
each such holder will be entitled to receive, upon surrender of one or more Data
Tree Common Certificates to the Exchange Agent in the manner set forth in
subsection (b) below, certificates representing the FAFCO Common Shares (the
"FAFCO Common Certificates") into which the Shares represented by such Data Tree
Common Certificates were converted in the Merger.
(b) Exchange Procedures. As soon as practicable after the date of this
Agreement, FAFCO and the Company shall cause the Exchange Agent to mail and/or
make available to each holder of a Data Tree Common Certificate (other than
those which are held by any subsidiary of the Company or in the treasury of the
Company or which are held directly or indirectly by FAFCO or any direct or
indirect subsidiary of FAFCO, including FAFCOSUB) a copy of the Prospectus
Supplement and a notice and letter of transmittal advising such holder of the
proposed Merger and the procedure for surrendering to the Exchange Agent such
Data Tree Common Certificate in exchange for the Merger Consideration
deliverable in respect thereof pursuant to this Section 2. Upon the surrender
for cancellation to the Exchange Agent of such Data Tree Common Certificates,
together with a letter of transmittal, duly executed and completed in accordance
with the instructions thereon, and any other items specified by the letter of
transmittal, the Exchange Agent shall promptly transfer to the Person entitled
thereto the Merger Consideration deliverable in respect thereof. The Merger
Consideration shall be transferred by delivery of a FAFCO Common Certificate
registered in the name of such Person representing the number of FAFCO Common
Shares to be received by such Person and a check drawn on FAFCO in the amount of
any fractional interest to be received by such Person.
Until so surrendered, each Data Tree Common Certificate shall be deemed,
for all corporate purposes, to evidence only the right to receive upon such
surrender the Merger Consideration deliverable in respect thereof to which such
Person is entitled pursuant to this Section 2. No interest shall be paid or
accrued in respect of any cash payment due for a fractional share. Data Tree
Common Certificates so surrendered shall be cancelled upon the effectiveness of
the Merger.
(c) Registration Name on Certificates. If the Merger Consideration (or any
portion thereof) is to be delivered to a Person other than the Person in whose
name the Data Tree Common Certificate surrendered in exchange therefor is
registered, it shall be a condition to the payment of the Merger Consideration
that the Data Tree Common Certificates so surrendered shall be properly endorsed
or accompanied by appropriate stock powers and otherwise in proper form for
transfer, that such transfer otherwise be proper and that the Person requesting
such transfer pay to the Exchange Agent any transfer or other taxes payable by
reason of the foregoing or establish to the satisfaction of the Exchange Agent
that such taxes have been paid or are not required to be paid.
(d) Unavailable Certificates. In the event any Data Tree Common Certificate
shall have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the Person claiming such certificate to be lost, stolen or
destroyed, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed certificate the Merger Consideration deliverable in respect thereof as
determined in accordance with this Section 2, provided that the Person to whom
the Merger Consideration is paid shall, as a condition precedent to the payment
thereof, give the Surviving Corporation a bond in such sum as it may direct or
otherwise indemnify the Surviving Corporation in a manner satisfactory to it
against any claim that may be made against the Surviving Corporation with
respect to the Data Tree Common Certificate claimed to have been lost, stolen or
destroyed.
(e) Merger Not Consummated. In the event the Merger is not consummated for
any reason, FAFCO and the Company shall direct the Exchange Agent to return to
(i) each Person who deposited a Data Tree Share Certificate and any other
agreements or instruments tendered to the Exchange Agent by such Person and (ii)
FAFCO, the Merger Consideration.
2.6 No Further Rights of Transfers. At and after the Effective Time, each
holder of a Data Tree Common Certificate shall cease to have any rights as a
shareholder of the Company, except for, in the case of a holder of a Data Tree
Common Certificate (other than Excepted Shares), the right to surrender his or
her Data Tree Common Certificate in exchange for the Merger Consideration or, in
the case of a Dissenting Shareholder, to perfect his or her right to receive
payment for his or her shares pursuant to California law if such holder has
validly perfected and not withdrawn his or her right to receive payment for his
or her shares, and no transfer of Shares shall be made on the stock transfer
books of the Surviving Corporation. Data Tree Common Certificates presented to
the Surviving Corporation after the Effective Time shall be cancelled and
exchanged as provided in this Section 2. At the close of business on the day of
the Effective Time the stock ledger of the Company with respect to the Shares
shall be closed.
2.7 Stock Option and Other Plans. Prior to the Closing Date, the board of
directors of the Company (or, if appropriate, any committee thereof) shall adopt
appropriate resolutions and take all other actions necessary to provide for the
cancellation or termination, effective on or before the Closing Date, of all the
outstanding employee stock options to purchase Shares heretofore granted under
any stock option plan of the Company applicable to employees, including, without
limitation, that certain 1997 Stock Option Plan listed as item (a)(1) on
Schedule 3.19.
2.8 Articles of Incorporation of the Surviving Corporation. The articles of
incorporation of the Company, as in effect immediately prior to the Effective
Time and attached hereto as Exhibit A, shall be the articles of incorporation of
the Surviving Corporation and thereafter shall continue to be its articles of
incorporation (the "Articles of Incorporation") until amended as provided
therein and under the Corporations Code.
2.9 By-Laws of the Surviving Corporation. The by-laws of the Company, as in
effect immediately prior to the Effective Time and attached hereto as Exhibit B,
shall be the by-laws of the Surviving Corporation and thereafter shall continue
to be its by-laws (the "By-Laws") until amended as provided therein and under
the Articles of Incorporation and the Corporations Code.
2.10 Directors and Officers of the Surviving Corporation. At the Effective
Time, the directors of FAFCOSUB immediately prior to the Effective Time shall be
the directors of the Surviving Corporation, each of such directors to hold
office, subject to the applicable provisions of the Articles of Incorporation
and By-Laws of the Surviving Corporation, until the next annual shareholders'
meeting of the Surviving Corporation and until their respective successors shall
be duly elected or appointed and qualified. At the Effective Time, the officers
of the Company immediately prior to the Effective Time shall, subject to the
applicable provisions of the Articles of Incorporation and By-Laws of the
Surviving Corporation, be the officers of the Surviving Corporation until their
respective successors shall be duly elected or appointed and qualified.
2.11 Closing. The closing of the Merger (the "Closing") shall take place at
the offices of White & Case, 633 West Fifth Street, Suite 1900, Los Angeles,
California, as soon as practicable after the last of the conditions set forth in
Section 6 hereof is fulfilled or waived (subject to applicable law) but in no
event later than the first Business Day thereafter, or at such other time and
place and on such other date as FAFCO and the Company shall mutually agree (the
"Closing Date").
SECTION 3
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND THE MAJOR SHAREHOLDER
The Company and the Major Shareholder represent, warrant and agree,
severally and not jointly, as follows:
3.1 Existence and Good Standing. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. The Company has all requisite power and authority to own, lease and
operate its properties and to carry on its business as now being conducted. The
Company is duly qualified or licensed to conduct its business, and is in good
standing in each jurisdiction listed on Schedule 3.1, which are the only
jurisdictions in which the character or location of the property owned, leased
or operated by the Company or the nature of the business conducted by the
Company makes such qualification necessary except for any jurisdiction where the
failure to so qualify would not cause a Material Adverse Effect.
3.2 Binding Effect. This Agreement has been duly executed and delivered by
the Company and the Major Shareholder and constitutes the valid and binding
agreement of the Company and the Major Shareholder enforceable against the
Company and the Major Shareholder, as the case may be, 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.
3.3 Capitalization. The authorized capital stock of the Company is
10,000,000 common shares, without par value, of which 7,039,830 (plus 41,452 if
Imperial Warrant I is exercised, plus 37,684 if Imperial Warrant II is exercised
plus 31,000 if Imperial Warrant III is exercised) are issued and outstanding as
of the date of this Agreement and owned of record by the shareholders as set
forth on Schedule 3.3. All such outstanding shares have been duly authorized and
validly issued and are fully paid and nonassessable. Except as set forth on
Schedule 3.3, there is not and as of the Effective Time there will not be,
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, any other securities of the Company,
or any equity interest in the Company or its business.
3.4 Subsidiaries and Investments. The Company does not own, directly or
indirectly, any capital stock or other equity or ownership or proprietary
interest in any corporation, partnership, association, trust, joint venture or
other entity.
3.5 Financial Statements and No Material Changes.
(a) FAFCO has heretofore been furnished with the balance sheets of the
Company as of September 30, 1997, September 30, 1996 and September 30, 1995,
inclusive, and the related statements of income, shareholders' equity and cash
flows for the years then ended, all certified by Ernst & Young LLP (the balance
sheet of the Company as at September 30, 1997 is hereinafter referred to as the
"Balance Sheet"). FAFCO also has heretofore been furnished with the unaudited
balance sheet of the Company as of December 31, 1997 and the related statements
of income, shareholders' equity and cash flow (collectively, the "Unaudited
Financial Statements"). Such financial statements, including the footnotes
thereto, except as indicated therein, have been prepared in accordance with US
GAAP. The Balance Sheet fairly presents, in all material respects, the financial
position of the Company at the date thereof and, except (i) as indicated therein
(ii) for obligations, including under contracts, that are not required to be
recorded as a liability under US GAAP or disclosed in notes to financial
statements and (iii) as disclosed on Schedule 3.5, reflects all claims against
and all debts and liabilities of the Company, fixed or contingent, as at the
date thereof and the related statements of income, shareholders' equity and cash
flows fairly present, in all material respects, the results of the operations of
the Company and the changes in the Company's financial position for the periods
indicated. The unaudited balance sheet as of December 31, 1997 fairly presents,
in all material respects, the financial condition of the Company at the date
thereof and, except (x) as indicated therein, (y) for obligations, including
under contracts, that are not required to be recorded as a liability under US
GAAP or disclosed in notes to financial statements and (z) as disclosed on
Schedule 3.5, reflect all claims against and all debts and liabilities of the
Company, fixed or contingent, as at the respective dates thereof, and the
related statements of income, shareholders' equity and cash flows fairly
present, in all material respects, the results of the operations of the Company
and the changes in its financial position for the periods indicated.
(b) Since September 30, 1997 (the "Balance Sheet Date") there has been no
change in the assets or liabilities, or in the business or condition, financial
or otherwise, or in the results of operations, of the Company, whether as a
result of any legislative or regulatory change, revocation of any license or
rights to do business, fire, explosion, accident, casualty, labor trouble,
flood, drought, riot, storm, condemnation, act of God, public force or otherwise
other than changes reflected in the Unaudited Financial Statements and changes
in the ordinary course of business that have not had and are not reasonably
expected to have a Material Adverse Effect on the Company.
(c) Since September 30, 1997, there has been no change in any of the
significant accounting (including tax accounting) policies, practices or
procedures of the Company except changes resulting from changes in accounting
pronouncements of the Financial Accounting Standards Boards or changes in
applicable laws or rules or regulations thereunder.
3.6 Books and Records. The minute books of the Company contain 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. Except (i) as set forth on Schedule 3.6, (ii) for license agreements
listed on Schedule 3.15 and (iii) for "shrinkwrap" software license agreements,
the Company has no 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
Company.
3.7 Title to Properties; Encumbrances. Except as set forth on Schedule 3.7
and except 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 of business, the Company has good, valid and marketable
title to (a) all of its properties and assets (real and personal, tangible and
intangible), including, without limitation, all of the properties and assets
reflected in the Financial Statements, 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, lien, charge or
other restriction of any kind or character, except for (i) liens reflected in
the Balance Sheet, (ii) 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 which do not materially detract from
the value of, or impair the use of, such property by the Company in the
operation of its business, (iii) liens for current taxes, assessments or
governmental charges or levies on property not yet due and delinquent, (iv)
liens that will not have a Material Adverse Effect on the Company and (v) liens
described on Schedule 3.7 (liens of the type described in clauses (i), (ii) and
(iii) above are hereinafter sometimes referred to as "Permitted Liens"). Except
as set forth on Schedule 3.7, all tangible assets of the Company are located
within the United States.
3.8 Real Property. The Company does not own, directly or indirectly, in
whole or in part any interest in any real property.
3.9 Leases. Schedule 3.9 contains an accurate and complete list of all real
property and tangible property leases to which the Company is a party (as lessee
or lessor). Each lease set forth on Schedule 3.9 (or required to be set forth on
Schedule 3.9) is in full force and effect; all rents and additional rents due by
the Company to date on each such lease have been paid (other than any pass
through expenses not yet invoiced to 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, other than any event,
occurrence or act that would not have a Material Adverse Effect on the Company.
The tangible property leased by the Company is in a state of good maintenance
and repair, reasonable wear and tear excepted. Except as set forth on Schedule
3.9, none of the tangible property leased by the Company is located outside the
United States.
3.10 Material Contracts. Except as set forth on Schedule 3.10, the Company
is not bound by (a) any agreement, contract or commitment relating to the
employment of any Person (as hereinafter defined) by the Company or any bonus,
deferred compensation, pension, profit sharing, stock option, employee stock
purchase, retirement or other employee benefit plan, (b) 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,
(c) any agreement, contract or commitment relating to capital expenditures in
excess of $25,000 per individual item or $100,000 in the aggregate, (d) 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, (e)
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 of business), (f) any management service,
consulting or any other similar type contract, other than the Company's
Titlescape subscription system agreements entered into in the ordinary course of
its business, (g) any agreement, contract or commitment limiting the ability of
the Company to engage in any line of business or to compete with any Person, (h)
any agreement, contract or commitment not entered into in the ordinary course of
business which involves $50,000 or more and is not cancelable without penalty
within 30 days or (i) any agreement, contract or commitment which might
reasonably be expected to have a Material Adverse Effect. Each contract or
agreement set forth on Schedule 3.10 (or required to be set forth on Schedule
3.10) is in full force and effect. The Company has not violated any of the terms
or conditions of any contract or agreement set forth on Schedule 3.10 (or
required to be set forth on Schedule 3.10) in any material respect, and, to the
best knowledge, information and belief of the Company and the Major Shareholder,
all of the covenants to be performed by any other party thereto have been fully
performed.
3.11 Restrictive Documents. Except as set forth on Schedule 3.11, the
Company is not subject to, or a party to, any charter, by-law, 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) has or might reasonably be expected to have a Material
Adverse Effect on the Company, or (b) would restrict the ability of the Company
to acquire any property or conduct business in any area.
3.12 Litigation. Except as set forth on Schedule 3.12, there is no action,
suit, proceeding at law or in equity, arbitration or administrative or other
proceeding by or before (or to the best knowledge, information and belief of the
Company and the Major Shareholder any investigation by) any governmental or
other instrumentality or agency, pending, or, to the best knowledge, information
and belief of the Company and the Major Shareholder, threatened, against or
affecting the Company or any of its properties or rights which could materially
and adversely affect the right or ability of the Company to carry on its
business as now conducted, or which could have a Material Adverse Effect. The
Company is not subject to any judgment, order or decree entered in any lawsuit
or proceeding which may have a Material Adverse Effect on the Company.
3.13 Taxes.
(a) Tax Returns. The Company has timely filed or caused to be timely filed
with the appropriate taxing authorities all material returns, statements, forms
and reports for Taxes (the "Returns") that are required to be filed by, or with
respect to, the Company 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 Company for the periods covered
thereby.
(b) Payment of Taxes. All material Taxes and Tax liabilities of the Company
for all taxable years or periods that end on or before the Closing Date and,
with respect to any taxable year or 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 timely paid or adequately
accrued and disclosed and fully provided for on the books and records of the
Company in accordance with US GAAP.
(c) Other Tax Matters.
(i) Except as set forth on Schedule 3.13(c)(i), the Company has not
been the subject of an audit or other examination of Taxes by the tax
authorities of any nation, state or locality nor has the Company received any
written notices from any taxing authority relating to any issue which could
affect the Tax liability of the Company.
(ii) Except as set forth on Schedule 3.13(c)(ii) the Company (A) has
not, as of the Closing Date, entered into an agreement or waiver or been
requested to enter into an agreement or waiver extending any statute of
limitations relating to the payment or collection of Taxes of the Company and
(B) is not, as of the Closing Date, currently contesting the Tax liability of
the Company before any court, tribunal or agency.
(iii) The Company has not been included in any "consolidated,"
"unitary" or "combined" Return provided for under the laws of the United States,
any foreign jurisdiction or any state or locality with respect to Taxes for any
taxable period for which the statute of limitations has not expired.
(iv) All Taxes which the Company is (or was) required by law to
withhold or collect have been duly withheld or collected, and have been timely
paid over to the proper authorities to the extent due and payable.
(v) The Company is not a "United States real property holding
corporation" within the meaning of Section 897(c)(2) of the Code.
(vi) There are no tax sharing, allocation, indemnification or similar
agreements in effect as between the Company or any predecessor or affiliate
thereof and any other party (including the Major Shareholder and any
predecessors or affiliates thereof) under which FAFCO or the Company could be
liable for any Taxes or other claims of any party.
(vii) The Company has not applied for, been granted, or agreed
to any accounting method change for which it will be required to take into
account any adjustment under Section 481 of the Code or any similar provision of
the Code or the corresponding tax laws of any nation, state or locality.
(viii) No election under Section 341(f) of the Code has been made or
shall be made prior to the Closing Date to treat the Company as a consenting
corporation, as defined in Section 341 of the Code.
3.14 Insurance. Set forth on Schedule 3.14 is a complete list of insurance
policies which the Company maintains with respect to its businesses, properties
or employees. Such policies are in full force and effect and are free from any
right of termination on the part of the insurance carriers (other than any
statutory or contract rights to terminate for convenience upon notice or to
decline to renew). Such policies, with respect to their amounts and types of
coverage, are adequate to insure fully against risks to which the Company and
its property and assets are normally exposed in the operation of its business.
There has not been any material adverse change in the Company's relationship
with its insurers or in the premiums payable pursuant to such policies during
the past year.
3.15 Intellectual Properties. The Company possesses or has adequate rights
to use all material Intellectual Property necessary for the operation of the
business of the Company as now conducted. All of the Intellectual Property that
is material to the conduct of the Company's business taken as a whole is listed
on Schedule 3.15 and is owned by the Company free and clear of any and all
encumbrances that would have a Material Adverse Effect on the Company or its
ability to utilize the item of Intellectual Property to which such encumbrance
relates other than any material Intellectual Property that is licensed to
Company as disclosed on Schedule 3.15 hereto. The use of the Intellectual
Property by the Company does not conflict with, infringe upon, violate or
interfere with or constitute a misappropriation of any Intellectual Property
owned by any other Person, except where such conflict, infringement, violation
or interference would not result in a Material Adverse Effect on Company. The
Company has not received written notice that the use of any Intellectual
Property conflicts with, infringes upon, violates or interferes with the rights
of any other Person. The Company is not in default under the terms of any third
party license or other right to use Intellectual Property which default is
likely to have a Material Adverse Effect on Company.
3.16 Compliance with Laws. The Company is in compliance in all material
respects with all applicable laws, regulations, orders, judgments and decrees,
except where the failure to comply is not likely to have a Material Adverse
Effect.
3.17 Governmental Licenses. The Company has all governmental licenses,
permits, franchises, approvals and other authorizations of any governmental
authority (the "Licenses") necessary to own, lease and operate its properties
and enable it to carry on its business as presently conducted except for those
Licenses, the lack of which would not have a Material Adverse Effect on the
Company. All Licenses held by the Company, are in full force and effect.
3.18 Labor Matters. (a) 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,
except where the failure to comply is not likely to have a Material Adverse
Effect, and has not and is not engaged in any unfair labor practice; (b) no
unfair labor practice complaint against the Company is pending before the
National Labor Relations Board; (c) there is no labor strike, dispute slowdown
or stoppage actually pending or threatened against or involving the Company; (d)
no representation question exists respecting the employees of the Company; (e)
no grievance which might have a Material Adverse Effect upon the Company exists,
no arbitration proceeding arising out of or under any collective bargaining
agreement is pending and no claim therefor has been asserted; (f) no collective
bargaining agreement is currently being negotiated by the Company; and (g) the
Company has not experienced any material labor difficulty during the last three
years.
3.19 Employee Benefit Plans.
(a) List of Plans. Set forth in Schedule 3.19(a) is an accurate and
complete list of all domestic and foreign (i) "employee benefit plans," within
the meaning of Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended, and the rules and regulations thereunder ("ERISA"); (ii)
bonus, stock option, stock purchase, restricted stock, incentive, fringe
benefit, profit-sharing, pension, or retirement, deferred compensation, medical,
life, disability, accident, salary continuation, severance, accrued leave,
vacation, sick pay, sick leave, supplemental retirement and unemployment benefit
plans, programs, arrangements, commitments and/or practices (whether or not
insured); and (iii) employment, consulting, termination, and severance contracts
or agreements; for active, retired or former employees or directors, whether or
not any such plans, programs, arrangements, commitments, contracts, agreements
and/or practices (referred to in (i), (ii) or (iii) above) are in writing or are
otherwise exempt from the provisions of ERISA; that have been established,
maintained or contributed to (or with respect to which an obligation to
contribute has been undertaken) or with respect to which any potential liability
is borne by the Company (including, for this purpose and for the purpose of all
of the representations in this Section 3.19, any predecessors to the Company and
all employers (whether or not incorporated) that would be treated together with
the Company and/or the Shareholders as a single employer (1) within the meaning
of Section 414 of the Internal Revenue Code of 1986, as amended, and the rules
and regulations promulgated thereunder (the "Code"), or (2) as a result of the
Company and/or the Shareholders being or having been a general partner of any
such employer), since September 2, 1974 ("Employee Benefit Plans").
(b) Status of Plans. Each Employee Benefit Plan (including any related
trust) complies in form with the requirements of all applicable laws, including,
without limitation, ERISA and the Code, except for any noncompliance that will
not have a Material Adverse Effect on the Company, and has at all times been
maintained and operated in substantial compliance with its terms and the
requirements of all applicable laws, including, without limitation, ERISA and
the Code. No complete or partial termination of any Employee Benefit Plan has
occurred or is expected to occur, and no proceedings have been instituted, and
no condition exists and no event has occurred that could constitute grounds,
under Title IV of ERISA to terminate or appoint and trustee to administer any
Employee Benefit Plan. The Company has no commitment, intention or understanding
to create, modify or terminate any Employee Benefit Plan. Except as required to
maintain the tax-qualified status of any Employee Benefit Plan intended to
qualify under Section 401(a) of the Code, no condition or circumstance exists
that would prevent the amendment or termination of any Employee Benefit Plan. No
event has occurred and no condition or circumstance has existed that could
result in a material increase in the benefits under or the expense of
maintaining any Employee Benefit Plan from the level of benefits or expense
incurred for the most recent fiscal year ended thereof. No Employee Benefit Plan
is a "multiple employer plan" within the meaning of the Code or ERISA.
(c) Liabilities. No Employee Benefit Plan subject to Section 412 or 418B of
the Code or Section 302 of ERISA has incurred any accumulated funding deficiency
within the meaning of Section 412 or 418B of the Code or Section 302 of ERISA,
respectively, or has applied for or obtained a waiver from the Internal Revenue
Service ("IRS") of any minimum funding requirement or an extension of any
amortization period under Section 412 of the Code or Section 303 or 304 of
ERISA. Except for payments of premiums to the Pension Benefit Guaranty
Corporation ("PBGC"), which have been timely paid in full, the Company has not
incurred any liability (including, for this purpose and for the purpose of all
of the representations in this Section 3.19, any indirect, contingent, or
secondary liability) to the PBGC in connection with any Employee Benefit Plan
covering any active, retired or former employees or directors of the Company,
including, without limitation, any liability under Section 4069 or 4212(c) of
ERISA or any penalty imposed under Section 4071 of ERISA, or ceased operations
at any facility or withdrawn from any such Employee Benefit Plan in a manner
which could subject it to liability under Section 4062, 4063 or 4064 of ERISA,
or knows of any facts or circumstances that might give rise to any liability of
the Company to the PBGC under Title IV of ERISA that could reasonably be
anticipated to result in any claims being made against FAFCO by the PBGC.
The Company has not incurred any withdrawal liability (including any
contingent or secondary withdrawal liability) within the meaning of Section 4201
or 4204 of ERISA to any Employee Benefit Plan which is a "multiemployer plan"
(as such term is defined in Section 4001(a)(3) of ERISA) ("Multiemployer Plan"),
and no event has occurred and no condition or circumstance has existed, that
presents a material risk of the occurrence of any withdrawal from or the
partition, termination, reorganization or insolvency of any such Multiemployer
Plan which could result in any liability of the Company to any such
Multiemployer Plan.
The Company does not maintain any Employee Benefit Plan which is a "group
health plan" (as such term is defined in Section 5000(b)(1) of the Code or
Section 607(1) of ERISA) that has not been administered and operated in all
respects in compliance with the applicable requirements of Sections 601-609 of
ERISA and Section 4980B of the Code and the Company is not subject to any
material liability, including, without limitation, additional contributions,
fines, taxes, penalties or loss of tax deduction as a result of such
administration and operation. Each Employee Benefit Plan that is intended to
meet the requirements of Section 125 of the Code meets such requirements, except
where the failure to meet such requirement would not result in a material
liability of the Company, and each program of benefits for which employee
contributions are provided pursuant to elections under any Employee Benefit Plan
meets the requirements of the Code applicable thereto. The Company does not
maintain any Employee Benefit Plan which is an "employee welfare benefit plan"
(as such term is defined in Section 3(1) of ERISA) that has provided any
"disqualified benefit" (as such term is defined in Section 4976(b) of the Code)
with respect to which an excise tax could be imposed.
The Company does not maintain any Employee Benefit Plan (whether qualified
or non-qualified under Section 401(a) of the Code) providing for post-employment
or retiree health, life insurance and/or other welfare benefits and having
unfunded liabilities, and the Company does not have any obligation to provide
any such benefits to any retired or former employees or active employees
following such employees' retirement or termination of service (other than (i)
benefit coverage mandated by Section 4980B of the Code, or similar state laws,
(ii) death or retirement benefits under any Employee Benefit Plan that is
intended to be qualified under Section 401(a) of the Code, (iii) benefits the
full cost of which are borne by the current or former employees of the Company
(or the employees' beneficiaries), (iv) disability benefits for employees
currently away from work under any Company disability plan that is an "employee
welfare benefit plan" (as such term is defined in section 3(1) of ERISA and (v)
life insurance benefits in respect of employees who died while in service, the
premiums for which are solely payable prior to the death of such employee). The
Company does not have any unfunded liabilities pursuant to any Employee Benefit
Plan that is not intended to be qualified under Section 401(a) of the Code.
Except as set forth in Schedule 3.19(a), the Company has not incurred any
liability for any tax or excise tax arising under Chapter 43 of the Code, and no
event has occurred and no condition or circumstance has existed that could give
rise to any such liability.
No asset of the Company is subject to any lien arising under Section 302(f)
of ERISA or Section 412(n) of the Code, and no event has occurred and no
condition or circumstance has existed that could give rise to any such lien. The
Company has not been required to provide any security under Section 307 of ERISA
or Section 401(a)(29) or 412(f) of the Code, and no event has occurred and no
condition or circumstance has existed that could give rise to any such
requirement to provide any such security.
There are no actions, suits, claims or disputes pending, or, to the best
knowledge, information and belief of the Company and the Major Shareholder
threatened, anticipated or reasonably expected to be asserted against or with
respect to any Employee Benefit Plan or the assets of any such plan (other than
routine claims for benefits and appeals of denied routine claims). No civil or
criminal action brought pursuant to the provisions of Title I, Subtitle B, Part
5 of ERISA is pending, threatened, anticipated, or reasonably expected to be
asserted against the Company or any fiduciary of any Employee Benefit Plan, in
any case with respect to any Employee Benefit Plan. No Employee Benefit Plan or
any fiduciary thereof has been the direct or indirect subject of an audit,
investigation or examination by any governmental or quasi-governmental agency.
(d) Contributions. Full payment has been timely made of all amounts which
the Company is required, under applicable law or under any Employee Benefit Plan
or any agreement relating to any Employee Benefit Plan to which the Company is a
party, to have paid as contributions or premiums thereto as of the last day of
the most recent fiscal year of such Employee Benefit Plan ended prior to the
date hereof. All such contributions and/or premiums have been fully deducted for
income tax purposes and no such deduction has been challenged or disallowed by
any governmental entity, and to the best knowledge, information and belief of
the Major Shareholder no event has occurred and no condition or circumstance has
existed that could reasonably give rise to any such challenge or disallowance.
The Company has made adequate provision for reserves in accordance with US GAAP
to meet contributions and premiums and any other liabilities that have not been
paid or satisfied because they are not yet due under the terms of any Employee
Benefit Plan, applicable law or related agreements. Benefits under all Employee
Benefit Plans are as represented and have not been increased subsequent to the
date as of which documents have been provided.
(e) Funded Status; Withdrawal Liability. No Employee Benefit Plan is
covered by Title IV of ERISA.
(f) Tax Qualification. Each Employee Benefit Plan intended to be qualified
under Section 401(a) of the Code has, as currently in effect, been determined to
be so qualified by the IRS. Each trust established in connection with any
Employee Benefit Plan which is intended to be exempt from Federal income
taxation under Section 501(a) of the Code has, as currently in effect, been
determined to be so exempt by the IRS. To the best knowledge, information and
belief of the Company and the Major Shareholder, since the date of each most
recent determination referred to in this paragraph (f), no event has occurred
and no condition or circumstance has existed that resulted or is likely to
result in the revocation of any such determination or that could adversely
affect the qualified status of any such Employee Benefit Plan or the exempt
status of any such trust.
(g) Transactions. No "reportable event" (as such term is defined in
Section 4043 of ERISA) for which the 30-day notice requirement has not been
waived by the PBGC has occurred or is expected to occur with respect to any
Employee Benefit Plan. Neither the Company nor any of its respective directors,
officers, employees or, to the best knowledge, information and belief of the
Company and the Major Shareholder, other persons who participate in the
operation of any Employee Benefit Plan or related trust or funding vehicle, has
engaged in any transaction with respect to any Employee Benefit Plan or breached
any applicable fiduciary responsibilities or obligations under Title I of ERISA
that would subject any of them to a tax, penalty or liability for prohibited
transactions or breach of any obligations under ERISA or the Code or would
result in any claim being made under, by or on behalf of any such Employee
Benefit Plan by any party with standing to make such claim.
(h) Triggering Events. Except as set forth on Schedule 3.19(h), the
execution of this Agreement and the consummation of the transactions
contemplated hereby, do not constitute a triggering event under any Employee
Benefit Plan, policy, arrangement, statement, commitment or agreement, whether
or not legally enforceable, which (either alone or upon the occurrence of any
additional or subsequent event) will or may result in any payment (whether of
severance pay or otherwise), "parachute payment" (as such term is defined in
Section 280G of the Code), acceleration, vesting or increase in benefits to any
employee or former employee or director of the Company. No Employee Benefit Plan
provides for the payment of severance, termination, change in control or
similar-type payments or benefits.
(i) Documents. The Company has made available to FAFCO and its counsel true
and complete copies of all material documents in connection with each Employee
Benefit Plan, including, without limitation (where applicable): (i) all Employee
Benefit Plans as in effect on the date hereof, together with all amendments
thereto, including, in the case of any Employee Benefit Plan not set forth in
writing, a written description thereof; (ii) all current summary plan
descriptions, summaries of material modifications, and material communications;
(iii) all current trust agreements, declarations of trust and other documents
establishing other funding arrangements (and all amendments thereto and the
latest financial statements thereof); (iv) the most recent IRS determination
letter obtained with respect to each Employee Benefit Plan intended to be
qualified under Section 401(a) of the Code or exempt under Section 501(a) of the
Code; (v) the annual report on IRS Form 5500-series for each of the last three
years for each Employee Benefit Plan required to file such form; (vi) the most
recently prepared actuarial valuation report for each Employee Benefit Plan
covered by Title IV of ERISA; (vii) the most recently prepared financial
statements; and (viii) all contracts and agreements relating to each Employee
Benefit Plan, including, without limitation, service provider agreements,
insurance contracts, annuity contracts, investment management agreements,
subscription agreements, participation agreements, and recordkeeping agreements
and collective bargaining agreements.
3.20 Interests in Clients, Suppliers, Etc. Except as set forth on Schedule
3.20, to the Company's and the Major Shareholder's best knowledge, information
and belief neither the Major Shareholder nor, to the Company's and the Major
Shareholder's knowledge without inquiry or further investigation, any other
officer or director of the Company possesses, directly or indirectly, any
financial interest in, or is a director, officer or employee of, any Person
which is a client, supplier, customer, lessor, lessee, or competitor or
potential competitor of the Company. Ownership of securities of a company whose
securities are registered under the Securities Exchange Act of 1934, as amended,
of 1% or less of any class of such securities shall not be deemed to be a
financial interest for purposes of this Section 3.20.
3.21 Bank Accounts, Powers of Attorney and Compensation of Employees. Set
forth on Schedule 3.21 is an accurate and complete list showing (a) the name and
address of each bank in which the Company has an account or safe deposit box,
the number of any such account or any such box and the names of all persons
authorized to draw thereon or to have access thereto, (b) the names of all
persons, if any, holding powers of attorney from the Company and a summary
statement of the terms thereof and (c) the names of all persons whose
compensation from the Company for the fiscal year ended on the Balance Sheet
Date exceeded an annualized rate of $50,000, together with a statement of the
full amount paid or payable to each such person for services rendered during
such fiscal year.
3.22 No Changes Since Balance Sheet Date. Except as set forth on Schedule
3.22, since the Balance Sheet Date, except as expressly contemplated by this
Agreement, the Company has not (a) incurred any liability or obligation of any
nature (whether accrued, absolute, contingent or otherwise), except in the
ordinary course of business, (b) permitted any of its assets to be subjected to
any mortgage, pledge, lien, security interest, encumbrance, restriction or
charge of any kind (other than Permitted Liens), (c) sold, transferred or
otherwise disposed of any assets except in the ordinary course of business, (d)
made any capital expenditure or commitment therefor, except in the ordinary
course of business, (e) declared or paid any dividend or made any distribution
on any shares of its capital stock, (f) redeemed, purchased or otherwise
acquired any shares of its capital stock, (g) granted or issued any option,
warrant or other right to purchase or acquire any shares of its capital stock,
(h) made any bonus or profit sharing distribution or payment of any kind, (i)
increased its indebtedness for borrowed money, except current borrowings from
banks in the ordinary course of business, or made any loan to any Person, (j)
written off as uncollectible any notes or accounts receivable, except write-offs
in the ordinary course of business charged to applicable reserves, none of which
individually or in the aggregate is material to the Company, (k) granted any
increase in the rate of wages, salaries, bonuses or other remuneration of any
executive employee or other employees, except in the ordinary course of
business, (l) cancelled or waived any claims or rights of substantial value, (m)
made any change in any method of accounting or auditing practice, (n) otherwise
conducted its business or entered into any transaction, except in the usual and
ordinary manner and in the ordinary course of business, or (o) agreed, whether
or not in writing, to do any of the foregoing.
3.23 Consents and Approvals; No Violations. Assuming (i) the filings
required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act") are made and the waiting period thereunder has been
terminated or expired, (ii) the Shareholders approve the Merger and (iii) the
Merger Documents are accepted for filing with the California Secretary of State,
the execution and delivery of this Agreement by the Company and the Major
Shareholder and the consummation of the transactions contemplated hereby will
not (a) violate any provision of the articles of incorporation or by-laws (or
equivalent) of the Company, (b) violate any statute, ordinance, rule,
regulation, order or decree of any court or any governmental or regulatory body,
agency or authority applicable to the Company or the Major Shareholder, (c)
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, (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 lien, security interest, charge or encumbrance upon any of the
properties or assets of the 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
the Company is a party, or by which it or any of its properties or assets may be
bound, excluding from the foregoing clauses (c) and (d) filings, notices,
permits, consents and approvals the absence of which, and violations, breaches,
defaults, conflicts and liens which, in the aggregate, would not have a Material
Adverse Effect on the Company.
3.24 Disclosure. None of this Agreement, any Schedule, Exhibit or
certificate attached hereto or delivered pursuant to this Agreement contains any
untrue statement of a material fact, or omits any statement of a material fact
necessary in order to make the statements contained herein or therein, in light
of the circumstances in which they were made, not misleading. There is no fact
known to the Company or the Major Shareholder which is reasonably likely to have
a Material Adverse Effect on the Company and which has not been disclosed in a
Schedule, Exhibit or certificate attached or provided hereto.
3.25 Broker's or Finder's Fees. Subject to Section 11.2 and except as set
forth on Schedule 3.25, no agent, broker, person or firm acting on behalf of any
of the Major Shareholder or the Company is, or will be, entitled to any
commission or broker's or finder's fees from any of the parties hereto or from
any Person controlling, controlled by or under common control with any of the
parties hereto, in connection with any of the transactions contemplated by this
Agreement.
3.26 Copies of Documents. The Major Shareholder or the Company have caused
to be made available for inspection and copying by FAFCO and its advisers, true,
complete and correct copies of all documents referred to in this Section 3 or in
any Schedule or Exhibit attached hereto.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF FAFCO AND FAFCOSUB
Each of FAFCO and FAFCOSUB represents, warrants and agrees, severally and
not jointly, as follows:
4.1 Existence and Good Standing; Power and Authority. Each of FAFCO and
FAFCOSUB is a corporation duly organized, validly existing and in good standing
under the laws of the State of California. Each of FAFCO and FAFCOSUB has the
corporate power and authority to enter into, execute and deliver this Agreement
and perform its obligations hereunder. This Agreement has been duly authorized
and approved by all required corporate action of FAFCO and FAFCOSUB and
constitutes the legal, valid and binding obligation of FAFCO and FAFCOSUB and is
enforceable against FAFCO and FAFCOSUB 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.
4.2 Consents and Approvals; No Violations. Assuming (i) the filings
required under the HSR Act are made and the waiting period thereunder has been
terminated or expired, (ii) the Registration Statement has been filed and
declared effective and any waiting period under the Securities Act has expired,
(iii) the Shareholders approve the Merger, (iv) the Merger Documents are
accepted for filing with the California Secretary of State and (v) assuming the
Prospectus Supplement is delivered to the Shareholders at lease twenty (20)
Business Days prior to the Data Tree Shareholders Meeting the execution and
delivery of this Agreement by FAFCO and FAFCOSUB and the consummation of the
transactions contemplated hereby will not (a) violate any provision of the
articles of incorporation or by-laws (or equivalent) of FAFCO or FAFCOSUB, (b)
violate any statute, ordinance, rule, regulation, order or decree of any court
or any governmental or regulatory body, agency or authority applicable to FAFCO
or FAFCOSUB, (c) 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, (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 lien, security interest, charge or encumbrance
upon any of the properties or assets of FAFCO or FAFCOSUB 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 FAFCO or FAFCOSUB is a party, or by which they or any
of their properties or assets may be bound, excluding from the foregoing clauses
(c) and (d) filings, notices, permits, consents and approvals the absence of
which, and violations, breaches, defaults, conflicts and liens which, in the
aggregate, would not have a Material Adverse Effect on FAFCO or FAFCOSUB taken
as a whole.
4.3 Restrictive Documents. Neither FAFCO nor FAFCOSUB is subject to any
charter, by-law, mortgage, lien, lease, agreement, instrument, order, law, rule,
regulation, judgment or decree, or any other restriction of any kind or
character, which has or might reasonably be expected to have a Material Adverse
Effect on FAFCO or FAFCOSUB.
4.4 Broker's or Finder's Fees. No agent, broker, person or firm acting on
behalf of FAFCO or FAFCOSUB is, or will be, entitled to any commission or
broker's or finder's fees from any of the Parties hereto, or from any Person
controlling, controlled by or under common control with any of the Parties
hereto, in connection with any of the transactions contemplated by this
Agreement.
4.5 FAFCO Common Shares. The FAFCO Common Shares to be delivered at Closing
have been authorized and, when delivered at Closing, will be validly issued,
fully paid, nonassessable and registered pursuant to an effective registration
statement under the Securities Act and will be issued in compliance with all
federal and state securities laws.
4.6 Capitalization. The authorized capital stock of FAFCO is 1,000 shares
of Series A Junior Participating Preferred Shares, $1.00 par value, none of
which are issued and outstanding and 36,000,000 common shares, $1.00 par value,
of which 17,850,189 are issued and outstanding as of the date of this Agreement.
All such outstanding shares have been duly authorized and validly issued, and
are fully paid and nonassessable, were not issued in violation or breach of any
preemptive or similar rights, and have been issued in compliance with all
applicable federal and state securities laws. Except for options granted under
FAFCO's 1996 Employee Stock Option Plan and the 1997 Directors Stock Plan, and
except as set forth on Schedule 4.6, there are no outstanding options, warrants,
convertible securities or other securities or rights issued or granted by FAFCO
which entitle the holder thereof to purchase or acquire FAFCO Common Shares 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 on
Schedule 4.6, no Person has any demand or piggyback registration rights in
respect of their FAFCO Common Shares.
4.7 SEC Reports and Financial Statements. Each form, report, schedule,
registration statement, definitive proxy statement filed by FAFCO with the SEC
prior to the date hereof (as such documents have been amended prior to the date
hereof, the "SEC Reports"), as of their respective dates, complied in all
material respects with the applicable requirements of the Securities Act and the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder and, since the first date on which FAFCO Common Shares were listed
for trading on the New York Stock Exchange, the rules of the New York Stock
Exchange. FAFCO has made available to the Company accurate and complete copies
of all SEC Reports filed by the Company since January 1, 1997. None of the SEC
Reports, as of their respective dates, contained or contains any untrue
statement of material fact or omits to state a material 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. The consolidated
financial statements of FAFCO and its subsidiaries included in such SEC Reports
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 US 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 of the SEC) and fairly present in all
material respects, subject, in the case of the unaudited interim financial
statements, to normal, year-end adjustments, the consolidated financial position
of FAFCO and its subsidiaries as of the dates thereof and neither FAFCO nor any
of its subsidiaries has incurred any liabilities and obligations (whether
absolute, accrued, fixed, contingent, liquidated, unliquidated or otherwise and
whether due or to become due) of any nature except liabilities, obligations and
contingencies (a) which are reflected in the consolidated balance sheet of FAFCO
and its subsidiaries at December 31, 1997, (b) which (i) were incurred in the
ordinary course of business after December 31, 1997 or (ii) are disclosed in the
SEC Reports filed after December 31, 1997, (c) which are not required to be
recorded as a liability under US GAAP or disclosed in notes to financial
statements or (d) which individually or in the aggregate are not expected to
have a Material Adverse Effect on FAFCO. Since December 31, 1996, there has been
no change in any of the significant accounting (including tax accounting)
policies, practices or procedures of FAFCO or any of its subsidiaries except
changes resulting from changes in accounting pronouncements of the Financial
Accounting Standards Boards or changes in applicable laws or rules or
regulations thereunder.
4.8 No Material Changes. Except as contemplated by this Agreement or as
disclosed in any SEC Report or for changes in the ordinary course of business
that have not had and are not reasonably expected to have a Material Adverse
Effect on FAFCO or its subsidiaries taken as a whole, since December 31, 1997
there has been no change in the assets or liabilities, or in the business or
condition, financial or otherwise, or in the results of operations, of FAFCO,
whether as a result of any legislative or regulatory change, revocation of any
license or rights to do business, fire, explosion, accident, casualty, labor
trouble, flood, drought, riot, storm, condemnation, act of God, public force or
otherwise.
4.9 Litigation. Except as disclosed in the SEC Reports, there is no
action, suit, proceeding at law or in equity, arbitration or administrative or
other proceeding by or before (or to the best knowledge, information and belief
of FAFCO any investigation by) any governmental or other instrumentality or
agency, pending, or, to the best knowledge, information and belief of FAFCO,
threatened, against or affecting FAFCO or its subsidiaries or any of its or
their properties or rights which could have a Material Adverse Effect taken as a
whole. Neither FAFCO nor its subsidiaries is subject to any judgment, order or
decree entered in any lawsuit or proceeding which may have a Material Adverse
Effect on FAFCO or its subsidiaries taken as a whole.
4.10 Compliance with Laws. FAFCO and its subsidiaries are in compliance in
all material respects with (i) all applicable laws, regulations, orders,
judgments and decrees, except where the failure to comply would not likely have
a Material Adverse Effect on FAFCO and its subsidiaries taken as a whole and
(ii) FAFCO and its subsidiaries have not violated any of the terms or conditions
of any material contract or agreement in any material respect, and, to the best
knowledge, information and belief of FAFCO, all of the covenants to be performed
by any other party thereto have been fully performed.
4.11 Disclosure. None of this Agreement, any Schedule, Exhibit or
certificate attached hereto or delivered pursuant to this Agreement contains any
untrue statement of a material fact, or omits any statement of a material fact
necessary in order to make the statements contained herein or therein, in light
of the circumstances in which they were made, not misleading. There is no fact
known to FAFCO which is reasonably likely to have a Material Adverse Effect on
FAFCO.
SECTION 5
TRANSACTIONS PRIOR TO THE EFFECTIVE TIME
5.1 Conduct of the Business of the Company Prior to Closing. During the
period from the date of this Agreement to the Effective Time, the Company shall
conduct its operations only according to its ordinary and usual course of
business; use its reasonable efforts to preserve intact its business
organizations, keep available the services of its officers and employees
(without having any obligation to provide retention packages) and maintain
existing relationships with licensors, suppliers, distributors, customers,
landlords, employees, agents and others having business relationships with it;
confer with FAFCO concerning operational matters of a material nature (other
than any matters relating to sales presentations in which the Company is
competing with First American Real Estate Solutions LLC or its affiliates) and
report periodically to FAFCO concerning the business, operations and finances of
the Company. Notwithstanding the immediately preceding sentence, prior to the
Effective Time, except as may be first approved in writing by FAFCO or as is
otherwise permitted or required by this Agreement, the Company shall and the
Major Shareholder shall cause the Company to (a) refrain from amending or
modifying its articles of incorporation or by-laws from their respective forms
on the date of this Agreement, (b) refrain from increasing any bonuses,
salaries, or other compensation to any director, officer, employee or
stockholder or entering into any employment, severance, or similar agreement
with any director, officer, or employee (except that the Company may adopt a
severance or bonus plan for payment of the Key Employee Bonuses and may pay the
President of the Company a bonus of $62,500 on or about March 31, 1998), (c)
refrain from adopting or increasing any profit sharing, bonus, deferred
compensation, savings, insurance, pension, retirement, or other employee benefit
plan for or with any of its employees, (d) refrain from entering into any
contract or commitment except contracts and commitments in the ordinary course
of business, (e) refrain from increasing its indebtedness for borrowed money,
except current borrowings in the ordinary course of business, (f) refrain from
canceling or waiving any claim or right of substantial value which individually
or in the aggregate is material, (g) refrain from declaring or paying any
dividends in respect of its capital stock or redeeming, purchasing or otherwise
acquiring any of its capital stock, (h) refrain from making any material change
in accounting methods or practices, except as required by law or US GAAP, (i)
refrain from issuing or selling any shares of capital stock or any other
securities, or issuing any securities convertible into, or options, warrants or
rights to purchase or subscribe to, or entering into any arrangement or contract
with respect to the issue and sale of, any shares of its capital stock or any
other securities, or making any other changes in its capital structure, except
such issuances or sales of securities which the Company is already obligated to
make as of the date of this Agreement and which are disclosed to FAFCO, (j)
refrain from selling, leasing or otherwise disposing of any material asset or
property other than sales of inventory in the ordinary course of business, (k)
refrain from making any capital expenditure or commitment therefor, except in
the ordinary course of business, (l) refrain from writing off as uncollectible
any notes or accounts receivable, except write-offs in the ordinary course of
business charged to applicable reserves, none of which individually or in the
aggregate is material, (m) to the extent not included in clauses (a) through (l)
above, refrain from taking any of the actions described in Section 3.22 and (n)
refrain from agreeing in writing to do any of the foregoing.
5.2 Review of the Company. (a) FAFCO may, prior to the Closing Date,
directly or through its representatives, review the properties, books and
records of the Company and its financial and legal condition to the extent FAFCO
deems necessary or advisable to familiarize itself with such properties and
other matters; such review shall not, however, affect the representations and
warranties made by the Company or the Major Shareholder in this Agreement or the
remedies of FAFCO for breaches of those representations and warranties. The
Company shall and the Major Shareholder shall cause the Company to permit FAFCO
and its representatives to have, after the date of execution of this Agreement,
full access to the premises and to all the books and records of the Company and
to cause the officers of the Company to furnish FAFCO with such financial and
operating data and other information with respect to the business and properties
of the Company as FAFCO shall from time to time reasonably request.
(b) In the event of termination of this Agreement, FAFCO shall keep
confidential any material information obtained from the Company or the Major
Shareholder concerning the Company's properties, operations and business (unless
readily ascertainable from public or published information or trade sources)
until the same ceases to be material (or becomes so ascertainable) and, at the
request of the Company, shall return to the Company all copies of any schedules,
statements, documents or other written information obtained in connection
therewith, including any materials prepared by FAFCO or its representatives
(except for work product encompassed by the attorney-client privilege)
containing any such confidential information, except to the extent that such
materials contain information confidential to FAFCO, in which case such
materials shall be destroyed. The Company and the Major Shareholder shall
deliver or cause to be delivered to FAFCO such additional instruments,
documents, certificates and opinions as FAFCO may reasonably request for the
purpose of (a) verifying the information set forth in this Agreement and on any
Schedule or Exhibit attached hereto and (b) consummating or evidencing the
transactions contemplated by this Agreement.
5.3 Exclusive Dealing. During the period from the date of this Agreement
through the Closing Date, the Company and the Major Shareholder shall not take
any action to, directly or indirectly, encourage, initiate or engage in
discussions or negotiations with, or provide any information to, any Person,
other than FAFCO, concerning any purchase of the Shares or any merger, sale of
substantially all of the assets of the Company or similar transaction involving
the Company.
5.4 Shareholder Approval. In order to consummate the Merger, the Company,
acting through its Board of Directors, shall, in accordance with applicable law,
promptly call a special meeting of the Shareholders (the "Data Tree Shareholder
Meeting") or solicit written consents from its Shareholders for the purpose of
voting upon this Agreement and the Merger and the Company agrees that this
Agreement and the Merger shall be submitted at such Data Tree Shareholder
Meeting (or in connection with such written consent); provided, however, that
the Data Tree Shareholder Meeting shall not be held, or a written consent
solicited, on a day earlier than the day that is twenty (20) Business Days after
the Prospectus Supplement has been delivered to the Shareholders. The Company
agrees that it will include in materials distributed to the Shareholders in
connection with the Merger the recommendation of its board of directors that
holders of Shares approve and adopt this Agreement and approve the Merger. The
Major Shareholder will cause all Shares owned or controlled by the Major
Shareholder to be voted in favor of the Merger. FAFCO will cause all shares of
FAFCOSUB to be voted in favor of the Merger.
5.5 Best Efforts. Each of the Company, FAFCO, FAFCOSUB and the Major
Shareholder shall, and the Company shall cause each of its Subsidiaries to,
cooperate and use their respective best efforts to take, or cause to be taken,
all appropriate action, and to make, or cause to be made, all filings necessary,
proper or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, including, without
limitation, their respective best efforts to obtain, prior to the Effective
Time, all licenses, permits, consents, approvals, authorizations, qualifications
and orders of governmental authorities and parties to contracts with the
Company, FAFCO and FAFCOSUB as are necessary for consummation of the
transactions contemplated by this Agreement and to fulfill the conditions the
Merger; provided, however, that no loan agreement or contract for borrowed money
shall be repaid except as currently required by its terms, in whole or in part,
and no contract shall be amended to increase the amount payable thereunder or
otherwise to be more burdensome to the Company, FAFCO or FAFCOSUB in order to
obtain any such consent, approval or authorization without first obtaining the
written approval of the Parties.
5.6 HSR Act. The Company and FAFCO shall, as soon as practicable, file a
Notification and Report Form under the HSR Act with the FTC and the Antitrust
Division and shall use their best efforts to respond as promptly as practicable
to all inquiries received from the FTC or the Antitrust Division for additional
information or documentation.
SECTION 6
CONDITIONS PRECEDENT TO MERGER
6.1 Conditions Precedent to Obligations of FAFCO, FAFCOSUB, and the Company
and the Major Shareholder. The respective obligations of FAFCO and FAFCOSUB, on
the one hand, and the Major Shareholder and the Company, on the other hand, to
effect the Merger are subject to the satisfaction or waiver (subject to
applicable law) at or prior to the Closing Date of each of the following
conditions:
(a) Approval of Company's Shareholders. This Agreement and the Merger shall
have been approved and adopted by the requisite vote or consent of the
stockholders of the Company in accordance with applicable law and the Company's
articles of incorporation and by-laws;
(b) HSR Act. Any waiting period (and any extension thereof) under the
HSR Act applicable to the Merger shall have expired or been terminated;
(c) Injunction. No preliminary or permanent injunction or other order shall
have been issued by any court or by any governmental or regulatory agency, body
or authority which prohibits the consummation of the Merger and the transactions
contemplated by this Agreement and which is in effect at the Closing Date;
(d) 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 governmental authority which prohibits
the consummation of the Merger; all governmental and other consents and
approvals, if any, disclosed on any Schedule attached hereto or necessary to
permit the consummation of the transactions contemplated by this Agreement shall
have been received, except where the failure to obtain a consent will not have a
Material Adverse Effect on the Company or FAFCO;
(e) No Litigation. As of the Effective Time, no action or proceedings shall
have been instituted before a court or other government body or by any public
authority to restrain or prohibit the consummation of the Merger (each Party
agreeing to use commercially reasonable efforts to avoid the effect of any order
or having any injunction lifted) and the consummation of the transactions
contemplated by the agreements described in Section 6.1(f);
(f) Agreements. On or before the Closing Date, the following agreements
shall have been duly executed and delivered by each of the respective parties
thereto:
(i) the Contribution and Joint Venture Agreement, substantially in the
form of Exhibit C;
(ii) the Operating Agreement (the "Operating Agreement"),
substantially in the form of Exhibit D;
(iii) the Employment Agreement, substantially in the form of Exhibit
E;
(iv) the Noncompetition Agreement, substantially in the form of
Exhibit F;
(v) the Supply Agreement, substantially in the form of Exhibit G; and
(vi) the Promissory Note substantially in the form of Exhibit H;
(g) Securities Matters. As of the Closing Date, the SEC shall have declared
effective a Registration Statement covering the (i) issuance by FAFCO of the
FAFCO Common Shares to be delivered to the Shareholders and (ii) resale of the
FAFCO Common Shares to be received by any Shareholder subject to Rule 145 and
all applicable time periods under the Securities Act shall have expired and no
stop order shall have been issued by the SEC with respect to the Registration
Statement;
(h) Dissenting Shareholders. There shall be no Dissenting Shareholder and
the period during which any Shareholder who or which failed to vote in favor of
the Merger has the right to perfect dissenters' rights shall have expired or the
Shareholder shall have waived such right; and
(i) Listing. As of the Closing Date, the FAFCO Common Shares to be
delivered shall have been listed with the New York Stock Exchange, subject only
to official notice of issuance.
6.2 Conditions Precedent to Obligations of FAFCO and FAFCOSUB. The
obligations of FAFCO and FAFCOSUB to effect the Merger are also subject to the
satisfaction or waiver, at the specified time, of each of the following
conditions:
(a) Truth of Representations and Warranties. The representations and
warranties of the Company and the Major Shareholder contained herein that are
qualified as to materiality shall be true and accurate, and those not so
qualified shall be true and accurate in all material respects, in each case at
and as of the date of this Agreement and as of the Closing Date (except to the
extent a representation or warranty speaks specifically as of an earlier date or
as contemplated in this Agreement), and the Company and the Major Shareholder
shall have delivered to FAFCO, a certificate dated the Closing Date, to such
effect; provided, however that the representations and warranties contained in
Section 3.5(b) need only be true and accurate as of the date of this Agreement.
(b) Performance of Agreements. All of the agreements of the Company and the
Major Shareholder to be performed prior to the Closing pursuant to the terms of
this Agreement shall have been duly performed in all material respects, and the
Company and the Major Shareholder shall have delivered to FAFCO a certificate,
dated the Closing Date, to such effect;
(c) Opinions of Counsel. On the Closing Date FAFCO shall have received a
favorable opinion, dated the Closing Date, of (i) Cooley Godward LLP, counsel to
the Company, in the form set forth in Exhibit I and (ii) counsel to R. Squared
Limited, in the form set forth in Exhibit J;
(d) Good Standing and Other Certificates. As of the Closing Date, the
Company shall have delivered to FAFCO (a) copies of the Company's articles of
incorporation including all amendments thereto, certified by the Secretary of
State or other appropriate official of its jurisdiction of incorporation, (b) a
certificate from the Secretary of State or other appropriate official of the
Company's jurisdiction of incorporation to the effect that the Company is in
good standing in such jurisdiction and listing all charter documents of the
Company on file, (c) a certificate from the Secretary of State or other
appropriate official in each State in which the Company is qualified to do
business to the effect that the Company is in good standing in such State, (d) a
certificate as to the tax status of the Company from the appropriate official in
its jurisdiction of incorporation and each state in which the Company is
qualified to do business and (e) a copy of the by-laws of the Company, certified
by the Secretary of the Company as being true and correct and in effect on the
Closing Date;
(e) No Material Adverse Change. As of the Closing Date (i) there shall have
been no Material Adverse Effect on the Company and there shall not have occurred
any change or development that would reasonably be expected to have a Material
Adverse Effect on the Company, (ii) the Related Documents shall be in full force
and effect, and no event shall have occurred and no condition shall exist which
has, or could reasonably be expected to have, a material adverse effect upon (A)
the validity or enforceability of any Related Document or (B) the ability of any
party (other than FAFCO) to any Related Document to perform its obligations
under such Related Document and (iii) no party (other than FAFCO) to any Related
Document shall have breached any material covenant of such party thereunder or
failed to perform any material obligation of such party thereunder;
(f) Imperial Warrants. As of the Closing Date, Imperial Bank shall have
either put or exercised the Imperial Warrants and, if exercised, Imperial Bank
shall have voted its Shares in favor of the Merger;
(g) Intra-Company Debt. As of the Closing Date, all indebtedness, other
than travel and similar advances, of the Major Shareholder, any Shareholder or
the directors, officers and employees of the Company to the Company shall have
been repaid in full, except for approximately the $170,000 owed the Company by
Kumar Corporation as evidenced by a certain promissory note;
(h) Proceedings. As of the Closing Date, all corporate proceedings to be
taken in connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to FAFCO and its counsel, and FAFCO shall have received copies of all
such documents and other evidences as it or its counsel may reasonably request
in order to establish the consummation of such transactions and the taking of
all corporate proceedings in connection therewith;
(i) FIRPTA Statement. The Company shall furnish to FAFCO on or before the
Closing Date a copy of a statement, dated not more than thirty days prior to the
Closing Date, issued by the Company pursuant to Section 1.897-2(h) of the Code,
certifying that the Shares delivered pursuant to the Merger are not a U.S. real
property interest as defined in section 897 of the Code; and
(j) Related Party Transactions. On or before the Closing Date, all
agreements and/or arrangements between the Company on the one hand and any
Shareholder (or any Person controlling, controlled or under common control with
any Shareholder) (such Shareholder or other Person, a "Related Party") on the
other hand, entered into on or before the date of this Agreement, shall have
been reduced to written agreements in form and substance reasonably satisfactory
to FAFCO.
6.3 Conditions Precedent to Obligation of the Company and the Major
Shareholder. The obligation of the Company and the Major Shareholder to effect
the Merger are also subject to the satisfaction or waiver, at or prior to the
Closing Date, of each of the following conditions:
(a) Opinions of Counsel. On the Closing Date the Company shall have
received (i) a favorable opinion, dated the Closing Date, of White & Case LLP,
counsel to FAFCO and FAFCOSUB, in the form set forth in Exhibit K and (ii) a tax
opinion, dated the Closing Date, of Cooley Godward LLP to the effect that the
Merger will constitute a reorganization within the meaning of Section 368(a) of
the Code and no gain or loss will be recognized by the Company or its
shareholders as a result of the transactions contemplated by this Agreement;
(b) Good Standing Certificate. As of the Closing Date FAFCO and FAFCOSUB
shall have delivered to the Company and the Major Shareholder (i) copies of the
articles of incorporation of FAFCO and FAFCOSUB, respectively, including all
amendments thereto, certified by the Secretary of State of the State of
California and (ii) a certificate from the Secretary of State of the State of
California to the effect that FAFCO and FAFCOSUB, respectively, is in good
standing in such State, and listing all charter documents of FAFCO on file;
(c) Truth of Representations and Warranties. The representations and
warranties of FAFCO and FAFCOSUB contained herein that are qualified as to
materiality shall be true and accurate, and those not so qualified shall be true
and accurate in all material respects, in each case at and as of the date of
this Agreement and as of the Closing Date (except to the extent a representation
or warranty speaks specifically as of an earlier date or as contemplated in this
Agreement), and FAFCO shall have delivered to the Company and the Major
Shareholder a certificate, dated the Closing Date, to such effect; provided,
however that the representations and warranties contained in the third sentence
of Section 4.6 and Section 4.8 need only be true and accurate as of the date of
this Agreement.
(d) Performance of Agreements. All of the agreements of FAFCO and FAFCOSUB
to be performed prior to the Closing pursuant to the terms of this Agreement
shall have been duly performed in all material respects, and FAFCO and FAFCOSUB
shall have delivered to the Company and the Major Shareholder a certificate,
dated the Closing Date, to such effect;
(e) Proceedings. As of the Closing Date, all proceedings to be taken in
connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to the Company, the Major Shareholder and their respective counsel,
and the Company and the Major Shareholder shall have received copies of all such
documents and other evidences as they or their counsel may reasonably request in
order to establish the consummation of such transactions and the taking of all
proceedings in connection therewith;
(f) No Material Adverse Change. As of the Closing Date there shall have
been no Material Adverse Effect on FAFCO and there shall not have occurred any
change or development that would reasonably be expected to have a Material
Adverse Effect on FAFCO; and
(g) FAFCO Common Share Price. On each Trading Day between the date of the
Data Tree Shareholder Meeting and the Closing Date the average closing sales
price of a FAFCO Common Share for the preceding five Trading Days shall have
been equal to or greater than $42.525.
SECTION 7
COVENANTS RELATING TO SECURITIES MATTERS
7.1 Prospectus Supplement.
(a) FAFCO, the Company and the Major Shareholder shall jointly prepare and
FAFCO shall file with the SEC as soon as practicable following the date of this
Agreement a Prospectus Supplement (the "Prospectus Supplement") to registration
statement no. 333-45459 of FAFCO (the "Registration Statement"), which
Prospectus Supplement shall describe, among other things, the transactions
contemplated by this Agreement. The Prospectus Supplement shall also cover the
resale of FAFCO Common Shares received by all Shareholders who are subject to
Rule 145 (promulgated under the Securities Act restrictions on resale. The
portion of the Registration Statement relating to the registration of FAFCO
Common Shares for resale will be maintained and kept effective until the earlier
of (i) one year from the Effective Time and (ii) the time at which each selling
Shareholder named in the Registration Statement can sell all FAFCO Common Shares
held by such Shareholder in a 90 day period pursuant to the resale restrictions
imposed by Rule 145 under the Securities Act. All Shareholders subject to Rule
145 restrictions are the intended beneficiaries of this covenant, which shall
survive the Closing. FAFCO, and the Company shall also take any action (other
than, with respect to FAFCO and the Company, qualifying to do business in any
jurisdiction in which they are not now so qualified) required to be taken under
state blue sky or securities laws in connection with the issuance of FAFCO
Common Shares necessary to fulfill the transaction contemplated by this
Agreement. FAFCO, the Company and the Major Shareholder shall each furnish the
other all information concerning FAFCO, the Company or the Major Shareholder, as
the case may be, and all such other information required for use in the
Prospectus Supplement and each of FAFCO, the Company and the Major Shareholder
shall each take such other action as the other may reasonably request in
connection with the preparation of the Prospectus Supplement. FAFCO shall use
commercially reasonable efforts to have or to cause the Registration Statement
and the Prospectus Supplement to become effective as promptly as practicable and
shall take all action required under applicable federal or state securities laws
in connection with the issuance of FAFCO Common Shares in the Merger (other than
qualifying to do business in any jurisdiction in which FAFCO is not now so
qualified).
(b) If at any time prior to the Closing Date any event with respect to
FAFCO, the Company or the Major Shareholder shall occur which is required at
that time to be described in the Prospectus Supplement, the Party with respect
to whom the event occurs shall promptly notify the other Parties, and to the
extent required by law, FAFCO will promptly file an amendment or supplement with
the SEC and disseminate such amendment to the Shareholders.
7.2 Listing. FAFCO shall promptly prepare and submit to the New York Stock
Exchange listing applications covering the FAFCO Common Shares to be issued in
the Merger, and shall use its best efforts to cause such shares to be approved
for listing and trading on the New York Stock Exchange prior to the Effective
Time, subject to official notice of issuance.
SECTION 8
OTHER COVENANTS
8.1 Amended Returns. The Company shall not file any amended federal, state,
local and foreign tax return and tax report with respect to the Company without
the prior written consent of FAFCO.
8.2 Tax Free Reorganization. The Company, FAFCO and FAFCOSUB each
acknowledges and agrees that (i) it intends the Merger to constitute a
reorganization within the meaning of Section 368(a) of the Code and (ii) it will
report the Merger as such a reorganization in any and all Returns filed by it.
At or prior to the Closing, FAFCO, together with FAFCOSUB, and the Company will
execute and deliver to White & Case LLP and Cooley Godward LLP tax
representation letters substantially in the form set forth in Exhibits L and M,
respectively, for the purpose of (A) the review of the federal income tax
consequences of the Merger and the preparation and rendering of a tax opinion in
accordance with this Agreement by Cooley Godward LLP and (B) the preparation of
the discussion of the tax consequences of the Merger to be included in the
Prospectus Supplement.
8.3 Continuity of Interest. (a) Except for transfers described in Section
368(a)(2)(C) of the Code and transfers permitted to be made pursuant to Treasury
Regulation Sections 1.368-1(d), -1(e) and -2(k)(2) FAFCO has no plan or
intention to: (i) liquidate the Company; (ii) merge the Company with or into
another corporation including FAFCO or its affiliates; (iii) sell, distribute or
otherwise dispose of the stock of the Company; or (iv) cause the Company to sell
or otherwise dispose of any of its assets or of any assets acquired from
FAFCOSUB, except for dispositions made in the ordinary course of business or
payment of expenses incurred by the Company pursuant to the Merger; and
(b) Except for repurchases or redemptions of FAFCO Common Stock that are
consistent with past practices and pursuant to pre-existing purchase programs
that were not created or modified in connection with the Merger, neither
FAFCOSUB nor FAFCO nor any "related person" (as such term is defined by Treasury
Regulation Section 1.368-1(e)(3)) of FAFCOSUB or FAFCO will, in connection with
the Merger, repurchase or redeem any of the FAFCO Common Stock to be issued to
the Shareholders in the Merger.
8.4 Continuity of Business Enterprise. FAFCO intends that, following the
Merger, the Company will continue its historic business or use a significant
portion of its historic business assets in a business in accordance with
Treasury Regulation Section 1.368-1(d).
8.5 Directors and Officers Indemnification. FAFCO shall, and FAFCO shall
cause the Surviving Corporation to, keep in effect provisions of the articles of
incorporation and bylaws of Company providing for exculpation of director
liability and indemnification of directors, officers and agents of Company to
the fullest extent permitted under the Corporations Code, which provisions shall
not be amended except as required by applicable law or except to make changes
permitted by law that would enlarge the right of indemnification of such
directors, officers and agents. FAFCO shall, and shall cause the Surviving
Corporation to, keep in effect and cause compliance with the terms and
conditions of the indemnification agreements, if any, between Company and each
of its directors in effect as of the date of this Agreement.
8.6 Employee Matters. From and after the Effective Time the employees of
the Surviving Corporation shall cease to participate in any Employee Benefit
Plans or any other benefit plan of the Company and shall from and after the
Effective Time participate in FAFCO's employee benefit plans, as in effect from
time to time, in the same manner as similarly situated employees of other FAFCO
subsidiaries.
At or before the Effective Time, FAFCO and the Company shall make
reasonable provision for the crediting of each of the Company's employee's
accrued and unused sick leave, vacation and holiday time and the crediting of
each employee's accumulated deductibles, in each case, as of the Effective Time,
for purposes of similar FAFCO employee policies and employee welfare plans,
which recognize such time or deductibles.
SECTION 9
TERMINATION
9.1 Events of Termination. This Agreement may be terminated (a) at any time
by mutual written agreement of the Parties, (b) by FAFCO by written notice to
the Major Shareholder and the Company, if the conditions set forth in Section
6.1 and 6.2 (other than the execution and delivery by FAFCO of the agreements
set forth in Section 6.1(f)) hereof shall not have been complied with or
performed on or prior to the 90th day from the date hereof (or such later date
as the Parties may have agreed to in writing) in any material respect and FAFCO
shall not have materially breached any of its representations, warranties,
covenants or agreements contained herein, (c) by FAFCO by written notice to the
Company and the Major Shareholder, if the Board of Directors of the Company
shall have withdrawn or modified in any manner adverse to FAFCO or FAFCOSUB its
approval or recommendation of the Merger, (d) by the Company and/or the Major
Shareholder by written notice to FAFCO, if the conditions set forth in Section
6.1 and Section 6.3 (other than the execution and delivery by the Major
Shareholder and R. Squared Limited of the agreements set forth in Section
6.1(f)) hereof shall not have been complied with or performed on or prior to the
90th day from the date hereof (or such later date as the Parties may have agreed
to in writing) in any material respect and the Company or the Major Shareholder
shall not have materially breached any of their representations, warranties,
covenants or agreements contained herein, (e) by the Company and/or the Major
Shareholder by written notice to FAFCO, if the Average Price is less than (but
not equal to) $42.525, (f) by any of the Parties by written notice to the other
Parties if the Effective Time shall not have occurred within one month after the
Closing Date or (g) by FAFCO by written notice to the Company and the Major
Shareholder, to be received no later than the date that is two weeks after the
date of this Agreement, if FAFCO is not satisfied with its due diligence review
of the Related Parties, provided that such due diligence review is limited to
such Related Party's existence, good standing, power and authority to enter into
and perform its obligations under the agreements it has with the Company, and
the enforceability of such agreements, and, further, with regard to Data Tree
India Private Limited, only, that (1) it has good, valid and marketable title to
all of its assets, (2) all leases to which it is a party are in full force and
effect and all rents and additional rents to be paid by it on each such lease
have been paid, (3) it is not bound by, subject to or a party to any material
contract or restrictive document, (4) that there is no action, suit, proceeding
at law or in equity, arbitration or administrative or other proceeding involving
it, (5) it has timely filed or cause to be timely filed with the appropriate
taxing authorities all returns and has timely paid or provided for all material
Taxes, (6) it has all Licenses necessary to own, lease and operate its
properties and enable it to carry on its business as presently conducted and (7)
it is in compliance with all applicable labor laws and has not experienced any
material labor difficulty in the last year.
9.2 Effect of Termination. In the event that this Agreement shall be
terminated pursuant to Section 9.1, all further obligations of the Parties
hereto under this Agreement (other than pursuant to Sections 5.2(b) (Review of
the Company), 11.2 (Expenses) and 11.5 (Publicity) 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.
SECTION 10
SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
10.1 Survival of Representations.
(a) The representations and warranties of the Company and the Major
Shareholder contained in Section 3 (or in any certificate delivered by the
Company or the Major Shareholder in connection with the Closing related to any
such representation and warranty of the Company or the Major Shareholder) are
made only as of the date of this Agreement and as of the Closing Date, as the
case may be. Such representations and warranties shall expire for all purposes
at 12:01 A.M., Pacific Standard Time, on the day after the six month anniversary
of the Closing Date. Without limiting the foregoing, except solely as and to the
extent provided in Sections 10.1(c) and 10.2, from and after any such expiration
of any such representation or warranty of the Company or the Major Shareholder,
such representation or warranty shall be of no further force or effect, and
FAFCO shall not assert any claim or bring any legal action, suit or other
proceeding based upon or relating to any inaccuracy in or breach of, or any
breach of any obligation in respect of, or any other claim with respect to, such
representation or warranty.
(b) The representations and warranties of FAFCO and FAFCOSUB contained in
Section 4 (or in any certificate delivered by FAFCO or FAFCOSUB in connection
with the Closing related to any such representation and warranty of FAFCO or
FAFCOSUB) are made only as of the date of this Agreement and the Closing Date,
as the case may be. Such representations and warranties shall expire for all
purposes at 12:01 A.M., Pacific Standard Time, on the day after the six month
anniversary of the Closing Date. Without limiting the foregoing, except solely
as and to the extent provided by Sections 10.1(c) and 10.2, from and after any
such expiration of any such representation or warranty of FAFCO, such
representation or warranty shall be of no further force or effect, and neither
the Company, the Major Shareholder nor any other Shareholder shall assert any
claim or bring any legal action, suit or other proceeding based upon or relating
to any inaccuracy in or breach of any obligation in respect of or any other
claim with respect to, such representation or warranty.
(c) All claims for indemnification under Section 10.2 with respect to the
representations and warranties contained herein, or in any certificate referred
to in Sections 10.1(a) or (b), must be asserted on or prior to the date of
expiration of such representations and warranties set forth in Section 12.1(a)
or (b), as the case may be, by the transmittal of written notice to the other
Parties prior to such date of expiration in accordance with Section 10.3, and
all legal actions, suits or other proceedings with respect to such claims must
be brought within 90 days after such date of expiration.
10.2 Indemnification.
(a) The Major Shareholder agrees to indemnify and hold FAFCO and its
officers, directors, shareholders, employees, agents and any successors thereto
(the "FAFCO Parties"), harmless from any and all losses, liabilities,
obligations, damages, costs and expenses (including reasonable attorney fees)
(collectively, "Damages") suffered or paid as a result of or arising out of the
failure of any representation or warranty made by the Major Shareholder or the
Company in Section 3 of this Agreement (or in any certificate delivered by the
Company or the Major Shareholder in connection with the Closing related to any
such representation and warranty of the Company or the Major Shareholder) to be
true and correct in all material respects as of the date hereof or as of the
Closing Date, as the case may be; provided, however, that the FAFCO Parties
shall be entitled to indemnification with respect to Damages (i) only after the
aggregate amount of such Damages exceeds two hundred fifty thousand U.S. dollars
($250,000), provided that once such damages exceed two hundred fifty thousand
U.S. dollars ($250,000), subject to clause (ii) below, FAFCO shall be entitled
to indemnification as to all Damages (including the initial two hundred fifty
thousand U.S. dollars ($250,000) and (ii) equal to or less than two million U.S.
dollars ($2,000,000).
(b) FAFCO agrees to indemnify and hold each Shareholder and the Company
harmless from Damages suffered or paid as a result of or arising out of the
failure of any representation or warranty made by FAFCO or FAFCOSUB in Section 4
of this Agreement (or in any certificate delivered by FAFCO or FAFCOSUB in
connection with the Closing related to any such representation and warranty of
FAFCO or FAFCOSUB) to be true and correct in all material respects as of the
date hereof or as of the Closing Date, as the case may be; provided, however,
that the Shareholders and the Company shall be entitled to indemnification with
respect to Damages (i) only after the aggregate amount of such Damages exceeds
two hundred fifty thousand U.S. dollars ($250,000), provided that once such
damages exceed two hundred fifty thousand U.S. dollars ($250,000), subject to
clause (ii) below, the Shareholders and the Company, in the aggregate, shall be
entitled to indemnification as to all Damages (including the initial two hundred
fifty thousand U.S. dollars ($250,000) and (ii) equal to or less than two
million U.S. dollars ($2,000,000), in the aggregate.
(c) The sole recourse and remedy of FAFCO for any inaccuracy in or breach
of, or any breach of any obligation with respect of, or any other claim with
respect to, any representation or warranty or alleged representation or warranty
by or on behalf of the Major Shareholder or the Company contained in or made
pursuant to this Agreement or any other certificate, instrument, or document
delivered pursuant hereto or thereto, shall be under the provisions of and to
the extent provided in this Section 10. FAFCO shall comply with this Section
10.2(c), will not assert any inaccuracy, breach or claim or seek any recourse or
remedy in respect thereof other that under the provisions of this Section 10.
(d) The sole recourse and remedy of the Shareholders and the Company for
any inaccuracy in or breach of, or any breach of any obligation in respect of,
or any claim with respect to, any representation or warranty or alleged
representation or warranty by or on behalf of FAFCO or FAFCOSUB contained in or
made pursuant to this Agreement, or any other certificate, instrument or
document delivered pursuant hereto or thereto, shall be under the provisions of
and to the extent provided for in this Section 10. The Company and the
Shareholders shall comply with this Section 10.2(d), and not assert any such
inaccuracy, breach or claim or seek any recourse or remedy in respect thereof
other than under the provisions of this Section 10.
(e) The obligations to indemnify and hold harmless pursuant to this Section
10.2 shall survive the consummation of the transactions contemplated by this
Agreement.
10.3 Indemnification Procedure.
(a) Promptly after the incurring of Damages by any Party or other Person
entitled to indemnification under this Section 10 (each, an "Indemnified
Party"), including, without limitation, any claim by a third party described in
Section 10.3(c) which might give rise to indemnification hereunder, the
Indemnified Party shall promptly deliver a Certificate to the Party that is
required to indemnify such Indemnified Party under Section 10 (such indemnifying
Party, the "Indemnifying Party").
(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 ten 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 the County of Orange, State of
California, in accordance with the Commercial Arbitration Rules of the American
Arbitration Association then in effect and, as to matters not specifically
governed thereby, shall comply with the provisions of the California Arbitration
Act (Cal. Code Civ. Proc. Sections 1280-1294.2). There shall be three
arbitrators, one to be chosen by each party directly at will, and the third
arbitrator to be selected by the two arbitrators so chosen. Each party shall pay
the fees of the arbitrator he or it selects and of his or its own attorneys and
the expenses of his or her witnesses, and all other fees and costs shall be
borne equally by the parties. Judgment on any award rendered by the arbitrators
may be entered in any court having jurisdiction.
(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 Damages for which such
Indemnified Party would be entitled to indemnification pursuant to this
Agreement, such Indemnified Party shall deliver to the Indemnifying Party a
written notice describing in reasonable detail such claim and such 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 such 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 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 on or more legal defenses available to the
Indemnified Party which are not available to the Indemnifying Party, or
available to the Indemnifying Party, but the assertion of which would be adverse
to the interests of the Indemnified Party. No Indemnifying Party shall 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
loss or liability by reason of such settlement or judgment. An Indemnified
Party's election to defend against the claim of any third party shall be without
prejudice to its rights to seek indemnification from the Indemnifying Party
under this Section 10.3. An Indemnifying Party may challenge a claim for
indemnification pursuant to Section 10.3(b) while assuming the defense of the
underlying claim under this Section 10.3(c).
(d) Claims for Damages specified in any Certificate to which an
Indemnifying Party shall not object in writing within ten days of receipt of
such Certificate, claims for Damages covered by a memorandum of agreement of the
nature described in Section 10.3(b), claims for Damages the validity and amount
of which have been the subject of arbitral determination as described in Section
10.3(b) and claims for Damages 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 in Section 10.3(c) are
hereinafter referred to as "Agreed Claims". Within ten 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 one business day
prior to such payment.
SECTION 11
MISCELLANEOUS
11.1 Knowledge. Except as otherwise set forth herein, where any
representation or warranty contained in this Agreement is expressly qualified by
reference to the best knowledge, information and belief of (i) the Company
and/or Major Shareholder, the Company and the Major Shareholder each confirms
that it or he has made due and diligent inquiry as to the matters that are the
subject of such representations and warranties or (ii) FAFCO, FAFCO confirms
that its president, chief financial officer, general counsel and tax director
has made due and diligent inquiry as to the matters that are the subject of such
representations and warranties.
11.2 Expenses.
(a) In connection with the transactions contemplated by this Agreement
and the related documents, the Company shall pay the reasonable fees and
expenses of the counsel, auditors and financial advisors of the Company and all
reasonable fees and expenses of the counsel to the Major Shareholder. The sum
total amount of such expenses that exceed $1,000,000 shall be known as "Surplus
Expenses".
(b) Except as provided in Section 11.29(a), the other Parties hereto shall
pay all of their own expenses relating to the transactions contemplated by this
Agreement and the documents described herein, including, without limitation, the
fees and expenses of their respective counsel, auditors and financial advisers.
11.3 Governing Law. The interpretation and construction of this Agreement,
and all matters relating hereto, shall be governed by the laws of the State of
California applicable to agreements executed and to be performed solely within
such State.
11.4 Jurisdiction; Agents for Service of Process. Any judicial proceeding
brought against any of the Parties to this Agreement on any dispute arising out
of this Agreement or any matter related hereto may be brought in the courts of
the State of California, or in the United States District Court for the Central
District of California, and, by execution and delivery of this Agreement, each
of the Parties to this Agreement accepts the exclusive jurisdiction of such
courts, and irrevocably agrees to be bound by any judgment rendered thereby in
connection with this Agreement.
11.5 Publicity. Except as otherwise required by law, neither the Company
nor the Major Shareholder 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, without obtaining the prior consent
of FAFCO to the contents and the manner of presentation and publication thereof,
which consent shall not be unreasonably withheld. Except as otherwise required
by law, FAFCO shall not 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, without obtaining the prior approval
of the Company and the Major Shareholder to the contents and the manner of
presentation and publication thereof, which consent shall not be unreasonably
withheld.
11.6 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:
if to FAFCO or FAFCOSUB, to:
The First American Financial Corporation
114 East Fifth Street
Santa Ana, California 92702
Telephone: 714-558-3211
Facsimile: 714-647-2242
Attention: Parker S. Kennedy
with a copy to:
White & Case LLP
633 West Fifth Street, Suite 1900
Los Angeles, California 90071
Telephone: 213-620-7700
Facsimile: 213-687-0758
Attention: Neil W. Rust
if to the Company, to:
Data Tree Corporation
550 West "C" Street, Suite 2040
San Diego, California 92101
Telephone: 619-231-3300
Facsimile: 619-231-3301
Attention: Harish K. Chopra
with a copy to:
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, California 92121
Telephone: 619-550-6064
Facsimile: 619-452-3555
Attention: Barbara L. Borden
if to the Major Shareholder, to:
Harish K. Chopra
P.O. Box 9360
Rancho Santa Fe, California 92067
Telephone: 619-759-9959
Facsimile: 619-759-1747
with a copy to:
Sheppard, Mullin, Richter & Hampton LLP
501 W. Broadway, 19th Floor
San Diego, California 92101
Telephone: 619-338-6618
Fax: 619-234-3815
Attention: Michael Changaris
or such other address or number as shall be furnished in writing by any such
Party, and such notice or communication shall, if properly addressed, be deemed
to have been given as of the date so delivered, sent by facsimile or three
business days after deposit into the U.S. mail.
11.7 Parties in Interest. This Agreement may not be transferred, assigned,
pledged or hypothecated by any Party hereto. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
heirs, executors, administrators, successors and permitted assigns.
11.8 Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one instrument.
11.9 Entire Agreement. This Agreement, including the other documents
referred to herein 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.
11.10 Amendments. This Agreement may not be amended or modified orally, but
only by an agreement in writing signed by FAFCO, the Company and the Major
Shareholder.
11.11 Severability. In case any provision in this Agreement shall be held
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions hereof will not in any way be affected or impaired
thereby.
11.12 Third Party Beneficiaries. Except as expressly provided herein, 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
or the Shareholders.
<PAGE>
IN WITNESS WHEREOF, each of FAFCO, FAFCOSUB and the Company has caused
its corporate name to be hereunto subscribed by its officer thereunto duly
authorized and the Major Shareholder, has signed this Agreement, all as of the
day and year first above written.
THE FIRST AMERICAN FINANCIAL
CORPORATION
By____________________________
Name:
Title:
IMAGE ACQUISITION CORP.
By____________________________
Name:
Title:
DATA TREE CORPORATION
By____________________________
Name:
Title:
____________________________
Harish K. Chopra
<PAGE>
EXHIBIT A
CERTIFICATE OF AMENDMENT OF THE
ARTICLES OF INCORPORATION OF
DATA TREE CORPORATION
HARISH K. CHOPRA and MICHAEL D. REYNOLDS certify that:
FIRST: They are the President and Secretary, respectively, of DATA TREE
CORPORATION, a California corporation (the "Corporation").
SECOND: Article V of the Articles of Incorporation of this Corporation is
amended to read in its entirety as follows:
"V. STOCK
The corporation is authorized to issue one class of stock to be designated
"Common Stock". The total number of shares which the Corporation is authorized
to issue is ten million (10,000,000) shares. Upon this amendment of the Articles
of Incorporation, each outstanding share of Common Stock shall be split and
converted into ten (10) shares of Common Stock."
THIRD: The foregoing amendment of the Articles of Incorporation has been
duly approved by the Board of Directors of this Corporation.
FOURTH: The foregoing amendment of the Articles of Incorporation has been
duly approved by the required vote of shareholders in accordance with the
Articles of Incorporation of this Corporation and Section 903 of the California
Corporations Code. The total number of outstanding shares of this Corporation is
703,983 shares of Common Stock. The percentage vote required was more than 50%
of the outstanding Common Stock. The number of shares voting in favor of the
amendment and restatement equaled or exceeded the vote required.
I further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of his own knowledge.
Dated: May 20, 1997
/s/ Harish K. Chopra
------------------------------
HARISH K. CHOPRA, President
/s/ Michael D. Reynolds
------------------------------
MICHAEL D. REYNOLDS, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
DATA TREE CORPORATION
(Formerly Image Provider Systems, Inc.)
Harish K. Chopra, Robert F. Rice, and Peter J. Wetterlind, and each of them,
declare and certify as follows:
1. DATA TREE CORPORATION, (formerly Image Provider Systems, Inc.), was
incorporated on January 4, 1988 as Image Provider Systems, Inc.,
Corporation Number 1426074. On July 29, 1992, the name of said Corporation
was changed to DATA TREE CORPORATION, Document A 421134.
2. Harish K. Chopra is one of three (3) Directors, the President, the Chief
Financial Officer, and the owner of 60.9756%. of the total issued and
outstanding capital stock of DATA TREE CORPORATION.
3. Robert F. Rice is one of three (3) Directors, and the owner of 7.8049% of
the total issued and outstanding capital stock of DATA TREE CORPORATION.
4. Peter J. Wetterlind is one of three (3) Directors of DATA TREE CORPORATION.
5. Harish K. Chopra, Robert F. Rice, and Peter J. Wetterlind are all and the
only Directors of DATA TREE CORPORATION.
6. Harish K. Chopra, Robert F. Rice, and Peter J. Wetterlind, and each of
them, adopted, effective as of July 26, 1993, the amendment to the Articles
of Incorporation of DATA TREE CORPORATION as set forth hereinbelow.
7. Said amendment has been duly approved by the required vote of shareholders
in accordance with Section 902 of the California Corporations Code. The
total number of outstanding shares of the Corporation is 512,500. The
number of shares voting in favor of said amendment equaled or exceeded the
vote required. The percentage vote required was more than 50%.
FIRST
Article III is amended to read as follows:
III. DIRECTORS
"The number of Directors of the Corporation shall be not less than three
(3) , nor more than five (5) , the exact number to be determined by
amendment to the Bylaws of the Corporation approved by a majority of the
total issued and outstanding capital stock of the Corporation."
Harish K. Chopra, Robert F. Rice, and Peter J. Wetterlind, as the Directors and
owners of a total of 68.7805% of the total issued and outstanding capital stock
of DATA TREE CORPORATION, and each of them, further declare and certify, under
the penalty of perjury as defined by and under the laws of the State of
California, that the matters set forth in the foregoing Certificate of Amendment
of Articles of Incorporation of DATA TREE CORPORATION are true and correct of
their own knowledge.
Dated: July 30, 1993.
/s/ Harish K. Chopra
------------------------------------------------------------
HARISH K. CHOPRA, Director, President, Chief Financial
Officer, and Owner of 60.9756% of the total issued and
outstanding capital stock of DATA TREE CORPORATION (formerly
Image Provider Systems, Inc.)
/s/ Robert F. Rice
------------------------------------------------------------
ROBERT F. RICE, Director and owner of 7.8049% of the total
issued and outstanding capital stock of DATA TREE
CORPORATION (formerly Image Provider Systems, Inc.)
/s/ Peter J. Wetterlind
------------------------------------------------------------
PETER J. WETTERLIND, Director of DATA TREE corporation
(formerly Image Provider Systems, Inc.)
/s/ Logan L. Hines
------------------------------------------------------------
Logan ("Pat") Hines, Secretary of DATA TREE CORPORATION
(formerly Image Provider Systems, Inc.)
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
IMAGE PROVIDER SYSTEMS, INC.
Harish K. Chopra, Robert F. Rice, and Peter J. Wetterlind, and each of them,
declare and certify as follows:
1. IMAGE PROVIDER SYSTEMS, INC., a California Corporation organized under the
General Corporation Law of the State of California, was incorporated on
January 4, 1988 as Corporation Number 1426074.
2. Harish K. Chopra is one of three Directors, the President, Secretary, Chief
Financial Officer, and the owner of 60.19% of the total issued and
outstanding capital stock of IMAGE PROVIDER SYSTEMS, INC.
3. Robert F. Rice is one of three Directors, and the owner of 7.58% of the
total issued and outstanding capital stock of IMAGE PROVIDER SYSTEMS, INC.
4. Peter J. Wetterlind is one of three Directors of IMAGE PROVIDER SYSTEMS,
INC.
5. Harish K. Chopra, Robert F. Rice, and Peter J. Wetterlind are all and the
only Director of IMAGE PROVIDER SYSTEMS, INC.
6. Harish K. Chopra Robert F. Rice, and Peter J. Wetterlind, and each of them
adopted, effective as of July 29, 1992, the two (2) amendments to the
Articles of Incorporation of IMAGE PROVIDER SYSTEMS, INC. as set forth
hereinbelow.
7. Said amendments have been duly approved by the required vote of
shareholders in accordance with Section 902 of the Corporations Code. The
total number of outstanding shares of the corporation is 527,500. The
number of shares voting In favor of said amendments equaled or exceeded the
vote required. The percentage vote required was more than 50%.
FIRST
Article I is amended to read as follows:
I. "The name of this Corporation is DATA TREE CORPORATION".
SECOND
Article V is amended to read as follows:
V. STOCK
"The Corporation is authorized to issue ten million (10,000,000) shares of
capital stock."
Said Harish K. Chopra, Robert F. Rice, and Peter J. Wetterlind, as the Officers,
Directors, and owners of 67.77% of the total issued and outstanding capital
stock of IMAGE PROVIDER SYSTEMS, INC., and each of them, further declare and
certify under the penalty of perjury as defined by and under the laws of the
State of California that the matters set forth in the foregoing Certificate of
Amendment of Articles of Incorporation are true and correct of their own
knowledge.
Dated: July 22, 1992.
/s/ Harish K. Chopra
------------------------------------------------------------
HARISH K. CHOPRA, Director, President, Secretary, Chief
Financial Officer, and Owner of 60.19% of the total issued
and outstanding capital stock Of IMAGE PROVIDER SYSTEMS,
INC.
/s/ Robert F. Rice
------------------------------------------------------------
ROBERT F. RICE; Director-land owner of 7.58% of the total
issued and outstanding capital stock of IMAGE PROVIDER
SYSTEMS, INC.
/s/ Peter J. Wetterlind
------------------------------------------------------------
PETER J. WETTERLIND, Director of IMAGE PROVIDER SYSTEMS, INC.
<PAGE>
ARTICLES OF INCORPORATION OF
IMAGE PROVIDER SYSTEMS, INC.
I. NAME
The name of the corporation is Image Provider Systems. Inc.
II. PURPOSE
The purpose of this corporation is to engage in any lawful act or activity for
which a corporation may be organized under the General Corporation Law of
California other than the banking business or the practice of a profession
permitted to be incorporated by the California Corporations Code.
III. DIRECTORS
The number of Directors of the corporation is one (1). The name and address of
the person appointed as initial director is:
1. Harish K. Chopra 408 Caldwell Court, San Dimas, CA 9,1773
IV. AGENT FOR SERVICE OF PROCESS
The name and address of this corporation's initial agent for service of process
in this state is:
Harish K. Chopra
408 Caldwell Court
San Dimas, CA 91773
V. STOCK
The corporation is authorized to issue one million (1,000,000) shares of capital
stock.
VI. CLOSE CORPORATION
This corporation is a close corporation. All of the corporation's issued shares
shall be held of record by not more than 35 persons.
IN WITNESS WHEREOF the undersigned who is the above named initial Director of
this corporation, have executed the Articles of Incorporation on January 4,
1988.
/s/ Harish K. Chopra
--------------------
Harish K. Chopra
The undersigned, being the person named above as the initial director, declares
that he is the person who executed the foregoing Article of Incorporation, which
execution is his act and deed.
Dated: 1-4-88
/s/ Harish K. Chopra
--------------------
Harish K. Chopra
<PAGE>
EXHIBIT B
CERTIFICATE OF ADOPTION
OF
AMENDMENT TO BYLAWS OF
DATA TREE CORPORATION
(formerly Image Provider Systems, Inc.)
EFFECTIVE AS OF JULY 26, 1993
I, the undersigned, do hereby certify as follows:
1. I am the President of DATA TREE CORPORATION, (formerly Image Provider
Systems, Inc.), a corporation organized under the General Corporation Law
of the State of California, and the holder of approximately 61% of the
total issued and outstanding capital stock of said Corporation;
2. The Bylaws of DATA TREE CORPORATION, (formerly Image Provider Systems,
Inc.), have been duly amended through July 26, 1993 as follows:
FIRST
Article II, Section 1, Principal Executive Office, is hereby amended to fix the
principal executive office of the Corporation at:
330 North "D" Street, Suite 405
San Bernardino, California 92401
SECOND
Article IV, Section 2, Number of Directors, is hereby amended to provide that
the authorized number of Directors of this Corporation shall be five (5).
THIRD
Article VII, Fiscal Year, shall be amended to provide that the fiscal year of
the Corporation shall begin on the first day of October and end on the last day
of September of each year.
IN WITNESS WHEREOF, I have hereunto set my hand effective as of the 26th day of
July, 1993.
/s/Harish K. Chopra
Harish K. Chopra,
President, Director, and the holder of
60.9756% of the total issued and
outstanding capital stock of DATA TREE
CORPORATION, (formerly Image Provider
Systems, Inc.)
Approved:
/s/Robert F. Rice
ROBERT F. RICE, Director and owner of
7.8049% of the total issued and outstanding
capital stock of DATA TREE CORPORATION,
(formerly Image Provider Systems, Inc.)
/s/Peter J. Wetterlind
PETER J WETTERLIND, Director of DATA TREE
CORPORATION,(formerly Image Provider Systems,
Inc.)
Approved:
/s/ Logan Hines Logan, ("Pat")
Hines, Secretary, DATA TREE
CORPORATION, (formerly Image
Provider Systems, Inc.)
<PAGE>
BY LAWS
OF
IMAGE PROVIDER SYSTEMS, INC.
ARTICLE I
DEFINITIONS
Section 1. Purpose of Bylaws
These Bylaws shall serve to govern and regulate the affairs of the Corporation,
except as otherwise provided by the Corporations Code of the State of California
and other applicable statutes or the Articles of Incorporation of the
Corporation.
Section 2. Board
As used in these Bylaws, the term "Board" means the Board of Directors of the
Corporation.
Section 3. Directors
As used in these Bylaws in relation to any power or duty requiring collective
action, the term "Directors" means the Board of Directors of the Corporation.
Section 4. Articles
As used in these Bylaws, the term "Articles" means the Articles of Incorporation
of the Corporation.
Section 5. Code
As used in these Bylaws, the term "Code" means the Corporations Code of the
State of California as from time to time amended.
Section 6. Construction
Except as otherwise provided in these Bylaws or when the context requires
otherwise, the general provisions, rules of construction, and definitions in the
Code shall govern the construction of these Bylaws. Without limiting the
generality of this provision, the singular number includes the plural and the
plural number includes the singular; the masculine gender includes the feminine
and neuter genders; and the term "person" includes both a corporation and a
natural person.
ARTICLE II
OFFICES
Section 1. Principal Executive Office
The principal executive office of the Corporation is hereby fixed and located
at:
398 West Fourth Street, Suite 205
San Bernardino, California 92401.
The Board is hereby granted full power and authority to change the location of
said principal executive office to any place within or outside the State of
California.
If the principal executive office is located outside the State of California,
and if the Corporation has one or more business offices within the State of
California, the Board shall fix and designate a principal business office within
the State of California.
Any change of location of the principal executive office of the Corporation
shall be noted on a schedule which shall be attached to these Bylaws.
Section 2. Other Offices
The Corporation may also have offices at such other places within or outside the
State of California where the Corporation is qualified to do business as the
Board may from time to time designate or the business of the Corporation may
require.
ARTICLE III
MEETINGS OF SHAREHOLDERS
Section 1. Annual Meetings of Shareholders
a. Place of Meetings
Meetings of shareholders shall be held either at the principal executive
office of the Corporation or at any other place within or without the State
of California which may be designated either by the Board or by the written
consent, given either before or after the meeting and filed with the
Secretary, of all persons entitled to vote at such meeting.
b. Time of Meetings; Business Transacted
The annual meeting of shareholders shall be held on the third Tuesday of
April of each year, at the hour of 10:00 A.M., if not a legal holiday; and
if a legal holiday, on the next succeeding full business day. Provided,
however, that any annual meeting may be adjourned as provided in these
Bylaws.
If the annual meeting of shareholders shall not be held on the date above
specified, the Board shall cause a meeting in lieu thereof to be held as
soon thereafter as convenient, and, in any case, not later than sixty (60)
days after the date designated above, and any business transacted or
election held at such meeting shall be as valid as if transacted or held at
the annual meeting.
At the annual meeting, Directors shall be elected, reports of the affairs
of the Corporation shall be considered, and any other business may be
transacted which is within the powers of the shareholders.
Section 2. Special Meetings of Shareholders
a. Persons Entitled to Call
A special meeting of the shareholders may be called at any time by the
Board, the Chairperson of the Board, if any, the President, or one or more
shareholders holding shares in the aggregate entitled to cast not less than
ten percent (10%) of the votes at such meeting.
A special meeting of the shareholders may also be called as provided in
section 5 of article IV hereof on filling vacancies on the Board.
b. Method of Calling
If a special meeting is called by any person or persons other than the
Board, the request shall be in writing, shall specify the time of such
meeting and the general nature of the business proposed to be transacted,
and shall be delivered personally or sent by registered or certified mail
or by telegraphic or other facsimile transmission to the Chairperson of the
Board, if any, the President, any Vice President, or the Secretary of the
Corporation.
The officer receiving such request shall cause notice to be promptly given
to all shareholders entitled to vote, in accordance with the provisions of
section 3 hereof, that a meeting will be held at the time requested by such
person or persons calling the meeting, not less than thirty-five (35) nor
more than sixty (60) days after the receipt of such request.
Nothing contained in this subsection (b) shall be construed as limiting,
fixing, or otherwise affecting the time when a meeting of shareholders
called by action of the Board may be held.
Section 3. Notice of Shareholders' Meetings
a. Notice of Meetings
Whenever shareholders are required or permitted to take any action at a
meeting, a written notice of the meeting shall be given to each shareholder
entitled to vote thereat, subject to the provisions of subsection (f)
hereof.
b. Method of Giving Notice of Meeting or Report
Notice of a shareholders' meeting or any report thereof shall be given
either personally or by first-class mail, postage prepaid, or other means
of written communication, addressed to the shareholder at the address of
such shareholder appearing on the books of the Corporation or given by the
shareholder to the Corporation for the purpose of notice; or if no such
address appears or is given, at the place where the principal executive
office of the Corporation is located. The notice or report shall be deemed
to have been given at the time when delivered personally or deposited in
the mail or sent by other means of written communication.
If any notice or report addressed to the shareholder at the address of such
shareholder appearing on the books of the Corporation is returned to the
Corporation by the United States Postal Service because it could not be
delivered to the shareholder at such address, all future notices or reports
shall be deemed to have been duly given without further mailing if they
shall be available for the shareholder on written demand at the principal
executive office of the Corporation for a period of one (1) year from the
date of the giving of such notice or report to all other shareholders.
An affidavit of the mailing or other means of giving such notice or report
of any shareholders' meeting shall be executed by the Secretary, Assistant
Secretary, or any transfer agent of the Corporation giving such notice or
report, and shall be filed and maintained in the minute book of the
Corporation.
c. Time of Notice
Notice of any meeting of shareholders shall be sent to each shareholder
entitled thereto not less than ten (10) nor more than sixty (60) days
before the date of the meeting. Provided, however, that notice of a special
meeting of shareholders shall be sent to each shareholder entitled thereto
forthwith and in any event within twenty (20) days after the receipt of the
request for such meeting as provided in section 2(b) hereof.
d. Contents of Notice
1) Generally
The notice of any meeting of shareholders shall state the place, date,
and hour of the meeting and:
a) in the case of a special meeting, the general nature of the
business to be transacted, or
b) in the case of the annual meeting, those matters which the Board,
at the time of giving such notice intends to present for action
by the shareholders.
The notice of any meeting at which Directors are to be elected shall
include the name of any nominee or nominees whom, at the time of such
notice, management intends to present for election.
2) Additional Contents of Notice
If action is proposed to be taken at any meeting of shareholders for
approval of:
a) a contract or transaction in which a Director has a direct or
indirect financial interest, pursuant to section 310 of the Code;
b) an amendment to the Articles, pursuant to section 902 of the
Code;
c) a reorganization of the Corporation, pursuant to section 1201 of
the Code;
d) a voluntary dissolution of the Corporation pursuant to section
1900 of the Code; or
e) a distribution in dissolution other than in accordance with the
rights of outstanding preferred shares, pursuant to section 2007
of the Code,
the notice of such meeting shall also state the general nature of such
proposal.
e. Notice of Adjourned Meeting
Any meeting of shareholders may adjourn by the vote of a majority of the
shares represented either in person or by proxy to another time or place or
from day to day or time to time until its business is completed or, if a
quorum is not and was not present in person or by proxy, until a quorum
shall attend. Any adjournment and the reason for it shall be recorded in
the minutes of the meeting.
If the adjournment is for more than forty-five (45) days, or if the time
and place of the adjourned meeting are not announced at the meeting at
which the adjournment is taken, or if after the adjournment a new record
date is fixed for the adjourned meeting, a notice of the adjourned meeting
shall be given to each shareholder of record entitled to vote at such
meeting. Otherwise, no notice of the adjourned meeting need be given. At
the adjourned meeting, the Corporation may transact any business which
might have been transacted at the original meeting.
f. Validation of Defectively Called or Noticed Meeting
The transactions of any meeting of shareholders, however called and
noticed, and wherever held, shall be as valid as though had at a meeting
duly held after regular call and notice, if a quorum be present either in
person or by proxy, and if, either before or after the meeting, each person
entitled to vote, who was not present in person or by proxy, signs a
written waiver of notice, a consent to the holding of the meeting, or an
approval of the minutes.
Said waiver, consent, or approval need not specify either the business to
be transacted or the purpose of any meeting of shareholders, except that if
action is taken or proposed to be taken for approval of any of those
matters specified in subsection (d)(2) hereof, said waiver, consent, or
approval shall state the general nature of such proposal.
All such waivers, consents, or approvals shall be filed with and maintained
in the corporate records.
Attendance by any person at a meeting shall also constitute a waiver of
notice of such meeting, except when such person objects, at the beginning
of the meeting, to the transaction of any business because the meeting is
not lawfully called or convened, and except that attendance at a meeting is
not a waiver of any right to object to the consideration of matters not
included in the notice of the meeting if such objection is expressly made
at such meeting.
Section 4. Quorum of Shareholders
a. Definition of Quorum
A majority of the shares entitled to vote, represented in person or by
proxy, shall constitute a quorum at any meeting of shareholders. Provided,
however, that whenever shares are disqualified under any provision of the
Code from voting on any matter, they shall not be considered outstanding
for the determination of a quorum at any meeting to act on such matter
under any other provision of such Code, the Articles, or these Bylaws.
b. Loss of Quorum.
The shareholders present at a duly called or held meeting at which a quorum
is present may continue to transact business notwithstanding the withdrawal
of shareholders sufficient to leave less than a quorum, if any such action
taken is approved by at least a majority of the shares required to
constitute a quorum.
c. Adjournment for Lack of Quorum
In the absence of a quorum, any meeting of shareholders may be adjourned
from time to time by the vote of a majority of the shares represented
either in person or by proxy, but no other business may be transacted,
except as provided in subsection (b) hereof.
Section 5. Determining Shareholders of Record
a. Record Date Fixed By Board
For purposes of determining the shareholders entitled to notice of any
meeting, to vote, to give consent to corporate action without a meeting, to
receive payment of any dividend or other distribution or allotment of any
rights, or to exercise any rights in respect of any other lawful action,
the Board may fix in advance a record date, which date shall not be more
than sixty (60) nor less than ten (10) days prior to the date of any such
meeting, nor more than sixty (60) days prior to any such action without a
meeting, any such payment, or any such exercise of rights.
b. Record Date Not Fixed By Board
If no record date is fixed:
1) The record date for determining shareholders entitled to notice of or
to vote at a meeting of shareholders shall be the close of business on
the business day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the business day next
preceding the day on which the meeting is held;
2) The record date for determining shareholders entitled to give consent
to corporate action without a meeting, when no prior action by the
Board has been taken, shall be the day on which the first such written
consent is given; and
3) The record date for determining shareholders for any other purpose
shall be the close of business on the day on which the Board adopts
the resolution relating thereto, or the sixtieth (60th) day prior to
the date of such action, whichever is later.
c. Record Date for Adjourned Meeting
A determination of shareholders of record entitled to notice of or to vote
at a meeting of shareholders shall apply to any adjournment of the meeting
unless the Board fixes a new record date for the adjourned meeting. The
Board must, however, fix a new record date if the meeting is adjourned for
more than forty-five (45) days from the date set for the original meeting.
d. Rights of Shareholders of Record
Shareholders on the record date are entitled to notice, to vote, to give
consent to corporate action without a meeting, to receive payments of any
dividends or other distributions or allotments of any rights, or to
exercise any rights in respect of any other lawful action, as the case may
be, notwithstanding any transfer of any shares on the books of the
Corporation after the record date, except as otherwise provided in the
Articles or in the Code.
Section 6. Voting
a. Votes Per Share
Except as otherwise provided in subsection (c) hereof, and except as may
otherwise be provided in the Articles, each outstanding share, regardless
of class, shall be entitled to one vote on each matter submitted to a vote
of shareholders. Whenever shares are disqualified by the Code from voting
on any matter, they shall not be considered outstanding for the
determination of the required vote to approve action on such matter under
any other provision of the Code, the Articles, or these Bylaws.
b. Voting Procedure
1) Voice or Ballot
Shareholders may vote by voice or ballot. Provided, however, that any
election of Directors must be by ballot if demanded by any shareholder
at a meeting and before the voting has begun.
2) Election of Directors.
At a meeting of shareholders at which Directors are to be elected, no
shareholder shall be entitled to cumulate votes (that is, cast for any
one or more candidates a number of votes greater than the number of
such shareholder's shares) unless the candidates' names have been
placed in nomination prior to commencement of the voting and a
shareholder has given notice at the meeting prior to commencement of
the voting of his or her intention to cumulate votes. If any
shareholder has given such notice, then every shareholder entitled to
vote may cumulate votes for candidates in nomination by casting for
any one candidate a number of votes equal to the number of Directors
to be elected multiplied by the number of votes to which such
shareholder's shares are entitled, or distributing such shareholder's
votes on the same principle among any or all such candidates as the
shareholder sees fit. The candidates receiving the highest number of
such votes, up to the number of Directors to be elected, shall be
elected.
3) Matters Other than the Election of Directors
On any matter other than the election of Directors, any shareholder
may vote part of his or her shares in favor of the proposal and
refrain from voting the remaining shares or vote them against the
proposal. However, if such shareholder fails to specify the number of
shares which he or she is voting affirmatively, it will be
conclusively presumed that his or her approving vote is with respect
to all shares that such shareholder is entitled to vote.
If a quorum is present, the affirmative vote of the majority of the
shares represented at a meeting of shareholders and entitled to vote
on any matter other than the election of Directors shall be the act of
the shareholders, unless the vote of a greater number or voting by
classes is required by the Code or the Articles.
Section 7. Proxies
Every person entitled to vote for Directors or on any other matter shall have
the right to do so either in person or by one or more agents authorized by a
written proxy signed by such person and filed with the Secretary of the
Corporation.
Except as otherwise provided by written agreement between the parties, the
recordholder of shares which such person holds as pledgee or otherwise as
security or which belong to another must issue to the pledgor or to the owner of
such shares, on demand therefor and payment of necessary expenses thereof, a
proxy to vote or take other action thereon.
a. Validity of Proxy
A proxy shall be deemed signed if the shareholder's name is placed on the
proxy, whether by manual signature, typewriting, telegraphic transmission,
or otherwise, by the shareholder or the shareholder's attorney in fact. A
proxy bearing no handwritten or handprinted signature is presumptively
invalid; provided, however, that facsimile signatures from securities
brokers or dealers and by banks and trust companies are presumptively valid
in the absence of evidence of lack of authenticity or authorization.
If a proxy bears a legible date, it will be presumed to have been executed
on that date. The dates contained on the proxies presumptively determine
the order of their execution, regardless of the postmark dates on the
envelopes in which they are transmitted. If a proxy bears no legible date,
it will be presumed to have been executed on the postmark date on the
envelope in which it was transmitted. In the absence of evidence of such
postmark date, the proxy will be presumed to have been executed on the date
it was received by the Corporation.
b. Duration of Proxy
A validly executed proxy which does not state that it is irrevocable shall
continue in full force and effect unless:
1) Revoked by the person executing it, prior to the vote pursuant to such
proxy, by a writing delivered to the Corporation stating that such
proxy is revoked, or by a subsequent proxy executed by, or attendance
at the meeting and voting in person by, the person executing such
proxy; or
2) Written notice of the death or incapacity of the maker of any proxy is
received by the Corporation before the vote pursuant to said proxy is
counted;
Provided, however, that no proxy shall be valid after the expiration of
eleven (11) months from the date thereof, unless otherwise provided
therein.
c. Proxy Providing for Irrevocability
1) When Proxy is Irrevocable
A proxy which states that it is irrevocable is irrevocable for the
period specified therein when it is held by any of the following or a
nominee of any of the following:
a) A pledgee;
b) A person who has purchased or agreed to purchase or holds an
option to purchase the shares, or a person who has sold all or a
portion of such person's shares in the Corporation to the maker
of the proxy;
c) A creditor or creditors of the Corporation or the shareholder who
extended or continued credit to the Corporation or the
shareholder in consideration of the proxy, if the proxy states
that it was given in consideration of such extension or
continuation of credit and the name of the person extending or
continuing such credit; or
d) A person who has contracted to perform services as an employee of
the Corporation, if a proxy is required by the contract of
employment and if the proxy states that it was given in
consideration of such contract of employment, the name of the
employee, and the period of employment contracted for.
In addition, a proxy may be made irrevocable, notwithstanding the
death or incapacity of the maker thereof, if it is given to secure the
performance of a duty or to protect a title, either legal or
equitable, until the happening of events which by its terms discharge
the obligations secured by the proxy.
2) When Irrevocable Proxy is Revocable
Notwithstanding the period of irrevocability specified in paragraph
(1) hereof, such proxy becomes revocable when the pledge is redeemed,
the option or agreement to purchase is terminated, the seller no
longer owns any shares of the Corporation or dies, the debt of the
Corporation or the shareholder is paid, or the period of employment
provided for in the contract of employment has terminated.
A proxy may be revoked, notwithstanding a provision making it
irrevocable, by a purchaser of shares without knowledge of the
existence of such provision, unless the existence of the proxy and its
irrevocability appears on the certificate representing such shares.
d. Directors' Determination of Execution and Use of Proxies
The Board may, in advance of any annual or special meeting of
shareholders, prescribe additional regulations concerning the manner
of execution, filing, and validation of proxies which are intended to
be voted at any such meeting.
Section 8. Conduct of Meetings
a. Presiding Officer and Secretary
The presiding officer at each meeting of shareholders shall be the
President of the Corporation, or in his or her absence any Vice President
designated by the President, or if no such officer is present a person
chosen at the meeting by a majority in interest of the shareholders
represented in person or by proxy and entitled to vote.
The Secretary of the Corporation, or in the Secretary's absence an
Assistant Secretary, or if no such officer is present a person designated
by the presiding officer at such meeting shall act as secretary of the
meeting and take minutes of such meeting.
b. Procedure
Procedural matters at shareholders' meetings shall be governed by Robert's
Rules of Order insofar as such rules are not inconsistent with the Code,
the Articles, or these Bylaws.
Section 9. Shareholders' Action by Written Consent Without a Meeting
a. When Authorized
Any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, shall be signed by
the holders of outstanding shares having not less than the minimum number
of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and
voted.
In the case of an election of Directors, however, such a consent shall be
effective only if signed by the holders of all outstanding shares entitled
to vote for the election of Directors; provided, however, that a Director
may be elected at any time to fill a vacancy on the Board that has not been
filled by the Directors, by the written consent of the holders of a
majority of the outstanding shares entitled to vote for the election of
Directors.
All such consents shall be filed with and maintained in the corporate
records.
b. Notice of Shareholders' Approval
If the consents of all shareholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all such
shareholders has not been received, the Secretary of the Corporation shall
give prompt notice of the corporate action approved by the shareholders
without a meeting in the manner specified in section 3 hereof.
In the case of approval of the following actions, such notice shall be
given at least ten (10) days before the consummation of any action
authorized by such approval:
1) Any contract or transaction in which a Director has a direct or
indirect financial interest, pursuant to section 310 of the Code;
2) Any indemnification by the Corporation of any of its agents, pursuant
to section 317 of the Code;
3) Any reorganization of the Corporation, pursuant to section 1201 of the
Code; or
4) Any distribution in dissolution other than in accordance with the
rights of outstanding preferred shares, pursuant to section 2007 of
the Code.
c. Revocation of Consent
Any shareholder, a transferee of his or her shares, a personal
representative of such shareholder, or their respective proxyholders may
revoke any such written consent by a writing received by the Secretary of
the Corporation prior to the time that written consents for the number of
shares required to authorize the proposed action have been filed with the
Secretary, but may not do so thereafter. The revocation is effective on its
receipt by the Secretary.
ARTICLE IV
DIRECTORS
Section 1. Powers
Subject to the provisions of the Code, the Articles, and these Bylaws relating
to action required to be approved by the shareholders, and provided that the
Board may delegate the day to day operations of the business of the Corporation
to others, the business and affairs of the Corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the Board.
Section 2. Number of Directors
The authorized number of Directors of this Corporation shall be three (3).
The authorized number of Directors may be changed by a duly adopted amendment to
the Articles or by an amendment to this Bylaw adopted by the vote or written
consent of holders of a majority of the outstanding shares entitled to vote.
Provided, however, that an amendment reducing the number of Directors to a
number less than five (5) cannot be adopted if the votes cast against its
adoption at a meeting of shareholders, or if the shares not consenting in the
case of action by written consent, are equal to more than sixteen and two-thirds
percent (16 2/3%) of the outstanding shares entitled to vote.
Section 3. Election and Term of Office of Directors
Directors shall be elected at each annual meeting of shareholders and shall hold
office until the next such annual meeting. Provided, however, that if any such
annual meeting of shareholders is not held or the Directors are not elected
thereat, the Directors may be elected at any special meeting of shareholders
held for that purpose. Each Director, including a Director elected to fill a
vacancy on term for which elected and until a successor has been elected and
qualified.
Section 4. Vacancies on the Board
a. When Vacancy Occurs
A vacancy or vacancies on the Board shall be deemed to exist:
1) In the event of the death, resignation, or removal of any Director;
2) If the authorized number of Directors is increased; or
3) If the shareholders fail, at any meeting of shareholders at which any
Director or Directors are to be elected, to elect the number of
Directors to be voted for at such meeting.
b. Reduction in Authorized Number of Directors
No reduction in the authorized number of Directors shall have the effect of
removing any Director before such Director's term of office expires.
c. Resignation of Director
Any Director may resign effective on giving written notice to the
Chairperson of the Board, if any, the President, the Secretary, or the
Board, unless the notice specifies a later time for the resignation to
become effective. If the resignation of a Director is effective at a future
time, the Board may elect a successor to take office when the resignation
becomes effective.
Unless otherwise specified therein, the acceptance of any such resignation
shall not be necessary to make it effective.
d. Removal of Director
No Director may be removed from office prior to the expiration of such
Director's term of office other than in accordance with the following
provisions:
1) Removal by the Board
The Board may remove any Director who has been declared of unsound
mind by a court order or convicted of a felony.
2) Removal by Shareholders
Any or all of the Directors may be removed by the shareholders without
cause if such removal is approved by the affirmative vote or written
consent of a majority of the outstanding shares entitled to vote,
subject to the following:
a) No Director may be removed, unless the entire Board is removed,
when the votes cast against removal (or not consenting in writing
to such removal) would be sufficient to elect such Director if
voted cumulatively at an election at which the same total number
of votes were cast (or, if such action is taken by written
consent, at which all shares entitled to vote were voted) and the
entire number of Directors authorized at the time of the
Director's most recent election were then being elected; and
b) When by the provisions of the Articles the holders of the shares
of any class or series, voting as a class or series, are entitled
to elect one or more Directors, any Director so elected may be
removed only by the applicable vote of the holders of the shares
of such class or series.
3) Removal by Court
Shareholders holding at least ten percent (10%) of the number of
outstanding shares of any class may sue in the superior court of the
county in which the principal executive office of the Corporation is
located, to remove from office any Director in case of fraudulent or
dishonest acts or gross abuse of authority or discretion with
reference to the Corporation. In such case, the Corporation must be
made a party to the action.
Section 5. Filling Vacancies
a. By the Board
Except as otherwise provided in the Articles or in these Bylaws, and except
for a vacancy created by the removal of a Director as provided in section
4(d) hereof, vacancies on the Board may be filled by a majority of the
Directors then in office, whether or not less than a quorum, or by a sole
remaining Director.
Each Director so elected shall hold office until the next annual meeting of
shareholders and until a successor has been elected and qualified.
b. By Shareholders
The shareholders may elect a Director at any time to fill any vacancy not
filled by the Directors and any such election by written consent shall
require the consent of a majority of the outstanding shares entitled to
vote.
Each Director so elected shall hold office until the next annual meeting of
shareholders and until a successor has been elected and qualified.
c. By Special Meeting of Shareholders
If, after the filling of any vacancy by the Directors, the Directors then
in office who have been elected by the shareholders shall constitute less
than a majority of the Directors then in office, any holder or holders of
an aggregate of five percent (5%) or more of the total number of shares at
such time outstanding having the right to vote for such Directors may call
a special meeting of shareholders, or apply to the superior court of the
county in which the principal executive office of the Corporation is
located for an order that a special meeting be held, to elect the entire
Board.
Each Director so elected shall hold office until the next annual meeting of
shareholders and until a successor has been elected and qualified.
Notwithstanding any other provision of these Bylaws, the term of office of
any Director shall terminate on the election of a successor as provided in
this subsection (c).
Section 6. Meetings of the Board
a. Call of Meetings
Meetings of the Board may be called by the Chairperson of the Board, if
any, the President, any Vice President, the Secretary, the Chief Financial
Officer, or any Director of the Corporation.
b. Place of Meetings
1) Regular Meetings
Regular meetings of the Board may be held at any place within or
outside the State of California that has been designated from time to
time by resolution of the Board. In the absence of such a designation,
regular meetings shall be held at the principal executive office of
the Corporation.
2) Special Meetings
Special meetings of the Board shall be held at any place within or
outside the State of California that has been designated in the notice
of the meeting or, if not stated in the notice or there is no notice,
at the principal executive office of the Corporation.
3) Meetings by Telephone
Any meeting, regular or special, may be held by conference telephone
or similar communication equipment, whenever such participation is
authorized by resolution adopted by the Board, so long as all
Directors participating in such meeting can hear one another. All
Directors participating in such meeting shall be deemed to be present
in person.
c. Time of Meetings
1) Regular Meetings
a) Annual Meeting
Immediately following each annual meeting of shareholders, the
Board shall hold a regular meeting for the purpose of
organization, election of officers, and the transaction of other
business.
b) Other Regular Meetings
Other regular meetings of the Board shall be held at such time as
shall from time to time be fixed by the Board.
2) Special Meetings
Special meetings of the Board shall be held on four (4) days' notice
by first-class mail, postage prepaid, or forty-eight (48) hours'
notice delivered personally or by telephone.
d. Notice of Meetings
1) Regular Meetings
Regular meetings of the Board shall be held without notice.
2) Special Meetings
Notice of the time and place of any special meeting of the Board must
be:
a) in writing and delivered personally to each Director or sent to
each Director by first-class mail, postage prepaid, or by
telegraph or telegram, charges prepaid, addressed to such
Director at his or her address as shown on the records of the
Corporation; or
b) by telephone.
Notice by mail must be deposited in the United States mail in the
place where the Corporation principal executive office is located at
least four (4) days prior to the time the meeting is to be held.
Notice by telegraph or telegram must be delivered to the telegraph
company in the place where the Corporation's principal executive
office is located at least forty-eight (48) hours prior to the time
the meeting is to be held. Notice delivered personally or by telephone
must be delivered or given at least forty-eight (48) hours prior to
the time the meeting is to be held.
Oral notice given personally or by telephone may be communicated
either to the Director or to any person at the office of the Director
whom the person giving the notice has reason to believe will promptly
communicate it to the Director.
The notice need not specify the purpose of the meeting nor the place
of the meeting if the meeting is to be held at the principal executive
office of the Corporation.
Notice given as herein provided shall constitute due and legal notice.
3) Entry of Service of Notice
The fact of service of notice, showing that notice was given in the
manner provided hereinabove, shall be filed with and maintained in the
corporate records and shall be conclusive on the question of service
of notice.
4) Registration of Address for Notice
Each Director shall register his or her address with the Secretary,
and notices of meetings mailed or telegraphed to such address shall
constitute valid notices thereof.
e. Waiver of Notice
The transactions of any meeting of the Board, however called and noticed
and wherever held, shall be as valid as though had at a meeting duly held
after regular call and notice if a quorum is present and if, either before
or after the meeting, each of the Directors not present signs a written
waiver of notice, a consent to the holding of the meeting, or an approval
of the minutes thereof. Said waiver, consent, or approval need not specify
the purpose of the meeting. All such waivers, consents, and approvals shall
be filed with and maintained in the corporate records.
Notice of a meeting shall also be deemed given to any Director who attends
the meeting without objecting, either before or at the beginning of the
meeting, to the lack of notice to such Director.
Section 7. Quorum
a. Definition of Quorum
1) Where Corporation has only one Director
Where the Corporation has only one Director, one Director shall
constitute a quorum for purposes of the Code, the Articles, and these
Bylaws.
2) Where Corporation has two or more Directors
Where the Corporation has two (2) or more Directors, a quorum for the
transaction of business shall be:
a) not less than one-third (1/3) of the authorized number of
Directors; or
b) not less than two (2) Directors, whichever is larger.
b. Loss of Quorum
Business may continue to be transacted at any meeting at which a quorum is
initially present notwithstanding the withdrawal of Directors sufficient to
leave less than a quorum, so long as any action taken is approved by at
least a majority of the required quorum for such meeting.
Section 8. Adjourned Meeting
a. When Permitted
A majority of the Directors present, whether or not constituting a quorum,
may adjourn any meeting to another time and place.
b. Notice of Adjournment
Notice of the time and place of holding an adjourned meeting need not be
given, unless the meeting is adjourned for more than twenty-four (24)
hours. In that case, notice of the time and place shall be given to the
Directors who are not present at the time of the adjournment in the manner
specified in section 6(d)(2) hereof, before the time of such adjourned
meeting.
Section 9. Conduct of Meetings
a. Presiding Officer and Secretary
The presiding officer at each meeting of the Board shall be the Chairperson
of the Board, if any, or in his or her absence the Vice Chairperson of the
Board, if any, or the President, or if he or she is not present any Vice
President, and if no such officer is present any Director chosen by a
majority of the Directors present.
The Secretary or an Assistant Secretary shall attend and take minutes of
each meeting of the Board. In the absence of such officer, the presiding
officer at such meeting shall designate some person present to take minutes
of the meeting.
b. Procedure
Procedural matters at meetings of the Board shall be governed, so far as
practicable, by Robert's Rules of Order, provided such rules are not
inconsistent with the Code, the Articles, these Bylaws, or Board
resolutions.
Section 10. Transactions of Board
a. In General
Except as otherwise provided in the Articles or in these Bylaws, every
act or decision done or made by a majority of the Directors present at
a meeting duly held at which a quorum is present shall be regarded as
the act of the Board, subject to the provisions of the following
sections of the Code:
1) Section 310 of the Code relating to approval of contracts or
transactions in which a Director has a direct or indirect material
financial interest;
2) Section 311 of the Code relating to the appointment of committees; and
3) Section 317(e) of the Code relating to indemnification of Directors.
b. Validity of Transactions
The transactions of any meeting of the Board, however called and noticed
and wherever held, are as valid as though had at a meeting duly held after
regular call and notice if a quorum is present and if, either before or
after the meeting, each of the Directors not present signs a written waiver
of notice, a consent to the holding of the meeting, or an approval of the
minutes thereof. All such waivers, consents, and approvals shall be filed
with and maintained in the corporate records.
Section 11. Action Without a Meeting
Any action required or permitted to be taken by the Board may be taken without a
meeting, if all members of the Board shall individually or collectively consent
in writing to such action. Such written consent or consents shall be filed with
and maintained in the corporate records. Such action by written consent shall
have the same force and effect as a unanimous vote of the Board at a meeting
duly held after regular call and notice.
Section 12. Board Committees
a. Authority to Appoint.
The Board may, by resolution adopted by a majority of the authorized number
of Directors, designate one or more committees, each consisting of two (2)
or more Directors, to serve at the pleasure of the Board. The Board may
designate one or more Directors as alternate members of any committee, who
may replace any absent member at any meeting of such committee.
Vacancies on any committee may be filled by the Board only.
b. Authority of Committees
The Board may delegate to any such committee any of the Board's powers and
authority in the management of the business and affairs of the Corporation,
consistent with the Articles, these Bylaws, and the Code, except with
respect to the following:
1) The approval of any action for which the Code also requires
shareholders' approval or approval of the outstanding shares.
2) The filling of vacancies on the Board or on any committee.
3) The fixing of compensation of any Director for serving on the Board or
on any committee.
4) The amendment or repeal of these Bylaws or the adoption of new bylaws.
5) The amendment or repeal of any resolution of the Board which by its
express terms is not so amendable or repealable.
6) A distribution to the shareholders as defined in section 166 of the
Code, except at a rate, in a periodic amount, or within a price range
determined by the Board.
7) The appointment of any other committee of the Board or of any member
thereof.
c. Conduct of Committee Meetings
1) The Chairperson of the Board, if any, or the President of the
Corporation shall be an ex-officio member of each Board committee so
appointed.
2) The Board may prescribe the manner in which committee proceedings are
conducted or authorize the committee to do so.
3) Regular meetings of any committee shall be held at the time and place
specified in any resolution duly adopted by the Board or, in the
absence thereof, by the committee. On failure to designate a meeting
place, such meetings shall be held at the principal executive office
of the Corporation.
4) Special meetings of any committee may be called by the chairperson of
the committee, any two members of the committee, the Chairperson of
the Board, if any, or the President by written notice to each
committee member. Such special meetings of the committee shall be held
at the time and place specified in such notice or, on failure to
specify the place, at the principal executive office of the
Corporation.
5) Notice of such special meetings of the committee shall be given in the
same manner as specified in section 6(d) hereof for the giving of
notice of special meetings of the Board.
6) A majority of the authorized number of members of any committee shall
constitute a quorum of such committee for the transaction of business.
7) Minutes shall be kept of each committee meeting. The original or a
copy of such minutes, certified by the committee chairperson or such
other person as such committee chairperson designates, shall be
delivered to the Secretary of the Corporation for filing in the
corporate records and a copy thereof shall be retained by the
committee.
8) The transactions of any meeting of any committee, however called and
noticed and wherever held, shall be as valid as though had at a
meeting duly held after regular call and notice if a quorum is present
and if, either before or after such meeting, each of the members not
present signs a written waiver of notice, a consent to the holding of
such meeting, or an approval of the minutes thereof. All such waivers,
consents, and approvals shall be filed with and maintained in the
corporate records and in the committee records.
9) Any action required or permitted to be taken by any Board committee
may be taken without a meeting, if all members of the committee shall
individually or collectively consent in writing such action. Such
written consent or consents shall be filed with and maintained in the
corporate records and in the committee records.
Section 13. Fees and Compensation of Directors
Directors and members of committees may receive such compensation, if any, for
their services, and such reimbursement for their expenses, if any, as may be
fixed or determined from time to time by resolution of the Board. Provided,
however, that nothing contained herein shall be construed in any way to preclude
any Director from serving the Corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation for such services.
Section 14. Transactions with Corporation
a. Interested Directors
No contract or other transaction between the Corporation and one or more of
its Directors, or between the Corporation and any corporation, firm, or
association in which one or more of such Directors has a material financial
interest, is either void or voidable because such Director or such other
corporation, firm, or association are parties, or because such Director is
present at the meeting of the Board or Board committee which authorizes,
approves, or ratifies such contract or transaction, if:
1) The material facts as to the transaction and as to such Director's
interest therein are fully disclosed or known to the shareholders, and
such contract or transaction is approved in good faith by the
affirmative vote or written consent of a majority of the outstanding
shares entitled to vote other than the shares owned by such interested
Director or Directors; or
2) The material facts as to the transaction and as to such Director's
interest therein are fully disclosed or known to the Board or Board
committee, such Board or Board committee authorizes, approves, or
ratifies the contract or transaction in good faith by a vote
sufficient without counting the vote of such interested Director or
Directors, and the contract or transaction is just and reasonable as
to the Corporation at the time it is authorized, approved, or
ratified; or
3) As to contracts or transactions not approved as provided in
subparagraphs (1) and (2) hereof, the person asserting the validity of
such contract or transaction sustains the burden of proving that the
contract or transaction was just and reasonable as to the Corporation
at the time it was authorized, approved, or ratified.
A mere common directorship does not constitute a material financial
interest within the meaning of the above provisions. Nor is a Director
interested within the meaning of the above provisions in a resolution
fixing the compensation of another Director as a Director, officer, or
employee of the Corporation, notwithstanding the fact that the first
Director is also receiving compensation from the Corporation.
b. Common Directors
No contract or other transaction between the Corporation and any
corporation or association of which one or more of the Directors of this
Corporation are directors is either void or voidable because such Director
or Directors are present at the Board or Board committee meeting which
authorizes, approves, or ratifies such contract or transaction, if:
1) The material facts as to the transaction and as to such Director's
other directorship are fully disclosed or known to the Board or Board
committee, and the Board or Board committee authorizes, approves, or
ratifies the contract or transaction in good faith by a vote
sufficient without counting the vote of the common Director or
Directors, or the contract or transaction is approved in good faith by
the affirmative vote or written consent of a majority of the
outstanding shares entitled to vote; or
2) As to contracts or transactions not approved as provided in
subparagraph (1) hereof, such contract or transaction is just and
reasonable as to the Corporation at the time it is authorized,
approved, or ratified.
This subsection (b) does not apply to contracts or transactions covered by
subsection (a) hereof.
Interested or common Directors may be counted in determining the presence of a
quorum at a meeting of the Board or Board committee which authorizes, approves,
or ratifies a contract or transaction.
ARTICLE V
OFFICERS
Section 1. Number and Titles
The officers of the Corporation shall be a President, one or more Vice
Presidents, a Secretary, and a Chief Financial Officer. The Corporation may also
have, at the discretion of the Board, a Chairperson of the Board, one or more
Assistant Secretaries, one or more Assistant Treasurers, and such other officers
as may be appointed in accordance with the provisions of section 3 hereof.
Any number of offices may be held by the same person.
In its discretion, the Board may leave unfilled any office except President,
Secretary, and Chief Financial Officer.
Section 2. Election of Officers
The officers of the Corporation, except such officers as may be appointed in
accordance with the provisions of sections 3 or 4 hereof, shall be chosen
annually by the Board, and each shall hold office and serve at the pleasure of
the Board subject to any rights which any such officer may have under any
contract of employment with the Corporation, until his or her successor shall be
appointed or until he or she shall resign, be removed from office, or become
otherwise disqualified to serve.
Section 3. Other Officers
The Board may appoint, and may empower the President to appoint, such other
officers as the business of the Corporation may require, each of whom shall hold
office for such period, have such authority, and perform such duties as are
provided by these Bylaws or as the Board may from time to time determine.
Section 4. Vacancies
If the office of President, Secretary, or Chief Financial Officer becomes vacant
by reason of death, resignation, removal, or otherwise, the Board shall
forthwith fill it by appointing a successor officer who shall hold such office
for the unexpired term.
If any other office becomes vacant, the Board may, in its discretion, leave such
office unfilled for such period as it may determine, or it may appoint a
successor officer to fill such vacancy in the manner specified in section 3
hereof.
Section 5. Removal and Resignation of Officers
Subject to the rights, if any, of an officer under any contract of employment,
any officer may be removed, either with or without cause, by the vote of the
Board at any regular or special meeting of the Board or by the unanimous written
consent of the Directors then in office without a meeting, or, except in the
case of an officer chosen by the Board, by any officer upon whom such power of
removal may be conferred by the Board.
Any officer may resign at any time, without prejudice to the rights the
Corporation may have under any contract to which the officer is a party, by
giving written notice to the Chairperson of the Board, if any, or to the
President or Secretary. Resignation from office does not, however, ipso facto
constitute resignation from the Board. Any such resignation shall take effect on
the date such notice is received or at such later date as is specified therein.
Unless otherwise specified therein, the acceptance of any such resignation shall
not be necessary to make it effective.
Section 6. Compensation of Officers
Officers shall receive such salaries and other compensation as shall be
determined from time to time by the Board.
Section 7. Chairperson of the Board
The Chairperson of the Board, if any, shall if present preside at meetings of
the Board and shall exercise and perform such other powers and duties as may
from time to time be assigned to him or her by the Board or prescribed by the
Code or these Bylaws.
Section 8. President
Subject to such supervisory powers as may be given by the Board to the
Chairperson of the Board, if any, the President shall be the chief executive
officer of the Corporation and shall, subject to the control of the Board, have
general supervision, direction, and control of the business and affairs and of
the officers of the Corporation. He or she shall preside at all meetings of the
shareholders and in the absence of the Chairperson of the Board, if any, at all
meetings of the Board. He or she shall have the general powers and duties of
management usually vested in the office of president of a corporation, and shall
have such other powers and duties as may be prescribed by the Board or these
Bylaws.
Section 9. Vice Presidents
In the absence or disability of the President, the Vice Presidents, if any, in
order of their rank as fixed by the Board or, if not ranked, the Vice President
designated by the Board shall perform all the duties of the President. When
acting as President, such Vice President shall have all the powers of and be
subject to all the restrictions upon the President. Vice Presidents shall have
such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the Board or these Bylaws and by the
President or the Chairperson of the Board, if any.
Section 10. Secretary
The Secretary shall keep or cause to be kept, at the principal executive office
or such other place as the Board may direct, a book of minutes of all meetings
and actions of Directors, committees of Directors, and shareholders. Such
minutes shall include the time and place of holding meetings, whether regular or
special, and, if special, how authorized, the notice given, the names of those
present at Directors' meetings or committee meetings, the number of shares
present or represented at shareholders' meetings, and a description of the
proceedings.
The Secretary shall keep, or cause to be kept, at the principal executive office
or at the office of the Corporation's transfer agent or registrar, as determined
by resolution of the Board, a share register or duplicate share register,
showing the name and address of every shareholder, the number and class of
shares held by each shareholder, the number and date of every certificate issued
for shares, and the number and date of cancellation of every certificate
surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings of the
shareholders and of the Board required by these Bylaws or by the Code to be
given, shall keep the seal of the Corporation, if any, in safe custody, and
shall have such other powers and perform such other duties as may be prescribed
by the Board or these Bylaws.
Section 11. Chief Financial Officer
The Chief Financial Officer shall keep and maintain, or cause to be kept and
maintained, the financial, accounting, and tax books and records of the
Corporation, including of its assets, liabilities, shareholders' equity, income,
expenses, receipts, disbursements, gains, losses, properties, business
transactions, and shares. Said books and records shall at all reasonable times
be open to inspection by any Director.
The Chief Financial Officer shall deposit, or cause to be deposited, all moneys
and other valuables in the name and to the credit of the Corporation with such
depositaries as may be designated by the Board. He or she shall disburse, or
cause to be disbursed, the funds of the Corporation as may be ordered by the
Board, shall render, or cause to be rendered, to the President upon request
appropriate accounts and reports of his or her transactions as Chief Financial
Officer and of the financial condition of the Corporation, and shall have such
other powers and perform such other duties as may be prescribed by the Board or
these Bylaws.
ARTICLE VI
RECORDS, REPORTS, AND DOCUMENTS
Section 1. Checks, Drafts, Evidences of Indebtedness
All checks, drafts, and other orders for payment of money, notes, and other
evidences of indebtedness, issued in the name of or payable to the Corporation,
shall be signed or endorsed by such person or persons and in such manner as from
time to time shall be determined by resolution of the Board.
Section 2. Representation of Shares of Other Corporations
The Chairperson of the Board, if any, the President, any Vice President, or any
other person authorized by resolution of the Board or by any of the foregoing
designated officers, is authorized to vote on behalf of the Corporation any and
all shares of any other corporation or corporations, foreign or domestic,
standing in the name of the Corporation. Such authority may be exercised in
person or by proxy.
Section 3. Corporate Contracts and Instruments; How Executed
The Board, except as otherwise provided in these Bylaws, may authorize any
officer or officers, or other agent or agents, to enter into any contract or
execute any instrument in the name of and on behalf of the Corporation. Such
authority may be general or confined to specific instances. Unless such action
is authorized or ratified by the Board, or unless such authority is within the
agency power of such officer or agent, no officer, agent, or employee shall have
any power or authority to bind the Corporation in any way by any contract or
engagement, or to pledge its credit, or to render it liable for any purpose or
for any amount.
The corporate seal, if any, shall not be required to be affixed to any document.
Section 4. Certificates For Shares
A certificate or certificates for shares of the capital stock of the Corporation
shall be issued to each shareholder when such shares are fully paid. The Board
may authorize the issuance of certificates for shares as partly paid provided
that such certificates shall state the amount of the consideration to be paid
therefor and the amount paid.
All certificates for shares of capital stock of the Corporation shall state the
number of shares and the class or series of such shares and shall be signed in
the name of the Corporation by the Chairperson of the Board, if any, or the
President or any Vice President and by the Chief Financial Officer or an
Assistant Treasurer or the Secretary or an Assistant Secretary. Any or all of
such signatures may be facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed on a
certificate shall have ceased to hold such office prior to the issuance of the
certificate, such certificate may be issued by the Corporation with the same
effect as if such officer, transfer agent, or registrar held such office on the
date of issue.
Section 5. Lost Certificates
Except as otherwise provided herein, no new certificate for shares shall be
issued to replace an old certificate unless the latter is surrendered to the
Corporation and cancelled.
In case any share certificate or certificate for any other security is lost,
stolen, or destroyed, the Board may authorize the issuance of a replacement
certificate on such terms and conditions as the Board may require, including a
provision for indemnification of the Corporation secured by a bond or other
adequate security sufficient to protect the Corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft, or destruction of the certificate or the issuance of the
replacement certificate.
Section 6. Maintenance Of Share Register
The Corporation shall keep at its principal executive office, or at the office
of its transfer agent or registrar, if either be appointed and as determined by
resolution of the Board, a record of its shareholders, including the names and
addresses of all shareholders and the number and class of shares held by each
shareholder.
Section 7. Maintenance of Bylaws
The Corporation shall keep at its principal executive office, or if its
principal executive office is not in the State of California, at its principal
business office in the State of California, the original or a copy of these
Bylaws as amended to date, which shall be open to inspection by the shareholders
at all reasonable times during normal office hours. If the principal executive
office of the Corporation is outside the State of California and the Corporation
has no principal business office in the State of California, the Secretary
shall, upon the written request of any shareholder, furnish to such shareholder
a copy of these Bylaws as amended to date.
Section 8. Maintenance of Other Corporate Records
The accounting books and records and the minutes of the proceedings of the
shareholders and of the Board and of any committee or committees of the Board
shall be kept at such place or places as designated by the Board, or, in the
absence of such designation, at the principal executive office of the
Corporation. The minutes shall be kept in written form and the accounting books
and records shall be kept in written form or in any other form capable of being
converted into written form.
Section 9. Annual Report to Shareholders
The annual report to shareholders referred to in section 1501 of the Code is
expressly dispensed with, but nothing herein shall be interpreted as prohibiting
the Board from issuing annual or other periodic reports to the shareholders of
the Corporation as the Board may consider appropriate.
Section 10. Annual Statement of General Information
The Corporation shall, during the month of XX5 in each year, file with the
Secretary of State of the State of California a statement of general
information, in compliance with the provisions of section 1502 of the Code.
ARTICLE VII
FISCAL YEAR
The fiscal year of the Corporation shall begin on the first day of January and
end on the last day of December of each year.
ARTICLE VIII
AMENDMENTS
Section 1. Amendment By Shareholders
Subject to the provisions of section 2 of article IV hereof regarding a
reduction in the authorized number of Directors, new bylaws may be adopted or
these Bylaws may be amended or repealed by the vote or written consent of
holders of a majority of the outstanding shares entitled to vote.
Section 2. Amendment By Directors
Subject to the rights of the shareholders as provided in section 1 hereof,
bylaws, other than a bylaw or an amendment thereto changing the authorized
number of Directors, may be adopted, amended, or repealed by the Board.
<PAGE>
EXHIBIT C
CONTRIBUTION AND JOINT VENTURE AGREEMENT
By and Among
THE FIRST AMERICAN FINANCIAL CORPORATION,
FIRST AMERICAN REAL ESTATE INFORMATION SERVICES, INC.,
FIRST AMERICAN REAL ESTATE SOLUTIONS LLC,
R. SQUARED LIMITED
and
HARISH K. CHOPRA
_____ __, 1998
<PAGE>
TABLE OF CONTENTS<F1>
<F1> This Table of Contents is provided for convenience only, and does not form
a part of the attached Contribution and Joint Venture.
<TABLE>
Page
<S> <C> <C>
SECTION 1. DEFINITIONS....................................................................... 2
1.01. Defined Terms............................................................... 2
1.02. Principles of Construction.................................................. 10
SECTION 2. ORGANIZATION OF NEWCO; CLOSING; SCOPE OF BUSINESS................................. 10
2.01. Organization................................................................ 10
2.02. Contributions............................................................... 11
2.03. Effective Time.............................................................. 12
2.04. Instruments of Transfer and Conveyance...................................... 12
SECTION 3. REPRESENTATIONS AND WARRANTIES.................................................... 12
3.01. Authorization and Validity of the Agreement................................. 12
3.02. DTI......................................................................... 13
SECTION 4. COVENANTS......................................................................... 13
4.01. Best Efforts................................................................ 13
4.02. Consents; Further Assurances................................................ 14
4.03. Notices of Certain Events................................................... 14
4.04. DTI......................................................................... 15
SECTION 5. PUTS AND CALLS.................................................................... 15
5.01. R2 Put Option............................................................... 15
5.02. FAFCO Call Option........................................................... 17
5.03. General Put/Call Provisions................................................. 19
5.04. Dispute Resolution.......................................................... 19
SECTION 6. DTI; FINANCING.................................................................... 20
6.01. DTI......................................................................... 20
6.02. Loans to NEWCO.............................................................. 21
SECTION 7. TERMINATION....................................................................... 21
7.01. Events of Termination....................................................... 21
7.02. Effect of Termination....................................................... 21
SECTION 8. MISCELLANEOUS..................................................................... 22
8.01. Fees and Expenses........................................................... 22
8.02. Extension; Waiver........................................................... 22
8.03. Confidentiality............................................................. 22
8.04. Public Announcements........................................................ 22
8.05. Records Retained by FAFCO, R2 and NEWCO..................................... 22
8.06. Notices..................................................................... 23
8.07. Entire Agreement............................................................ 24
8.08. Binding Effect; Benefit; Assignment......................................... 24
8.09. Amendment and Modification.................................................. 24
8.10 Effect of Termination....................................................... 25
8.11 Counterparts................................................................ 25
8.12 Applicable Law; Submission to Jurisdiction.................................. 25
8.13 Severability................................................................ 25
8.14 Access to Records........................................................... 25
</TABLE>
<PAGE>
CONTRIBUTION AND JOINT VENTURE AGREEMENT, made as of ___________, 1998
(this "Agreement"), by and among THE FIRST AMERICAN FINANCIAL CORPORATION, a
California corporation ("FAFCO"), FIRST AMERICAN REAL ESTATE INFORMATION
SERVICES, INC., a California corporation, ("FAREISI"), FIRST AMERICAN REAL
ESTATE SOLUTIONS LLC, a California limited liability company ("FARES") and R.
SQUARED LIMITED, an Irish company ("R2"), and HARISH K. CHOPRA, an individual
residing in Rancho Santa Fe, California ("CHOPRA").
W I T N E S S E T H :
WHEREAS, FARES owns and operates the Digistar Business (as defined
below);
WHEREAS, Data Tree Corporation, a California corporation ("Data Tree")
owns and operates the Data Tree Business (as defined below);
WHEREAS, CHOPRA is the President and Chief Executive Officer of Data
Tree and CHOPRA, together with R2, an Irish company owns approximately a 44%
interest in Data Tree;
WHEREAS, FAFCO, Image Acquisition Corp. ("FAFCOSUB"), Data Tree and
CHOPRA have entered into an Agreement and Plan of Merger, dated as of March 27,
1998 (the "Merger Agreement"), pursuant to which, at the Effective Time,
FAFCOSUB will merge with and into Data Tree (the "Merger") whereby Data Tree
will become a wholly-owned subsidiary of FAFCO (Data Tree, as the post-Merger
subsidiary of FAFCO, the "Surviving Corporation");
WHEREAS, FAFCO desires to contribute $_________<F1> to FAFCOSUB (the
"Cash Contribution");
<F1> Amount to be inserted shall be the sum of the Surplus Expenses (as defined
in the Merger Agreement) and $486,627 (which represents the key employee bonuses
and the put payment on the Imperial Warrants (as defined in the Merger
Agreement).
WHEREAS, FAFCO desires to loan to FAFCOSUB (the "FAFCO Loan") and
FAFCOSUB desires to borrow from FAFCO a certain sum, to be specified at the
Closing;<F2>
<F2> The sum shall be $1,000,000 less the amount, if any, by which the Imperial
Bank facility is increased prior to Closing.
WHEREAS, FAFCO desires to contribute all of the capital stock of the
Surviving Corporation to FAREISI;
WHEREAS, FAREISI desires to cause the Surviving Corporation to
contribute the Data Tree Business, the Cash Contribution and the FAFCO Loan to
FARES;
WHEREAS, FARES desires that R2 and CHOPRA agree not to compete with,
or against, the Data Tree Business following FARES' acquisition of the Data Tree
Business;
WHEREAS, FARES and R2 desire to become the joint owners of a
California limited liability company to be formed pursuant to Section 2.01 of
this Agreement to own and operate the combined Data Tree Business and Digistar
Business;
WHEREAS, to effectuate their intent FAFCO, FAREISI, FARES and R2 deem
it advisable to make the contributions set forth in this Agreement; and
WHEREAS, in order to set forth certain terms and conditions upon which
NEWCO will be owned and operated, the Parties desire to enter into this
Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth, the Parties agree as follows:
SECTION 1.
DEFINITIONS
1.01. Defined Terms. As used in this Agreement, the following terms
shall have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
"Adjusted Earnings" means, with respect to an Exercise Date or the
Option Termination Date, the profits of NEWCO for the 12 consecutive complete
calendar month period ended prior to said Exercise Date, or the Option
Termination Date, as the case may be, assuming an effective tax rate of 40%
(which percentage the Parties may from time to time hereafter agree to adjust to
reflect material changes in tax rates), as determined in accordance with US GAAP
and excluding (i) the effect, if any, on the profits of NEWCO of any
amortization of goodwill resulting from the acquisition of Data Tree in
accordance with the Merger Agreement and (ii) Excluded Interest.
"Affiliate" shall mean and include, with reference to any Person, any
other Person, other than NEWCO, Controlling, Controlled by or under common
Control with such Person.
"Agreement" shall mean this Contribution and Joint Venture Agreement,
as the same may be amended, modified and/or supplemented from time to time.
"Business" shall mean the Data Tree Business and/or the Digistar
Business, as the context may require.
"Business Day" shall mean any day, excluding Saturday, Sunday or any
day which shall be a legal holiday in the State of California.
"Business Records" shall have the meaning set forth in Section 8.05.
"Call Exercise Date" means the day on which FAFCO delivers the Call
Exercise Notice.
"Call Exercise Notice" has the meaning given thereto in Section
5.02(b) hereof.
"Call Option" means either of the First Call Option, the Second Call
Option or the Third Call Option, or all of them, as the context requires.
"Call Payment Date" shall have the meaning set forth in Section
4.02(c).
"Capital Account" shall have the meaning given thereto in the NEWCO
Operating Agreement.
"Cash Contribution" shall have the meaning set forth in the seventh
WHEREAS clause hereto.
"CHOPRA" shall have the meaning set forth in the introductory
paragraph to this Agreement.
"Closing" shall have the meaning set forth in the Merger Agreement.
"Closing Date" shall have the meaning set forth in the Merger
Agreement.
"Control" shall mean the power to vote more than 50% of the Voting
Interests of an Entity or to otherwise control the management and affairs of
such Entity (including by way of the power to veto any material act or
decision).
"Data Tree" shall have the meaning set forth in the fourth WHEREAS
clause hereto.
"Data Tree Business" shall mean the business and operations conducted
by Data Tree immediately prior to the Effective Time.
"Digistar Business" shall mean the business and operations conducted
by the "Digistar" division of FARES immediately prior to the Effective Time.
"DTI" shall mean Datatree India Private Limited, an Indian
corporation.
"DTI Option Period" shall have the meaning set forth in Section
6.01(a).
"DTI Purchase Option" shall have the meaning set forth in Section
6.01(a).
"Effective Date" shall mean the day during which the Effective Time
occurs.
"Effective Time" shall have the meaning provided in the Merger
Agreement.
"Employment Agreement" shall mean that certain Employment Agreement
dated the Closing Date by and between CHOPRA and NEWCO.
"Encumbrances" shall mean all liens, encumbrances, restrictions and
claims of every kind and character.
"Enterprise Value" shall mean, as of any date of determination, an
amount in dollars equal to product of the Adjusted Earnings as of such date and
15.
"Entity" shall mean any Person that is not a natural Person.
"Excess Working Capital Debt" shall mean Working Capital Debt between
the date of this Agreement and the Option Termination Date, incurred from time
to time by NEWCO, to the extent the amount of such Working Capital Debt exceeds
$2,000,000.
"Excess Working Capital Period" means each period during which there
is any Excess Working Capital Debt.
"Excluded Interest" shall mean an amount equal to the product of:
(A) the total interest costs/accruals on Working Capital Debt
(for the period for which Adjusted Earnings are measured)
for the Excess Working Capital Period, or portion thereof
included in the period for which Adjusted Earnings are
measured, and
(B) a fraction, the numerator of which is the Objected Debt and
the denominator of which is the Working Capital Debt;
provided, however that (i) the numerator described in paragraph (B) above cannot
be a number less than zero and (ii) any pay-downs of Working Capital Debt shall
decrease the Objected Debt (which, for the avoidance of doubt, is the numerator
in the fraction described in paragraph (B) immediately above) (attached hereto
as Exhibit B are examples illustrating the calculation of Excluded Interest;
Exhibit B is included for purposes of illustration only and shall not affect the
construction hereof).
"Exercise Date" means a Put Exercise Date, a Call Exercise Date, or
both.
"FAFCO" shall have the meaning set forth in the introductory paragraph
of this Agreement.
"FAFCO Interest" shall have the meaning set forth in Section 2.02(b).
"FAFCO Loan" shall have the meaning set forth in the eighth WHEREAS
clause hereto.
"FAFCO Note" shall have the meaning set forth in Section 2.02(a).
"FAREISI" shall have the meaning set forth in the introductory
paragraph of this Agreement.
"FAREISI Interest" shall have the meaning set forth in Section
2.02(c).
"FARES" shall have the meaning set forth in the introductory paragraph
of this Agreement.
"FARES Interest" shall have the meaning set forth in Section 2.02(d).
"First Call Notice" shall have the meaning set forth in Section
5.02(b).
"First Call Option" shall have the meaning set forth in Section
5.02(a)(i).
"First Put/Call Period" shall mean the period commencing on the First
Trigger Date and ending on the day preceding the Second Trigger Date.
"First Put Notice" shall have the meaning set forth in Section
5.01(b).
"First Put Option" shall have the meaning set forth in Section
5.01(a)(i).
"First Trigger Date" shall mean March 31, 2001.
"Forced Call" shall have the meaning set forth in Section
5.02(a)(iii).
"Forced Call Notice" shall have the meaning set forth in Section
5.02(d).
"Forced Call Payment Date" shall have the meaning set forth in Section
5.02(d).
"Forced Call Price" means the Enterprise Value as of the Option
Termination Date multiplied by the Membership Interest of R2, expressed as a
decimal.
"Interests" shall mean the FAFCO Interest, the FARES Interest and/or
the FAREISI Interest, as the context may require.
"Major Exchange" shall mean any one of the following securities
exchanges or quotation systems: New York Stock Exchange, NASDAQ, American Stock
Exchange or Pacific Stock Exchange.
"Mean Price" means the arithmetic mean of the last reported sales
price of one FAFCO common share as reported on the New York Stock Exchange for
the twenty consecutive Trading Days ending prior to the date that is two Trading
Days before the Exercise Date or ending on such earlier date as may be required
by the Securities and Exchange Commission.
"Membership Interest" shall have the meaning set forth in the NEWCO
Operating Agreement.
"Merger" shall have the meaning set forth in the sixth WHEREAS clause
hereto.
"Merger Agreement" shall have the meaning set forth in the sixth
WHEREAS clause hereto.
"NEWCO" shall mean the California limited liability company to be
formed pursuant to Section 2.
"NEWCO Business" shall mean the business owned and operated by NEWCO
after the Closing which shall include, without limitation, the combined Digistar
Business and the Data Tree Business.
"NEWCO Operating Agreement" shall mean that certain Operating
Agreement, dated the Closing Date, by and between FARES and R2.
"Noncompetition Agreement" shall mean that certain Noncompetition
Agreement, dated the Closing Date by and among NEWCO, R2 and CHOPRA.
"Note" shall have the meaning provided in Section 2.02(f).
"Objected Debt" shall mean an amount equal to the Excess Working
Capital Debt to which an Objection has been made.
"Objection" shall mean the written objection of CHOPRA delivered to
NEWCO, with a copy to FAFCO, within five business days of NEWCO's delivery to
the CHOPRA of notice of its intent to incur Excess Working Capital Debt;
provided, however, that (1) CHOPRA's failure to deliver an objection notice
shall be deemed to be CHOPRA's approval of NEWCO's incurring of such Excess
Working Capital Debt and (2) CHOPRA's approval of/failure to object to or
objection to, as the case may be, the total commitment under a revolving credit
facility shall constitute approval of or objection to, as the case may be, all
draw-downs under such facility up to the maximum amount permitted by that
facility, irrespective of the repayment of any principal under such facility and
irrespective of whether or not such draw-downs exceed $2,000,000.
"Option" or "Options" means either a Put Option or a Call Option, or
both, as the case may be.
"Option Price" means, with respect to the exercise of an Option:
(A) if CHOPRA is employed by NEWCO or any Affiliates of NEWCO at
the time such Option is exercised, an amount equal to the product of:
(x) the Enterprise Value on the applicable Exercise Date and
(y) the Membership Interest of R2, that is being sold and
purchased pursuant to such Option, expressed as a decimal;
(B) if CHOPRA's employment with NEWCO and all Affiliates of NEWCO
has been terminated by NEWCO "without cause" (as defined in the
Employment Agreement) prior to the time such Option is exercised, an
amount equal to the greater of:
(i) the product of:
(x) the Enterprise Value on the applicable Exercise Date
and
(y) the Membership Interest of R2 that is being sold and
purchased pursuant to such Option, expressed as a
decimal; and
(ii) the product of:
(x) $5,000,000 and
(y) that portion of R2's Membership Interest that is being
sold and purchased pursuant to such Option, expressed
as a decimal; and
(C) if CHOPRA's employment with NEWCO and all Affiliates of NEWCO
has been terminated by NEWCO for "cause" (as defined in the Employment
Agreement) prior to the time such Option is exercised or if CHOPRA
resigns, retires, is disabled or dies prior to the time such Option is
exercised, an amount equal to the product of (x) the Enterprise Value
on the applicable Exercise Date and (y) the Membership Interest of R2
that is being sold and purchased pursuant to such Option, expressed as
a decimal; provided, however, that in no such event shall the Option
Price be less than the lesser of:
(i) the product of:
(x) $5,000,000 and
(y) that portion of R2's Membership Interest that is being
sold and purchased pursuant to such Option, expressed
as a decimal; and
(ii) the product of:
(x) the Enterprise Value on the date CHOPRA's employment
terminated and
(y) that portion of R2's Membership Interest that is being
sold and purchased pursuant to such Option, expressed
as a decimal.
"Option Termination Date" shall mean March 31, 2005.
"Panel" shall have the meaning set forth in Section 5.03(b).
"Panel Date" shall have the meaning set forth in Section 5.03(b).
"Party" and "Parties" means FAFCO, FAREISI, FARES, R2 and CHOPRA
individually and collectively, as the context requires.
"Permitted Encumbrances" shall mean, with respect to any Entity or any
Interest, Encumbrances which (i) are for current taxes, assessments or
governmental charges not yet due or (ii) were incurred in the ordinary course of
business and which do not in the aggregate materially detract from the value of
the Entity, the Interest associated with such Entity, if any, or which could
reasonably be expected to materially impair the use thereof in the operation of
the Business.
"Person" shall mean and include any individual, partnership,
association, joint stock company, joint venture, corporation, trust, limited
liability company, unincorporated organization, government, agency or political
subdivision thereof.
"Prime Rate" means, as of any date of determination, the per annum
rate of interest specified as the Prime Rate in the Wall Street Journal
published on such date, provided that for any date on which the Wall Street
Journal is not published, "Prime Rate" means the per annum rate of interest
specified as the Prime Rate in the Wall Street Journal last published before
such date.
"Put Consideration Notice" shall have the meaning provided in Section
5.01(c).
"Put Exercise Notice" has the meaning given thereto in Section 5.01(b)
hereof.
"Put Exercise Date" means the date on which R2 delivers the Put
Exercise Notice.
"Put Payment Date" shall have the meaning provided in Section 5.01(c).
"Put Option" means either the First Put Option, the Second Put Option
or the Third Put Option, or all of them, as the context requires.
"R2" shall have the meaning set forth in the introductory paragraph to
this Agreement.
"Second Call Notice" shall have the meaning set forth in Section
5.02(b).
"Second Call Option" shall have the meaning set forth in Section
5.02(a)(ii).
"Second Put/Call Period" shall mean the period commencing on the
Second Trigger Date and ending on the day preceding the Third Trigger Date.
"Second Put Notice" shall have the meaning set forth in Section
4.01(b).
"Second Put Option" shall have the meaning set forth in Section
5.01(a)(ii).
"Second Trigger Date" shall mean March 31, 2002.
"Supply Agreement" means that certain Supply Agreement, dated the
Closing Date between NEWCO and R2.
"Third Call Notice" shall have the meaning set forth in Section
5.02(b).
"Third Call Option" shall have the meaning set forth in Section
5.02(a)(iii).
"Third Put/Call Period" shall mean the period commencing on the Third
Trigger Date and ending on the Option Termination Date.
"Third Put Notice" shall have the meaning set forth in Section
5.01(b).
"Third Put Option" shall have the meaning set forth in Section
5.01(a)(iii).
"Third Trigger Date" shall mean March 31, 2003.
"Trading Day" means a day on which the New York Stock Exchange is open
for at least one-half of its normal business hours.
"Transactional Taxes" shall have the meaning set forth in Section
2.01(b)(ii).
"Trigger Date" means either the First Trigger Date, the Trigger Date
or the Third Trigger Date, or all of them, as the context requires.
"US GAAP" means United States generally accepted accounting principles
applied on a consistent basis.
"Voting Interest" shall mean with respect to any Entity, any equity
interest of such Entity having general voting power under ordinary circumstances
to participate in the election of a majority of the governing body of such
Entity (irrespective of whether at the time any other class or classes of equity
interest of such Entity shall have or might have voting power by reason of the
happening of any contingency).
"Working Capital Debt" shall mean indebtedness for borrowed money that
is incurred by NEWCO after the date of this Agreement and on or before the
Option Termination Date for working capital purposes.
1.02. Principles of Construction.
(a) All references to Sections and subsections are to 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 US GAAP.
(c) 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."
(d) The Table of Contents hereto and the Section headings herein are
for convenience only and shall not affect the construction hereof.
(e) This Agreement is the result of negotiations among and have been
reviewed by counsel to the Parties and are the products of all Parties.
Accordingly, this Agreement shall not be construed against any Party merely
because of such Party's involvement in the preparation of this Agreement.
SECTION 2.
ORGANIZATION OF NEWCO;
CLOSING; SCOPE OF BUSINESS
2.01. Organization.
(a) NEWCO shall be a limited liability company established under the
laws of the State of California, (i) having as its registered name such name as
from time to time is set forth in NEWCO's Articles of Organization and (ii)
having its principal offices located in San Diego, California or such location
as from time to time is set forth in NEWCO's Articles of Organization.
(b) (i) All out-of-pocket costs of the establishment of NEWCO as a
limited liability company as contemplated by Section 2.01(a) (including
organizational changes and amendments to organizational documents that may be
made on or before the Effective Date) shall be borne by FARES.
(ii) Except as otherwise provided in Section 11.2(a) of the Merger
Agreement, each Party shall bear its own (A) costs incurred as a result of the
transfer of any Interests to NEWCO, including payments to third parties, if any,
to obtain their consent to such transfer (it being understood and agreed that
each Party shall determine, in its sole discretion, whether or not to obtain any
such consent), (B) attorneys' fees and related costs incurred by it in
connection with the preparation, execution and delivery of this Agreement and
the transactions contemplated hereby or thereby, except as may otherwise
expressly be provided herein or therein and (C) sales, use, transfer,
conveyance, bulk transfer, business and occupation, value added or income taxes,
or other taxes, duties, excises or governmental charges imposed by any taxing
jurisdiction with respect to the transfer, assignment or conveyance of its
Interests or otherwise on account of this agreement or the transactions
contemplated hereby including, without limitation, those arising from its
corporate reorganizations and intercompany transactions in contemplation of such
transactions (the foregoing taxes described in this clause (C) being hereinafter
referred to as "Transactional Taxes").
2.02. Contributions.
(a) Prior to the Effective Time, FAFCO shall contribute the Cash
Contribution to the capital of FAFCOSUB. Concurrently, FAFCO shall make the
FAFCO Loan to FAFCOSUB and FAFCOSUB shall deliver to FAFCO a promissory note, in
the principal amount of the FAFCO Loan bearing interest at the Prime Rate, in
the form attached hereto as Exhibit A, duly executed by FAFCOSUB (the "FAFCO
Note").
(b) Immediately following the Effective Time, FAFCO shall contribute
to the capital of FAREISI, free and clear of all encumbrances, all of the
capital stock of the Surviving Corporation held by FAFCO as a result of the
Merger (the "FAFCO Interest").
(c) Immediately following the transaction described in subsection (b)
above, FAREISI shall cause the Surviving Corporation to contribute to the
capital of FARES, free and clear of all encumbrances, except Permitted
Encumbrances, the Cash Contribution, the proceeds of the FAFCO Loan and all of
the assets, properties, rights, services and interests constituting the Data
Tree Business, together with the FAFCO Note and all liabilities and obligations
of any nature comprising the Data Tree Business, whether absolute, accrued,
contingent or otherwise, and whether due or to become due, arising out of or
relating to such assets, properties, rights, services and interests (all such
assets, properties, rights, services, liabilities, obligations and interests
being transferred are hereinafter collectively referred to as the "FAREISI
Interest").
(d) Immediately following the transactions described in subsection (c)
above, FARES shall contribute to NEWCO, (i) free and clear of all Encumbrances,
other than Permitted Encumbrances, the FAREISI Interest and (ii) all of the
assets, properties, rights, services and interests constituting the Digistar
Business, together with all liabilities and obligations of any nature of FARES
(other than debt for borrowed money) in respect of the Digistar Business (all
such assets, properties, rights, services, liabilities, obligations and
interests being transferred hereunder are hereinafter referred to as the "FARES
Interest"). In consideration of such contribution, NEWCO shall, in accordance
with the NEWCO Operating Agreement, credit the Capital Account of FARES and
issue to FARES a Membership Interest in NEWCO equal to 80% of the initial
Membership Interests.
(e) Immediately following the Effective Time, the Noncompetition
Agreement entered into between R2 and CHOPRA on the Closing Date shall become
effective. Concurrent with the transactions described in subsection (d) above,
in consideration of R2 entering into the Noncompetition Agreement, NEWCO shall,
in accordance with the NEWCO Operating Agreement, credit the Capital Account of
R2 and shall issue to R2 a Membership Interest in NEWCO equal to 1.893% of the
initial Membership Interests.
(f) Concurrent with the transactions described in subsections (d) and
(e) above, R2 shall deliver to NEWCO a promissory note, dated the effective
date, in the principal amount of $11,000,000, bearing interest at a fixed rate
of 8% per annum, in the form attached as Exhibit H to the Merger Agreement, duly
executed by R2 (the "Note"). In consideration of R2 delivering the Note, NEWCO
shall issue to R2 a Membership Interest in NEWCO equal to 18.107% of the
Membership Interests.
2.03. Effective Time. If the closing under the Merger Agreement is
consummated, the transactions referred to in Sections 2.02(b), (c), (d), (e),
(f) and (g) shall be deemed, as between the Parties, to have occurred
immediately after the Effective Time in the order of priority set forth in
Section 2.02.
2.04. Instruments of Transfer and Conveyance. The sale, transfer and
conveyance of the Interests shall be effected by delivery on or prior to the
Effective Date by each Party hereto of such deeds, transfers in registrable
form, endorsements, assurances, conveyances, releases, discharges, assignments,
certificates, drafts, checks or other instruments of transfer and conveyance,
duly executed by such Party or such other Person, as the case may be, as any
other Party reasonably deems necessary to vest in NEWCO all right, title and
interest in and to the Interests, free and clear of any Encumbrance of any kind,
except Permitted Encumbrances.
SECTION 3.
REPRESENTATIONS AND WARRANTIES
3.01. Authorization and Validity of the Agreement. Each of the Parties
represents and warrants to each of the other Parties as follows:
(a) He or it, as the case may be, has full power and authority to
execute and deliver this Agreement, to perform his or its obligations hereunder
and to consummate the transactions contemplated hereby. The execution, delivery
and performance by such Party of this Agreement and the consummation of the
transactions contemplated hereby, have, where necessary, been duly authorized
and approved by its Board of Directors, if applicable, and shareholder(s), if
applicable, and no other corporate or shareholder action is necessary to
authorize the execution, delivery and performance by such Party of this
Agreement and the consummation of the transactions contemplated hereby. This
Agreement has been duly executed and delivered by such Party and, assuming the
due execution of this Agreement by the other Parties hereto, is a valid and
binding obligations of such Party enforceable against such Party in accordance
with its terms, except to the extent that enforceability may be subject to
applicable bankruptcy, insolvency, reorganization, moratorium and similar laws
affecting the enforcement of creditors' rights generally and to general
equitable principles.
(b) Each document and instrument executed by such Party as
contemplated by this Agreement, when executed and delivered by such Party in
accordance with the terms hereof, shall have been duly executed and delivered by
such Party and, assuming due execution and delivery by the other Parties
thereto, shall be valid and binding upon such Party and enforceable against such
Party in accordance with its terms, except to the extent that its enforceability
may be subject to applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting the enforcement of creditors' rights generally and to
general equitable principles.
3.02. DTI. CHOPRA further represents and warrants as follows:
(a) Ownership of Stock. As of the Closing Date, CHOPRA will be the
lawful owner of all the capital stock of DTI, other than less than 5% of the
capital stock of DTI owned by resident Indian directors, free and clear of all
liens, pledges, charges, security interests, encumbrances, restrictions and
claims of every kind.
(b) Options. There are no outstanding options, warrants, rights,
calls, commitments, conversion rights, rights of exchange, plans or other
agreement of any character providing for the purchase, issuance or sale of any
of the capital stock of DTI, any other securities of DTI or any interest in DTI
or its business.
SECTION 4.
COVENANTS
4.01. Best Efforts. Except to the extent specifically provided in
Section 4.02, each Party shall, and shall cause its respective Affiliates to,
cooperate and use its respective reasonable best efforts to take, or cause to be
taken, all appropriate action and to make, or cause to be made, all filings
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement,
including, without limitation, its respective reasonable best efforts to obtain,
prior to the Effective Time, all licenses, consents, approvals, authorizations,
qualifications and orders of governmental authorities and parties to contracts
with or affecting the Data Tree Business and the Digistar Business as are
necessary for consummation of the transactions contemplated by this Agreement;
provided, that, except as otherwise specifically required by this Agreement, no
loan agreement or contract for borrowed money shall be repaid except as
currently required by its terms, in whole or in part, and no contract shall be
amended to increase the amount payable thereunder or otherwise to be more
burdensome to the Data Tree Business or the Digistar Business in order to obtain
any such consent, approval or authorization without first obtaining the written
approval of the other Parties and no Party shall be required to make any cash
payment, provide any guaranty or relinquish any property or contractual rights
to obtain any such consent, approval or authorization (except for filing fees
and fees and expenses of attorneys, accountants and other professional advisors
and payments in accordance with the terms of contracts in existence as of the
date hereof).
4.02. Consents; Further Assurances.
(a) Subject to the proviso to Section 4.01, FAFCO, FAREISI and FARES
agree that they will use their best efforts to obtain the written consent of any
other necessary party to the assignment of any contract, lease, commitment,
sales order, purchase order or undertaking constituting a part of any Interest
to be transferred hereunder and, to the extent that any such contract, lease,
commitment, sales order, purchase order or undertaking requiring such consent is
transferred or assigned pursuant to the terms of this Agreement without such
consent, FAFCO, FAREISI and FARES will cooperate with each other and with NEWCO
in any lawful arrangement designed to provide each Party and NEWCO the benefits
under any such Interest. Notwithstanding Section 4.01 and any other provision of
this Section 4.02(a) to the contrary, none of FAFCO, FAREISI or FARES shall be
required to seek the consent to the transfer of the FAFCO Interest, the FAREISI
Interest or the FARES Interest, as the case may be, of any party to a contract
with FAFCO, FAREISI or FARES pursuant to which a consent is required, provided
that, in lieu of seeking and obtaining any such required consent, FAFCO, FAREISI
or FARES, as the case may be, agrees to indemnify and hold NEWCO harmless from
all claims, expenses, obligations, damages, costs, payments, liabilities,
losses, interest, fines and penalties (including, without limitation, costs and
expenses of litigation, reasonable attorneys' fees and reasonable consultants'
fees, but excluding any special or consequential or indirect damages) suffered
or paid, directly or indirectly, through application of NEWCO's assets or
otherwise, as a result of or arising out of the failure of FAFCO, FAREISI or
FARES, as the case may be, to seek or obtain any such required consent.
(b) Subject to the proviso to Section 4.01, on or after the Effective
Date and without further consideration, FAFCO, FAREISI and FARES 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 NEWCO or any other Party may reasonably request for the more effective
conveyance, assignment and transfer to NEWCO of any of the Interests, and FAFCO,
FAREISI and FARES shall lend its assistance to NEWCO or any other Party in the
collection and reduction to possession of the Interests, in the exercise of
rights with respect thereto and otherwise in the effectuation of the intentions
and purposes of this Agreement.
4.03. Notices of Certain Events. Each Party hereto shall promptly
notify the other Parties of:
(a) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement;
(b) any notice or other communication from any governmental entity in
connection with the transactions contemplated by this Agreement;
(c) any actions, suits, claims (or to its knowledge, investigations)
or proceedings commenced or, to its knowledge threatened against, relating
to or involving or otherwise affecting the consummation of the transactions
contemplated by this Agreement; and
(d) such Party's obtaining knowledge of the occurrence, or failure to
occur, of any event which occurrence or failure to occur will be likely to
cause (i) any representation or warranty contained in this Agreement to be
untrue and inaccurate in any material respect, or (ii) any material failure
of any Party to comply with or satisfy any covenant, condition or agreement
to be complied with or satisfied by it under this Agreement; provided, that
no such notification shall affect the representations, warranties or
obligations of the Parties or the conditions to the obligations of the
Parties hereunder or thereunder.
4.04. DTI.
(a) During the DTI Option Period, Chopra shall not permit DTI to wind
up, liquidate or dissolve its affairs or enter into any transaction of merger or
consolidation, or convey, sell, lease or otherwise dispose of (or agree to do
any of the foregoing at any future time) all or any part of its property or
assets, or purchase or otherwise acquire (in one or a series of related
transactions) any part of the property or assets (other than purchases or other
acquisitions of inventory, materials and equipment in the ordinary course of
business) of any Person.
(b) During the DTI Option Period, Chopra shall not permit DTI to
create or suffer to exist any lien, pledge, charge, security interest,
encumbrance, restriction or claim of any kind upon any of DTI's assets, whether
now owned or hereafter acquired, to secure any debt or other obligation.
SECTION 5.
PUTS AND CALLS
5.01. R2 Put Option.
(a) (i) During the First Put/Call Period, R2 shall, unless FAFCO has
delivered the First Call Notice, have the right (the "First Put Option") to sell
to FAFCO 33-1/3% (but not less than 33-1/3%) of the Membership Interest owned by
R2 on the First Trigger Date.
(ii) If by the Second Trigger Date, R2 has not sold any of its
Membership Interest to FAFCO, during the Second Put/Call Period R2 shall, unless
FAFCO has delivered the Second Call Notice, have the right to sell to FAFCO
66-2/3% (but not less than 66-2/3%) of the Membership Interest owned by R2 on
the Second Trigger Date. If by the Second Trigger Date, R2 has sold 33-1/3% of
the Membership Interest owned by R2 on the First Trigger Date to FAFCO, during
the Second Put/Call Period R2 shall, unless FAFCO has delivered the Second Call
Notice, have the right to sell to FAFCO 50% (but not less than 50%) of the
Membership Interest owned by R2 on the Second Trigger Date. R2's right to sell a
portion of its Membership Interest pursuant to this clause (ii) is hereinafter
referred to as the "Second Put Option".
(iii) During the Third Put/Call Period, R2 shall, unless FAFCO
has delivered the Third Call Notice, have the right (the "Third Put Option") to
sell to FAFCO 100% (but not less than 100%) of the Membership Interest owned by
R2 on the Third Trigger Date.
(b) If R2 elects to exercise the First Put Option, R2 shall deliver
written notice of such election (the "First Put Notice") to FAFCO no sooner than
the First Trigger Date and no later than 5:00 P.M., Pacific Standard Time, on
the Business Day immediately preceding the Second Trigger Date. If R2 elects to
exercise the Second Put Option, R2 shall deliver written notice of such election
(the "Second Put Notice") to FAFCO no sooner than the Second Trigger Date and no
later than 5:00 P.M., Pacific Standard Time, on the Business Day immediately
preceding the Third Trigger Date. If R2 elects to exercise the Third Put Option,
R2 shall deliver written notice of such election (the "Third Put Notice") to
FAFCO no sooner than the Third Trigger Date and no later than 5:00 P.M., Pacific
Standard Time, on the Business Day immediately preceding the Option Termination
Date. Any written notice delivered to FAFCO pursuant to this subsection (b) is
hereinafter referred to as a "Put Exercise Notice".
(c) If FAFCO receives a Put Exercise Notice, FAFCO shall, within 30
days of its receipt of such Put Exercise Notice, deliver written notice to R2 (a
"Put Consideration Notice") specifying (i) the date, which shall be a Business
Day no later than 30 days (or, if the Option Price is to be paid by delivery of
unrestricted registered FAFCO common shares, as soon as practicable thereafter,
but no later than 120 days) after the date of such Put Consideration Notice, on
which the Put Option described in such Put Exercise Notice shall be paid (the
"Put Payment Date"), (ii) the Option Price and (iii) FAFCO's election, in its
sole and unfettered discretion, to pay the Option Price (A) in cash, (B) by
delivering to R2 an unsecured promissory note of FAFCO in an aggregate principal
amount equal to the Option Price, which promissory note shall have a three year
maturity from the Put Payment Date, shall bear interest at the Prime Rate, shall
be payable in equal quarterly installments of principal, together with accrued
interest thereon, shall be subject to acceleration upon default and shall
otherwise be in a form reasonably acceptable to R2, (C) by delivering to R2 that
number of unrestricted registered FAFCO common shares listed on a Major Exchange
equal to the quotient resulting from the division of the Option Price by the
Mean Price (provided that in lieu of delivering a fractional common share, FAFCO
shall pay cash in amount equal to the product of the Mean Price and the
fractional interest (expressed as a decimal)) or (D) any combination of cash,
promissory notes and FAFCO common shares in accordance with the foregoing. In
the event that FAFCO fails to timely deliver a Put Consideration Notice, the Put
Payment Date shall occur on the date which is 35 days following the date of the
applicable Put Exercise Notice and FAFCO shall be deemed to have elected to pay
the Option Price in cash.
(d) On each Put Payment Date,
(i) R2 shall deliver to FAFCO the certificates, if any, properly
endorsed, representing that portion of R2's Membership Interest that is to be
sold to FAFCO on such Put Payment Date, together with such other duly executed
instruments of transfer reasonably requested by FAFCO to give effect to the
purchase and sale of the applicable portion of R2's Membership Interest pursuant
to this Section 5.01 and
(ii) FAFCO shall deliver to R2, in immediately available funds or
as otherwise permitted in paragraph (c) above, the Option Price.
5.02. FAFCO Call Option.
(a) Except as otherwise provided in 5.02(f):
(i) During the First Put/Call Period, FAFCO shall, unless R2 has
delivered the First Put Notice, have the right (the "First Call Option") to
purchase from R2 33-1/3% (but not less than 33-1/3%) of the Membership Interest
owned by R2 on the First Trigger Date.
(ii) If by the Second Trigger Date, R2 has not sold any of its
Membership Interest to FAFCO, during the Second Put/Call Period, FAFCO shall,
unless R2 has delivered the Second Put Notice, have the right to purchase from
R2 66-2/3% (but not less than 66-2/3%) of the Membership Interest owned by R2 on
the Second Trigger Date. If by the Second Trigger Date, R2 has sold 33-1/3% of
the Membership Interest owned by R2 on the First Trigger Date to FAFCO, during
the Second Put/Call Period FAFCO shall, unless R2 has delivered the Second Put
Notice, have the right to purchase from R2 50% (but not less than 50%) of the
Membership Interest owned by R2 on the Second Trigger Date. FAFCO's right to
purchase a portion of R2's Membership Interest pursuant to this clause (ii) is
hereinafter referred to as the "Second Call Option".
(iii) During the Third Put/Call Period, FAFCO shall, unless R2
has delivered the Third Put Notice, have the right (the "Third Call Option") to
purchase from R2 100% (but not less than 100%) of the Membership Interest owned
by R2 on the Third Trigger Date. If FAFCO does not exercise the Third Call
Option at or before 5:00 P.M., Pacific Standard Time on the Business Day
immediately preceding the Option Termination Date, FAFCO shall be deemed to have
exercised the Third Call Option on the Option Termination Date (the "Forced
Call").
(b) If FAFCO elects to exercise the First Call Option, FAFCO shall
deliver written notice of such election (the "First Call Notice") to R2 no
sooner than the First Trigger Date and no later than 5:00 P.M., Pacific Standard
Time, on the Business Day immediately preceding the Second Trigger Date. If
FAFCO elects to exercise the Second Call Option, FAFCO shall deliver written
notice of such election (the "Second Call Notice") to R2 no sooner than the
Second Trigger Date and no later than 5:00 P.M., Pacific Standard Time, on the
Business Day immediately preceding the Third Trigger Date. If FAFCO elects to
exercise the Third Call Option, FAFCO shall deliver written notice of such
election (the "Third Call Notice") to R2 no sooner than the Third Trigger Date
and no later than 5:00 P.M., Pacific Standard Time, on the Business Day
immediately preceding the Option Termination Date. Any written notice delivered
to R2 pursuant to this subsection (b) is hereinafter referred to as a "Call
Exercise Notice".
(c) Each Call Exercise Notice shall specify (i) the date, which shall
be a Business Day no later than 30 days (or, if the Option Price is to be paid
by delivery of unrestricted registered FAFCO common shares, as soon as
practicable thereafter, but no later than 120 days) after the date of such Call
Exercise Notice, on which the Call Option described in such Call Exercise Notice
shall be paid (the "Call Payment Date"), (ii) the Option Price and (iii) FAFCO's
election, in its sole and unfettered discretion, to pay the Option Price (A) in
cash, (B) by delivering to R2 that number of unrestricted registered FAFCO
common shares listed on a Major Exchange equal to the quotient resulting from
the division of the Option Price by the Mean Price (provided that in lieu of
delivering a fractional common share, FAFCO shall pay cash in amount equal to
the product of the Mean Price and the fractional interest (expressed as a
decimal)) or (C) any combination of cash, and FAFCO common shares in accordance
with the foregoing.
(d) In the event of a Forced Call, FAFCO shall deliver to R2 no later
than 30 days after the Option Termination Date a written notice (the "Forced
Call Notice") specifying (i) the date, which shall be a Business Day no later
than 30 days (or, if the Forced Call Price is to be paid by delivery of
unrestricted registered FAFCO common shares, as soon as practicable thereafter,
but no later than 120 days) after the date of such Forced Call Notice, on which
the Forced Call described in such Forced Call Notice shall be paid (the "Forced
Call Payment Date"), (ii) the Forced Call Price and (iii) FAFCO's election, in
its sole and unfettered discretion, to pay the Forced Call Price (A) in cash,
(B) by delivering to R2 that number of unrestricted registered FAFCO common
shares listed on a Major Exchange equal to the quotient resulting from the
division of the Forced Call Price by the Mean Price (provided that in lieu of
delivering a fractional common share, FAFCO shall pay cash in amount equal to
the product of the Mean Price and the fractional interest (expressed as a
decimal)) or (C) any combination of cash, and FAFCO common shares in accordance
with the foregoing (the "Forced Call Notice").
(e) On each Call Payment Date, if any, or on the Forced Call Payment
Date, if applicable, (i) R2 shall deliver to FAFCO the certificates, if any,
properly endorsed, representing that portion of R2's Membership Interest that is
to be purchased by FAFCO on such Call Payment Date or Forced Call Payment Date,
as the case may be, together with such other duly executed instruments of
transfer reasonably requested by FAFCO to give effect to the purchase and sale
of the applicable portion of R2's Membership Interest pursuant to this Section
5.02 and (ii) FAFCO shall deliver to R2, in immediately available funds or as
otherwise permitted in paragraphs (c) and (d) above, the Option Price or the
Forced Call Price, as the case may be.
(f) FAFCO may not exercise its:
(i) First Call Option if, at the time of its exercise, the Option
Price would be less than the product of $16,500,000 and the Membership Interest
of R2, expressed as a decimal;
(ii) Second Call Option if at the time of its exercise:
(x) R2 has not sold any of its Membership Interest to FAFCO
and the Option Price would be less than the product of
$33,000,000 and the Membership Interest of R2,
expressed as a decimal or
(y) R2 has sold 33-1/3% of its Membership Interest to FAFCO
and the Option Price would be less than the product of
$16,500,000 and the Membership Interest of R2,
expressed as a decimal;
(iii) Third Call Option if at the time of its exercise:
(x) R2 has not sold any of its Membership Interest to FAFCO
and the Option Price would be less than the product of
$49,500,000 and the Membership Interest of R2,
expressed as a decimal or
(y) R2 has sold 66-2/3% of its Membership Interest to FAFCO
and the Option Price would be less than the product of
$16,500,000 and the Membership Interest of R2,
expressed as a decimal.
5.03. General Put/Call Provisions.
(a) In the event NEWCO is subject to any voluntary or involuntary
bankruptcy proceeding at any time after the applicable Trigger Date (unless, in
the case of any involuntary proceeding, such proceeding is dismissed within 60
days), the Options shall terminate.
(b) The place of payment of the Option Price or the Forced Call Price,
as the case may be, shall be the principal offices of NEWCO or at such other
location as shall be agreed upon in writing by FAFCO and R2 no later than 3
Business Days prior to the time of payment.
5.04. Dispute Resolution.
(a) In the event of any dispute arising out of or relating to this
Section 5 (including, without limitation, any dispute involving the
determination of the Option Price or the Forced Call Price or any other amount
(including, without limitation, the Adjusted Earnings upon which the Option
Price or the Forced Call Price or any such other amount is based) to be paid in
connection with the purchase of R2's Membership Interest pursuant to any
provision of this Section 5), FAFCO or R2, as the case may be, shall provide
written notice to the other party of the dispute, which notice shall specify the
notifying party's position. Each of FAFCO and R2 agree to attempt in good faith
to resolve any such dispute within 30 days following the receipt of the written
notice thereof.
(b) If the dispute cannot be resolved within the 30 day period
described in Section 5.04(a) above, either FAFCO or R2 may, by delivering
written notice to the other, submit any such dispute to the following resolution
procedure. A panel (the "Panel") shall be created to resolve the dispute and
shall be composed of three members who shall be appointed as follows: (i) one
Panel member shall be appointed by each of FAFCO and R2 as designated by written
notice to the other within 15 days after receipt of the notice submitting the
disputes to the resolution procedure and (ii) the third, who shall serve as
chairperson, shall be appointed by the two Panel members so appointed pursuant
to preceding clause (i) within 10 days after the second appointment pursuant to
such clause (i). If a Person, or Persons, entitled to appoint a Panel member
fails to appoint such Panel member within the time period permitted therefor,
such Panel member shall at the written request of either Party be appointed by
the American Arbitration Association. The date on which all Panel members shall
have been selected is hereinafter referred to as the "Panel Date". The place of
the dispute resolution proceedings and all other matters to be determined by the
Panel will be determined by the majority vote of the Panel. Except as provided
in Section 5.04(c) below, each of FAFCO and R2 shall bear their respective costs
and expenses (including attorneys' fees) in connection with the dispute
resolution proceedings and shall be responsible for one-half of the fees, costs
and expenses of the Panel.
(c) The Panel shall render a written decision with reasons therefor
within 30 days of the Panel Date. The Panel may award fees, costs and expenses
(including attorneys' fees and Panel costs) to the prevailing Party and may
award interest on any amount determined to be owing. Any determination by the
Panel shall be final and binding upon the Parties and may be enforced by any
court of competent jurisdiction in the same manner as a judgment in such court.
(d) Notwithstanding anything to the contrary contained in this Section
5.04, each of FAFCO and R2 hereby covenant and agree that, in the event of a
dispute involving the determination of the Option Price or the Forced Call Price
or any other amount to be paid in connection with the purchase of R2's
Membership Interest pursuant to any provision of this Section 5, (i) each such
Party shall, within the time limit prescribed in Section 5.04(b)(i) above,
appoint a representative from its independent certified public accountants as
its Panel member and (ii) the third Panel member shall, within the time limit
prescribed in Section 5.04(b)(ii) above, be appointed by the two Panel members
appointed by the Parties pursuant to clause (i) of this Section 5.04(d) from a
firm of independent certified public accountants of nationally recognized
standing. If a Person, or Persons, entitled to appoint a Panel member pursuant
to this Section 5.04(d) fails to appoint such Panel member within the time
period permitted therefor, such Panel member shall at the written request of
either Party be appointed by the American Arbitration Association.
SECTION 6.
DTI; FINANCING
6.01. DTI.
(a) From and after the date NEWCO purchases all of the images it is
required to purchase from R2 pursuant to the Supply Agreement to and including
the date that is six months thereafter (the "DTI Option Period"), NEWCO shall
have the right (i) to purchase the capital stock of, or merge with DTI, or
purchase the assets of DTI or otherwise acquire DTI or its assets for a purchase
price of $200,000 or (ii) so long as CHOPRA is employed by NEWCO or any
affiliate thereof at the time NEWCO makes its election, to enter into a supply
agreement providing (A) for a term no less than the greater of: (x) the
remainder of the Term (as defined in the Employment Agreement) and (y) two years
from the commencement of such supply agreement, (B) that NEWCO will purchase all
of DTI's output at cost, (C) that if CHOPRA's employment with NEWCO and all
Affiliates of NEWCO terminates, NEWCO will have sixty days to decide whether to
purchase the capital stock of, merge with, purchase the assets of or otherwise
acquire DTI or its assets for a purchase price of $200,000, (D) that NEWCO may,
directly or through its representatives, review the properties, books and
records of DTI and its financial and legal condition to the extent NEWCO deems
necessary or advisable to familiarize itself with such properties and other
matters and (E) for terms otherwise acceptable to FARES (as the Majority
Interest of NEWCO under the NEWCO Operating Agreement) and R2 (the "DTI Purchase
Option"). Any amounts paid pursuant to the DTI Purchase Option or Section
6.01(a)(C) shall be paid in cash in immediately available funds.
(b) If NEWCO elects to exercise the DTI Purchase Option, FAFCO shall
deliver written notice of such election to CHOPRA no sooner than the first day
the DTI Option Period and no later than 5:00 P.M., Pacific Standard Time, on the
last day of the DTI Option Period. As soon as practicable, thereafter,
documents, in a form acceptable to NEWCO and CHOPRA, shall be prepared to effect
the acquisition of DTI.
(c) CHOPRA agrees to use his best effort, to a reasonable extent, to
(i) assist NEWCO in completing its due diligence review of DTI, (ii) assist
NEWCO in structuring the acquisition of DTI in a tax and accounting efficient
manner, (iii) convert DTI into the corporate form, or equivalent, or any other
form satisfactory to NEWCO and (iv) cause DTI to cooperate in obtaining any
consents, licenses, approvals or equivalent necessary to effect the acquisition
of DTI.
(d) On or before the commencement of the DTI Option Period CHOPRA agrees
to, and agrees to use his best efforts to cause any Person to, sell, convey and
transfer to DTI (i) all of the assets and liabilities of Data Tree (India)
Corporation and (ii), to the extent such assets and liabilities are used to
provided the products and services described in the Supply Agreement, the assets
and liabilities of any other Entity controlled by CHOPRA and/or R2 providing to
NEWCO and/or R2 the products and services described in the Supply Agreement.
6.02. Loans to NEWCO. To the extent that any Party lends or advances
funds to NEWCO, the Parties agree that the Party lending or advancing funds
shall be entitled to receive interest thereon at a rate per annum not to exceed
the Prime Rate.
SECTION 7.
TERMINATION
7.01. Events of Termination. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Closing by mutual consent of the Parties or in the event the Merger Agreement is
terminated pursuant to Section 9 of the Merger Agreement.
7.02. Effect of Termination. In the event that this Agreement shall be
terminated pursuant to Section 7.01, all further obligations of the Parties
hereto under this Agreement shall terminate without further liability or
obligation of either Party to the other Parties hereunder; provided, however,
that no Party shall be released from liability hereunder if this Agreement is
terminated and the transactions abandoned by reason of (i) willful failure of
such Party to have performed its obligations hereunder or (ii) any knowing
misrepresentation made by such Party of any matter set forth herein.
SECTION 8.
MISCELLANEOUS
8.01. Fees and Expenses. Except as provided in Section 2.01(b) above,
all costs and expenses incurred in connection with this Agreement and the
consummation of the transactions contemplated hereby shall be paid by the Party
incurring such costs and expenses.
8.02. Extension; Waiver. At any time prior to the Effective Date, the
Parties hereto, by action taken by or on behalf of the respective Boards of
Directors or other governing body of such Parties, may (i) extend the time for
the performance of any of the obligations or other acts of the other Parties
hereto, (ii) waive any inaccuracies in the representations and warranties
contained herein of the other Parties or in any document, certificate or writing
delivered pursuant hereto or thereto by the other Parties or (iii) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of any Party to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
Party.
8.03. Confidentiality. Subject to the requirements of applicable law,
each Party shall maintain in confidence all information (i) transferred to NEWCO
by reason of the transfer of Interests and (ii) all information received from
the other Party as a result of any due diligence investigation conducted
relative to the execution of the Agreement and shall use such information only
for the benefit of NEWCO and, except in accordance with the immediately
succeeding sentence, shall not disclose any such information to a third party or
make any unauthorized use thereof. The obligation of confidentiality and non-use
shall not apply to any information which (a) is or becomes generally available
to the public through no fault of the receiving party, (b) is independently
developed by the receiving party, (c) is received in good faith from a third
party who is lawfully in possession of such information and has the lawful right
to disclose or use it, (d) is required by a court order or regulatory or
governmental agency to be disclosed or (e) the delivering Party in good faith
believes it is required by law or regulatory authority to disclose; provided,
however, that the other Parties shall first be notified of such good faith
belief, and the delivering Party shall not make any such disclosure if a Party
provides an opinion prepared by independent counsel that the disclosure is not
so required.
8.04. Public Announcements. The Parties agree to consult promptly with
each other prior to issuing any press release or otherwise making any public
statement with respect to the transactions contemplated hereby and shall not
issue any such press release or make any such public statement prior to such
consultation and review by the other Party of a copy of such release or
statement, unless required by applicable law.
8.05. Records Retained by FAFCO, R2 and NEWCO. Except as may otherwise
be provided in this Agreement, FAFCO, FAREISI, FARES and R2 shall transfer and
deliver, or cause to be transferred and delivered, and FAFCO, FAREISI, FARES and
R2 shall cause their Affiliates to transfer and deliver to NEWCO after the
Closing all data, records and other information which pertain to its respective
Interests (with the exception of documents created for this transaction)
including, without limitation, tax records and personnel records necessary for
NEWCO to conduct the NEWCO Business (all of the foregoing being hereinafter
called the "Business Records"). To the extent that the original copies of any
such Business Records also contain information relating to any Party or any of
its Affiliates not relating to its Interests, said Party may deliver to NEWCO
copies deleting such information but shall not destroy the original Business
Records except in accordance with normal record retention policies (or otherwise
take action to make such original Business Records unavailable to NEWCO). Any
Business Records which any Party requires in connection with pending or
threatened litigation, or which are otherwise subject to hold orders as provided
in said Party's record retention and protection policies, may be retained by
said Party and copies thereof delivered to NEWCO.
8.06. 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 or
by mail, postage prepaid, sent by telecopier, as follows:
(a) if to R2, to it at:
R. Squared Limited
c/o Royal Bank of Canada Trust Co. (Cayman) Limited
P.O. Box 1586, George Town, Grand Cayman
Cayman Islands, British West Indies
Telephone: 345-949-0253
Telecopier: 345-949-5777
Attention: Piers Strandling
(b) if to CHOPRA at:
Harish K. Chopra
P.O. Box 9360
Rancho Santa Fe, California 92067
Telephone: 619-759-9959
Telecopier: 619-759-1747
(c) if to FAFCO, FAREISI or FARES, to it at:
The First American Financial Corporation
114 East Fifth Street
Santa Ana, California 92702
Telephone: (714) 558-3211
Telecopier: (714) 647-2242
Attention: Parker S. Kennedy
with a copy to:
White & Case
633 West Fifth Street, 19th Floor
Los Angeles, California 90071
Telephone: (213) 620-7700
Telecopier: (213) 687-0758
Attention: Neil W. Rust
or to such other Person or address as any Party shall specify by notice in
writing to each of the other Parties. 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 and deemed delivered: (i) if sent by U.S. mail, three Business Days
after deposit in the U.S. mail, postage prepaid; (ii) if sent by FedEx or other
overnight delivery service, two Business Days after delivery to such service;
(iii) if sent by personal courier, upon receipt; and (iv) if sent by facsimile,
upon receipt.
8.07. Entire Agreement. This Agreement and the other documents
referred to herein or delivered pursuant hereto, collectively contain the entire
understanding of the Parties hereto with respect to the subject matter contained
herein and supersede all prior agreements and understandings, oral and written,
with respect thereto unless specifically set forth to the contrary herein.
8.08. Binding Effect; Benefit; Assignment.
(a) This Agreement shall inure to the benefit of and be binding upon
the Parties hereto and their respective successors and permitted assigns, but
neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned by any of the Parties hereto without the prior written consent
of each other Party. Nothing in this Agreement, expressed or implied, is
intended to confer on any Person other than the Parties hereto or their
respective successors and permitted assigns, any rights, remedies, obligations
or liabilities under or by reason of this Agreement.
(b) Notwithstanding anything stated in the foregoing paragraph (a),
upon acknowledging this Agreement by its execution of the signature page hereto,
NEWCO will be, for all purposes, treated as third party beneficiary to the
representations and warranties of each Party in this Agreement.
8.09. Amendment and Modification. Subject to applicable law, this
Agreement may be amended, modified and supplemented in writing by the Parties
hereto in any and all respects before the Effective Date (notwithstanding any
shareholder approval), by action taken by the respective Boards of Directors of
such Parties, or by the respective officers authorized by such Boards of
Directors, provided, that after any such shareholder approval, no amendment may
be made which by law requires further approval by such shareholders without such
further approval.
8.10. Effect of Termination. In the event that this Agreement shall be
terminated pursuant to Section 7, all further obligations of the parties hereto
under this Agreement (other than pursuant to Sections 8.01, 8.03 and 8.06) shall
terminate without further liability or obligation of either party to the other
party hereunder; provided, however, that no party shall be released from
liability hereunder if this Agreement is terminated and the transactions
abandoned by reason of (i) willful failure of such party to have performed its
obligations hereunder or (ii) any knowing misrepresentation made by such party
of any matter set forth herein.
8.11. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument.
8.12. Applicable Law; Submission to Jurisdiction.
(a) This Agreement and the legal relations between the Parties hereto
shall be governed by and construed in accordance with the laws of the State of
California, without regard to the conflict of laws rules thereof.
(b) Except in the case of disputes in relation to Section 5, each of
the Parties agrees that any legal action or proceeding with respect to this
Agreement may be brought in the Courts of the State of California or the United
States District Court for the Central District of California and, by execution
and delivery of this Agreement, each Party hereby irrevocably submits itself in
respect of its property, generally and unconditionally to the non-exclusive
jurisdiction of the aforesaid courts in any legal action or proceeding arising
out of this Agreement. Each of the Parties hereby irrevocably waives any
objection which it may now or hereafter have to the laying of venue of any of
the aforesaid actions or proceedings arising out of or in connection with this
Agreement brought in the courts referred to in the preceding sentence. Each
Party consents to process being served in any such action or proceeding by the
mailing of a copy thereof to the address for notices to it set forth in Section
8.06 and agrees that such service upon receipt shall constitute good and
sufficient service of process or notice thereof. Nothing in this paragraph shall
affect or eliminate any right to serve process in any other matter permitted by
law.
8.13 Severability. If any term, provision, covenant or restriction
contained in this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void, unenforceable or against its regulatory
policy, the remainder of the terms, provisions, covenants and restrictions
contained in this Agreement shall remain in full force and effect and shall in
no way be affected, impaired or invalidated.
8.14 Access to Records. At all times that R2 is a member of NEWCO, and
thereafter for the sole purpose of determining the accuracy of the Option Price
or the Forced Call Price, as the case may be, R2 shall have the right to make
copies of all books and records of NEWCO; provided, however that R2 shall
maintain in confidence all such books and records of NEWCO.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly
executed in their respective corporate names by their respective officers, each
of whom is duly and validly authorized and empowered, all as of the day and year
first above written.
THE FIRST AMERICAN FINANCIAL CORPORATION
By______________________________________
Name:
Title:
FIRST AMERICAN REAL ESTATE
INFORMATION SERVICES, INC.
By_______________________________________
Name:
Title:
FIRST AMERICAN REAL ESTATE SOLUTIONS LLC
By_______________________________________
Name:
Title:
R. SQUARED LIMITED
By_______________________________________
Name:
Title:
______________________________________
Harish K. Chopra
ACKNOWLEDGED AND AGREED TO:
DATA TREE LLC
By_______________________________
Name:
Title:
<PAGE>
EXHIBIT A
FORM OF
PROMISSORY NOTE
$__________ Santa Ana, California
_________ __, 1998
IMAGE ACQUISITION CORP., a corporation organized and existing under
the laws of the State of California (together with its successors and assigns,
the "Payor"), hereby promises to pay to the order of THE FIRST AMERICAN
FINANCIAL CORPORATION or its assigns (the "Payee"), in lawful money of the
United States of America in immediately available funds, at such location in the
United States of America as the Payee shall from time to time designate, on
______ __, 2000, the principal sum of _________ UNITED STATES DOLLARS
($__________) or, if less, the then unpaid principal amount of this Note.
The Payor promises also to pay interest on the unpaid principal amount
from time to time outstanding hereunder in like money at said location from the
date hereof until repaid in full at the Prime Rate, said interest to be payable
on any repayment (on the amount repaid), at maturity and, after maturity, on
demand. For purposes of this Note, "Prime Rate" shall mean, as of any date of
determination, the per annum rate of interest specified as the Prime Rate in the
Wall Street Journal published on such date, provided that for any date on which
the Wall Street Journal is not published, "Prime Rate" shall mean the per annum
rate of interest specified as the Prime Rate in the Wall Street Journal last
published prior to such date.
This Note is the FAFCO Note referred to in the Contribution and Joint
Venture Agreement, dated as of ________ __, 1998 (the "Contribution Agreement"),
by and among the Payee, First American Real Estate Information Services, Inc.,
First American Real Estate Solutions LLC, R. Squared Limited and Harish K.
Chopra and is entitled to the benefits thereof.
Upon the commencement of any bankruptcy, reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or
similar proceeding of any jurisdiction relating to the Payor, the unpaid
principal amount hereof shall become immediately due and payable without
presentment, demand, protest or notice of any kind in connection with this Note.
This Note may be voluntarily repaid by the Payor prior to maturity, in
whole or in part, without premium or penalty. The Payee is hereby authorized to
record all repayments hereof in its books and records, and such books and
records shall constitute prima facie evidence of the accuracy of the information
contained therein.
The Payor hereby waives presentment, demand, protest or notice of any
kind in connection with this Note.
All payments under this Note shall be made without offset,
counterclaim or deduction of any kind.
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE
LAW OF THE STATE OF CALIFORNIA.
IMAGE ACQUISITION CORP.
By ___________________________________
Name:
Title:
<PAGE>
EXHIBIT B
EXCLUDED INTEREST EXAMPLES
Assumptions:
1. Working Capital Debt (WCD)- $15,000,000
2. Objected Amount (OA) - $8,000,000
3. Therefore, approved amount = $1,420,000
4. Two loans: $7,000,000 at 10%, simple interest
$8,000,000 at 9%, simple interest
5. Therefore, total interest payment (TIP) = $1,420,000
OA
Formula: Excluded Interest (EI) = (TIP) --------
WCD
Example 1: with assumptions unchanged.
$8,000,000
EI - ($1,420,000) ------------ = $757,333.33
$15,000,000
Example 2: pay-down of $2,000,000 of the 9% debt, WCD now $13,000,000, OA now
$6,000,000 (i.e., $8,000,000 minus $2,000,000 pay-down)
TIP=[($6,000,000)(.09)] + [($7,000,000)(.10)]=$1,240,000
$6,000,000
EI=($1,240,000) ------------ = $572,307.69
$13,000,000
Example 3: continuation of Example 2, with an additional pay-down of $4,000,000
of the 10% debt, WCD now $9,000,000, OA now $2,000,000.
TIP = [$6,000,000)(.09)] + [($3,000,000)(.10)]=$840,000
$2,000,000
EI = ($840,000)----------- = $186,666.67
$9,000,000
<PAGE>
EXHIBIT D
OPERATING AGREEMENT
FOR
DATA TREE LLC,
A CALIFORNIA LIMITED LIABILITY COMPANY
By and Between
FIRST AMERICAN REAL ESTATE SOLUTIONS LLC
and
R. SQUARED LIMITED
Dated as of _____ __, 1998
<PAGE>
TABLE OF CONTENTS<F1>
<F1> This Table of Contents is provided for convenience only and does not form a
part of the attached Operating Agreement.
<TABLE>
<S> <C> <C>
Page
SECTION 1. DEFINED TERMS; CONSTRUCTION................................................. 1
1.01 Defined Terms............................................................... 1
1.02 Construction................................................................ 5
SECTION 2. ORGANIZATIONAL MATTERS...................................................... 5
2.01 Formation of the Company.................................................... 5
2.02 Name of the Company......................................................... 5
2.03 Term........................................................................ 5
2.04 Principal Office and Registered Agent....................................... 6
2.05 Addresses of the Members.................................................... 6
2.06 Purpose and Business of the Company......................................... 6
SECTION 3. CAPITAL CONTRIBUTIONS....................................................... 6
3.01 Initial Capital Contributions............................................... 6
3.02 Capital Accounts............................................................ 6
3.03 Revaluation of Capital Accounts............................................. 7
3.04 No Interest................................................................. 7
3.05 Return of Capital Account................................................... 7
3.06 Percentage Interests........................................................ 7
SECTION 4. THE MEMBERS................................................................. 7
4.01 Limited Liability........................................................... 7
4.02 Admission of Additional Members............................................. 7
4.03 Withdrawals................................................................. 8
4.04 Transactions With The Company............................................... 8
4.05 Termination of Membership Interest.......................................... 8
4.06 Unanimous Consent of Members................................................ 8
4.07 Approval by the Majority Interest........................................... 9
4.08 Meetings of the Members..................................................... 9
SECTION 5. MANAGEMENT AND CONTROL OF THE COMPANY....................................... 11
5.01 Management and Powers....................................................... 11
5.02 Officers.................................................................... 11
SECTION 6. ALLOCATIONS OF NET PROFITS AND NET LOSSES;
DISTRIBUTIONS............................................................... 14
6.01 Allocations of Net Profit and Net Loss...................................... 14
6.02 Special Allocations......................................................... 14
6.03 Code Section 704(c) Allocations............................................. 16
6.04 Allocations of Net Profits and Losses and Distributions in
Respect of a Transferred Interest........................................... 16
6.05 Distributions of Distributable Cash by the Company.......................... 16
6.06 Form of Distribution........................................................ 17
6.07 Restriction on Distributions................................................ 17
6.08 Return of Distributions..................................................... 18
SECTION 7. MEMBERSHIP INTEREST TRANSFER RESTRICTIONS................................... 18
7.01 Transfer Restrictions....................................................... 18
7.02 Void Transfer............................................................... 18
7.03 New Members................................................................. 18
SECTION 8. CONSEQUENCES OF DISSOLUTION EVENTS; TERMINATION OF MEMBERSHIP INTEREST...... 18
8.01 Dissolution Event........................................................... 18
8.02 Winding Up the Company...................................................... 19
8.03 Final Statement............................................................. 19
SECTION 9. BOOKS AND RECORDS; TAX RETURNS; ACCESS BY MEMBERS........................... 19
9.01 Company Books and Records................................................... 19
9.02 Tax Returns................................................................. 20
9.03 Inspection, Audit and Copies of Records..................................... 21
9.04 Access...................................................................... 21
SECTION 10. INDEMNIFICATION AND INSURANCE............................................... 22
10.01 Indemnification of Agents................................................... 22
10.02 Insurance................................................................... 22
SECTION 11. MISCELLANEOUS............................................................... 22
11.01 FAFCO Overhead Fee.......................................................... 22
11.02 Specific Performance........................................................ 22
11.03 Amendments and Modifications................................................ 22
11.04 Notices..................................................................... 23
11.05 Counterparts................................................................ 23
11.06 Governing Law............................................................... 24
11.07 Successors.................................................................. 24
11.08 Severability................................................................ 24
11.09 Entire Agreement............................................................ 24
</TABLE>
<PAGE>
OPERATING AGREEMENT
This OPERATING AGREEMENT (this "Agreement") for Data Tree LLC, a California
limited liability company (the "Company"), dated as of _____ __, 1998, is
entered into by and between the First American Real Estate Solutions LLC
("FARES") and R. Squared Limited ("R2").
SECTION 1.
DEFINED TERMS; CONSTRUCTION
1.01 Defined Terms. As used in this Agreement, the following terms shall
have the following meanings:
"ACT" means the Beverly-Killea Limited Liability Company Act, codified in
the California Corporations Code, Section 17000 et seq., as the same may be
amended from time to time.
"ADJUSTED CAPITAL ACCOUNT DEFICIT" means, with respect to any Member, the
deficit balance, if any, in such Member's Capital Account as of the end of the
applicable Fiscal Year after (i) crediting thereto any amounts which such Member
is, or is deemed to be, obligated to restore pursuant to Treasury Regulations
ss. 1.704-2(g)(1) and ss. 1.704-2(i)(5) and (ii) debiting such Capital Account
by the amount of the items described in Treasury Regulations ss.
1.704-1(b)(2)(ii)(d)(4), (5) and (6). The foregoing definition of Adjusted
Capital Account Deficit is intended to comply with the provisions of Treasury
Regulation ss. 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently
therewith.
"ARTICLES" means the Articles of Organization for the Company originally
filed with the California Secretary of State and as amended from time to time.
"BANKRUPTCY" means, with respect to any Person, the occurrence of one or
more of the following events: (i) such Person commences a voluntary case
concerning itself under Title 11 of the United States Code entitled
"Bankruptcy," as now or hereafter in effect, or any successor thereto (the
"Bankruptcy Code"); (ii) an involuntary case is commenced against such Person
and the petition is not controverted within 10 days, or is not dismissed within
60 days, after commencement of the case; (iii) a custodian (as defined in the
Bankruptcy Code) is appointed for, or takes charge of, all or substantially all
of the property of, such Person; (iv) such Person commences any other proceeding
under any reorganization, arrangement, adjustment of debt, relief of debtors,
dissolution, insolvency or liquidation or similar law of any jurisdiction
whether now or hereafter in effect; (v) there is commenced against such Person
any such proceeding which remains undismissed for a period of 60 days; (vi) such
Person is adjudicated insolvent or bankrupt or any order of relief or other
order approving any such case or proceeding is entered; (vi) such Person suffers
the appointment of a custodian or the like for it or any substantial part of its
property to continue undischarged or unstayed for a period of 60 days; (vii)
such Person makes a general assignment for the benefit of creditors; or (viii)
any corporate or partnership action is taken by such Person for the purpose of
effecting any of the foregoing.
"BUSINESS DAY" means any day, excluding Saturday, Sunday or any day which
shall be a legal holiday in the State of California.
"CAPITAL ACCOUNT" means, with respect to any Member, the capital account
which the Company establishes and maintains for such Member pursuant to Section
3.02.
"CAPITAL CONTRIBUTION" means, with respect to any Member, the total amount
of cash and the fair market value of property contributed (net of liabilities
secured by such contributed property that the Company is considered to assume
under Section 752 of the Code) to the Company by such Member.
"CODE" means the U.S. Internal Revenue Code of 1986, as amended from time
to time, and the provisions of any succeeding law.
"COMPANY MINIMUM GAIN" has the meaning given to the term "partnership
minimum gain" in the Regulations Sections 1.704-2(b)(2) and 1.704-2(d).
"CONTRIBUTION AGREEMENT" means that certain Contribution and Joint Venture
Agreement, dated as of even date herewith, by and among FAFCO, First American
Real Estate Information Services, Inc., FARES, Experian Information Solutions,
Inc., R2 and Harish K. Chopra.
"CORPORATIONS CODE" means the California Corporations Code, as amended from
time to time, and the provisions of any succeeding law.
"DISSOLUTION EVENT" means, with respect to any Member, the withdrawal from
this Agreement by, the Bankruptcy of, or the dissolution of such Member.
"DISTRIBUTABLE CASH" means the amount of cash which the Majority Interest,
in consultation with the President, deems available for distribution to the
Members, taking into account all debts, liabilities, and obligations of the
Company then due, and working capital and other amounts which the Majority
Interest deems necessary for the Company's business or to place into reserves
for customary and usual claims with respect to such business.
"EMPLOYMENT AGREEMENT" means that certain Employment Agreement, dated as of
even date herewith between the Company and Harish K. Chopra.
"FAFCO" means The First American Financial Corporation.
"FAFCO OVERHEAD FEE" has the meaning given thereto in Section 11.01.
"FISCAL YEAR" means the Company's fiscal year, which shall be the calendar
year.
"FORMER MEMBER" has the meaning given thereto in Section 8.01.
"GAAP" means generally accepted accounting principles in the United States
of America applied on a consistent basis.
"MAJORITY INTEREST" means those Members who hold a majority of the
Percentage Interests which all Members hold.
"MEMBER" means each Person who (i) is an initial signatory to this
Agreement or has been admitted to the Company as a Member in accordance with the
Articles or this Agreement and (ii) has not become the subject of a Dissolution
Event or ceased to be a Member in accordance with Section 8 or for any other
reason.
"MEMBER MINIMUM GAIN" means an amount, determined in accordance with
Regulations Section 1.704-2(i)(3) with respect to any Member Nonrecourse Debt,
equal to the Company Minimum Gain that would result if such Member Nonrecourse
Debt were treated as a Nonrecourse Liability.
"MEMBER NONRECOURSE DEBT" has the meaning given to the term "partner
nonrecourse debt" in Regulations Section 1.704-2(b)(4).
"MEMBER NONRECOURSE DEDUCTIONS" has the meaning given to the term "partner
nonrecourse deductions" in Regulations Section 1.704-2(i).
"MEMBERSHIP INTEREST" means a Member's entire interest in the Company,
including, without limitation, the right to receive distributions of the
Company's assets and allocations of income, gain, loss, deduction, credit and
similar items from the Company pursuant to this Agreement and the Act, the right
to vote on or participate in the management, and the right to receive
information concerning the business and affairs, of the Company.
"NET PROFITS" and "NET LOSSES" mean, for each Fiscal Year or other period,
an amount equal to the Company's taxable income or loss for such year or period,
determined in accordance with Code Section 703(a), (i) including in the
calculation thereof all items of income, gain, loss or deduction required to be
stated separately pursuant to Code Section 703(a)(1), (ii) adding any income of
the Company that is exempt from federal income tax and (iii) subtracting any
nondeductible expenditures of the Company not properly chargeable to Capital
Accounts described in Code Section 705(a)(2)(B) or treated as Code Section
705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i);
provided, however:
(1) in the event that for purposes of calculating Capital Accounts an
asset of the Company is properly reflected on the books of the Company at a book
value other than the adjusted tax basis of the asset under the Code, then (a)
the amount of any adjustment to such a book value shall be taken into account as
gain or loss from the disposition of such asset and (b) after such adjustment
depreciation with respect to such asset and any gain or loss resulting from
disposition of such asset shall be computed by reference to the book value of
the asset as so carried; and
(2) any items that are specially allocated pursuant to the Agreement
other than by allocation as part of Net Profits or Net Losses as such shall not
be taken into account in computing Net Profits and Net Losses.
"NONRECOURSE DEDUCTION" has the meaning given to such term in Regulations
Section 1.704-2(b)(1).
"NONRECOURSE LIABILITY" has the meaning set forth in Regulations Section
1.752- 1(a)(2).
"PERCENTAGE INTEREST" means, with respect to a Member, the percentage set
forth in Section 3.06 with respect to such Member, as such percentage may be
adjusted from time to time pursuant to the terms of this Agreement.
"PERSON" means and includes any individual, partnership, association, joint
stock company, joint venture, corporation, trust, limited liability company,
unincorporated organization or other enterprise or any government or political
subdivision or any agency, department or instrumentality thereof.
"REGULATIONS" means, unless the context clearly indicates otherwise, the
regulations in force as final or temporary that have been issued by the U.S.
Department of Treasury pursuant to its authority under the Code, and any
successor regulations.
"REMAINING MEMBERS" has the meaning given thereto in Section 8.01.
"TAX ALLOWANCE AMOUNT" means, with respect to any Member, for any calendar
quarter, (i) forty percent (40%) of the excess of (a) the estimated taxable
income allocable to such Member arising from its ownership of an Percentage
Interest in the Company for the Fiscal Year through such calendar quarter over
(b) any Losses of the Company for prior Fiscal Years and such Fiscal Year that
are allocable to such Member that were not previously utilized in the
calculation of Tax Allowance Amounts minus (ii) prior distributions of Tax
Allowance Amounts for such Fiscal Year, all as determined by the Tax Matters
Member in good faith. The amount so determined by the Tax Matters Member shall
be the Tax Allowance Amount for such period and shall be final and binding on
all Members.
"TAX MATTERS MEMBER" has the meaning given thereto in Section 9.02(b).
"TRANSFER" means any sale, transfer, assignment, donation, exchange,
charge, gift, pledge, hypothecation, conveyance, encumbrance or other
disposition in any manner whatsoever, voluntarily or involuntarily, including,
without limitation, any attachment, assignment for the benefit of creditors or
transfer by operation of law or otherwise.
1.02 Construction. (a) To the fullest extent permissible, each Member and
the Company hereby waives such provisions of the California Corporations Code as
are inconsistent with the terms hereof.
(b) 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, and Section, subsection and
Schedule references are to this Agreement unless otherwise specified.
(c) All accounting terms not specifically defined herein shall be construed
in accordance with GAAP.
(d) The meanings given to terms used herein shall be equally applicable to
both the singular and plural forms of such terms.
(e) The Table of Contents hereto and the Section headings herein are for
convenience only and shall not affect the construction hereof.
SECTION 2.
ORGANIZATIONAL MATTERS
2.01 Formation of the Company. The Members have formed a California limited
liability company under the laws of the State of California by filing the
Articles with the California Secretary of State and entering into this
Agreement, which Agreement shall be deemed effective as of the date the Articles
were so filed. The rights and liabilities of the Members shall be determined
pursuant to the Act and this Agreement. To the extent that the rights or
obligations of any Member are different by reason of any provision of this
Agreement than they would be in the absence of such provision, this Agreement
shall, to the extent permitted by the Act, control.
2.02 Name of the Company. The name of the Company shall be "Data Tree LLC."
The business of the Company may be conducted under that name or, upon compliance
with applicable laws, any other name that the Majority Interest deems
appropriate or advisable. The Company shall file any fictitious name
certificates and similar filings, and any amendments thereto, that the Company
or the Majority Interest considers appropriate or advisable.
2.03 Term. The term of this Agreement commenced on the filing of the
Articles and shall continue until the date of dissolution of the Company set
forth in the Articles, unless extended or sooner terminated as hereinafter
provided.
2.04 Principal Office and Registered Agent. The Company shall continuously
maintain an office and registered agent in the State of California. The
principal office of the Company shall be located at San Diego, California or as
the Members unanimously may otherwise determine. The Company may also have such
offices, anywhere within and without the State of California, as the Majority
Interest may determine from time to time, or the business of the Company may
require. The registered agent shall be as stated in the Articles or as otherwise
determined by the Majority Interest.
2.05 Addresses of the Members. The respective addresses of the Members are
as set forth in Section 11.03.
2.06 Purpose and Business of the Company. The purpose of the Company is to
engage in any lawful activity for which a limited liability company may be
organized under the Act. Without limiting the foregoing, the primary business of
the Company shall be to engage in the Data Tree Business and the Digistar
Business (as those terms are defined in the Contribution Agreement).
SECTION 3.
CAPITAL CONTRIBUTIONS
3.01 Initial Capital Contributions. Initially each Member shall make
Capital Contributions to the Company in the amount and form set forth in
Schedule 3.01 hereof. No Member shall be required to make any additional Capital
Contributions.
3.02 Capital Accounts. The Company shall establish and maintain a separate
Capital Account for each Member in accordance with Regulations Section
1.704-1(b)(2)(iv). Each Member shall receive a credit to its Capital Account in
the amount of (i) the amount of any Capital Contribution made in cash, (ii) the
fair market value (net of liabilities that the Company is considered to assume,
or take subject to, under Section 752 of the Code) of any Capital Contribution
made in property other than cash, and (iii) allocations to such Member of Net
Profits. Each Member's Capital Account shall be debited with (i) the amount of
any cash and the fair market value of property distributed to such Member (net
of liabilities that such Member is considered to assume or take subject to
Section 752 of the Code), all as may be determined in accordance with this
Agreement, and (ii) allocations of Net Losses. If a Member transfers all or a
part of its Membership Interest in accordance with this Agreement, such Member's
Capital Account attributable to the transferred Membership Interest shall carry
over to the new owner of such Membership Interest pursuant to Regulations
Section 1.704-1(b)(2)(iv)(l). If any property other than cash is distributed to
a Member, the Capital Accounts of the Members shall be adjusted as if the
property had instead been sold by the Company for a price equal to its fair
market value and the proceeds distributed. Upon liquidation and winding-up of
the Company, any unsold Company property shall be valued to determine the gain
or loss which would result if such property were sold at its fair market value
at the time of such liquidation. The Capital Accounts of the Members shall be
adjusted to reflect how any such gain or loss would have been allocated under
Section 6 if such property had been sold at the assigned values.
3.03 Revaluation of Capital Accounts. The Capital Accounts of the Members
shall be increased or decreased in accordance with Regulations Section
1.704-1(b)(2)(iv)(f) to reflect a revaluation of the property of the Company on
the Company's books as of the following times: (i) the acquisition of an
additional interest in the Company by any new or existing Member in exchange for
more than a de minimis capital contribution; (ii) the distribution by the
Company to a Member of more than a de minimis amount of money or other property
as consideration for an interest in the Company; and (iii) the liquidation of
the Company within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g);
provided, however, that adjustments pursuant to clauses (i) and (ii) above shall
be made only if the Majority Interest reasonably determines that such
adjustments are necessary or appropriate to reflect the relative economic
interests of the Members in the Company.
3.04 No Interest. Except as provided herein, no Member shall be entitled to
receive any interest or other earnings on its Capital Contributions.
3.05 Return of Capital Account. Except upon the dissolution of the Company
or as may be specifically provided in this Agreement, no Member shall have the
right to demand or receive the return of all or any part of its Capital Account
or its capital contributions to the Company.
3.06 Percentage Interests. The Percentage Interests of the Members on the
date of this Agreement shall be 20% with respect to R2 and 80% with respect to
FARES. Immediately following any additional Capital Contributions, including
those made by a new Member, the Percentage Interests shall be adjusted by the
Company to reflect the new relative proportions of the Capital Accounts of the
Members. The Percentage Interests of the Members shall also be adjusted by the
Company in the event of a continuation of the Company notwithstanding the
termination of a Membership Interest pursuant to Section 4.05 of this Agreement.
SECTION 4.
THE MEMBERS
4.01 Limited Liability. Except as expressly set forth in this Agreement or
required by law, no Member shall be personally liable for any debt, obligation,
or liability of the Company, whether that liability or obligation arises in
contract, tort, or otherwise.
4.02 Admission of Additional Members. The Company, with the approval of all
the Members, may admit to the Company additional Members. Any additional Members
shall obtain Membership Interests and will participate in the management, Net
Profits, Net Losses, and distributions of the Company on such terms as are
determined unanimously by the Members.
4.03 Withdrawals. Any Member who is under obligation to render services to
the Company may withdraw or resign as a Member at any time upon sixty (60) days
prior written notice to the Company, without prejudice to the rights if any, of
the Company or other Members under any contract to which the withdrawing Member
is a party. Except as provided in the preceding sentence, no other Member
(including R2 and FARES) may withdraw or resign as a Member of the Company.
4.04 Transactions With The Company. Subject to any limitations set forth in
this Agreement, a Member may lend money to and transact other business with the
Company. Subject to other applicable law, such Member has the same rights and
obligations with respect thereto as a Person who is not a Member.
4.05 Termination of Membership Interest. Upon (i) the transfer of a
Member's Membership Interest in violation of Section 7 or (ii) the occurrence of
a Dissolution Event as to such Member which does not result in the dissolution
of the Company under Section 8, the Membership Interest of a Member shall be
terminated by the Company and thereafter that Member shall be entitled only to
an economic interest with respect to such Member's withdrawn Membership Interest
and not a return of such Member's Capital Account. Each Member acknowledges and
agrees that such termination upon the occurrence of any of the foregoing events
is not unreasonable under the circumstances existing as of the date hereof.
4.06 Unanimous Consent of Members. Notwithstanding any other provision of
this Agreement, the following matters shall require the unanimous vote of the
Members in favor thereof:
(a) any amendment of the Articles or this Agreement;
(b) a decision to compromise the obligation of a Member to make a Capital
Contribution or return money or property paid or distributed in violation of the
Act;
(c) selecting or changing accounting methods and making other decisions
with respect to treatment of items for accounting or financial reporting
purposes;
(d) the sale, lease or other conveyance or transfer, or mortgaging or the
placing or suffering of any easement, right of way, security interest, deed of
trust, mortgage, option or other encumbrance of any kind on any substantial
portion of the property or other assets of the Company, except in the ordinary
course of business;
(e) the incurring of any debt for working capital purposes in excess of
$2,000,000 or any other debt in excess of $250,000;
(f) the determination to make prepayment on any debt of the Company in
excess of $250,000 other than in accordance with the instruments evidencing such
debt;
(g) determining whether to terminate or dissolve the Company;
(h) the acquisition of any real property or any leasehold or other interest
therein, other than in the ordinary course of business, so long as the purchase
price is not less than $250,000;
(i) lending of any sum of money by the Company, the extension of credit or
becoming a surety, guarantor, endorser or accommodation maker;
(j) commencement, settlement, assignment, transfer, compromise, release or
other action with respect to any claim of the Company or any legal, judicial,
arbitral or administrative proceedings, so long as the amount involved in
connection therewith is not less than $50,000;
(k) any other action which under the terms of this Agreement requires the
consent or approval of the Members, not including, for the avoidance of doubt,
actions requiring the consent or approval of a Majority Interest;
(l) making a general assignment for the benefit of creditors, filing a
voluntary petition under the federal bankruptcy law, filing a petition or answer
seeking for the Company a reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any statute, law
or regulation, or seeking, consenting to or acquiescing in the appointment of a
trustee or liquidator of the Company;
(m) any decision the result of which would constitute a default under the
terms of any agreement or instrument evidencing any of the debts of the Company;
(n) engaging in any business other than the primary business specified in
Section 2.06 hereof or any business incidental thereto; or
(o) making any Capital Contribution to the Company, other than the initial
Capital Contributions specified on Schedule 3.01.
4.07 Approval by the Majority Interest. Unless otherwise set forth in this
Agreement, in all other matters in which a vote, approval or consent of the
Members is required, a vote, consent, or approval of the Majority Interest (or,
in instances in which there are defaulting or remaining Members, non-defaulting
or remaining Members who hold a majority of Percentage Interests held by all
non-defaulting or remaining Members) shall be sufficient to authorize or approve
such acts.
4.08 Meetings of the Members.
(a) Date, Time and Place of Meetings of Members; Secretary. Meetings of
Members may be held at such date, time and place within or without the State of
California as the Majority Interest may fix from time to time. No annual or
regular meetings of Members are required. However, if such meetings are held,
such meetings shall be noticed, held and conducted pursuant to the Act, except
as otherwise provided in this Section 4.08. At any Members' meeting, the
Majority Interest shall appoint a person to preside at the meeting and a person
to act as secretary of the meeting. The secretary of the meeting shall prepare
minutes of the meeting which shall be placed in the minute books of the Company.
(b) Quorum. The presence in person or by proxy of the Majority Interest
shall constitute a quorum at a meeting of Members. If there is no such quorum,
the Majority Interest present in person or by proxy may adjourn the meeting from
time to time until a quorum shall have been obtained.
(c) Action by Written Consent without a Meeting. Any action that may be
taken at a meeting of Members may be taken without a meeting, if a consent in
writing setting forth the action so taken, is signed and delivered to the
Company within sixty (60) days of the record date for that action by Members
having not less than the minimum number of votes that would be necessary to
authorize or take that action at a meeting at which all Members entitled to vote
on that action at a meeting were present and voted. All such consents shall be
filed with the secretary of the Company, and shall be maintained in the Company
records. Any Member giving a written consent, or the Member's proxy holders, may
revoke the consent by a writing received by the secretary of the Company before
written consents of the number of votes required to authorize the proposed
action have been filed.
(d) Telephonic Participation by Member at Meetings. Members may participate
in any Members' meeting through the use of any means of conference telephones or
similar communications equipment as long as all Members participating can hear
one another. A Member so participating is deemed to be present in person at the
meeting.
(e) Proxies. Every Member entitled to vote shall have the right to do so
either in person or by one or more agents authorized by a written proxy signed
by the person and filed with the secretary of the Company. A proxy shall be
deemed signed if the Member's name is placed on the proxy (whether by manual
signature, typewriting, telegraphic transmission, electronic transmission or
otherwise) by the Member or the Member's attorney in fact. A proxy may be
transmitted by an oral telephonic transmission if it is submitted with
information from which it may be determined that the proxy was authorized by the
Member or the Member's attorney-in-fact. A validly executed proxy which does not
state that it is irrevocable shall continue in full force and effect unless (i)
revoked by the person executing it, before the vote pursuant to that proxy, by a
writing delivered to the Company stating that the proxy is revoked, or by a
subsequent proxy executed by, or attendance at the meeting and voting in person
by, the person executing the proxy or (ii) written notice of the death or
incapacity of the maker of that proxy is received by the Company before the vote
pursuant to that proxy is counted; provided, however, that no proxy shall be
valid after the expiration of eleven (11) months from the date of the proxy,
unless otherwise provided in the proxy. The revocability of a proxy that states
on its face that it is irrevocable shall be governed by the provisions of
Corporations Code Sections 705(e) and 705(f).
SECTION 5.
MANAGEMENT AND CONTROL OF THE COMPANY
5.01 Management and Powers. In entering into this Agreement, the intent of
each Member is to actively engage in the management of the Company; except as
provided in Section 4.06, the Majority Interest shall have full, complete and
exclusive authority, power and discretion to manage and control the business,
property and affairs of the Company, to make all decisions regarding those
matters and to perform any and all other acts or activities customary or
incident to the management of the Company's business, property and affairs,
except, to the extent desired by the Majority Interest, insomuch as the Majority
Interest delegates to the officers described in Section 5.02 such authority,
power and discretion, which delegation may at any time be revoked or limited by
the Majority Interest.
5.02 Officers.
(a) Appointment of Officers. The Majority Interest may appoint officers at
any time. The officers of the Company, if deemed necessary by the Majority
Interest, may include a chairperson, president, vice-president, secretary and
chief financial officer. The officers shall serve at the pleasure of the
Majority Interest, subject to all rights, if any, of an officer under any
contract of employment. Any individual may hold any number of offices. No
officer need be a resident of the State of California or citizen of the United
States. The officers shall exercise such powers and perform such duties as
specified in this Agreement and as shall be determined from time to time by the
Majority Interest.
(b) Removal, Resignation and Filling of Vacancy of Officers. Subject to the
rights, if any, of an officer under a contract of employment, any officer may be
removed, either with or without cause, by the Majority Interest at any time.
Any officer may resign at any time by giving written notice to the Company.
Any resignation shall take effect at the date of the receipt of that notice or
at any later time specified in that notice; and, unless otherwise specified in
that notice, the acceptance of the resignation shall not be necessary to make it
effective. Any resignation is without prejudice to the rights, if any, of the
Company under any contract to which the officer is a party.
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
this Agreement for regular appointments to that office.
(c) Salaries of Officers. The salaries of all officers and agents of the
Company shall be fixed by the Majority Interest.
(d) Duties and Powers of the Chairperson. The chairperson shall, if
present, preside at meetings of the Members and exercise and perform such other
powers and duties as may be from time to time assigned to him or her by the
Majority Interest or prescribed by this Agreement. If there is no president, the
chairperson shall in addition be the chief executive officer of the Company and
shall have the powers and duties prescribed in Section 5.09(e). The initial
chairperson shall be Dennis Gilmore.
(e) Duties and Powers of the President. Subject to Sections 5.01 and
5.02(i) and to such supervisory powers as may be given by the Majority Interest
to the chairperson, if there be such an officer, the president shall be the
chief executive officer of the Company, and shall, subject to the control of the
Majority Interest, have general and active management of the business of the
Company and shall see that all orders of the Majority Interest are carried into
effect. He or she shall have the general powers and duties of management usually
vested in the office of president or chief executive officer of a corporation,
and shall have such other powers and duties as may be prescribed by the Majority
Interest or this Agreement. He or she alone shall submit all operating budgets
relating to the Company to the Members for their approval. The initial president
shall be Harish Chopra.
Subject to Sections 5.01 and 5.02(i) and to such supervisory power as may
be given by the Majority Interest to the chairperson, if there shall be such
officer, the president shall execute bonds, mortgages and other contracts,
except where required or permitted by law to be otherwise signed and executed,
and except where the signing and execution thereof shall be expressly delegated
by the Majority Interest or this Agreement to some other officer or agent of the
Company.
(f) Duties and Powers of Vice-President. The vice-president, or if there
shall be more than one, the vice-presidents in the order determined by the
Majority Interest, shall, in the absence or disability of the president, perform
the duties and exercise the powers of the president and shall perform such other
duties and have such other powers as the President and/or the Majority Interest
may from time to time prescribe.
(g) Duties and Powers of Secretary. The secretary shall attend all meetings
of the Members and shall record all the proceedings of the meetings in a book to
be kept for that purpose, and shall perform like duties for the standing
committees when required. The secretary shall give, or cause to be given, notice
of all meetings of the Members and shall perform such other duties as may be
prescribed by the President and/or the Majority Interest. The secretary shall
have custody of the seal, if any, and the secretary shall have authority to
affix the same to any instrument requiring it, and when so affixed, it may be
attested by his or her signature. The Majority Interest may give general
authority to any other officer to affix the seal of the Company, if any, and to
attest the affixing by his or her signature.
The secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the Company's transfer agent or registrar, as
determined by the Majority Interest, a register, or a duplicate register,
showing the names of all Members, their addresses and a record of their
Percentage Interests. The secretary shall also keep all documents described in
Section 9 of this Agreement and such other documents as may be required under
the Act. The secretary shall perform such other duties and have such other
authority as may be prescribed elsewhere in this Agreement, or, from time to
time, by the Majority Interest. The secretary shall have the general duties,
powers and responsibilities of a secretary of a corporation.
If the Majority Interest chooses to appoint an assistant secretary or
assistant secretaries, the assistant secretaries, in the order of their
seniority, in the absence, disability or inability to act of the secretary,
shall perform the duties and exercise the powers of the secretary, and shall
perform such other duties as the Majority Interest may from time to time
prescribe.
(h) Duties and Powers of Chief Financial Officer. The chief financial
officer shall keep and maintain, or cause to be kept and maintained, adequate
and correct books and records of accounts of the properties and business
transactions of the Company, including accounts of its assets, liabilities,
receipts, disbursements, gains, losses, capital and Membership Interests. The
books of account shall at all reasonable times be open to inspection by any
Member.
The chief financial officer shall have the custody of the funds and
securities of the Company, and shall keep full and accurate accounts of receipts
and disbursements in books belonging to the Company, and shall deposit all
moneys and other valuable effects in the name and to the credit of the Company
in such depositories as may be designated by the Majority Interest.
The chief financial officer shall disburse the funds of the Company as may
be ordered by the Majority Interest, taking proper vouchers for such
disbursements, and shall, if so requested, render to the president and the
Majority Interest an account of all his or her transactions as chief financial
officer and of the financial condition of the Company.
The chief financial officer shall perform such other duties and shall have
such other responsibility and authority as may be prescribed elsewhere in this
Agreement or from time to time by the President and/or the Majority Interest.
The chief financial officer shall have the general duties, powers and
responsibility of a chief financial officer of a corporation, and shall be the
chief financial and accounting officer of the Company.
If the Majority Interest chooses to elect an assistant financial officer or
assistant financial officers, the assistant financial officers in the order of
their seniority shall, in the absence, disability or inability to act of the
chief financial officer, perform the duties and exercise the powers of the chief
financial officer, and shall perform such other duties as the President and/or
the Majority Interest shall from time to time prescribe.
(i) Signing Authority of Officers. Subject to restrictions in this
Agreement, including, for the avoidance of doubt, the restrictions in this
Section 5.02(i), and any restrictions imposed by the Majority Interest, any
officer, acting alone is authorized (i) to endorse checks, drafts, and other
evidences of indebtedness made payable to the order of the Company, but only for
the purpose of deposit into the Company's accounts, and (ii), except as set
forth below, to sign contracts and obligations on behalf of the Company and to
sign all checks, drafts and other evidences of indebtedness. All checks, drafts
and other instruments obligating the Company to pay money in an amount of
$50,000 or more must be signed on behalf of the Company by any one officer and
the chairperson (or any other individual designated by the Majority Interest),
acting together or the chairperson acting alone.
SECTION 6.
ALLOCATIONS OF NET PROFITS AND NET LOSSES; DISTRIBUTIONS
6.01 Allocations of Net Profit and Net Loss. Subject to the prior special
allocations set forth in Section 6.02 hereof, Net Losses and Net Profits shall
be allocated as follows:
(a) Net Loss. Net Loss shall be allocated to the Members in proportion to
their Percentage Interests. Notwithstanding the previous sentence, losses
allocated to a Member shall not exceed the maximum amount of losses that can be
allocated without causing a Member to have an Adjusted Capital Account Deficit
at the end of any Fiscal Year. In the event that any Member would have an
Adjusted Capital Account Deficit as a consequence of an allocation of losses in
proportion to Percentage Interests, the amount of losses that would be allocated
to such Member but for such allocation shall be allocated to the other Members
to the extent that such allocations would not cause such other Members to have
an Adjusted Capital Account Deficit and allocated among such other Members in
proportion to their Percentage Interests. Any allocation of items of loss
pursuant to this Section 6.01(a) shall be taken into account in computing
subsequent allocations pursuant to this Section 6, and prior to any allocation
of items in such Section so that the net amount of any items allocated to each
Member pursuant to this Section 6 shall, to the maximum extent practicable, be
equal to the net amount that would have been allocated to each Member pursuant
to this Section 6 if no reallocation of losses had occurred under this Section
6.01(a).
(b) Net Profit. Net Profit shall be allocated to the Members in proportion
to their Percentage Interests.
6.02 Special Allocations. Notwithstanding Section 6.01, the following
special allocations shall be made in the following order:
(a) Minimum Gain Chargeback. If there is a net decrease in Company Minimum
Gain during any Fiscal Year, each Member shall be specially allocated items of
Company income and gain for such Fiscal Year (and, if necessary, in subsequent
Fiscal Years) in an amount equal to the portion of such Member's share of the
net decrease in Company Minimum Gain that is allocable to the disposition of
Company property subject to a Nonrecourse Liability, which share of such net
decrease shall be determined in accordance with Regulations Section
1.704-2(g)(2). Allocations pursuant to the previous sentence shall be made in
proportion to the respective amounts required to be allocated to each Member
pursuant thereto. The items to be so allocated shall be determined in accordance
with Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This Section 6.02(a)
is intended to comply with the minimum gain chargeback requirement contained in
Regulations Section 1.704-2(f) and shall be interpreted consistently therewith.
To the extent permitted by such Regulations and for purposes of this Section
6.02(a) only, each Member's net decrease in Company Minimum Gain shall be
determined prior to any other allocations pursuant to this Section 6 with
respect to such Fiscal Year and without regard to any net decrease in Company
Minimum Gain during such Fiscal Year.
(b) Chargeback of Minimum Gain Attributable to Member Nonrecourse Debt. If
there is a net decrease in Member Minimum Gain attributable to Member
Nonrecourse Debt, during any Fiscal Year, each member who has a share of the
Member Minimum Gain attributable to such Member Nonrecourse Debt (which share
shall be determined in accordance with Regulations Section 1.704-2(i)(5)) shall
be specially allocated items of Company income and gain for such Fiscal Year
(and, if necessary, in subsequent Fiscal Years) in an amount equal to that
portion of such Member's share of the net decrease in Member Minimum Gain
attributable to such Member Nonrecourse Debt that is allocable to the
disposition of Company property subject to such Member Nonrecourse Debt (which
share of such net decrease shall be determined in accordance with Regulations
Section 1.704- 2(i)(5)). Allocations pursuant to the previous sentence shall be
made in proportion to the respective amounts required to be allocated to each
Member pursuant thereto. The items to be so allocated shall be determined in
accordance with Regulations Sections 1.704-2(i)(4) and 1.704-2(j)(2)(ii). This
Section 6.02(b) is intended to comply with the minimum gain chargeback
requirement contained in Regulations Section 1.704-2(i)(4) and shall be
interpreted consistently therewith. Solely for purposes of this Section 6.02(b)
each Member's net decrease in Member Minimum Gain shall be determined prior to
any other allocations pursuant to this Section 6 with respect to such Fiscal
Year, other than allocations pursuant to Section 6.02(a).
(c) Qualified Income Offset. If a Member unexpectedly receives any
adjustments, allocations, or distributions described in Regulations Section
1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Company income and gain shall be
specifically allocated to such Member in an amount and manner sufficient to
eliminate such excess deficit balance as quickly as possible, provided that an
allocation pursuant to this Section 6.02(c) shall be made if and only to the
extent that such Member would have an Adjusted Capital Account Deficit after all
other allocations provided for in this Section 6 have been tentatively made as
if this Section 6.02(c) were not in this Agreement. The foregoing provision is
intended to comply with Regulations Section 1.704-1(b)(2)(ii)(d) and shall be
interpreted and applied in a manner consistent with such Regulations.
(d) Gross Income Allocation. In the event that any Member has an Adjusted
Capital Account Deficit at the end of any Fiscal Year, then each such Member
shall be specially allocated items of income in the amount of such excess as
quickly as possible, provided that an allocation pursuant to this Section
6.02(d) shall be made if and only to the extent that such Member would have an
Adjusted Capital Account Deficit in excess of such sum after all other
allocations provided for in this Section 6 have been tentatively made as if this
Section 6.02(d) were not in this Agreement.
(e) Nonrecourse Deductions. Any nonrecourse deductions (as defined in
Regulations Section 1.704-2(b)(1)) for any Fiscal Year or other period shall be
specially allocated to the Members in proportion to their then respective
Percentage Interests.
(f) Member Nonrecourse Deductions. Those items of Company loss, deduction,
or Code Section 705(a)(2)(B) expenditures which are attributable to Member
Nonrecourse Debt for any Fiscal Year or other period shall be specially
allocated to the Member who bears the economic risk of loss with respect to the
Member Nonrecourse Debt to which such items are attributable in accordance with
Regulations Section 1.704-2(i).
(g) Section 754 Adjustments. To the extent an adjustment to the adjusted
tax basis of any Company asset is required to be taken into account in
determining Capital Accounts pursuant to Regulations Section
1.704-1(b)(2)(iv)(m), the amount of such adjustment to the Capital Account shall
be treated as an item of gain (if the adjustment increases the basis of the
asset) or loss (if the adjustment decreases such basis), and such gain or loss
shall be specially allocated to the Members in a manner consistent with the
manner in which their Capital Accounts are required to be adjusted pursuant to
such Regulations Section.
(h) Subsequent Allocations. Any special allocation of items of income or
gain pursuant to Section 6.02(a), 6.02(b), 6.02(c) or 6.02(d) shall be taken
into account in computing subsequent allocations pursuant to this Section 6, so
that the net amount of any items allocated to each Member shall, to the extent
practicable, be equal to the net amount that would have been allocated to each
such Member pursuant to the provisions of this Section 6 if such special
allocations under this Section 6.02 had not occurred.
6.03 Code Section 704(c) Allocations. Notwithstanding any other provision
in this Section 6, in accordance with Code Section 704(c) and the Regulations
promulgated thereunder, income, gain, loss, and deduction with respect to any
property contributed to the capital of the Company shall, solely for tax
purposes, be allocated among the Members so as to take account of any variation
between the adjusted basis of such property to the Company for federal income
tax purposes and its fair market value on the date of contribution. Allocations
pursuant to this Section 6.03 are solely for purposes of federal, state and
local taxes. As such, they shall not affect or in any way be taken into account
in computing a Member's Capital Account or share of profits, losses, or other
items of distributions pursuant to any provision of this Agreement.
6.04 Allocations of Net Profits and Losses and Distributions in Respect of
a Transferred Interest. If any Membership Interest is increased or decreased
during any Fiscal Year of the Company, Net Profit or Net Loss for such Fiscal
Year shall be assigned pro rata to each day in the particular period of such
Fiscal Year to which such item is attributable (i.e., the day on or during which
it is accrued or otherwise incurred) and the amount of each such item so
assigned to any such day shall be allocated to the Member based upon its
respective Membership Interest at the close of such day.
6.05 Distributions of Distributable Cash by the Company.
(a) Ordinary Distributions. Subject to the provisions of Sections 6.05(b)
and (c), upon the approval of the Majority Interest, the Company may make
ordinary distributions (in amounts to be determined by the Majority Interest) to
the Members pro rata in accordance with their respective Percentage Interests.
(b) Distribution of Tax Allowance Amounts. Notwithstanding Section 6.05(a)
above, as soon as reasonably practicable after the end of each calendar quarter,
the Tax Matters Member shall determine the Tax Allowance Amount for every Member
in respect of such quarter. Upon such determination, the Company shall
distribute each Member's Tax Allowance Amount to such Member provided that such
distribution is not prohibited by any agreement to which the Company is then a
party or is otherwise bound. All such distributions shall have priority over any
distributions pursuant to Section 6.05(a) above. To the extent that the
cumulative distributions of Tax Allowance Amounts to a Member pursuant to this
Section 6.05(b) for a Fiscal Year exceed an amount equal to the cumulative Tax
Allowance Amount calculated with respect to such Member at the end of such
Fiscal Year as if no prior distributions of Tax Allowance Amounts had been made,
the excess shall not be treated as a Tax Allowance Amount and shall reduce the
amount otherwise distributable to such Member under Section 6.05(a).
(c) Withholding. The Company is authorized to withhold from distributions
to a Member, or with respect to allocations to a Member, and to pay over to a
Federal, foreign, state or local government, any amounts required to be withheld
pursuant to the Code, or any provisions of any other Federal, foreign, state or
local law. Any amounts withheld in accordance with the foregoing shall be
treated as having been distributed pursuant to this Section 6 to such Member for
all purposes of this Agreement, and shall be offset against the current or next
amounts otherwise distributable to such Member.
6.06 Form of Distribution. A Member, regardless of the nature of the
Member's Capital Contribution, has no right to demand and receive any
distribution from the Company in any form other than money. No Member may be
compelled to accept from the Company a distribution of any asset in kind in lieu
of a proportionate distribution of money being made to other Members.
6.07 Restriction on Distributions. (a) No distribution shall be made if,
after giving effect to the distribution:
(i) The Company would not be able to pay its debts as they become due
in the usual course of business; or
(ii) The Company's total assets would be less than the sum of its
total liabilities plus, unless this Agreement provides otherwise, the
amount that would be needed, if the Company were to be dissolved at the
time of the distribution, to satisfy the preferential rights of other
Members, if any, upon dissolution that are superior to the rights of the
Member receiving the distribution.
(b) The Company may base a determination that a distribution is not
prohibited on any of the following:
(i) financial statements prepared in accordance with GAAP;
(ii) a fair valuation; or
(iii) any other method that is reasonable in the circumstances.
6.08 Return of Distributions. Members who receive distributions made in
violation of the Act or this Agreement shall return such distributions to the
Company. Except for those distributions made in violation of the Act or this
Agreement, no Member shall be obligated to return any distribution to the
Company or pay the amount of any distribution for the account of the Company or
to any creditor of the Company. The amount of any distribution returned to the
Company by a Member or paid by a Member for the account of the Company or to a
creditor of the Company shall be added to the account or accounts from which it
was subtracted when it was distributed to the Member.
SECTION 7.
MEMBERSHIP INTEREST TRANSFER RESTRICTIONS; NEW MEMBERS
7.01 Transfer Restrictions. A Transfer of a Membership Interest or any
portion thereof shall require the vote or consent of the Majority Interest in
favor of such Transfer.
7.02 Void Transfer. Any purported Transfer of any Member's Membership
Interest in violation of Section 7.01 shall be void and the Company shall not
give effect to any such purported Transfer or recognize any such purported
transferee. In the event of any such purported Transfer, the Company shall
continue to recognize as a Member only those persons whose names appear in the
records of the Company.
7.03 New Members. Additional Persons may be admitted as Members upon the
approval of the Members.
SECTION 8.
CONSEQUENCES OF DISSOLUTION EVENTS;
TERMINATION OF MEMBERSHIP INTEREST
8.01 Dissolution Event. Upon the occurrence of a Dissolution Event, the
Company shall dissolve unless the remaining Members ("Remaining Members")
holding a majority of the Percentage Interests which all Remaining Members hold,
consent within ninety (90) days of the Dissolution Event to the continuation of
the business of the Company. If the Remaining Members consent to the
continuation of the business of the Company, the Membership Interest of the
Member or Members whose actions or conduct resulted in the Dissolution Event
("Former Member") shall terminate and thereafter such Members or Members shall
be entitled only to an economic interest with respect to such Member's or
Members' terminated Membership Interest and not a return of such Member's
Capital Account.
8.02 Winding Up the Company. If, upon the occurrence of a Dissolution
Event, the Remaining Members fail to consent to the continuation of the business
of the Company, the Company shall promptly notify the Members of such
dissolution and shall wind up the affairs of the Company and liquidate the
Company assets. Such winding up and liquidation shall be accomplished as soon as
practicable giving due regard to the prudent liquidation of the Company's assets
in such a manner as to preserve the value of the Company's assets to the extent
that the Majority Interest deems practicable. Distributions made with respect to
the liquidation of the Company shall be made to the Members no later than ninety
days following completion of the liquidation. The proceeds of such liquidation
shall be paid in the following order:
(a) first, in payment of the debts and liabilities of the Company and the
expenses of liquidation or distribution;
(b) then, to the establishment of such reserves as may be deemed reasonably
necessary by the Majority Interest for any contingent, unliquidated or
unforeseen liabilities or obligations of the Company or the Members arising out
of or in connection with the Company; and
(c) then, after making all allocations required by Section 6.01, to
Members, in proportion to the positive balance in the Members' respective
Capital Accounts after satisfaction of each Member's obligation to the Company.
8.03 Final Statement. Each of the Members shall be furnished with a
statement which shall set forth the assets and liabilities of the Company (as of
the date of complete liquidation) and an accounting of the manner in which the
assets of the Company were distributed.
SECTION 9.
BOOKS AND RECORDS; TAX RETURNS; ACCESS BY MEMBERS
9.01 Company Books and Records. Proper and complete records and books of
account of the Company business shall be kept by the Company under the
supervision of the Majority Interest and shall, if the Majority Interest so
determines, be audited by certified public accountants selected by the Majority
Interest. The financial books of the Company shall be maintained in accordance
with GAAP. The allocation of the income of the Company for financial reporting
purposes shall be in accordance with each respective Membership Interest and
shall be calculated in accordance with GAAP.
The Company shall maintain at its principal office all of the following:
(a) A current list of the full name and last known business or residence
address of each Member, together with the Capital Contributions, Capital Account
and Percentage Interest of each Member;
(b) A copy of the Articles and any and all amendments thereto together with
executed copies of any powers of attorney pursuant to which the Articles or any
amendments thereto have been executed;
(c) Copies of the Company's federal, state, and local income tax or
information returns and reports, if any, for the six (6) most recent taxable
years;
(d) A copy of this Agreement and any and all amendments thereto together
with executed copies of any powers of attorney pursuant to which this Agreement
or any amendments thereto have been executed;
(e) Copies of the financial statements of the Company, if any, for the six
(6) most recent Fiscal Years; and
(f) The Company's books and records as they relate to the internal affairs
of the Company for at least the current and past four (4) Fiscal Years.
9.02 Tax Returns.
(a) Preparation; Filing. At the expense of the Company, federal and state
Company tax returns shall be prepared. Except as otherwise expressly provided in
this Agreement, all positions and elections reflected on all Company tax returns
shall be taken, and all Company tax returns shall be filed, only after
consultation with all the Members. For federal income tax purposes only, the
Members agree that their relationship under this Agreement shall constitute a
partnership within the meaning of Section 761(a) of the Code. Tax allocations
shall be made in accordance with Section 6 hereof. The Members agree to take all
action, including the amendment of this Agreement and the execution of other
documents as may be required to qualify for such tax treatment. Each Member
shall bear the sole expense and cost of preparing its separate tax return. Each
Member shall agree to file its separate federal income tax returns in a manner
consistent with the provisions of this Agreement and in accordance with
applicable federal income tax law. The Members shall provide each other with
copies of all correspondence or summaries of other communications with the
Internal Revenue Service or U.S. Treasury regarding any aspect of items of
Company income, gain, loss or deduction and no Member shall enter into
settlement negotiations with the Internal Revenue Service or U.S. Treasury with
respect to the federal income tax treatment of any Company item of income, gain,
loss or deduction without first giving reasonable written advance notice of such
intended action to the other Member(s).
(b) Tax Matters Member. FARES is hereby designated as the "tax matters
partner", as that term is defined in Section 6231(a)(7) of the Code (the "Tax
Matters Member"). The Tax Matters Member shall furnish promptly to the Internal
Revenue Service a written statement, in accordance with Temporary Treasury
Regulations ss. 301.6223(c)-IT (or any successor thereto) in order to cause the
Internal Revenue Service to mail to each Member all notices described in Section
6223(a) of the Code or any corresponding provision of any successor federal
internal revenue law (and comparable provisions of state and local income tax
laws).
(c) Duties of the Tax Matters Member. The Tax Matters Member shall
cooperate with the other Members and shall promptly provide the other Members
with copies of notices or other materials from, and inform the other Member of
discussions engaged in with, the Internal Revenue Service and shall provide the
other Members with notice of all scheduled administrative proceedings, including
meetings with Internal Revenue Service agents, technical advice conferences and
appellate hearings, as soon as possible after receiving notice of the scheduling
of such proceedings. The Tax Matters Member will schedule such proceedings only
after consulting all the other Members with a view to accommodating the
reasonable convenience of both the Tax Matters Member and all the other Members.
The Tax Matters Member shall not take any action of any nature whatsoever
including, without limitation, agreeing to extend the period of limitations for
assessments, filing a petition or complaint in any court, filing a request for
an administrative adjustment of Company items after any return has been filed,
or entering into any settlement agreement with the Internal Revenue Service or
U.S. Treasury with respect to Company items of income, gain, loss or deduction,
in any such case without first consulting each other Member. The Tax Matters
Member may request extensions to file any tax return or statement without
consulting with, but shall so inform, the other Members. The provisions of this
Agreement regarding the Company's tax returns shall survive the termination of
the Company and the transfer of any Member's Membership Interest and shall
remain in effect for the period of time necessary to resolve any and all matters
regarding the federal income taxation of the Company and items of Company
income, gain, loss and deduction.
9.03 Inspection, Audit and Copies of Records. Each Member shall have the
right to inspect, make a separate audit and make copies of the books and records
of the Company. The Member exercising such right shall bear all expenses
incurred in the exercise of these rights.
9.04 Access. Each Member shall have access at reasonable times and upon
reasonable notice, without undue disruption of the business and operations of
the Company, to such properties, employees, agents, representatives and
information of the Company as it deems reasonably necessary in connection with
the ownership of its Membership Interest.
SECTION 10.
INDEMNIFICATION AND INSURANCE
10.01 Indemnification of Agents. The Company shall defend and indemnify any
Member, and Harish K. Chopra in his capacity as an officer, and may indemnify
any other Person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit or proceeding by reason of the
fact that he or she or it is or was a Member, officer, employee or other agent
of the Company or that, being or having been such a Member, officer, employee or
agent, he or she or it is or was serving at the request of the Company as a
manager, director, officer, employee or other agent of another limited liability
company, corporation, partnership, joint venture, trust or other enterprise (all
such persons being referred to hereinafter as an "agent"), to the fullest extent
permitted by applicable law in effect on the date hereof and to such greater
extent as applicable law may hereafter from time to time permit.
10.02 Insurance. The Company shall have the power to purchase and maintain
insurance on behalf of any Person who is or was an agent of the Company against
any liability asserted against such Person and incurred by such Person in any
such capacity, or arising out of such Person's status as an agent, whether or
not the Company would have the power to indemnify such Person against such
liability under the provisions of Section 10.01 or under applicable law.
SECTION 11.
MISCELLANEOUS
11.01 FAFCO Overhead Fee. The Company shall pay to FAFCO one percent (1.0%)
of each month's (or portion thereof) operating revenues of the Company (the
"FAFCO Overhead Fee") as compensation for overhead expenses incurred by FAFCO on
behalf of the Company. The FAFCO Overhead Fee due in respect of each month shall
be paid within 30 days following the end of the month in respect of which such
fee is due.
11.02 Specific Performance. Due to the fact that the parties hereto will be
irreparably damaged in the event that this Agreement is not specifically
enforced, in the event of a breach or threatened breach of the terms, covenants
and/or conditions of this Agreement by any of the parties hereto, the other
parties shall, in addition to all other remedies, be entitled to a temporary or
permanent injunction, without showing any actual damage, and/or a decree for
specific performance, in accordance with the provisions hereof.
11.03 Amendments and Modifications. The provisions of this Agreement may be
waived, altered, amended, modified, or repealed, in whole or in part, only on
the written consent of all parties to this Agreement. Any oral representations
or modifications concerning this instrument shall be of no force or effect
unless contained in a subsequent written modification signed by all parties to
this Agreement.
11.04 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 addressed as follows:
If to the Company:
Data Tree LLC
550 W. C Street, Suite 2040
San Diego, California 92101
Attn: President
Telephone: 619-231-3300
Facsimile: 619-231-3301
If to FARES:
First American Real Estate Solutions LLC
150 Second Avenue, Suite 1600
St. Petersburg, Florida 33701
Attn: John Long
Telephone: 800-449-8732
Facsimile: 813-895-3619
If to R2:
R. Squared Limited
c/o Royal Bank of Canada Trust Co. (Cayman) Limited
P.O. Box 1586, George Town, Grand Cayman
Cayman Islands, British West Indies
Attention: Piers Strandling
Telephone: 345-949-0253
Telecopier: 345-949-5777
or to such other Person or address as any party shall specify by notice in
writing to each of the other parties hereto. 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 Business Days after deposit in the
U.S. mail, postage prepaid; (ii) if sent by FedEx or other overnight delivery
service, two Business Days after delivery to such service; (iii) if sent by
personal courier, upon receipt; and (iv) if sent by facsimile, upon receipt.
11.05 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original, and all of which together shall
be deemed to be one and the same instrument.
11.06 Governing Law. This Agreement, including its existence, validity,
construction and operating effect, and the rights of each of the parties hereto,
shall be governed by and construed in accordance with the internal laws of the
State of California.
11.07 Successors. Subject to the restrictions against Transfer as herein
contained, the provisions of this Agreement shall inure to the benefit of and
shall be binding upon the respective successors and permitted assigns of each of
the parties hereto. Nothing in this Agreement, expressed or implied, is intended
to confer on any Person other than the parties hereto or their respective
successors and permitted assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
11.08 Severability. If any term, provision, covenant, or condition of this
Agreement is held by a court of competent jurisdiction to be invalid, void, or
unenforceable, the rest of this Agreement shall remain in full force and effect
and shall in no way be affected, impaired, or invalidated.
11.09 Entire Agreement. This Agreement, including all Schedules attached
hereto, constitutes the entire agreement of the parties pertaining to the
subject matter hereof, and fully supersedes any and all prior agreements or
understandings between the parties pertaining to the subject matter hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first written above.
FIRST AMERICAN REAL ESTATE SOLUTIONS LLC
By_________________________
Name:
Title:
R. SQUARED LIMITED
By_________________________
Name:
Title:
<PAGE>
SCHEDULE 3.01
INITIAL CAPITAL CONTRIBUTIONS
R. SQUARED LIMITED:
R. Squared Limited shall contribute:
1. a Noncompetition Agreement valued at $1,150,000; and
2. a Promissory Note, bearing interest at 8.0% and in the principal
amount of $11,000,000, valued at $11,000,000.
FIRST AMERICAN REAL ESTATE SOLUTIONS LLC
First American Real Estate Solutions LLC shall contribute:
1. the assets and liabilities of those business operations commonly
known as the "Data Tree" business and the "Digistar" business.
These businesses are valued at $48,600,000.
<PAGE>
EXHIBIT E
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT ("this Agreement"), dated as of _____ __, 1998,
between DATA TREE LLC a California limited liability company (the "Company") and
HARISH K. CHOPRA, an individual residing in Rancho Santa Fe, California (the
"Executive").
W I T N E S S E T H:
WHEREAS, the Executive is willing to serve as President of the Company
and the Company desires to retain the Executive in such capacity on the terms
and conditions herein set forth;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the Company and the Executive hereby agree as follows:
1. EMPLOYMENT
The Company agrees to employ the Executive, and the Executive agrees to
be employed by and serve the Company, upon the terms and conditions hereinafter
provided for a period of five years commencing as of the date first above
referenced (the "Start Date") and continuing until the fifth anniversary of the
Start Date (such period, the "Term"), unless earlier terminated pursuant to
Section 5. The Executive hereby represents and warrants that he has the legal
capacity to execute and perform this Agreement, that it is a valid and binding
agreement against him according to its terms, and that its execution and
performance by him does not violate the terms of any existing agreement or
understanding to which the Executive is a party or any judgment or decree to
which the Executive is subject. In addition, the Executive represents and
warrants that he knows of no reason why he is not physically or legally capable
of performing his obligations under this Agreement in accordance with its terms.
2. POSITION AND DUTIES
During the Term, the Executive agrees to serve as President of the
Company and will have such powers and duties as are commensurate with such
position and as reasonably may be conferred upon or delegated to him by the
Majority Interest (as that term is defined in that certain Operating Agreement
dated as of even date herewith among First American Real Estate Solutions LLC
("FARES") and R. Squared Limited, the "Operating Agreement") of the Company,
including without limitation, day-to-day responsibility for the management of
the Company. The Executive shall at all times be subject to the policies
established by the Majority Interest. In addition, the Executive agrees to serve
from time to time in such other positions with the Company as reasonably may be
requested by the Majority Interest, and thereafter approved by the governing
body of the applicable entity. During the Term, the Executive shall devote
substantially all of his business time, effort and skill as is reasonably
necessary to accomplish the duties for which the Executive is responsible in
accordance with the terms hereof and shall not take part in activities
detrimental to the best interests of the Company. The Executive will be based in
San Diego, California.
3. COMPENSATION
For all services rendered by the Executive in any capacity required
hereunder during the Term, including, without limitation, services as an
executive, officer, director or member of any committee of the Company or
division thereof, the Executive shall be compensated as follows:
(a) Base Salary. The Company shall pay the Executive a salary of two
hundred-fifty thousand U.S. dollars ($250,000) per annum (the "Base Salary").
The Base Salary shall be payable in accordance with the customary payroll
practices of the Company, but in no event less frequently than monthly.
(b) Bonus. The Executive shall be entitled to receive an annual formula
bonus during the Term (the "Bonus") equal to two percent (2.0%) of the Company's
pre-tax earnings for each fiscal year, or portion thereof, which are or shall be
described in that line item entitled "Income before provision for income taxes"
on the Company's Statements of Income for each fiscal year (the "Earnings").
The annual Bonus shall be paid in quarterly installments, based on two
percent (2.0%) of Earnings for each quarter during the fiscal year, or a portion
thereof. Each quarterly installment of the Bonus shall be paid within 45 days
following the end of each quarter. The annual Bonus shall be determined within
60 days after the end of each fiscal year during the Term. If the annual Bonus
for a fiscal year determined in accordance with the preceding paragraph (as
prorated for the number of quarters for which quarterly Bonus payments were made
to the Executive in respect of such fiscal year) is greater than the sum of the
quarterly-paid Bonuses paid to the Executive in respect of such fiscal year, the
excess shall be paid to the Executive at the time the annual Bonus is
determined. If the annual Bonus so determined (as prorated for the number of
quarters for which quarterly Bonus payments were made to the Executive in
respect of such fiscal year) is less than the sum of the quarterly-paid Bonuses
paid to the Executive in respect of such fiscal year, the deficiency shall be
reimbursed by the Executive within five days after the determination of the
annual Bonus.
The Company's fiscal year shall end on December 31 of each calendar
year. For purposes of this Agreement only, the Company's first fiscal year shall
commence on March 31, 1998 and shall end on December 31, 1998. Should the annual
Bonus to which the Executive is entitled at the end of the first fiscal year of
the Company during the Term based upon the above formula be less than $250,000,
the Company shall pay to the Executive a Bonus of $250,000; accordingly, for the
first fiscal year, quarterly Bonus payments shall in all events be no less than
$62,500.
The Earnings shall be calculated by the Company's accountant in
accordance with United States generally accepted accounting principles applied
on a consistent basis. For the purpose of determining the Bonus, Earnings shall
be calculated without taking into account (i) any amortization of goodwill
arising out of or in connection with the Merger (as that term is defined in that
certain Agreement and Plan of Merger, dated March 27, 1998 by and among The
First American Financial Corporation ("FAFCO"), Image Acquisition Corp., Data
Tree Corporation and the Executive (the "Merger Agreement") and (ii) the payment
or accrual of Excluded Interest (as defined below).
"Excluded Interest" means an amount equal to the product of:
(A) the total interest costs/accruals on Working Capital
Debt (for the period for which Earnings are measured)
for the Excess Working Capital Period (as defined
below) or portion thereof included in the period for
which Earnings are measured, and
(B) a fraction, the numerator of which is the Objected
Debt and the denominator of which is the Working
Capital Debt;
provided, however that (i) the numerator described in paragraph (B) above cannot
be a number less than zero and (ii) any pay-downs of Working Capital Debt shall
decrease the Objected Debt (which, for the avoidance of doubt, is the numerator
in the fraction described in paragraph (B) immediately above) (attached hereto
as Exhibit A are examples illustrating the calculation of Excluded Interest;
Exhibit A is included for purposes of illustration only and shall not affect the
construction hereof).
For the purpose of determining Excluded Interest, the following
definitions apply:
"Excess Working Capital Debt" means Working Capital Debt incurred from
time to time by the Company during the Term, to the extent the amount of such
Working Capital Debt exceeds $2,000,000.
"Excess Working Capital Period" means each period during the Term
during which there is any Excess Working Capital Debt;
"Objected Debt" means an amount equal to the Excess Working Capital
Debt to which an Objection has been made;
"Objection" means the written objection of the Executive delivered to
the Company (in accordance with Section 9 hereof) within five business days of
the Company's delivery to the Executive of notice of its intent to incur Excess
Working Capital Debt; provided, however, that (1) the Executive's failure to
deliver an objection notice shall be deemed to be the Executive's approval of
the Company's incurring of such Excess Working Capital Debt and (2) the
Executive's approval of/failure to object to or objection to, as the case may
be, the total commitment under a revolving credit facility shall constitute
approval of or objection to, as the case may be, all draw-downs under such
facility up to the maximum amount permitted by that facility, irrespective of
the repayment of any principal under such facility and irrespective of whether
or not such draw-downs exceed $2,000,000.
"Working Capital Debt" means indebtedness for borrowed money that is
incurred by the Company during the Term for working capital purposes.
For the avoidance of doubt, the Earnings shall be net of interest
expense, the FAFCO Overhead Fee (as that term is defined in the Operating
Agreement) and all other expenses used to calculate earnings in accordance with
generally accepted accounting principles.
(c) Medical and Dental Health Benefits. During the Term, the Executive
shall be entitled to medical and dental health benefits in accordance with the
practices established by FAFCO with respect to its and their key employees.
(d) Vacation; Sick Leave. During the Term, the Employee shall be
entitled to vacation and sick leave in accordance with the practices established
by FAFCO with respect to its key employees.
(e) Pension Plan. During the Term, the Executive shall participate in
FAFCO's pension plans in accordance with the practices established by FAFCO with
respect to its key employees.
(f) Deferred Compensation Plan. The Executive may participate in the
FAFCO deferred compensation plan in accordance with the practices established by
FAFCO with respect to its key employees.
(g) Supplemental Benefit Plans. The Executive shall not be entitled to
participate in any supplemental benefit plan offered to executive officers of
FAFCO and its subsidiaries. For the avoidance of doubt, supplemental benefit
plans in effect on the date hereof include the Executive Supplemental Plan and
the Management Supplemental Plan.
4. BUSINESS EXPENSES
The Company shall pay or reimburse the Executive for all reasonable
travel and out-of-pocket expenses incurred by the Executive in connection with
the performance of his duties and obligations under this Agreement, subject to
the Executive's presentation of appropriate vouchers in accordance with such
procedures as the Company may from time to time establish for senior officers
and to preserve any deductions for federal income taxation purposes to which the
Company may be entitled. During the DTI Option Period (as that term is defined
in the Contribution Agreement, which in turn is defined in the Operating
Agreement), the Company shall not reimburse the Executive for any expenses of
any nature related to Data Tree (India) Corporation; thereafter, and in the
event the DTI Purchase Option is exercised, such expenses shall be reimbursable.
5. TERMINATION OF EMPLOYMENT
(a) Termination. The Executive's employment hereunder shall terminate
prior to the last day of the Term (i) upon the death of the Executive, (ii) upon
the Permanent Disability of the Executive, (iii) at the option of the Company
for Cause (as defined below) upon written notice from the Company to the
Executive, (iv) at the option of the Company Without Cause (as defined below)
upon 30 days prior written notice from the Company to the Executive and (v) at
the option of the Executive upon 30 days prior written notice from the Executive
to the Company.
(b) Payments. In the event the Executive's employment hereunder shall
terminate prior to the last day of the Term as a result of the exercise by the
Company of its option to terminate the Executive's employment Without Cause, the
Company shall, as liquidated damages or severance, or both, continue, subject to
compliance by the Executive with the provisions of Section 6 below, to pay the
Executive's Base Salary and Bonus as in effect at the time of such termination
at the times and in the manner such Base Salary and Bonus would otherwise have
become due and payable until the earlier of (i) the expiration of the Term had
such termination not occurred, (ii) the death of the Executive or (iii) the
Disability of the Executive.
In the event the Executive's employment hereunder shall terminate prior
to the last day of the Term as a result of (i) the exercise by the Company of
its option to terminate the Executive's employment for Cause or (ii) the
exercise by the Executive of his option to terminate employment (whether by
retirement or otherwise), all earned but unpaid Base Salary as of the date of
termination of employment shall be payable in full to the Executive by the
Company. In addition, all quarterly Bonus amounts due but not yet paid as of the
date of termination shall be payable, provided that if the annual Bonus as
determined following the end of the fiscal year in which termination occurs, as
pro rated for the number of quarters for which quarterly Bonus payments were
made to the Executive in respect of such fiscal year, is less than the quarterly
Bonus payments made, the Executive shall reimburse the Company in the amount of
the difference within five days of the date of such determination; if such
amount is greater than the quarterly Bonus payments made, the Company shall pay
the difference within five days of the date of such determination. Except as
provided in the preceding two sentences, no other payments of any nature
whatsoever, including any Bonus or unearned Base Salary, shall be made, or
benefits provided, by the Company under this Agreement.
(c) Definitions. For purposes of this Agreement, the following terms
have the following meanings:
(i) "Cause" means (A) the Executive's failure to devote
substantially all of his business time, effort and skill as is reasonably
necessary to accomplish the duties for which the Executive is responsible in
accordance with the terms hereof or the taking part in activities detrimental to
the best interests of the Company, (B) a material breach by the Executive of any
material term of this Agreement, other than the provisions of Section 2 hereof,
(C) abuse of office or malfeasance by the Executive (including, without
limitation, acts or omissions by the Executive that could reasonably be expected
to have a material adverse effect on the business, operations, conditions or
prospects of the Company), (D) conviction of the Executive of a felony which the
Majority Interest reasonably deems to be an "abuse of office" or a crime, (E)
the Executive's gross negligence in performance or non-performance of any
material duty owed by the Executive in the course of his employment, or the
Executive's habitual neglect of his duty, all only after the Company has
provided the Executive written warning and 30 days opportunity to improve or (F)
any chemical dependence which materially affects the performance of the
Executive's duties and responsibilities to the Company.
(ii) "Permanent Disability" means the inability of the
Executive, as reasonably determined by the Majority Interest and confirmed by
competent medical evidence, to work for any period of 90 consecutive days or any
120 non-consecutive days during any twelve consecutive calendar month period due
to illness or injury of a physical or mental nature. In order to determine
issues of disability, the Executive agrees to submit himself for appropriate
medical examination to physicians reasonably acceptable to the Company and the
Executive.
(iii) "Without Cause" means termination of the Executive's
employment by the Company for any reason other than (A) death of the Executive,
(B) Permanent Disability, (C) expiration of the Term or (D) Cause; "Without
Cause" shall not include retirement or resignation by the Executive.
6. OTHER DUTIES OF THE EXECUTIVE DURING AND AFTER TERM
(a) Confidential Information. The Executive recognizes and acknowledges
that all information pertaining to the affairs, business, clients, customers,
vendors, plans or prospects of the Company (collectively, the "Business")
(including, without limitation, all customer lists, pricing policies,
projections, product development, trade secrets and other privileged and
confidential information essential to the Business), as such information may
exist from time to time, other than information that the Company has previously
made publicly available, is confidential information and is a unique and
valuable asset of the Business, access to and knowledge of which are essential
to the performance of the Executive's duties under this Agreement. The Executive
shall not at any time (during or after the Term), except to the extent
reasonably necessary in the performance of his duties under this Agreement,
divulge to any person, firm, association, corporation, partnership, limited
liability company or governmental agency, any information concerning the
Business (except such information as is required by law to be divulged to a
government agency or pursuant to lawful process), or make use of any such
information for his own purposes. All records, memoranda, letters, books,
reports, accounting, experience or other data, and other records and documents
relating to the Business, whether made by the Executive or otherwise coming into
his possession, are confidential information and are, shall be and shall remain
the property of the Company. No copies thereof shall be made which are not
retained by the Company, and the Executive agrees, on termination of his
employment or on demand of the Company, to deliver the same to the Company.
The obligation of confidentiality contained herein shall not apply to
information which (i) is generally available to the public through no fault of
the Executive, (ii) is required by a court order or regulatory or governmental
authority to be disclosed or (iii) is believed by the Executive in good faith to
be required by a court order or regulatory or governmental authority to be
disclosed, provided that before such disclosure the Company shall first be
notified of any such good faith belief by the Executive and the Executive shall
not make any such disclosure if the Company provides an opinion prepared by
independent counsel that the disclosure is not required.
(b) Intellectual Property. Any software, delivery systems, methods,
developments, inventions, processes, techniques, know-how, plans, products,
devices and/or improvements or the like, whether registered or filed with any
governmental authority or agency (domestic or foreign) or not so registered or
filed, which Employee may conceive or make, alone or with others, which are
related to the Company's business while in its employ, shall be and remain the
property of the Company, and the Executive hereby assigns any and all rights
therein to the Company. Employee further agrees on request to execute patent,
trademark, servicemark and copyright applications based on such software,
delivery systems, methods, developments, inventions and/or improvements,
including any other instruments deemed necessary by the Company for the
prosecution of such patent, trademark, servicemark and copyright application of
the acquisition.
(c) Non-Interference. For a period of two years after termination of
the Executive's employment hereunder, the Executive agrees not to, directly or
indirectly, interfere with the employment relationship between the Company and
its managers, officers and employees by soliciting any of such individuals to
participate in independent business ventures and agrees not to, directly or
indirectly, solicit business from any client or prospective client of the
Company within any of the Company's markets for the Executive's benefit or for
the benefit of any entity in which the Executive has an interest or is employed.
During the term of this Agreement and thereafter, the Executive shall
not take any action to disparage or criticize to any third parties any of the
services or products of the Company or to commit any other action that injures
or hinders the business of the Company.
(e) Enforceability. It is the desire and intent of the parties that the
provisions of this Section 6 shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. If any particular provision or portion of this Section 6
shall be adjudicated to be invalid or unenforceable, this Section 6 shall be
deemed amended to delete therefrom such provision or portion adjudicated to be
invalid or unenforceable, such amendment shall apply only with respect to the
operation of this Section 6 in the particular jurisdiction in which such
adjudication is made.
7. BREACH BY THE EXECUTIVE
Both parties to this Agreement recognize that the services to be
rendered under this Agreement by the Executive are special, unique and
extraordinary in character, and that in the event of the breach by the Executive
of the terms and conditions of this Agreement to be performed by the Executive,
the Company shall be entitled, if it so elects, to institute and prosecute
proceedings consistent with the provisions of Section 14, either in law or in
equity, to obtain damages for any breach of this Agreement or to enforce the
specific performance thereof by the Executive.
8. WITHHOLDING TAXES
The Company may directly or indirectly withhold from any payments made
under this Agreement all Federal, state, city or other taxes as shall be
required to be withheld pursuant to any law or governmental regulation or
ruling.
9. NOTICES
All notices, requests, demands and other communications required or
permitted hereunder shall be given in writing and shall be deemed to have been
duly given if sent by facsimile or delivered or mailed, postage prepaid by same
day or overnight mail as follows:
(a) If to the Company:
Data Tree LLC
550 W. C Street, Suite 2040
San Diego, California 92101
Attention: President
Facsimile: 619-231-3301
with a copy to:
The First American Financial Corporation
14 East Fifth Street
Santa Ana, California 92701
Attention: President
Facsimile: 714-647-2242
(b) If to the Executive:
Harish K. Chopra
P.O. Box 9360
Rancho Santa Fe, California 92067
Facsimile: 619-759-1747
or such other address as either party shall have previously specified in writing
to the other.
10. RIGHTS TO PAYMENTS
The Executive shall not under any circumstances have any option or
right to require payments hereunder otherwise than in accordance with the terms
of this Agreement.
11. SOURCE OF PAYMENT
All payments provided for under this Agreement shall be paid in cash
from the general funds of the Company; provided, however that to the extent the
Company does not have sufficient funds to pay the guaranteed Bonus of $250,000
for the first fiscal year of the Company, FAFCO agrees to make such payment.
12. BINDING AGREEMENT
Except as otherwise expressly provided herein, this Agreement shall be
binding upon, and shall inure to the benefit of, the Company, its successors and
assigns. This Agreement, as it relates to the Executive, is a personal contract
and the rights and interest of the Executive hereunder may not be sold,
transferred, assigned, pledged or hypothecated.
13. AMENDMENTS
This Agreement may not be waived, amended, modified, supplemented or
discharged orally, but only by agreement in writing signed by the party against
whom enforcement of any waiver, amendment, modification, supplement or discharge
is sought.
14. DISPUTE RESOLUTION
Any dispute arising out of or relating to this Agreement, or breach of
this Agreement, shall be settled by arbitration in the County of Orange, State
of California, in accordance with the Commercial Arbitration Rules of the
American Arbitration Association then in effect and, as to matters not
specifically governed thereby, shall comply with the provisions of the
California Arbitration Act (Cal. Code Civ. Proc. ss.ss.1280-1294.2). There shall
be three arbitrators, one to be chosen by each party directly at will, and the
third arbitrator to be selected by the two arbitrators so chosen. Each party
shall pay the fees of the arbitrator he or it selects and of his or its own
attorneys and the expenses of his or her witnesses, and all other fees and costs
shall be borne equally by the parties. Judgment on any award rendered by the
arbitrators may be entered in any court having jurisdiction.
15. SURVIVAL
The covenants set forth in Section 6 of this Agreement shall survive
and shall continue to be binding upon the Executive notwithstanding the
termination of this Agreement for any reason whatsoever. The covenants set forth
in Section 6 of this Agreement shall be deemed and construed as separate
agreements independent of any other provision of this Agreement. It is expressly
agreed that the remedy at law for the breach of the covenants of Section 6 is
inadequate and that injunctive relief shall be available to prevent the breach
or any threatened breach thereof.
16. EFFECTIVENESS. This Agreement shall become effective at the
Effective Time under the Merger Agreement.
17. GOVERNING LAW
THE VALIDITY, INTERPRETATION, PERFORMANCE, AND ENFORCEMENT OF THIS
AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CALIFORNIA APPLICABLE TO AGREEMENTS EXECUTED AND TO BE PERFORMED SOLEY
WITHIN SUCH STATE.
18. CAPTIONS
Section headings are for convenience of reference only and shall not be
considered a part of this Agreement.
19. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which when executed shall be deemed to be an original and all of which together
shall be deemed to be one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, on and as
of the day and year first above written.
DATA TREE LLC
By:________________________
Name:
"EXECUTIVE"
--------------------------
Harish K. Chopra
<PAGE>
EXHIBIT A
EXCLUDED INTEREST EXAMPLES
Assumptions:
1. Working Capital Debt (WCD)- $15,000,000
2. Objected Amount (OA) - $8,000,000
3. Therefore, approved amount = $1,420,000
4. Two loans: $7,000,000 at 10%, simple interest
$8,000,000 at 9%, simple interest
5. Therefore, total interest payment (TIP) = $1,420,000
OA
Formula: Excluded Interest (EI) = (TIP) --------
WCD
Example 1: with assumptions unchanged.
$8,000,000
EI - ($1,420,000) ------------ = $757,333.33
$15,000,000
Example 2: pay-down of $2,000,000 of the 9% debt, WCD now $13,000,000, OA now
$6,000,000 (i.e., $8,000,000 minus $2,000,000 pay-down)
TIP=[($6,000,000)(.09)] + [($7,000,000)(.10)]=$1,240,000
$6,000,000
EI=($1,240,000) ------------ = $572,307.69
$13,000,000
Example 3: continuation of Example 2, with an additional pay-down of $4,000,000
of the 10% debt, WCD now $9,000,000, OA now $2,000,000.
TIP = [$6,000,000)(.09)] + [($3,000,000)(.10)]=$840,000
$2,000,000
EI = ($840,000)----------- = $186,666.67
$9,000,000
<PAGE>
EXHIBIT F
NONCOMPETITION AGREEMENT
This NONCOMPETITION AGREEMENT, dated as of _____ __, 1998
(this "Agreement"), among DATA TREE LLC, a California limited liability company
(the "Company"), R. SQUARED LIMITED, an Irish company ("R2") and HARISH K.
CHOPRA, an individual residing in Rancho Santa Fe, California ("Chopra").
W I T N E S S E T H:
WHEREAS, as of the date hereof, R2 and Chopra collectively own
approximately 42.615% of the issued and outstanding common shares (the "Shares")
of the Data Tree Corporation ("Data Tree");
WHEREAS, Chopra, Data Tree, The First American Financial Corporation, a
California corporation ("FAFCO"), and Image Acquisition Corp., a California
corporation ("FAFCOSUB"), have entered into an Agreement and Plan of Merger,
dated as of March 27, 1998 (the "Merger Agreement"), pursuant to which, at the
Effective Time (as defined in the Merger Agreement) FAFCOSUB will merge with and
into Data Tree (the "Merger") and Data Tree will become, thereby, a wholly-owned
subsidiary of FAFCO;
WHEREAS, FAFCO will contribute all the capital stock of Data Tree to
the capital of First American Real Estate Information Services, Inc.
("FAREISI"); immediately thereafter FAREISI will cause Data Tree to contribute
all of its assets and liabilities (the "Data Tree Business") to First American
Real Estate Solutions LLC ("FARES"); immediately thereafter FARES will
contribute the Data Tree Business together with the Digistar Business (as
defined in that certain Contribution and Joint Venture Agreement, dated as of
the date hereof, by and among FAFCO, FAREISI, FARES, R2, Chopra and Experian
Information Solutions, Inc.) to the Company;
WHEREAS, the Data Tree Business and the Digistar Business include the
automation and digitalization of any public records of county recorders or, in
the absence of a county recorder, the official recordkeeper for a county or
equivalent political subsidivsion and the providing of that information to any
person or entity (such services being referred to herein as the "DTD Business");
WHEREAS, it is a condition precedent to FAFCO's and FAFCOSUB's
respective obligation to effect the Merger that R2 and Chopra enter into this
Agreement;
NOW, THEREFORE, in consideration of the agreements herein contained,
the parties hereto agree as follows:
1. CONSIDERATION. As consideration for the agreements of R2 and Chopra
contained in this Agreement, the Company shall grant R2 a 1.893% membership
interest in the Company, the value of which shall be reflected in the capital
accounts of the Company as $1,150,000, and the Company shall employ Chopra
pursuant to the Employment Agreement of even date herewith (the "Employment
Agreement").
2. NONCOMPETITION; ENFORCEABILITY.
(a) R2 and Chopra each acknowledge and agree that R2 and
Chopra (i) have knowledge of (and will continue to have access to) trade secrets
and confidential information about the Company, its products, customers and
methods of doing business, (ii) are, in connection with the execution of this
Agreement, and as a resulting effect of the Merger, transferring all their
Shares in Data Tree to FAFCO and (iii) will obtain substantial benefit from the
transfer of their Shares in Data Tree to FAFCO.
(b) In consideration of the foregoing, R2 agrees that R2 will
not, and Chopra agrees that neither R2 nor Chopra will, during the Term (as
defined in the Employment Agreement) and for a period of two years thereafter
(the "Noncompete Period"), regardless of any early termination thereof under the
Employment Agreement, within any jurisdiction, domestic or foreign, in which the
Company or any subsidiary of the Company is duly qualified to do business, and
within any marketing area in which the Company or any subsidiary of the Company
is doing a substantial amount of business, directly or indirectly own, manage,
operate, control, be employed by, provide consulting services to or participate
in the ownership, management, operation or control of, or be connected in any
manner with, any business of the type and character engaged in and substantially
competitive with the DTD Business.
3. ENFORCEABILITY.
(a) It is the desire and intent of the parties that the
provisions of Section 2 shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought.
(b) The parties intend that the covenants contained herein shall be
deemed to be a series of separate covenants, one for each county or each state
of the United States, including, if applicable, the District of Columbia, Puerto
Rico and the Virgin Islands, one for each province in Canada and one for each
other state or province or equivalent political subdivision of each country in
which the Company or any subsidiary of the Company is duly qualified to do
business or is doing a substantial amount of business; provided, however, that
in the event that the Company or any subsidiary of the Company is merged with or
into FAFCO or an affiliate thereof, the covenants described in this Section 3(b)
shall only exist with respect to those countries or political subdivisions, as
the case may be, within which the surviving entity is engaged in the document
imaging and database management systems business.
4. BREACH; SURVIVAL. All parties to this Agreement recognize that the
services to be rendered under this Agreement by R2 and Chopra are special,
unique and extraordinary in character, and that in the event of breach by R2 or
Chopra of the terms and conditions of this Agreement to be performed by R2
and/or Chopra, or in the event R2 or Chopra materially breaches any of the
covenants of Section 2, the Company shall be entitled, if it so elects, to
institute and prosecute proceedings, consistent with the procedures of Section 6
below, either in law or in equity, to obtain damages for any breach of this
Agreement, or to enforce the specific performance thereof by R2 or Chopra, or to
enjoin R2 or Chopra, as the case may be, from performing services for any such
other person, firm, corporation or other entity falling within the scope of
Section 2. The covenants of R2 and Chopra under this Agreement shall survive the
termination of the Term.
5. GOVERNING LAW; AMENDMENTS; CAPTIONS. This Agreement shall be
governed by and construed in accordance with the law of the State of California.
This Agreement may not be changed orally, but only by agreement in writing
signed by the party against whom enforcement of any waiver, change, modification
or discharge is sought. Section headings are for convenience of reference only
and shall not be considered a part of this Agreement.
6. DISPUTE RESOLUTION. Any dispute arising from or with respect to this
Agreement and other agreements referenced herein shall be decided by arbitration
in the County of Orange, State of California, in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then in effect and, as
to matters not specifically governed thereby, shall comply with the provisions
of the California Arbitration Act (Cal. Code Civ. Proc. ss.ss.1280-1294.2). The
parties hereto submit to in personam jurisdiction of state and federal courts
located in the County of Orange, State of California, for the purpose of
confirming any award resulting from such arbitration or entering a judgment
thereon.
7. PRIOR AGREEMENTS. This Agreement, the Merger Agreement, the
Employment Agreement and the other agreements and instruments defined herein and
therein contain the entire agreement between the parties and supersedes and
terminates all prior agreements, if any, between the parties relating to the
subject matter herein addressed.
8. NOTICES. Any notice or other communication required or permitted
hereunder shall be in writing and shall be sufficiently given if delivered in
person or sent by telecopy or by registered or certified mail, postage prepaid,
addressed as follows:
if to R2 and/or Chopra, to:
HARISH K. CHOPRA
P.O. Box 9360
Rancho Santa Fe, California 92067
Facsimile: 619-759-1747
if to the Company, to:
DATA TREE LLC
550 West "C" Street, Suite 2040
San Diego, California 92101
Attention: President
Facsimile: 619-231-3301
With a copy to:
THE FIRST AMERICAN FINANCIAL CORPORATION
114 East Fifth Street
Santa Ana, California 92701
Attention: President
Facsimile: 714-647-2242
or such other address or number as shall be furnished from time to time in
writing by any party to the other parties. Any such notice or communication
shall be deemed to have been given as of the date so delivered, sent by telecopy
or mailed.
9. EFFECTIVENESS. This Agreement shall become effective at the
Effective Time under the Merger Agreement.
IN WITNESS WHEREOF, each of the Company and R2 has caused its
name to be hereunto subscribed by its officer thereunto duly authorized and
Chopra has executed this Agreement, all on and as of the day and year first
above written.
DATA TREE LLC
By_________________________
Name:
Title:
R SQUARED LIMITED
By_________________________
Name:
Title:
---------------------------
Harish K. Chopra
<PAGE>
EXHIBIT G
________________________________________________________________________________
SUPPLY AGREEMENT
Dated as of ________ __, 1998
Between
DATA TREE LLC
and
R. SQUARED LIMITED
________________________________________________________________________________
<PAGE>
SUPPLY AGREEMENT
THIS SUPPLY AGREEMENT (this "Agreement") dated as of _______
__, 1998 between Data Tree LLC, a California limited liability company ("Data
Tree"), and R Squared Limited, an Irish company ("R2").
W I T N E S S E T H :
WHEREAS, R2 is engaged in the business of imaging real estate title
records; and
WHEREAS, Data Tree desires to secure a supply of imaged real estate
title records;
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. TERM
The term of this Agreement shall commence upon the date first
above-referenced and, unless earlier terminated as provided herein, shall
continue in full force and effect for a period of two and one-half years
thereafter (the "Term").
2. SUPPLY AND COMPENSATION
2.1 Supply Provided by R2. The parties agree that during the Term, Data
Tree shall order, and R2 shall scan or caused to be scanned, not less than
235,000,000 real estate title records (each, a "Title Image") in the aggregate
and 23,500,000 Title Images per calendar quarter (the "Quarterly Image Amount")
into a database which Data Tree shall own.
2.2 Price. In full compensation to R2 for its undertakings hereunder,
Data Tree shall pay R2 a cost of $0.055 for each Title Image (the "Image
Price"). R2 shall send Data Tree a statement of the compensation due it at the
end of each month and Data Tree shall pay the same within 15 days of its receipt
of each such statement. Any payments due hereunder, and not made by the due date
therefor, shall accrue interest that the rate of 8% per annum from the date said
payment became delinquent until paid in full (such interest shall be treated for
all purposes as part of the amount due hereunder). Notwithstanding the
foregoing, the compensation due to R2 for each quarter during the term hereof
shall not be less than $1,292,500 (the "Minimum Quarterly Contract Price");
provided, however, that the Minimum Quarterly Contract Price shall not be
payable at the end of a calendar quarter if the total number of Title Images
delivered during such quarter is less than the Quarterly Image Amount as a
direct result of a breach by R2 of its obligations under 6.3(b) hereof.
3. TERMINATION
3.1 Events of Termination. This Agreement may be terminated at any time
by mutual written agreement of Data Tree and R2.
3.2 Effect of Termination. In the event that this Agreement shall be
terminated pursuant to Section 3.1, all further obligations of the parties
hereto under this Agreement shall terminate without further liability or
obligation of either party to the other party hereunder; provided, however, that
(a) no party shall be released from liability hereunder if this Agreement is
terminated and the transactions abandoned by reason of the willful failure of
such party to have performed any material obligation hereunder and (b) Data Tree
shall be obligated to pay for those Title Images that are of a commercially
reasonable quality and which have been scanned into a database on behalf of Data
Tree on or prior to the date this Agreement terminates, to the extent such
scanned Title Images and database are delivered to Data Tree.
4. REPRESENTATIONS OF DATA TREE
Data Tree represents, warrants, and agrees as follows:
4.1 Existence and Good Standing. Data Tree is a limited liability
company duly organized and validly existing under the laws of the State of
California. Data Tree has the requisite power and authority to own, lease and
operate its properties and to carry on its business as now being conducted, and
to enter into, execute and deliver this Agreement and perform its obligations
hereunder.
4.2 Binding Effect. This Agreement has been duly executed and delivered
by Data Tree and constitutes the valid and binding agreement of Data Tree
enforceable against Data Tree 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. REPRESENTATIONS OF R2
R2 represents, warrants and agrees as follows:
5.1 Existence and Good Standing of R2; Power and Authority. (a) R2 is a
company duly organized, validly existing and in good standing under the laws of
Ireland. R2 has the requisite power and authority to own, lease and operate its
properties and to carry on its business as now being conducted, and to enter
into, execute and deliver this Agreement and perform its obligations hereunder.
(b) R2 does not engage in business in the United States, and the
services to be performed by R2 hereunder shall not be performed in the United
States. R2 is not subject to United States withholding tax.
5.2 Binding Effect. This Agreement has been duly executed and delivered
by R2 and constitutes the valid and binding agreement of R2 enforceable against
R2 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.
5.3 Ability and Capacity to Perform. R2 currently has the
understanding, knowledge and ability to supply, or arrange to supply, the
quantity of Title Images herein described.
6. COVENANTS
6.1 Further Assurances and Best Efforts. Each of Data Tree and R2
shall, at its sole cost, on demand do, execute, acknowledge and deliver all and
every such further acts and assurances as the other party hereto shall from time
to time reasonably require for carrying out the intention or facilitating the
performance of the terms of this Agreement.
6.2 Confidentiality. R2 shall not, during the period of this Agreement
or at any time thereafter, divulge to any third party any terms of this
Agreement.
6.3 Responsibility. (a) Data Tree shall be solely responsible at its
own cost for providing or otherwise making available to R2 at the location where
the services to be provided by R2 hereunder will be performed, adequate
software, microfilm and related technical equipment sufficient to enable R2 to
provide, or cause to be provided, to Data Tree each quarter Title Images in an
amount no less than the Quarterly Image Amount.
(b) R2 shall be responsible at its own cost for providing, or arranging
to have provided, all necessary personnel and non-technical equipment and
facilitates sufficient to perform its duties hereunder.
6.4 Withholding Tax. Provided the representations and warranties
contained in Section 5.1(b) hereto are true and accurate under current law,
there shall be no tax withholding by Data Tree on payments to R2 hereunder.
7. RIGHT OF OFFSET.
If and to the extent that Data Tree breaches its obligations under
Section 6.3(a) hereof and/or the last sentence of Section 2.2 hereof, R2 shall
be entitled to offset against payments due to Data Tree under that certain
Promissory Note issued by R2 in the original principal amount of $11,000,000
(the "Promissory Note"), for amounts that otherwise would have been due from
Data Tree had no breach occurred. The offset shall be applied to the next
payment then due under the Promissory Note, and to each payment thereafter until
such time as this offset amount shall be reduced to zero. In the event that any
amounts are so offset, the total number of Title Images required to be ordered
and scanned pursuant to Section 2.1 hereof shall be reduced by a number equal to
the offset amount divided by the Image Price. The amount entitled to be offset
hereunder is referred to herein as the "Offset."
8. MISCELLANEOUS
8.1 Expenses. The parties hereto shall pay all of their own expenses
relating to the transactions contemplated by this Agreement and the documents
described herein, including, without limitation, the fees and expenses of their
respective counsel.
8.2 Effectiveness. This Agreement shall become effective at the
Effective Time under that certain Agreement and Plan of Merger, dated as of
March 27, 1998 by and among The First American Financial Corporation, Image
Acquisition Corp., Data Tree Corporation and Harish Chopra.
8.3 Governing Law. The interpretation and construction of this
Agreement, and all matters relating hereto, shall be governed by the laws of the
State of California applicable to agreements executed and to be performed solely
within such State.
8.4 Jurisdiction; Agents for Service of Process. Any judicial
proceeding brought against any of the parties to this Agreement on any dispute
arising out of this Agreement or any matter related hereto may be brought in the
courts of the State of California, or in the United States District Court for
the Central District of California, and, by execution and delivery of this
Agreement, each of the parties to this Agreement accepts the exclusive
jurisdiction of such courts, and irrevocably agrees to be bound by any judgment
rendered thereby in connection with this Agreement.
8.5 Parties in Interest. This Agreement may not be transferred,
assigned, pledged or hypothecated by any party hereto. Any attempted transfer,
assignment, pledge or hypothecation of this Agreement shall be void ab initio.
8.6 Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one instrument.
8.7 Entire Agreement. This Agreement contains the entire understanding
of the parties hereto with respect to the subject matter contained herein. This
Agreement supersedes all prior agreements and understandings between the parties
with respect to such subject matter.
8.8 Principles of Construction.
(a) All references to Sections or subsections are to 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) 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.
8.9 Amendment and Modification. This Agreement may not be amended or
modified orally, but only by an agreement in writing signed by Data Tree and R2.
8.10 Waiver. No waiver of a breach, failure of any condition, or any
right or remedy contained in or granted by the provisions of this Agreement
shall be effective unless it is in writing and signed by the party waiving the
breach, failure, right or remedy. No waiver of any breach, failure, right or
remedy shall be deemed a waiver of any other breach, failure, right or remedy,
whether or not similar, nor shall any waiver constitute a continuing waiver
unless the writing so specifies.
8.11 Relationship. It is expressly understood and agreed that at no
time will the provisions of this Agreement be deemed to create a partnership or
any other relationship between R2 and Data Tree other than supplier and
purchaser.
8.12 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:
if to Data Tree, to:
Data Tree Corporation
550 West "C" Street, Suite 2040
San Diego, California 92101
Telephone: 619-231-3300
Facsimile: 619-231-3301
Attention: Harish K. Chopra
with a copy to:
The First American Financial Corporation
114 East Fifth Street
Santa Ana, California 92702
Telephone: 714-558-3211
Facsimile: 714-647-2242
Attention: President
if to R2, to:
R. Squared Limited
c/o Royal Bank of Canada Trust Co. (Cayman) Limited
P.O. Box 1586, George Town, Grand Cayman
Cayman Islands, British West Indies
Telephone: 345-949-0253
Facsimile: 345-949-5777
Attention: Piers Strandling
IN WITNESS WHEREOF, each of Data Tree and R2 has caused its corporate
name to be hereunto subscribed by its duly authorized officer and has signed
this Agreement, all as of the day and year first above written.
DATA TREE LLC
By____________________________
Name:
Title:
R. SQUARED LIMITED
By____________________________
Name:
Title:
<PAGE>
EXHIBIT H
SECURED PROMISSORY NOTE
$11,000,000 San Diego, California
___________, 1998
FOR VALUE RECEIVED, the undersigned, R. Squared Limited, an Irish company
("Maker"), promises to pay to Data Tree LLC, a California limited liability
company ("Payee"), at _______________, ___________, California ______ or at such
other place reasonably designated from time to time by Payee, the principal sum
of ELEVEN MILLION DOLLARS ($11,000,000), plus interest on the unpaid principal
balance at a fixed rate per annum of eight percent (8%).
Principal and interest under this secured promissory note (this "Note")
shall be payable in ten (10) equal quarterly payments in the amount of one
million two hundred twenty-four thousand five hundred ninety-two Dollars
($1,224,592) commencing _____________, 1998 and continuing on the first day of
each calendar quarter thereafter, until __________, [2000], when the entire
amount of unpaid principal and accrued but unpaid interest shall be due and
payable in full. Each payment received under this Note shall be applied first
against accrued but unpaid interest, and thereafter against unpaid principal.
Maker may, at its election, prepay this Note at any time, in whole or in
part, without penalty or premium.
Maker hereby waives presentment, demand, protest or notice of any kind in
connection with this Note.
At its option, and at any time(s) that Maker may elect, upon notice to
Payee (the "Notice"), Maker may deduct from any amounts due under this Note an
amount equal to all or any portion of the "Offset" (as that term is described in
that certain Supply Agreement, dated as of ___________, 1998, between the Maker
and the Payee) up to the full amount of such Offset as of the date of such
deduction, but only to the extent that the Maker has not previously deducted
such portion of the Offset from amounts due under this Note. The Offset shall be
applied to the next payment then due under this Note following the date of the
Notice from Maker, and to each payment thereafter until such time as the amount
of the Offset shall be reduced to zero.
To secure its obligations under this Note, Maker hereby grants to Payee a
security interest in 90% of the Membership Interest (as such term is defined in
the Operating Agreement, dated as of __________, 1998, between Maker and First
American Real Estate Solutions LLC) owned by Maker in Payee (the "Collateral").
Payee agrees to release from the security interest granted in this Note 5% of
the Collateral (i.e., a 1% Membership Interest) upon its receipt of a principal
repayment or prepayment in the aggregate amount of $1,100,000. To the extent of
each such release, the Membership Interest so release shall not be Collateral
hereunder. To the extent not previously released, Payee agrees to release from
the security interest granted in this Note all Collateral once Maker has made
payment in full on all principal of and interest on this Note. For as long as
this Note remains unpaid, Maker agrees that Maker will not: (i) grant any other
lien or security interest with respect to the Collateral and (ii) transfer,
whether by sale, gift, or otherwise, any ownership interest in the Collateral
without Payee's prior written approval. Upon the reasonable request of Payee,
Maker will take all action and will execute all documents and instruments
necessary or desirable to consummate and give effect to the security interest
granted pursuant to this paragraph.
Maker irrevocably appoints Payee as attorney-in-fact and grants Payee a
proxy to do (but Payee shall not be obligated and shall incur no liability to
Maker or any third party for failure to do so), after and during the continuance
of an Event of Default (as defined below), any act that Maker is obligated by
this Note to do and to exercise such rights and powers as Maker might exercise
with respect to the Collateral. With respect to voting the Collateral, this
paragraph constitutes an irrevocable appointment of a proxy, coupled with an
interest, which shall continue until this Note is paid in full. Except as
otherwise limited by this Note, as long as no Event of Default shall have
occurred, Maker shall be entitled to vote the Collateral and receive
distributions with respect thereto.
As used in this Note, the term "Event of Default" means (i) the failure by
Maker to make any payment under this Note when due, if such failure continues
for a period of twenty (20) business days or (ii) the grant of any lien or
security interest (other than the grant provided in this Note) with respect to
the Collateral or (iii) the transfer, whether by sale, gift, or otherwise, any
ownership interest in the Collateral without Payee's prior written approval.
This Note shall be governed by and construed in accordance with the
internal laws of the State of California. Principal and interest shall be
payable in lawful money of the United States of America.
THIS NOTE IS NOT NEGOTIABLE AND MAY NOT BE CONVEYED OR ASSIGNED, IN WHOLE
OR IN PART, NEGOTIATED OR ENDORSED IN BLANK BY PAYEE WITHOUT THE PRIOR WRITTEN
CONSENT OF MAKER. ANY ATTEMPTED ASSIGNMENT, BLANK ENDORSEMENT, OR NEGOTIATION OF
THIS NOTE WITHOUT THE PRIOR WRITTEN CONSENT OF MAKER SHALL BE NULL AND VOID.
"MAKER"
R. SQUARED LIMITED,
an Irish Company
By:________________________________
Title:_____________________________
<PAGE>
EXHIBIT I
PROPOSED FORM OF OPINION LETTER
OF COOLEY GODWARD LLP
[The final legal opinion shall contain customary
assumptions and qualifications.]
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of California.
2. The Company has the requisite corporate power to own, operate and lease
its property and assets and to conduct its business as it is currently being
conducted.
3. All corporate action on the part of the Company, its Board of Directors
and its shareholders necessary for the authorization, execution and delivery of
the Merger Agreement by the Company and the performance of the Company's
obligations under the Merger Agreement has been taken. The Merger Agreement has
been duly and validly authorized, executed and delivered by the Company and the
Major Shareholder and constitutes a valid and binding agreement of the Company
and the Major Shareholder enforceable against the Company and the Major
Shareholder in accordance with its terms, except as enforcement may be limited
by applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or
other similar laws affecting creditors' rights, and subject to general equity
principles and to limitations on availability of equitable relief, including
specific performance.
4. The authorized capital stock of the Company consists of (i) 10,000,000
shares of Common Stock, no par value, of which 7,039,830 shares have been issued
and are outstanding immediately prior to the Closing. To counsel's knowledge,
except as expressly set forth in the Merger Agreement (including the exception
schedules thereto relating to the Company (the "Company's Disclosure
Schedules")), there are no options, warrants, conversion privileges, or other
rights presently outstanding to purchase any authorized but unissued capital
stock of the Company. There are no voting agreements, co-sale rights or rights
of first refusal applicable to any of the Company's outstanding capital stock
under the Company's articles of incorporation, bylaws or any written Company
contract disclosed in Schedule 3.10 to the Company Disclosure Schedules.
5. The execution, delivery and performance by the Company of the Merger
Agreement and the consummation by the Company of the Merger as provided therein
will not violate any provision of the Company's articles of incorporation or
bylaws, and do not constitute a material default (or give rise to any right of
termination, cancellation or acceleration) under any provision of any Company
contract disclosed in the Company Disclosure Schedules and do not violate or
contravene (A) any governmental statute, rule or regulation applicable to the
Company or (B) any order, writ, judgment, injunction, decree, determination or
award which has been entered against the Company and of which counsel is aware,
the violation or contravention of which would have a material adverse effect on
the Company's business, financial condition and results of operations, taken as
a whole.
6. To counsel's knowledge, there is no action, proceeding or investigation
pending or threatened in writing against the Company before any court or
administrative agency that questions the validity of the Merger Agreement.
7. All consents, approvals, authorizations, or orders of, and filings,
registrations, and qualifications with any regulatory authority or governmental
body in the United States required to be obtained prior to the Closing in
connection with the Company's execution, delivery and performance of the Merger
Agreement and the consummation by the Company and the Major Shareholder of the
Merger as contemplated therein have been made or obtained, other than the filing
of the Merger Documents with the Secretary of State of the State of California
as contemplated by Section 2.1(a) of the Merger Agreement.
8. The Merger Documents have been duly authorized by the Company's Board of
Directors and its shareholders and, assuming due approval by the Boards of
Directors of FAFCO and FAFCOSUB, respectively, and the shareholders of FAFCOSUB,
and compliance by FAFCO and FAFCOSUB with all requirements of applicable law and
the Merger Agreement necessary to effect the Merger, upon their filing with the
Secretary of State of the State of California, the Merger will be effective.
<PAGE>
EXHIBIT J
PROPOSED FORM OF OPINION LETTER
OF COUNSEL FOR R2
[The final legal opinion shall contain customary
assumptions and qualifications.]
1. R2 has been duly organized and is validly existing as a company under
the laws of the Republic of Ireland.
2. R2 has the requisite corporate power to own, operate and lease its
property and assets and to conduct its business as it is currently being
conducted.
3. All corporate action on the part of R2, its Board of Directors and its
shareholders necessary for the authorization, execution and delivery of the
Related Documents to be signed by R2 and the performance of R2's obligations
under the Related Documents to be signed by R2 has been taken. Each of the
Related Documents to be signed by R2 has been duly and validly authorized,
executed and delivered by R2 and constitutes a valid and binding agreement of R2
enforceable against R2 in accordance with its terms, except as enforcement may
be limited by applicable bankruptcy, insolvency, reorganization, arrangement,
moratorium or other similar laws affecting creditors' rights, and subject to
general equity principles and to limitations on availability of equitable
relief, including specific performance.
4. The execution, delivery and performance by R2 of the Related Documents
to be signed by R2 will not violate any provision of R2's charter documents and
do not violate or contravene (A) any governmental statute, rule or regulation
applicable to R2 or (B) any order, writ, judgment, injunction, decree,
determination or award which has been entered against R2 and of which counsel is
aware, the violation or contravention of which would have a material adverse
effect on R2's business, financial condition and results of operations, taken as
a whole.
5. To counsel's knowledge, there is no action, proceeding or investigation
pending or threatened in writing against R2 before any court or administrative
agency that questions the validity of the Related Documents to be signed by R2.
6. All consents, approvals, authorizations, or orders of, and filings,
registrations, and qualifications with any regulatory authority or governmental
body in the Republic of Ireland required to be obtained prior to the Closing in
connection with R2's execution, delivery and performance of the Related
Documents to be signed by R2 have been made or obtained.
<PAGE>
EXHIBIT K
PROPOSED FORM OF OPINION LETTER
OF WHITE & CASE LLP
[The final legal opinion shall contain customary
assumptions and qualifications.]
1. Each of FAFCO and FAFCOSUB have been duly incorporated and are validly
existing corporations in good standing under the laws of the State of
California.
2. FAFCO has the requisite corporate power to own, operate and lease its
property and assets and to conduct its business as it is currently being
conducted.
3. All corporate action on the part of FAFCO and FAFCOSUB, their respective
Boards of Directors and shareholders necessary for the authorization, execution
and delivery of the Merger Agreement by FAFCO and FAFCOSUB and the performance
of FAFCO's and FAFCOSUB's obligations under the Merger Agreement has been taken.
The Merger Agreement has been duly and validly authorized, executed and
delivered by FAFCO and FAFCOSUB and constitutes a valid and binding agreement of
FAFCO and FAFCOSUB enforceable against each of FAFCO and FAFCOSUB in accordance
with its terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, arrangement, moratorium or other similar laws
affecting creditors' rights, and subject to general equity principles and to
limitations on availability of equitable relief, including specific performance.
4. The authorized capital stock of FAFCO consists of (i) 36,000,000 Common
Shares, $1.00 par value, of which ______ shares have been issued and are
outstanding immediately prior to the Closing, and (ii) 1,000 Series A Junior
Participating Preferred Shares, $1.00 par value, none of which are issued and
outstanding immediately prior to the Closing. The FAFCO Common Shares to be
issued to the shareholders of the Company in connection with the Merger (the
"Merger Shares") have been duly authorized and, when issued pursuant to the
terms of the Merger Agreement, will be validly issued, outstanding, fully paid
and nonassessable. To counsel's knowledge, except as expressly set forth in the
Merger Agreement (including the exception schedules thereto relating to FAFCO
(the "FAFCO Disclosure Schedules")) and Exhibit A to counsel's opinion, there
are no options, warrants, conversion privileges or other rights presently
outstanding to purchase any authorized but unissued capital stock of FAFCO.
There are no voting agreements, co-sale rights or rights of first refusal
applicable to any of FAFCO's outstanding capital stock under FAFCO's articles of
incorporation, bylaws or any FAFCO contract disclosed or attached as Exhibits to
FAFCO's SEC Reports or FAFCO's Disclosure Schedules.
5. The Merger Shares have been registered under the Securities Act of 1933,
as amended (the "Act"), pursuant to a registration statement on Form S-4 (the
"Registration Statement"). The Registration Statement became effective under the
Act by order of the Securities and Exchange Commission (the "SEC") on ________,
1998, and, to counsel's knowledge, no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or threatened under the Act. The Merger
Shares have been issued in compliance with all federal and California securities
laws.
6. The execution, delivery and performance by FAFCO of the Merger Agreement
and the consummation by FAFCO and FAFCOSUB of the Merger as provided therein
will not violate any provision of FAFCO's or FAFCOSUB's articles of
incorporation or bylaws, and do not constitute a material default (or give rise
to any right of termination, cancellation or acceleration) under any provision
of any FAFCO contract disclosed in or attached as an Exhibit to FAFCO's SEC
Reports or the FAFCO Disclosure Schedules, and do not violate or contravene (A)
any governmental statute, rule or regulation applicable to FAFCO or FAFCOSUB or
(B) any order, writ, judgment, injunction, decree, determination or award which
has been entered against FAFCO or FAFCOSUB and of which counsel is aware, the
violation or contravention of which would have a material adverse effect on
FAFCO's business, financial condition and results of operations, taken as a
whole.
7. To counsel's knowledge, there is no action, proceeding or investigation
pending or threatened in writing against FAFCO before any court or
administrative agency that questions the validity of the Merger Agreement.
8. All consents, approvals, authorizations, or orders of, and filings,
registrations, and qualifications with any regulatory authority or governmental
body in the United States required to be obtained prior to the Closing in
connection with FAFCO's and FAFCOSUB's execution, delivery and performance of
the Merger Agreement and the consummation by FAFCO and FAFCOSUB of the Merger as
provided therein have been made or obtained, other than the filing of the Merger
Documents with the Secretary of State of the State of California as contemplated
by Section 2.1(a) of the Merger Agreement.
9. The Merger Documents have been duly approved by FAFCO's and FAFCOSUB's
respective Boards of Directors and FAFCOSUB's shareholder and, assuming due
approval by the Board of Directors and shareholders of the Company and
compliance by the Company with all requirements of applicable law and the Merger
Agreement necessary to effect the Merger, upon their filing with the Secretary
of State of the State of California, the Merger will be effective.
<PAGE>
EXHIBIT L
FORM OF TAX REPRESENTATION LETTER
TO BE EXECUTED BY PARENT AND MERGER SUB
Cooley Godward, LLP White & Case LLP
Five Palo Alto Square 633 West Fifth Street, Suite 1900
3000 El Camino Real Los Angeles, California 90071
Palo Alto, California 94306-2155
Re: Merger pursuant to the Agreement and Plan of Merger (the "Reorganization
Agreement") dated March __, 1998, among THE FIRST AMERICAN FINANCIAL
CORPORATION, a California corporation ("Parent"), IMAGE ACQUISITION CORP.,
a California corporation and a wholly owned subsidiary of Parent ("Merger
Sub"), DATA TREE CORPORATION, a California corporation (the "Company"), and
HARISH CHOPRA, and the related Agreement of Merger between Merger Sub and
the Company (the "Agreement of Merger").
Ladies and Gentlemen:
This letter is supplied to you in connection with your rendering of opinions
regarding certain federal income tax consequences of the Merger. Unless
otherwise indicated, capitalized terms not defined herein have the meanings set
forth in the Reorganization Agreement. The Reorganization Agreement and the
Agreement of Merger, including exhibits and schedules attached thereto, are
collectively referred to as the "Agreements."
After consulting with their counsel and auditors regarding the meaning of and
factual support for the following representations, the undersigned hereby
certify and represent that the following facts are now true and will continue to
be true as of the Effective Time of the Merger and thereafter where relevant:
1. Pursuant to the Merger, Merger Sub will merge with and into the
Company, and the Company will acquire all of the assets and liabilities of
Merger Sub. Specifically, the assets transferred to the Company pursuant to the
Merger will represent at least ninety percent (90%) of the fair market value of
the net assets and at least seventy percent (70%) of the fair market value of
the gross assets held by Merger Sub immediately prior to the Merger. In
addition, at least ninety percent (90%) of the fair market value of the net
assets and at least seventy percent (70%) of the fair market value of the gross
assets held by the Company immediately prior to the Merger will continue to be
held by the Company immediately after the Merger. For the purpose of determining
the percentage of the Company's and Merger Sub's net and gross assets held by
the Company immediately following the Merger, the following assets will be
treated as property held by Merger Sub or the Company, as the case may be,
immediately prior but not subsequent to the Merger: (i) assets disposed of by
the Company or Merger Sub (other than assets transferred from Merger Sub to the
Company in the Merger) prior to or subsequent to the Merger and in contemplation
thereof (including without limitation any asset disposed of by the Company other
than in the ordinary course of business, pursuant to a plan or intent existing
during the period ending at the Effective Time of the Merger and beginning with
the commencement of negotiations (whether formal or informal) with Parent
regarding the Merger (the "Pre-Merger Period"); (ii) assets used by the Company
or Merger Sub to pay shareholders perfecting dissenters' rights or other
expenses or liabilities incurred in connection with the Merger and (iii) assets
used to make distribution, redemption or other payments in respect of stock of
the Company or rights to acquire such stock (including payments treated as such
for tax purposes) that are made in contemplation of the Merger or that are
related thereto;
2. Parent's principal reasons for participating in the Merger are bona
fide business purposes not related to taxes;
3. Prior to the Merger, Parent will be in "Control" of Merger Sub. As
used in this letter, "Control" shall consist of direct ownership of shares of
stock possessing at least eighty percent (80%) of the total combined voting
power of all classes of stock entitled to vote and at least eighty percent (80%)
of the total number of shares of all other classes of stock of the corporation.
For purposes of determining Control, a person shall not be considered to own
shares of voting stock if rights to vote such shares (or to restrict or
otherwise control the voting of such shares) are held by a third party
(including a voting trust) other than an agent of such person;
4. In the Merger, shares of stock of the Company representing Control
of the Company will be exchanged solely for shares of Parent Common Stock. For
purposes of this paragraph, shares of stock of the Company exchanged in the
Merger for cash and other property (including, without limitation, cash paid to
shareholders of the Company perfecting dissenters' rights, if any, or in lieu of
fractional shares of Parent Common Stock) will be treated as shares of stock of
the Company outstanding on the date of the Merger but not exchanged for shares
of Parent Common Stock;
5. Parent has no plan or intention to cause the Company to issue
additional shares of stock after the Merger, or take any other action, that
would result in Parent losing Control of the Company;
6. Parent has no plan or intention to repurchase or redeem, in
connection with the Merger, any of its stock issued pursuant to the Merger.
7. Except for transfers described in Section 368(a)(2)(C) of the Code
and transfers permitted to be made pursuant to Treasury Regulation Sections
1.368-1(d), -1(e) and -2(k)(2) Parent has no plan or intention to: (a) liquidate
the Company; (b) merge the Company with or into another corporation including
Parent or its affiliates; (c) sell, distribute or otherwise dispose of the stock
of the Company; or (d) cause the Company to sell or otherwise dispose of any of
its assets or of any assets acquired from Merger Sub, except for dispositions
made in the ordinary course of business or payment of expenses incurred by the
Company pursuant to the Merger;
8. In the Merger, Merger Sub will have no liabilities assumed by the
Company and will not transfer to the Company any assets subject to liabilities,
except to the extent incurred in connection with the transactions contemplated
by the Agreements;
9. Parent intends that, following the Merger, the Company will
continue its historic business or use a significant portion of its historic
business assets in a business;
10. During the past five (5) years, none of the outstanding shares of
capital stock of the Company, including the right to acquire or vote any such
shares have, directly or indirectly, been owned by Parent or, to Parent's
knowledge, persons related to Parent within the meaning of Treasury Regulation
Section 1.368-1(e)(3);
11. Neither Parent nor Merger Sub is an investment Company within the
meaning of Section 368(a)(F)(iii) and (iv) of the Code;
12. No shareholder of the Company is acting as agent for Parent in
connection with the Merger or the approval thereof; Parent will not reimburse
any shareholder of the Company for any stock of the Company such shareholder may
have purchased or for other obligations such shareholder may have incurred;
13. Neither Parent nor Merger Sub is, or will be at the Effective Time
of the Merger, under the jurisdiction of a court in a Title 11 or similar case
within the meaning of Section 368(a)(3)(A) of the Code;
14. Except for repurchases or redemptions of Parent Common Stock that
are consistent with past practices and pursuant to pre-existing purchase
programs that were not created or modified in connection with the Merger,
neither Merger Sub nor Parent nor any "related person" of Merger Sub or Parent
(as such term is defined by Treasury Regulation Section 1.368-1(e)(3)) will
repurchase or redeem any of the Parent Common Stock to be issued to the
shareholders of the Company in connection with the Merger;
15. Except with respect to (i) payments of cash to shareholders of the
Company perfecting dissenters' rights and (ii) payments of cash to shareholders
of the Company in lieu of fractional shares of Parent Common Stock, one hundred
percent (100%) of the stock of the Company outstanding immediately prior to the
Merger will be exchanged solely for Parent Common Stock. Thus, except as set
forth in the preceding sentence, Merger Sub and Parent intend that no
consideration be paid or received (directly or indirectly, actually or
constructively) for stock of the Company other than Parent Common Stock. It is
further represented that (i) all payments made for imaging services to be
provided by R. Squared Limited to Data Tree LLC are not in excess of the fair
market value of such services in the State of California, and such payments are,
in fact, less than amounts paid to other comparable providers of such services
in the State of California; (ii) with respect to the Promissory Note of R.
Squared Limited, in the principal amount of ____________ and bearing interest at
8.0% per annum, contributed to Data Tree LLC in exchange for an eighteen percent
Membership Interest therein, such note represents the full purchase price of
such Membership Interest for an amount equal to and not less than the fair
market value of such Membership Interest; and (iii) with respect to the
Noncompetition Agreement contributed to Data Tree LLC in exchange for a two
percent Membership Interest therein, the value of such Noncompetition Agreement
represents the full purchase price of such Membership Interest for an amount
equal to and not less than the fair market value of such Membership Interest;
16. The total fair market value of all consideration other than Parent
Common Stock received by shareholders of the Company in the Merger (including,
without limitation, cash paid to shareholders of the Company perfecting
dissenters' rights) will be less than ten percent (10%) of the aggregate fair
market value of stock of the Company outstanding immediately prior to the
Merger;
17. The total fair market value of the Parent Common Stock received by
each shareholder of the Company will be approximately equal to the fair market
value of the stock of the Company surrendered in exchange therefor, and the
aggregate consideration received by shareholders of the Company in exchange for
their stock of the Company will be approximately equal to the fair market value
of all of the outstanding shares of stock of the Company immediately prior to
the Merger;
18. Each of Merger Sub, Parent, the Company and each shareholder of
the Company will pay separately his, her or its own expenses relating to the
Merger;
19. There is no intercorporate indebtedness existing between Parent
and the Company or between Merger Sub and the Company that was issued, acquired
or will be settled at a discount as a result of the Merger, and Parent will
assume no liabilities of the Company or any shareholder of the Company in
connection with the Merger;
20. The terms of the Reorganization Agreement and the agreements
related thereto are the product of arm's length negotiations;
21. None of the compensation received by any shareholder-employee of
the Company will be separate consideration for, or allocable to, any of their
shares of stock of the Company; none of the shares of Parent Common Stock
received by any shareholder-employee of the Company will be separate
consideration for, or allocable to, any employment agreement or any covenants
not to compete; and the compensation paid to any shareholder-employee of the
Company will be for services actually rendered and will be commensurate with
amounts paid to third parties bargaining at arm's length for similar services;
22. The payment of cash in lieu of fractional shares of Parent Common
Stock is solely for the purpose of avoiding the expense and inconvenience to
Parent of issuing fractional shares and does not represent separately
bargained-for consideration. The total cash consideration that will be paid in
the transaction to the Company shareholders instead of issuing fractional shares
of Parent Common Stock will not exceed one percent (1%) of the total
consideration that will be issued in the transaction to the Company shareholders
in exchange for their shares of Company Capital Stock. The fractional share
interests of each Company shareholder will be aggregated, and no Company
shareholder will receive cash in an amount equal to or greater than the value of
one full share of Parent Common Stock;
23. With respect to each instance, if any, in which shares of stock of
the Company have been purchased by a shareholder of Parent (a "Shareholder")
during the Pre-Merger Period (a "Stock Purchase"): (i) the Stock Purchase was
made by such Shareholder not as a representative of Parent; (ii) the purchase
price paid by such Shareholder pursuant to the Stock Purchase was the product of
arm's length negotiations, was not advanced, and will not be reimbursed, either
directly or indirectly, by Parent; (iii) at no time was such Shareholder or any
other party required or obligated to surrender to Parent the Company Capital
Stock acquired in the Stock Purchase, and neither such Shareholder nor any other
party will be required to surrender to Parent the Parent Common Stock for which
such shares of stock of the Company will be exchanged in the Merger; and (iv)
the Stock Purchase was not a formal or informal condition to consummation of the
Merger; and
24. Parent and Merger Sub are authorized to make all of the
representations set forth herein.
The undersigned recognize that (i) your opinions will be based on the
representations set forth herein and on the statements contained in the
Agreements and documents related thereto, and (ii) your opinions will be subject
to certain limitations and qualifications including that they may not be relied
upon if any such representations are not accurate in all material respects.
The undersigned recognize that your opinions will not address any tax
consequences of the Merger or any action taken in connection therewith except as
expressly set forth in such opinions.
Very truly yours,
THE FIRST AMERICAN FINANCIAL
CORPORATION, a California corporation
By:__________________________________
Title:_______________________________
IMAGE ACQUISITION CORP.,
a California corporation
By:__________________________________
Title:_______________________________
<PAGE>
EXHIBIT M
TAX REPRESENTATION LETTER
TO BE EXECUTED BY THE COMPANY
Cooley Godward, LLP White & Case LLP
Five Palo Alto Square 633 West Fifth Street, Suite 1900
3000 El Camino Real Los Angeles, California 90071
Palo Alto California 94306-2155
Re: Merger pursuant to the Agreement and Plan of Merger (the "Reorganization
Agreement"), dated March __, 1998, among THE FIRST AMERICAN FINANCIAL
CORPORATION, a California corporation ("Parent"), IMAGE ACQUISITION CORP.,
a California corporation and a wholly owned subsidiary of Parent ("Merger
Sub"), DATA TREE CORPORATION, a California corporation (the "Company"), and
HARISH CHOPRA and the related Agreement of Merger between the Company and
Merger Sub (the "Agreement of Merger").
Ladies and Gentlemen:
This letter is supplied to you in connection with your rendering of opinions
regarding certain federal income tax consequences of the Merger. Unless
otherwise indicated, capitalized terms not defined herein have the meanings set
forth in the Reorganization Agreement or the Agreement of Merger. The
Reorganization Agreement and the Agreement of Merger, including exhibits and
schedules attached thereto, are collectively referred to as the "Agreements."
After consulting with its counsel and auditors regarding the meaning of and
factual support for the following representations, the undersigned hereby
certifies and represents that the following facts are now true and will continue
to be true as of the Effective Time of the Merger and thereafter where relevant:
1. Pursuant to the Merger, Merger Sub will merge with and into the
Company, and the Company will acquire all of the assets and liabilities of
Merger Sub. Specifically, the assets transferred to the Company pursuant to the
Merger will represent at least ninety percent (90%) of the fair market value of
the net assets and at least seventy percent (70%) of the fair market value of
the gross assets held by Merger Sub immediately prior to the Merger. In
addition, at least ninety percent (90%) of the fair market value of the net
assets and at least seventy percent (70%) of the fair market value of the gross
assets held by the Company immediately prior to the Merger will continue to be
held by the Company immediately after the Merger. For the purpose of determining
the percentage of the Company's and Merger Sub's net and gross assets held by
the Company immediately following the Merger, the following assets will be
treated as property held by Merger Sub or the Company, as the case may be,
immediately prior but not subsequent to the Merger: (i) assets disposed of by
the Company or Merger Sub (other than assets transferred from Merger Sub to the
Company in the Merger) prior to or subsequent to the Merger and in contemplation
thereof (including without limitation any asset disposed of by the Company,
other than in the ordinary course of business, pursuant to a plan or intent
existing during the period ending at the Effective Time of the Merger and
beginning with the commencement of negotiations (whether formal or informal)
with Parent regarding the Merger (the "Pre-Merger Period"); (ii) assets used by
the Company or Merger Sub to pay shareholders perfecting dissenters' rights or
other expenses or liabilities incurred in connection with the Merger and (iii)
assets used to make distribution, redemption or other payments in respect of
stock of the Company or rights to acquire such stock (including payments treated
as such for tax purposes) that are made in contemplation of the Merger or that
are related thereto;
2. Other than in the ordinary course of business or pursuant to its
obligations under the Agreements, the Company has made no transfer of any of its
assets (including any distribution of assets with respect to, or in redemption
of, stock) in contemplation of the Merger or during the Pre-Merger Period;
3. The Company's principal reasons for participating in the Merger are
bona fide business purposes unrelated to taxes;
4. At the Effective Time of the Merger, the Company will have no
outstanding equity interests other than those disclosed in Section __ of the
Reorganization Agreement. At the time of the Merger, except as specified in the
Reorganization Agreement, the Company will have no outstanding warrants,
options, or convertible securities or any other type of right outstanding
pursuant to which any person could acquire shares of the Company Capital Stock
or any other equity interest in the Company, other than those disclosed in
Section __ of the Reorganization Agreement or the Disclosure Schedule with
respect thereto;
5. In the Merger, shares of stock of the Company representing "Control"
of the Company will be exchanged solely for shares of voting stock of Parent. At
the Effective Time of the Merger, there will exist no rights to acquire the
Company Capital Stock or to vote (or restrict or otherwise control the vote of)
shares of stock of the Company which, if exercised, would affect Parent's
acquisition and retention of Control of the Company. For purposes of this
paragraph, shares of the stock of Company exchanged in the Merger for cash and
other property (including, without limitation, cash paid to shareholders of the
Company perfecting dissenters' rights, if any, or in lieu of fractional shares
of Parent Common Stock) will be treated as shares of stock of the Company
outstanding on the date of the Merger but not exchanged for shares of voting
stock of Parent. As used in this letter, "Control" shall consist of direct
ownership of shares of stock possessing at least eighty percent (80%) of the
total combined voting power of shares of all classes of stock entitled to vote
and at least eighty percent (80%) of the total number of shares of all other
classes of stock of the corporation. For purposes of determining Control, a
person shall not be considered to own shares of voting stock if rights to vote
such shares (or to restrict or otherwise control the voting of such shares) are
held by a third party (including a voting trust) other than an agent of such
person;
6. The total fair market value of all consideration other than shares
of Parent Common Stock received by shareholders of the Company in the Merger
(including, without limitation, cash paid to Company shareholders perfecting
dissenters' rights or in lieu of fractional shares of Parent Common Stock) will
be less than ten percent (10%) of the aggregate fair market value of shares of
stock of the Company outstanding immediately prior to the Merger;
7. The Company has no plan or intention to issue additional shares of
stock after the Merger, or take any other action, that would result in Parent
losing Control of the Company;
8. Except for transfers described in Section 368(a)(2)(C) of the Code
and Treasury Regulation Section 1.368-2(k)(2), the Company has no plan or
intention to sell or otherwise dispose of any of its assets or of any of the
assets acquired from Merger Sub in the Merger except for dispositions made in
the ordinary course of business or to pay expenses incurred by the Company
pursuant to the Merger;
9. The Company intends to continue its historic business or use a
significant portion of its historic business assets in a business following the
Merger;
10. The liabilities of the Company have been incurred by the Company in
the ordinary course of its business;
11. The fair market value of the Company's assets will, at the
Effective Time of the Merger, exceed the aggregate liabilities of the Company
plus the amount of liabilities, if any, to which such assets are subject;
12. The Company is not and will not be at the Effective Time of the
Merger an "investment company" within the meaning of Section 368(a)(2)(F)(iii)
and (iv) of the Code;
13. The Company is not and will not be at the Effective Time of the
Merger under the jurisdiction of a court in a Title 11 or similar case within
the meaning of Section 368(a)(3)(A) of the Code;
14. The Company has made no extraordinary distributions within the
meaning of Temporary Federal Treasury Regulation Section 1.368-IT(e) with
respect to its stock, prior to and in connection with the Merger;
15. The Company has not redeemed and no "related person" with respect
to the Company, as such term is defined by Treasury Regulation Section
1.368-1(e)(3), (without regard to Section 1.368-1(e)(3)(i)(A)), has purchased
any Company Capital Stock prior to and in connection with the Merger;
16. Except with respect to (i) payments of cash to shareholders of the
Company lieu of fractional shares of Parent Common Stock, and (ii) payments of
cash to shareholders of the Company perfecting dissenters' rights, one hundred
percent (100%) of the shares of stock of the Company outstanding immediately
prior to the Merger will be exchanged solely for shares of Parent Common Stock.
Thus, except as set forth in the preceding sentence, the Company intends that no
consideration be paid or received (directly or indirectly, actually or
constructively) for shares of stock of the Company other than shares of Parent
Common Stock. It is further represented that (i) all payments made for imaging
services to be provided by R. Squared Limited to Data Tree LLC are not in excess
of the fair market value of such services in the State of California, and such
payments are, in fact, less than amounts paid to other comparable providers of
such services in the State of California; (ii) with respect to the Promissory
Note of R. Squared Limited, in the principal amount of ____________ and bearing
interest at 8.0% per annum, contributed to Data Tree LLC in exchange for an
eighteen percent Membership Interest therein, such note represents the full
purchase price of such Membership Interest for an amount equal to and not less
than the fair market value of such Membership Interest; and (iii) with respect
to the Noncompetition Agreement contributed to Data Tree LLC in exchange for a
two percent Membership Interest therein, the value of such Noncompetition
Agreement represents the full purchase price of such Membership Interest for an
amount equal to and not less than the fair market value of such Membership
Interest;
17. The fair market value of the shares of Parent Common Stock received
by each shareholder of the Company will be approximately equal to the fair
market value of the shares of stock of the Company surrendered in exchange
therefor and the aggregate consideration received by shareholders of the Company
in exchange for their shares of stock of the Company will be approximately equal
to the fair market value of all of the outstanding shares of stock of the
Company immediately prior to the Merger;
18. Each of Merger Sub, Parent, the Company and each shareholder of the
Company will each pay separately his, her or its own expenses relating to the
Merger;
19. There is no intercorporate indebtedness existing between Parent and
the Company or between Merger Sub and the Company that was issued, acquired, or
will be settled at a discount as a result of the Merger; Parent will assume no
liabilities of the Company or any shareholder of the Company in connection with
the Merger;
20. The terms of the Reorganization Agreement and the other agreements
relating thereto are the product of arm's length negotiations;
21. None of the compensation received by any shareholder-employees of
the Company will be separate consideration for, or allocable to any of their
shares of stock of the Company; none of the shares of Parent Common Stock
received by any shareholder-employees of the Company will be separate
consideration for, or allocable to, any employment agreement or any covenants
not to compete; and the compensation paid to any shareholder-employees of the
Company will be for services actually rendered and will be commensurate with
amounts paid to third parties bargaining at arm's length for similar services;
22. With respect to each instance, if any, in which shares of stock of
the Company have been purchased by a shareholder of Parent (a "Shareholder")
during the Pre-Merger period (a "Stock Purchase"): (i) to the best knowledge of
the Company, (A) the Stock Purchase was made by such Shareholder on its own
behalf, rather than as a representative, or for the benefit of Parent, (B) the
Stock Purchase was entered into solely to satisfy the separate interests of such
Shareholder and the seller, and (C) the purchase price paid by such Shareholder
pursuant to the Stock Purchase was the product of arm's length negotiations; and
(ii) the Stock Purchase was not a formal or informal condition to consummation
of the Merger; and
23. The Company is authorized to make all of the representations set
forth herein.
The undersigned recognizes that (i) your opinions will be based on the
representations set forth herein and on the statements contained in the
Agreements and documents related thereto, and (ii) your opinions will be subject
to certain limitations and qualifications including that they may not be relied
upon if any such representations are not accurate in all material respects.
Notwithstanding anything herein to the contrary, the undersigned makes no
representations regarding any actions or conduct of the Company pursuant to
Parent's exercise of control over the Company after the Merger.
The undersigned recognizes that your opinions will not address any tax
consequences of the Merger or any action taken in connection therewith except as
expressly set forth in such opinions.
Very truly yours,
DATA TREE CORPORATION,
a California corporation
By:___________________________________
Title:________________________________
<PAGE>
ANNEX B
AGREEMENT OF MERGER
AGREEMENT OF MERGER, dated as of ________ __, 1998 (the "Merger
Agreement"), is made and entered into by and among The First American Financial
Corporation, a California corporation ("FAFCO"), Image Acquisition Corp., a
California corporation ("Merger Sub"), Data Tree Corporation, a California
corporation (the "Company"), and Harish Chopra, an individual residing in Rancho
Santa Fe, California (the "Major Shareholder"). The Company and Merger Sub are
sometimes hereinafter referred to as the "Constituent Corporations."
W I T N E S S E T H:
WHEREAS, FAFCO directly owns the one (1) outstanding share of stock of
Merger Sub;
WHEREAS, FAFCO, the Constituent Corporations and the Major Shareholder
have previously entered into an Agreement and Plan of Merger, dated as of March
27, 1998 (the "Agreement and Plan of Merger"), providing for certain
representations, warranties and agreements in connection with the transactions
contemplated hereby; and
WHEREAS, the respective boards of directors of the Constituent
Corporations deem it advisable and in the best interests of the Constituent
Corporations and in the best interest of the shareholders of the Constituent
Corporations that Merger Sub be merged with and into the Company (the "Merger")
so that the Company shall be the surviving corporation of the Merger.
NOW, THEREFORE, the parties hereto hereby agree as follows:
SECTION 1
THE MERGER
1.1 Effectiveness. The Merger shall become effective (the "Effective
Time") upon the filing of this Merger Agreement with the Secretary of State of
the State of California in accordance with Section 1103 of the California
General Corporation Law (the "CGCL").
1.2 Merger. At the Effective Time, (i) Merger Sub shall be merged with
and into the Company, (ii) the separate existence of Merger Sub shall thereupon
cease and (iii) the Company shall be the surviving corporation in the Merger
(the "Surviving Corporation") and shall continue its corporate existence, with
all of its purposes, objects, rights, privileges, powers, immunities and
franchises, under the laws of the State of California unaffected and unimpaired
by the Merger.
1.3 The Surviving Corporation. The Surviving Corporation shall succeed
to all of the rights, privileges, immunities and franchises of Merger Sub, all
of the properties and assets of Merger Sub and all of the debts, choses in
action and other interests due or belonging to Merger Sub and shall be subject
to, and responsible for, all of the debts, liabilities and obligations of Merger
Sub with the effect set forth in the CGCL.
1.4 Further Action. If at any time after the Effective Time any
further action is necessary or desirable to carry out the purposes of this
Merger Agreement or to vest the Surviving Corporation with the full right, title
and possession to all assets, property, rights, privileges, immunities, powers
and franchises of Merger Sub, the officers and directors of the Surviving
Corporation are fully authorized in the name of either or both of the
Constituent Corporations or otherwise to take all such action.
SECTION 2
CORPORATE GOVERNANCE MATTERS
2.1 Articles of Incorporation and Bylaws. At the Effective Time, the
Articles of Incorporation and the bylaws of the Company, as in effect
immediately prior to the Effective Time, shall be the Articles of Incorporation
of the Surviving Corporation.
SECTION 3
MANNER OF CONVERTING SHARES OF THE CONSTITUENT CORPORATIONS
3.1 Merger Sub Stock. At the Effective Time, each share of the Common
Stock of Merger Sub outstanding prior to the Effective Time shall automatically
be converted into and become one share of Common Stock of the Surviving
Corporation, and each certificate representing shares of Merger Sub shall,
without any action on the part of the holder thereof, be deemed to represent the
same number of shares of the Surviving Corporation.
3.2 Conversion of Company Common Stock. Except as provided in Section
3.5, at the Effective Time, each
share of Company Common Stock outstanding immediately prior to the Effective
Time shall be converted into the right to receive the Applicable Multiple (as
defined below) of fully paid and non-assessable shares of FAFCO Common Stock,
$1.00 par value (the "Shares"). The term "Applicable Multiple" shall mean a
fraction the numerator of which is the quotient resulting from the division of
the Purchase Price (as defined below) by the number of shares of Company Common
Stock outstanding as of the Effective time and the denominator of which is the
average of the last reported sales price of one Share as reported on the New
York Stock Exchange for the twenty consecutive trading days ending on the
trading day immediately prior to the special meeting of the Company's
shareholders at which the Company's shareholders will vote to approve the
Merger, the Agreement and Plan of Merger and this Merger Agreement. The term
"Purchase Price" means the difference between (x) $43,113,373 and (y) such
reasonable fees and expenses of the counsel, accountants and financial advisors
of the Company and personal counsel to the Major Shareholder which exceed
$1,000,000.
3.3 Closing of the Company's Stock Ledger. At and after the Effective
Time, all holders of certificates representing shares of Company Common Stock
that were outstanding immediately prior to the Effective Time shall cease to
have any rights as shareholders of the Company. At the close of business on the
day of the Effective Time-the stock ledger of the Company shall be closed with
respect to all shares of such Company Common Stock.
3.4 Exchange of Company Stock Certificates. At or prior to the
Effective Time, FAFCO shall deposit with the First American Trust Company (the
"Exchange Agent"), in trust for the holders of certificates (a "Company Stock
Certificate") which immediately prior to the Effective Time represented shares
of the Company's Common Stock, a certificate or certificates representing the
number of Shares which each shareholder of the Company is to receive in the
Merger. Upon surrender for cancellation to the Exchange Agent of a Company Stock
Certificate, together with the letter of transmittal provided to each Company
shareholder and duly executed and completed in accordance with the instructions
thereon, the Exchange Agent shall promptly transfer to such shareholder the
Shares to which such shareholder is entitled pursuant to Section 3.2. Until
surrendered as contemplated by this Section-3.4, each Company Stock Certificate
shall be deemed, from and after the Effective Time, to represent only the right
to receive shares of FAFCO Common Stock (and cash in lieu of any fractional
share of FAFCO Common Stock as contemplated by Section 3.5), pursuant to this
Merger Agreement. If any Company Stock Certificate shall have been lost, stolen
or destroyed, the Exchange Agent shall issue a certificate representing FAFCO
Common Stock with respect to such lost, stolen or destroyed Company Stock
Certificate in accordance with this Merger Agreement upon delivery by the owner
of such lost, stolen or destroyed Company Stock Certificate to the Surviving
Corporation of a bond in such sum as the Surviving Corporation may direct or
otherwise indemnify the Surviving Corporation in a manner satisfactory to the
Surviving Corporation against any claim that may be made against the Surviving
Corporation with respect to the Company Stock Certificate claimed to have been
lost, stolen or destroyed.
3.5 No Fractional Shares. No fractional shares of FAFCO Common Stock
shall be issued in connection with the Merger, and no certificates for any such
fractional shares shall be issued. In lieu of such fractional shares, any holder
of Company Common Stock who would otherwise be entitled to receive a fraction of
a share of FAFCO Common Stock shall, upon surrender of such holder's Company
Stock Certificate(s), be paid in cash in the form of a check drawn on FAFCO in
an amount (rounded to the nearest cent) equal to the value of such fractional
share of FAFCO Common Stock.
3.6 Dissenting Shares. Notwithstanding anything to the contrary
contained in this Merger Agreement, any shares of Company Common Stock
outstanding immediately prior to the Effective Time that were not voted in favor
of the Merger and are held by shareholders who have complied with the applicable
provisions of Chapter 13 of the CGCL (the "Dissenting Shares") shall not be
converted into or represent the right to receive any Shares in accordance with
Section 3.2 (or cash in lieu of fractional shares in accordance with Section
3.5), and each holder of Dissenting Shares shall be entitled only to such rights
as may be granted to such holder under Chapter 13 of the CGCL. From and after
the Effective Time, a holder of Dissenting Shares shall not have and shall not
be entitled to exercise any of the voting rights or other rights of a
shareholder of the Surviving Corporation. If any holder of Dissenting Shares
shall fail to assert or perfect, or shall waive, rescind, withdraw or otherwise
lose, such holder's right to dissent and obtain payment under Chapter 13 of the
CGCL, then such shares shall automatically be converted into and shall represent
only the right to receive (upon the surrender of Company Stock Certificate(s)
previously representing such shares) FAFCO Common Stock in accordance with
Section 3.2 (and cash in lieu of any fractional share in accordance with Section
3.5).
SECTION 4
MISCELLANEOUS
4.1 Termination.
(a) Notwithstanding the approval of this Merger Agreement by the
shareholders of the Company and Merger Sub, this Merger Agreement may be
terminated at any time prior to the Effective Time by mutual agreement of the
parties to this Merger Agreement.
(b) Notwithstanding the approval of this Merger Agreement by the
shareholders of the Company and Merger Sub, this Merger Agreement shall
terminate automatically in the event that the Agreement and Plan of Merger shall
be terminated as provided therein.
(c) In the event of the termination of this Merger Agreement as
provided above, this Merger Agreement shall become void and there shall be no
liability on the part of the Company, Merger Sub, FAFCO or the Major Shareholder
or the Company's, Merger Sub's or FAFCO's respective officers or directors,
except as otherwise provided in the Agreement and Plan of Merger.
4.2 Amendment. This Merger Agreement may be amended by the parties
hereto any time before or after approval hereof by the shareholders of the
Company or Merger Sub, but after such approval, no amendment shall be made which
by law requires the further approval of such shareholders without obtaining such
approval. This Merger Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
4.3 Counterparts. In order to facilitate the filing and recording of
this Merger Agreement, the same may be executed in any number of counterparts,
each of which shall be deemed to be an original.
IN WITNESS WHEREOF, the parties have duly executed this Agreement of
Merger as of the date first written above.
THE FIRST AMERICAN FINANCIAL
CORPORATION
By:
Parker S. Kennedy
President
By:
Mark R Arnesen
Secretary
IMAGE ACQUISITION CORP.
By:
Parker S. Kennedy
President
By:
Mark R Arnesen
Secretary
DATA TREE CORPORATION
By:
Harish K. Chopra
President
By:
Michael D. Reynolds
Secretary
Harish K. Chopra
<PAGE>
ANNEX C
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13. DISSENTERS' RIGHTS
1300. [RIGHT TO REQUIRE PURCHASE - "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED]. -- (a) If the approval of the outstanding shares (Section
152) of a corporation is required for a reorganization under subdivisions (a)
and (b) or subdivision (e) or (f) of Section 1201, each shareholder of the
corporation entitled to vote on the transaction and each shareholder of a
subsidiary corporation in a short-form merger may, by complying with this
chapter, require the corporation in which the shareholder holds shares to
purchase for cash at their fair market value the shares owned by the shareholder
which are dissenting shares as defined in subdivision (b). The fair market value
shall be determined as of the day before the first announcement of the terms of
the proposed reorganization or short-form merger, excluding any appreciation or
depreciation in consequence of the proposed action, but adjusted for any stock
split, reverse stock split, or share dividend which becomes effective
thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) or paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case were
the approval required by Section 1201 is sought by written consent rather
than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
1301. [DEMAND FOR PURCHASE]. -- (a) If, in the case of a reorganization,
any shareholders of a corporation have a right under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivisions (b) thereof, to require
the corporation to purchase their shares for cash, such corporation shall mail
to each such shareholder a notice of the approval of the reorganization by its
outstanding shares (Section 152) within 10 days after the date of such approval,
accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this section, a
statement of the price determined by the corporation to represent the fair
market value of the dissenting shares, and a brief description of the procedure
to be followed if the shareholder desires to exercise the shareholder's right
under such sections. The statement of price constitutes an offer by the
corporation to purchase at the price stated any dissenting shares as defined in
subdivision (b) of Section 1300, unless they lose their status as dissenting
shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
1302. [ENDORSEMENT OF SHARES]. -- Within 30 days after the date on which
notice of the approval by the outstanding shares or the notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder, the shareholder
shall submit to the corporation at its principal office or at the office of any
transfer agent thereof, (a) if the shares are certificated securities, the
shareholder's certificates representing any shares which the shareholder demands
that the corporation purchase, to be stamped or endorsed with a statement that
the shares are dissenting shares or to be exchanged for certificates of
appropriate denomination so stamped or endorsed or (b) if the shares are
uncertificated securities, written notice of the number of shares which the
shareholder demands that the corporation purchase. Upon subsequent transfers of
the dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.
1303. [AGREED PRICE - TIME FOR PAYMENT].-- (a) If the corporation and the
shareholder agree that the shares are dissenting shares and agree upon the price
of the shares, the dissenting shareholder is entitled to the agreed price with
interest thereon at the legal rate on judgments from the date of the agreement.
Any agreements fixing the fair market value of any dissenting shares as between
the corporation and the holders thereof shall be filed with the secretary of the
corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
1304. [DISSENTER'S ACTION TO ENFORCE PAYMENT]. -- (a) If the corporation
denies that the shares are dissenting shares, or the corporation and the
shareholder fail to agree upon the fair market values of the shares, then the
shareholder demanding purchase of such shares as dissenting shares or any
interested corporation, within six months after the date on which notice of the
approval by the outstanding shares (Section 152) or notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder, but not
thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305. [APPRAISER'S REPORT - PAYMENT - COSTS]. -- (a) If the court appoints
an appraiser or appraisers, they shall proceed forthwith to determine the fair
market value per share. Within the time fixed by the court, the appraisers, or a
majority of them, shall make and file a report in the office of the clerk of the
court. Thereupon, on the motion of any party, the report shall be submitted to
the court and considered on such evidence as the court considers relevant. If
the court finds the report reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
1306. [DISSENTING SHAREHOLDER'S STATUS AS CREDITOR]. -- To the extent that
the provisions of Chapter 5 prevent the payment to any holders of dissenting
shares of their fair market value, they shall become creditors of the
corporation for the amount thereof together with interest at the legal rate on
judgments until the date of payment, but subordinate to all other creditors in
any liquidation proceeding, such debt to be payable when permissible under the
provisions of Chapter 5.
1307. [DIVIDENDS PAID AS CREDIT AGAINST PAYMENT]. -- Cash dividends
declared and paid by the corporation upon the dissenting shares after the date
of approval of the reorganization by the outstanding shares (Section 152) and
prior to payment for the shares by the corporation shall be credited against the
total amount to be paid by the corporation therefor.
1308. [CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS]. --
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
1309. [TERMINATION OF DISSENTING SHAREHOLDER STATUS]. -- Dissenting shares
lose their status as dissenting shares and the holders thereof cease to be
dissenting shareholders and cease to be entitled to require the corporation to
purchase their shares upon the happening of any of the following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
1310. [SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION]. -- If
litigation is instituted to test the sufficiency of regularity of the votes of
the shareholder in authorizing a reorganization, any proceedings under Section
1304 and 1305 shall be suspended until final determination of such litigation.
1311. [EXEMPT SHARES]. -- This chapter, except Section 1312, does not apply
to classes of shares whose terms and provisions specifically set forth the
amount to be paid in respect to such shares in the event of a reorganization or
merger.
1312. [ATTACKING VALIDITY OF REORGANIZATION OR MERGER]. -- (a) No
shareholder of a corporation who has a right under this chapter to demand
payment of cash for the shares held by the shareholder shall have any right at
law or in equity to attack the validity of the reorganization or short-form
merger, or to have the reorganization or short-form merger set aside or
rescinded, except in an action to test whether the number of shares required to
authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days,
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
<PAGE>
ANNEX D
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
--------------------- ---------------------
COMMISSION FILE NUMBER: 0-3658
----------------
THE FIRST AMERICAN FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
INCORPORATED IN CALIFORNIA 95-1068610
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
114 EAST FIFTH STREET, SANTA ANA, CALIFORNIA 92701-4642
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(714) 558-3211
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON NEW YORK STOCK EXCHANGE
RIGHTS TO PURCHASE SERIES A
JUNIOR PARTICIPATING PREFERRED NEW YORK STOCK EXCHANGE
------------------------------ -----------------------
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
----------------
Indicate by check mark whether registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (17 C.F.R. 229.405) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [_]
On March 18, 1998, the aggregate market value of voting stock held by non-
affiliates was $887,616,253.
On March 18, 1998, there were 17,850,189 shares of Common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement are incorporated by
reference in Part III of this report. The definitive proxy statement will be
filed no later than 120 days after the close of Registrant's fiscal year.
This report includes 58 pages.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS.
The Company
The First American Financial Corporation (the "Company") was organized in
1894 as Orange County Title Company, succeeding to the business of two title
abstract companies founded in 1889 and operating in Orange County, California.
In 1924, the Company commenced issuing title insurance policies. In 1986, the
Company began a diversification program by acquiring and developing financial
service businesses closely related to the real estate transfer and closing
process. The Company is a California corporation and has its executive offices
at 114 East Fifth Street, Santa Ana, California 92701-4642. The Company's
telephone number is (714) 558-3211. Unless the context otherwise indicates, the
"Company," as used herein, refers to The First American Financial Corporation
and its subsidiaries.
General
The Company, through its subsidiaries, is engaged in the business of
providing real estate-related financial and information services to real
property buyers and mortgage lenders. These services include title insurance,
tax monitoring, credit reporting, property data services, flood certification,
field inspection services, appraisal services, mortgage loan servicing systems,
mortgage document preparation and home warranty services. The Company also
provides investment, trust and thrift services. Financial information regarding
each of the Company's primary business segments is included in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 8. Financial Statements and Supplementary Data" of Part II
of this report. Although industry-wide data for 1997 are not currently
available, the Company believes that its wholly owned subsidiary, First American
Title Insurance Company ("First American"), was the largest title insurer in the
United States, based on premiums written, and its wholly owned subsidiary, First
American Real Estate Information Services, Inc., was the nation's largest
provider of flood zone determinations, based on the number of flood zone
determination reports issued, the nation's largest mortgage credit reporting
service, based on the number of credit reports issued, and the nation's second
largest provider of tax monitoring services, based on the number of loans under
service. The Company also believes that its majority owned subsidiary, First
American Home Buyers Protection Corporation, was the second largest provider of
home warranties in the United States, based on the number of home protection
contracts under service. Substantially all of the Company's title insurance, tax
monitoring, credit reporting, flood zone determination and property information
business results from resales and refinancings of real estate, including
residential and commercial properties, and from the construction and sale of new
properties. The Company's home warranty business results from residential
resales and does not benefit from refinancings or commercial transactions.
Resales and refinancings of residential properties constitute the major source
of the Company's revenues. Real estate activity is cyclical in nature and is
affected greatly by the cost and availability of long term mortgage funds. Real
estate activity and, in turn, the Company's revenue base, can be adversely
affected during periods of high interest rates and/or limited money supply.
However, this adverse effect is mitigated in part by the continuing
diversification of the Company's operations into areas outside of its
traditional title insurance business.
Overview of Title Insurance Industry
Title insurance has become increasingly accepted as the most efficient
means of determining title to, and the priority of interests in, real estate in
nearly all parts of the United States. Today, virtually all real property
mortgage lenders require their borrowers to obtain a title insurance policy at
the time a mortgage loan is made.
Title Policies. Title insurance policies are insured statements of the
condition of title to real property, showing priority of ownership as indicated
by public records, as well as outstanding liens, encumbrances and other matters
of record, and certain other matters not of public record. Title insurance
policies are issued on the basis of a title report, which is prepared after a
search of the public records, maps, documents and prior title policies to
ascertain the existence of easements, restrictions, rights of way, conditions,
encumbrances or other matters affecting the title to, or use of, real property.
In certain instances, a visual inspection of the property is also made. To
facilitate the preparation of title reports, copies of public records, maps,
documents and prior title policies may be compiled and indexed to specific
properties in an area. This compilation is known as a "title plant."
The beneficiaries of title insurance policies are generally real estate
buyers and mortgage lenders. A title insurance policy indemnifies the named
insured and certain successors in interest against title defects, liens and
encumbrances existing as of the date of the policy and not specifically excepted
from its provisions. The policy typically provides coverage for the real
property mortgage lender in the amount of its outstanding mortgage loan balance
and for the buyer in the amount of the purchase price. Coverage under a title
insurance policy issued to a real property mortgage lender generally terminates
upon the sale of the insured property unless the owner carries back a mortgage
or makes certain warranties as to the title.
Before issuing title policies, title insurers seek to limit their risk of
loss by accurately performing title searches and examinations. The major
expenses of a title company relate to such searches and examinations, the
preparation of preliminary reports or commitments and the maintenance of title
plants, and not from claim losses as in the case of property and casualty
insurers.
The Closing Process. Title insurance is essential to the real estate
closing process in most transactions involving real property mortgage lenders.
In a typical residential real estate sale transaction, title insurance is
generally ordered on behalf of an insured by a real estate broker, lawyer,
developer, lender or closer involved in the transaction. Once the order has been
placed, a title insurance company or an agent conducts a title search to
determine the current status of the title to the property. When the search is
complete, the title company or agent prepares, issues and circulates a
commitment or preliminary title report ("commitment") to the parties to the
transaction. The commitment summarizes the current status of the title to the
property, identifies the conditions, exceptions and/or limitations that the
title insurer intends to attach to the policy and identifies items appearing on
the title that must be eliminated prior to closing.
The closing function, sometimes called an escrow in western states, is
often performed by a lawyer, an escrow company or a title insurance company or
agent (such person or entity, the "closer"). Once documentation has been
prepared and signed, and mortgage lender payoff demands are in hand, the
transaction is "closed." The closer records the appropriate title documents and
arranges the transfer of funds to pay off prior loans and extinguish the liens
securing such loans. Title policies are then issued insuring the priority of the
mort- gage of the real property mortgage lender in the amount of its mortgage
loan and the buyer in the amount of the purchase price. The time lag between the
opening of the title order and the issuance of the title policy is usually be-
tween 30 and 90 days.
Issuing the Policy: Direct vs. Agency. A title policy can be issued
directly by a title insurer or indirectly on behalf of a title insurer through
agents which are not themselves licensed as insurers. Where the policy is issued
by a title insurer, the search is performed by or at the direction of the title
insurer, and the premium is collected and retained by the title insurer. Where
the policy is issued by an agent, the agent performs the search, examines the
title, collects the premium and retains a portion of the premium. The remainder
of the premium is remitted to the title insurer as compensation for bearing the
risk of loss in the event a claim is made under the policy. The percentage of
the premium retained by an agent varies from region to region. A title insurer
is obligated to pay title claims in accordance with the terms of its policies,
regardless of whether it issues its policy directly or indirectly through an
agent.
Premiums. The premium for title insurance is due and earned in full when
the real estate transaction is closed. Premiums are generally calculated with
reference to the policy amount. The premium charged by a title insurer or an
agent is subject to regulation in most areas. Such regulations vary from state
to state.
THE COMPANY'S TITLE INSURANCE OPERATIONS
Overview. The Company, through First American Title Insurance Company and
its subsidiaries, transacts the business of title insurance through a network of
more than 300 branch offices and over 4,000 independent agents. Through its
branch office and agent network, the Company issues policies in all states
(except Iowa), the District of Columbia, Puerto Rico, Guam, the U.S. Virgin
Islands, the Bahama Islands, Canada, Mexico, Bermuda, the United Kingdom and
Australia. In Iowa, the Company provides abstracts of title only, because title
insurance is not permitted. Through acquisitions and start-ups during the
mid-1980s, the Company has grown from a large regional company to a nationwide
company, becoming less dependent on operating revenues from any one state or
region.
Based on industry statistics showing premiums written in the major areas in
which the Company operates, in 1996, the Company had the largest or second
largest share of the title insurance market in 30 states and in the District of
Columbia. In addition, the Company's national market share grew from 20.1% in
1995 to 20.4% in 1996. Industry statistics for 1997 are not currently available.
The Company plans to continue increasing its share of the title insurance
market through strategic acquisitions and further development of its existing
branch office and agency operations. The Company also will continue to focus on
expanding its share of the higher margin title insurance business conducted on
behalf of commercial clients. The Company believes its national commercial
market share has grown through programs directed at major developers, lenders
and law firms.
Sales and Marketing. The Company markets its title insurance services to a
broad range of customers. The Company believes that its primary source of
business is from referrals from persons in the real estate community, such as
independent escrow companies, real estate brokers, developers, mortgage brokers,
mortgage bankers, financial institutions and attorneys. In addition to the
referral market, the Company markets its title insurance services directly to
large corporate customers and certain mortgage lenders. As title agents
contribute a large portion of the Company's revenues, the Company also markets
its title insurance services to independent agents. The Company's marketing
efforts emphasize the quality and timeliness of its services and its national
presence.
While virtually all personnel in the Company's title insurance business
assist in marketing efforts, the Company maintains a sales force of
approximately 1,000 persons dedicated solely to marketing. This sales force is
located throughout the Company's branch office network. The Company provides its
sales personnel with training in selling techniques, and each branch manager is
responsible for hiring the sales staff and ensuring that sales personnel under
his or her supervision are properly trained. In addition to this sales force,
the Company has approximately 20 sales personnel in its national accounts
department. One of the responsibilities of the national accounts department
sales personnel is the coordination of marketing efforts directed at large real
estate lenders and companies developing, selling, buying or brokering properties
on a multistate basis. The Company also supplements the efforts of its sales
force through general advertising in various trade and professional journals.
The Company's increased commercial sales effort during the past decade has
enabled the Company to expand its commercial business base. Because commercial
transactions involve higher coverage amounts and yield higher premiums,
commercial title insurance business generates greater profit margins than does
residential title insurance business. Accordingly, the Company plans to continue
to emphasize its commercial sales program.
Although sales outside of the United States account for a small percentage
of the Company's revenues, the Company believes that the acceptance of title
insurance in foreign markets has increased in recent years. Accordingly, the
Company plans to continue its international sales efforts, particularly in
Canada, the United Kingdom and Australia.
Underwriting. Before a title insurance policy is issued, a number of
underwriting decisions are made. For example, matters of record revealed during
the title search may require a determination as to whether an exception should
be taken in the policy. The Company believes that it is important for the
underwriting function to operate efficiently and effectively at all decision
making levels so that transactions may proceed in a timely manner. To perform
this function, the Company has underwriters at the branch level, the regional
level and the national level. Based on the low turnover and longevity of First
American's employees and its continuing training programs, the Company believes
that its underwriting personnel are among the most experienced and well trained
in the title insurance industry.
Agency Operations. The relationship between the Company and each agent is
governed by an agency agreement which states the conditions under which the
agent is authorized to issue title insurance policies on behalf of the Company.
The agency agreement also prescribes the circumstances under which the agent may
be liable to the Company if a policy loss is attributable to error of the agent.
Such agency agreements typically have a term of one to five years and are
terminable immediately for cause.
Due to the high incidence of agency fraud in the title insurance industry
during the late 1980s, the Company instituted measures to strengthen its agent
selection and audit programs. In determining whether to engage an independent
agent, the Company investigates the agent's experience, background, financial
condition and past performance. The Company maintains loss experience records
for each agent and conducts periodic audits of its agents. The Company has also
increased the number of agent representatives and agent auditors that it
employs. Agent representatives periodically visit agents and examine their books
and records. In addition to periodic audits, a full agent audit will be
triggered if certain "warning signs" are evident. Warning signs that can trigger
an audit include the failure to implement Company-required accounting controls,
shortages of escrow funds and failure to remit underwriting fees on a timely
basis.
Title Plants. The Company's network of title plants constitutes one of its
principal assets. A title search is conducted by searching the public records or
utilizing a title plant. While public records are indexed by reference to the
names of the parties to a given recorded document, most title plants arrange
their records on a geographic basis. Because of this difference, records of a
title plant are generally easier to search. Most title plants also index prior
policies, adding to searching efficiency. Many title plants are computerized.
Certain offices of the Company utilize jointly owned plants or utilize a plant
under a joint user agreement with other title companies. The Company believes
its title plants, whether wholly or partially owned or utilized under a joint
user agreement, are among the best in the industry.
With the formation of a limited liability corporation ("LLC") with Experian
Group on January 1, 1998, the Company enhanced its investment in title plants.
Experian Group contributed to the LLC its real estate information division,
which the Company believes is the nation's leading operator of title plants,
with the second largest repository of imaged title documents.
The Company's title plants are carried on its balance sheet at original
cost, which includes the cost of producing or acquiring interests in title
plants or the appraised value of subsidiaries' title plants at dates of
acquisition for companies accounted for as purchases. Thereafter, the cost of
daily maintenance of these plants is charged to expense as incurred. A properly
maintained title plant has an indefinite life and does not diminish in value
with the passage of time. Therefore, in accordance with generally accepted
accounting principles, no provision is made for depreciation of these plants.
Since each document must be reviewed and indexed into the title plant, such
maintenance activities constitute a significant item of expense. The Company is
able to offset title plant maintenance costs at its plants through joint
ownership and access agreements with other title insurers and title agents.
Reserves for Claims and Losses. The Company provides for title insurance
losses based upon its historical experience by a charge to expense when the
related premium revenue is recognized. The resulting reserve for known claims
and incurred but not reported claims reflects management's best estimate of the
total costs required to settle all claims reported to the Company and claims
incurred but not reported, and is considered by the Company to be adequate for
such purpose.
In settling claims, the Company occasionally purchases and ultimately sells
the interest of the insured in the real property or the interest of the claimant
adverse to the insured. The assets so acquired are carried at the lower of cost
or fair value, less costs to sell. Notes, real estate and other assets purchased
or otherwise acquired in settlement of claims, net of valuation reserves,
totaled $12.2 million, $5.0 million and $3.9 million, respectively, as of
December 31, 1997.
Reinsurance and Coinsurance. The Company assumes and distributes large
title insurance risks through mechanisms of reinsurance and coinsurance. In
reinsurance agreements, in consideration for a portion of the premium, the
reinsurer accepts that part of the risk which the primary insurer cedes to the
reinsurer over and above the portion retained by the primary insurer. The
primary insurer, however, remains liable for the total risk in the event that
the reinsurer does not meet its obligation. As a general rule, the Company does
not retain more than $25 million of coverage on any single policy. Under
coinsurance agreements, each coinsurer is jointly and severally liable for the
risk insured, or for so much thereof as is agreed to by the parties. The
Company's reinsurance activities account for less than 1% of its total title
insurance operating revenues.
Competition. The title insurance business is highly competitive. The number
of competing companies and the size of such companies varies in the different
areas in which the Company conducts business. Generally, in areas of major real
estate activity, such as metropolitan and suburban localities, the Company
competes with many other title insurers. Approximately 90 title insurance
underwriters are members of the American Land Title Association, the title
insurance industry's national trade association. The Company's major nationwide
competitors in its principal markets include Chicago Title and Trust Company
(which also includes Ticor Title Insurance Company and Security Union Title
Insurance Company) Land America Title Insurance Company (formerly Commonwealth
Land Title Insurance Company and Lawyers Title Insurance Company), Stewart Title
Guaranty Company, Old Republic Title Insurance Group and Fidelity National Title
Insurance Company. In addition to these nationwide competitors, numerous agency
operations throughout the country provide aggressive competition on the local
level.
The Company believes that competition for title insurance business is based
primarily on the quality and timeliness of service, because parties to real
estate transactions are usually concerned with time schedules and costs
associated with delays in closing transactions. In those states where prices are
not established by regulatory authorities, the price of title insurance policies
is also an important competitive factor. The Company believes that it provides
quality service in a timely manner at competitive prices.
THE COMPANY'S RELATED BUSINESSES
As an adjunct to its title insurance business, in 1986 the Company embarked
on a diversification program by acquiring and developing financial service
businesses closely related to the real estate transfer and closing process. To
date, these businesses include tax monitoring, credit reporting, property data
services, flood certification, field inspection services, appraisal services,
mortgage loan servicing systems, mortgage document preparation and home warranty
services. The development of these businesses has allowed the Company to become
the nation's leading company offering a full range of services to real property
buyers and mortgage lenders. The Company also provides investment, trust and
thrift services.
The Real Estate Information Service Business. The real estate information
service business encompasses tax monitoring, mortgage credit reporting, flood
certification, mortgage loan servicing systems and other property information
services.
The tax monitoring service, established by the Company in 1987, advises
real property mortgage lenders of the status of property tax payments due on
real estate securing their loans. With the acquisition of TRTS Data Services,
Inc., (now named First American Real Estate Information Services, Inc.) in
November 1991, the Company believes that it is the second largest provider of
tax monitoring services in the United States.
Under a typical contract, a tax service provider monitors, on behalf of a
mortgage lender, the real estate taxes owing on properties securing such
lender's mortgage loans for the life of such loans. In general, providers of tax
monitoring services, such as the Company's tax service, indemnify mortgage
lenders against losses resulting from a failure to monitor delinquent taxes.
Where a mortgage lender requires that tax payments be impounded on behalf of
borrowers, providers of tax monitoring services, such as the Company's tax
service, may be required to monitor and oversee the transfer of these monies to
the taxing authorities and provide confirmation to lenders that such taxes have
been paid.
The Company's tax service business markets its product through a nationwide
sales staff which calls on servicers and originators of mortgage loans. The
Company's primary source of tax service business is from large multistate
mortgage lenders. The Company's only major nationwide competitor in the tax
service business is Transamerica Real Estate Tax Service. Because of its broad
geographic coverage and the large number of mortgage loans not being serviced by
a third party tax service provider, the Company believes that it is well
positioned to increase its market share in the tax service market.
The fee charged to service each mortgage loan varies from region to region,
but generally falls within the $44 to $95 price range and is paid in full at the
time the contract is executed. The Company recognizes revenues from tax service
contracts over the estimated duration of the contracts as the related servicing
costs are estimated to occur. However, income taxes are paid on the entire fee
in the year the fee is received. The Company maintains minimal reserves for
losses relating to its tax monitoring services because historically the
Company's losses relating to such services have been negligible, and the Company
is not presently aware of any reason why its historical loss experience will not
continue at current levels.
The Company's credit reporting service provides credit information reports
for mortgage lenders throughout the United States. These reports are derived
from two or more credit bureau sources and are summarized and prepared in a
standard form acceptable to mortgage loan originators and secondary mortgage
purchasers. The credit reporting service also provides prequalifying reports,
merged credit data, resident screening services, business reports, credit
scoring tools and personal credit reports. It also has recently branched into
the consumer lending and risk scoring areas, providing credit reporting and
information management services to automobile dealers, consumers and home equity
lenders nationwide. The Company's credit reporting service has grown primarily
through acquisitions. In 1994, the Company acquired all of the minority
interests in its lower tier subsidiaries Metropolitan Credit Reporting Services,
Inc., and Metropolitan Property Reporting Services, Inc. In 1994, the Company
also acquired California Credit Data, Inc., and Prime Credit Reports, Inc., and
in 1995, the Company acquired Credco, Inc. (now named First American Credco,
Inc.). With the acquisition of First American Credco, Inc., the Company believes
that it is now the largest mortgage credit reporting service in the United
States.
In January 1995, the Company acquired Flood Data Services, Inc. (now named
First American Flood Data Services, Inc.). This business furnishes to mortgage
lenders flood zone determination reports, which provide information on whether
or not property securing a loan is in a governmentally delineated special flood
hazard area. Federal legislation passed in 1994 requires that most mortgage
lenders obtain a determination of the current flood zone status at the time each
loan is originated and obtain updates during the life of the loan. First
American Flood Data Services, Inc., is the largest provider of flood zone
determinations in the United States.
In April 1996, the Company acquired the Excelis Mortgage Loan Servicing
System (MLS), now known as Excelis, Inc. Excelis MLS is the only commercially
available real-time on-line servicing system that has been developed since 1990
to meet increasingly sophisticated market demands. The software employs
rules-based technology which enables the user to customize the system to fit its
individual servicing criteria and policies.
In December 1996, the Company acquired Ward Associates, now known as First
American Field Services. The company was combined with First American's existing
field services company to provide comprehensive inspection and property
preservation services to mortgage lenders nationwide. With the acquisition, the
Company believes that it is now the second largest field services company in the
United States.
In May 1997, the Company purchased all of the operations of SMS, other than
SMS' flood zone determination business. SMS is a leading provider of real estate
information services to the U.S. mortgage and title insurance industries. The
acquired businesses include SMS' credit division, which the Company believes is
the third largest provider of U.S. mortgage credit information; SMS' property
appraisal division, which the Company believes is the second largest provider of
U.S. appraisal services; SMS' title division, which provides title and closing
services throughout the United States, servicing primarily home equity mortgage
institutions; SMS' settlement services business, which provides title plant
systems and accounting services, as well as escrow closing software, to the
title industry; and a controlling interest in what is believed by the Company to
be the largest mortgage document preparation firm.
On January 1, 1998, the Company and its real estate information service
subsidiaries (other than Excelis, Inc.) (the "Real Estate Information
Subsidiaries") consummated a business transaction with Experian Group
("Experian"), pursuant to which First American Real Estate Solutions LLC
("FARES") was established. Under the transaction, the Real Estate Information
subsidiaries contributed substantially all of their assets and liabilities to
FARES in exchange for an 80% ownership interest and Experian transferred
substantially all of the assets and liabilities of its Real Estate Solutions
division ("RES") to FARES in exchange for a 20% ownership interest. RES is
believed to be the nation's foremost supplier of core real estate data,
providing, among other things, property valuation information, title
information, tax information and imaged title documents. As a result of this
transaction, the Company believes that FARES will become the nation's largest
and most diverse provider of information technology and decision support
solutions for the mortgage and real estate industries.
The Home Warranty Business. The Company's home warranty business commenced
operations in 1984, in part with the proceeds of a $1.5 million loan from the
Company which was, in 1986, converted to a majority equity interest. The Company
currently owns 79% of its home warranty business, which is operated as a second
tier subsidiary, with the balance owned by management of that subsidiary. The
Company's home warranty business issues one-year warranties which protect
homeowners against defects in household systems and appliances, such as
plumbing, water heaters and furnaces. The Company's home warranty subsidiary
currently charges approximately $245 to $295 for its basic home warranty
contract. Optional coverage is available for air conditioners, pools, spas,
washers, dryers and refrigerators for charges ranging from approximately $25 to
$125. For an additional charge, coverage is renewable annually at the option of
the homeowner upon approval by the home warranty subsidiary. Fees for the
warranties are paid at the closing of the home purchase and are recognized
monthly over a 12-month period. Home warranties are marketed through real estate
brokers and agents. This business is conducted in certain counties of Arizona,
California, Nevada, Texas, Utah and Washington. In early 1997, the home warranty
subsidiary expanded operations to North and South Carolina. The principal
competitor of the Company's home warranty business is American Home Shield, a
subsidiary of Service Master L.P.
The Trust Business. Since 1960, the Company has conducted a general trust
business in California, acting as trustee when so appointed pursuant to court
order or private agreement. In 1985, the Company formed a banking subsidiary
into which its subsidiary trust operation was merged. As of December 31, 1997,
the trust operation was administering fiduciary and custodial assets having a
market value in excess of $1.3 billion.
The Thrift Business. During 1988, the Company, through a majority owned
subsidiary, acquired an industrial loan corporation (the "Thrift") that accepts
thrift deposits and uses deposited funds to originate and purchase loans secured
by commercial properties in Southern California. As of December 31, 1997, the
Thrift had approximately $62.5 million of demand deposits and $65.5 million of
loans outstanding.
The loans made or acquired by the Thrift currently range in amount from
$20,000 to $1,105,000 with an average loan balance of $270,500. Loans are made
only on a secured basis, at loan-to-value percentages no greater than 75%. The
Thrift specializes in making commercial real estate loans. In excess of 93% of
the Thrift's loans are made on a variable rate basis. The average yield on the
Thrift's loan portfolio as of December 31, 1997, was 11%. A number of factors
are included in the determination of average yield, principal among which are
loan fees and closing points amortized to income, prepayment penalties recorded
as income, and amortization of discounts on purchased loans. The Thrift's
primary competitors in the Southern California commercial real estate lending
market are local community banks, other thrift and loan companies and, to a
lesser extent, commercial banks. The Company believes that many borrowers who
might be eligible for loans from commercial banks use thrift and loan companies,
such as the Thrift, because, in general, thrift and loan companies offer longer
maturity loans than do commercial banks, which typically offer one-year
renewable loans. There is, however, a higher degree of risk associated with
longer term loans than shorter term loans. The Thrift's average loan is 60
months in duration.
The performance of the Thrift's loan portfolio is evaluated on an ongoing
basis by management of the Thrift. The Thrift places a loan on nonaccrual status
when two payments become past due. When a loan is placed on nonaccrual status,
the Thrift's general policy is to reverse from income previously accrued but
unpaid interest. Income on such loans is subsequently recognized only to the
extent that cash is received and future collection of principal is probable.
Interest income on nonaccrual loans which would have been recognized during the
year ended December 31, 1997, if all of such loans had been current in
accordance with their original terms, totaled $35,000. Interest income actually
recognized on these nonaccrual loans for the year ended December 31, 1997, was
$24,000. The following table sets forth the amount of the Thrift's nonperforming
loans as of the dates indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995 1994 1993
---- ---- ------ ------ ------
($000)
<S> <C> <C> <C> <C> <C>
NONPERFORMING ASSETS:
Loans accounted for on a nonaccrual basis........ $287 $166 $1,956 $1,741 $1,833
Accruing loans past due 90 or more days..........
Troubled debt restructurings.....................
---- ---- ------ ------ ------
Total.......................................... $287 $166 $1,956 $1,741 $1,833
==== ==== ====== ====== ======
</TABLE>
Based on a variety of factors concerning the creditworthiness of its
borrowers, the Thrift determined that it had $1,419,000 of potential problem
loans in existence as of December 31, 1997.
The Thrift's allowance for loan losses is established through charges to
earnings in the form of provision for loan losses. Loan losses are charged to,
and recoveries are credited to, the allowance for loan losses. The provision for
loan losses is determined after considering various factors, such as loan loss
experience, maturity of the portfolio, size of the portfolio, borrower credit
history, the existing allowance for loan losses, current charges and recoveries
to the allowance for loan losses, the overall quality of the loan portfolio, and
current economic conditions, as determined by management of the Thrift,
regulatory agencies and independent credit review specialists. While many of
these factors are essentially a matter of judgment and may not be reduced to a
mathematical formula, the Company believes that, in light of the collateral
securing its loan portfolio, the Thrift's current allowance for loan losses is
an adequate allowance against foreseeable losses.
The following table provides certain information with respect to the
Thrift's allowance for loan losses as well as charge-off and recovery activity.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ----- -----
($000)
<S> <C> <C> <C> <C> <C>
Allowance for Loan Losses:
Balance at beginning of year........... $1,050 $1,344 $ 950 $ 750 $ 500
------ ------ ------ ----- -----
Charge-Offs:
Real estate-mortgage................. (136) (766) (194) (311) (66)
Assigned lease payments.............. (5) (9) (9) (21) (44)
Other................................
------ ------ ------ ----- -----
(136) (771) (203) (320) (131)
------ ------ ------ ----- -----
Recoveries:
Real estate-mortgage................... 6 26 55 3
Assigned lease payments................ 22 18 35 28 32
Other.................................. 23
------ ------ ------ ----- -----
28 44 35 83 58
------ ------ ------ ----- -----
Net (charge-offs) recoveries........... (108) (727) (168) (237) (73)
Provision for losses................... 243 433 562 437 323
------ ------ ------ ----- -----
Balance at end of year................... $1,185 $1,050 $1,344 $950 $ 750
====== ======= ====== ===== =====
Ratio of net charge-offs during the year
to average loans outstanding during the
year.................................... .2% 1.4% .4% .6% .2%
====== ====== ====== ===== =====
</TABLE>
The adequacy of the Thrift's allowance for loan losses is based on formula
allocations and specific allocations. Formula allocations are made on a
percentage basis which is dependent on the underlying collateral, the type of
loan and general economic conditions. Specific allocations are made as problem
or potential problem loans are identified and are based upon an evaluation by
the Thrift's management of the status of such loans. Specific allocations may be
revised from time to time as the status of problem or potential problem loans
changes.
The following table shows the allocation of the Thrift's allowance for loan
losses and the percent of loans in each category to total loans at the dates
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- --------------- --------------- ---------------
% OF % OF % OF % OF % OF
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
($000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loan Categories:
Real estate-mortgage... $1,116 100 $1,015 100 $1,300 99 $879 99 $635 98
Real estate-
construction.......... 3 1
Assigned lease
payments.............. 39 34 41 71 1 95 1
Other.................. 30 1 20 1
------ --- ------ --- ------ --- ---- --- ---- ---
$1,185 100 $1,050 100 $1,344 100 $950 100 $750 100
====== === ====== === ====== === ==== === ==== ===
</TABLE>
<PAGE>
ACQUISITIONS
Commencing in the 1960s, the Company initiated a growth program with a view
to becoming a nationwide provider of title insurance. This program included
expansion into new geographic markets through internal growth and selective
acquisitions. In 1986 the Company began expanding into other real estate-
related financial services. To date, the Company has made numerous strategic
acquisitions designed to expand not only its direct title operations, but also
the range of services it can provide to real property buyers and mortgage
lenders. During the current year, some of the key acquisitions made by the
Company in furtherance of this strategy were:
<TABLE>
<CAPTION>
ACQUIRED ENTITY PRINCIPAL MARKET(S)
--------------- -------------------
<S> <C>
Title Insurance:
Settlers Abstract................................... Pennsylvania
Hillam Title Agency................................. Utah
Klamath County Title Company........................ Oregon
Illini Title Services, Inc.......................... Illinois
Pekin Abstract & Title Company...................... Illinois
Woodford County Abstract & Title.................... Illinois
Miller Abstract..................................... Missouri
Donegan Abstract.................................... Texas
Service Standard.................................... U.S. Virgin Islands
Real Estate Information Services: (1)
Strategic Mortgage Services, Inc.................... Nationwide
Real Estate Solutions (1)........................... Nationwide
</TABLE>
- --------
(1) On January 1, 1998, the Company formed a limited liability
corporation (LLC) with Experian Group (Experian). The purpose of the
LLC is to combine certain operations of the Company's subsidiary,
First American Real Estate Information Services, Inc., with Experian's
Real Estate Solutions division (RES). The LLC is 80% owned by the
Company and 20% owned by Experian.
REGULATION
The title insurance business is heavily regulated by state insurance
regulatory authorities. These authorities generally possess broad powers with
respect to the licensing of title insurers, the types and amounts of investments
that title insurers may make, insurance rates, forms of policies and the form
and content of required annual statements, as well as the power to audit and
examine title insurers. Under state laws, certain levels of capital and surplus
must be maintained and certain amounts of securities must be segregated or
deposited with appropriate state officials. Various state statutes require title
insurers to defer a portion of all premiums in a reserve for the protection of
policyholders and to segregate investments in a corresponding amount. Further,
most states restrict the amount of dividends and distributions a title insurer
may make to its shareholders.
The Company's home warranty business also is subject to regulation by
insurance authorities in the states in which it conducts such business. The
Company's trust company and industrial loan company are both subject to
regulation by the Federal Deposit Insurance Corporation. In addition, the
Company's trust company is regulated by the California Superintendent of Banks
and the Company's industrial loan company is regulated by the California
Commissioner of Corporations.
INVESTMENT POLICIES
The Company invests primarily in cash equivalents, federal and municipal
governmental securities, mortgage loans and investment grade debt and equity
securities. The largely fixed income portfolio is classified in the Company's
financial statements as "available for sale." In addition to the Company's
investment strategy, state laws impose certain restrictions upon the types and
amounts of investments that may be made by the Company's regulated subsidiaries.
<PAGE>
EMPLOYEES
The following table provides a summary of the total number of employees of
the Company as of December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF
BUSINESS EMPLOYEES
-------- ---------
<S> <C>
Title insurance................................................ 10,424
Real estate information services............................... 2,106
Home warranty.................................................. 295
Trust and banking.............................................. 105
------
Total........................................................ 12,930
======
</TABLE>
ITEM 2. PROPERTIES.
The Company owns two adjacent office buildings in Santa Ana, California,
which house its executive offices, its trust and banking subsidiary and the
Orange County title insurance branch operations. This complex, which contains
approximately 105,000 square feet of floor space and an enclosed parking area,
comprises one city block. The Company also owns an 18,000 square foot office
building located across the street from its main offices. This building is used
primarily for storage.
The Company's title insurance subsidiary, First American, and its
subsidiaries, own or lease buildings or office space in more than 400 locations
throughout the United States and Canada, principally for their respective title
operations.
The Company's real estate information subsidiary, First American Real
Estate Information Services, Inc. ("FAREISI"), houses its national operations in
a leased 231,000 square foot office building in Dallas, Texas. FAREISI's
corporate headquarters are housed in a leased office building located in St.
Petersburg, Florida. In addition, FAREISI and its subsidiaries lease office
space in more than 75 locations throughout the United States, principally for
their respective operations.
The Company's home warranty subsidiary owns 1.7 acres of land in Van Nuys,
California, which contains a 20,000 square foot office building, a 7,000 square
foot warehouse and a parking lot.
Each of the office facilities occupied by the Company or its subsidiaries
is in good condition and adequate for its intended use.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in numerous routine legal proceedings incidental to
such businesses described in Item 1 above. Some of these proceedings involve
claims for damages in material amounts. At this time, however, the Company does
not anticipate that the resolution of any of these proceedings will have a
materially adverse effect on its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
Common Stock Market Prices and Dividends
The Company's common stock trades on the New York Stock Exchange (ticker
symbol FAF). The approximate number of record holders of common stock on
February 25, 1998, was 3,033.
High and low stock prices and dividends for the last two years were (Note
A):
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
CASH CASH
------------- --------- ------------- ---------
HIGH-LOW HIGH-LOW
QUARTER ENDED RANGE DIVIDENDS RANGE DIVIDENDS
------------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
March 31..................... $29.75-$25.08 $.12 $21.33-$16.75 $.10
June 30...................... $26.58-$20.92 $.12 $22.50-$16.59 $.12
September 30................. $40.21-$26.00 $.135 $23.83-$19.50 $.12
December 31.................. $49.25-$39.83 $.135 $27.42-$22.42 $.12
</TABLE>
While the Company expects to continue its policy of paying regular
quarterly cash dividends, future dividends will be dependent on future earnings,
financial condition and capital requirements. The payment of dividends is
subject to the restrictions described in Note 2 to the consolidated financial
statements included in "Item 8. Financial Statements and Supplementary Data" of
Part II of this report.
RECENT SALES OF UNREGISTERED SECURITIES
In the last three years, the Company has issued unregistered shares of its
common stock to the sellers of the businesses in the acquisitions listed below.
<TABLE>
<CAPTION>
NUMBER
OF
SHARES
(Note CONSIDERATION
DATE OF SALE A) RECEIVED
------------ ------- -------------
<S> <C> <C>
September 14, 1995..................................... 67,500 $1,108,000
December 29, 1995...................................... 90,000 $1,605,000
September 13, 1996..................................... 98,063 $2,173,719
December 10, 1996...................................... 250,715 $5,417,149
July 8, 1997........................................... 7,200 $ 192,600
November 17, 1997...................................... 7,755 $ 315,047
December 31, 1997...................................... 825 $ 40,630
</TABLE>
- --------
Note A--After adjustment for 3-for-2 stock split effected January 15, 1998
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENT, PER SHARE AMOUNTS AND
EMPLOYEE DATA)
<S> <C> <C> <C> <C> <C>
Revenues................ $1,887,461 $1,597,566 $1,250,216 $1,376,393 $1,398,426
Net income.............. $ 64,709 $ 53,589 $ 7,587 $ 18,945 $ 66,291
Total assets............ $1,168,144 $ 979,794 $ 873,778 $ 828,649 $ 786,448
Notes and contracts
payable................ $ 41,973 $ 71,257 $ 77,206 $ 89,600 $ 85,022
Stockholders' equity.... $ 411,412 $ 352,465 $ 302,767 $ 292,110 $ 283,718
Return on average
stockholders' equity... 16.9% 16.4% 2.6% 6.6% 26.5%
Cash dividends on common
shares................. $ 8,818 $ 7,928 $ 6,850 $ 6,869 $ 5,840
Per share of common
stock
(Notes A & B)--
Net income
Basic............... $ 3.73 $ 3.12 $ .44 $ 1.10 $ 3.89
Diluted............. $ 3.64 $ 3.09 $ .44 $ 1.10 $ 3.89
Stockholders' equity.. $ 23.68 $ 20.34 $ 17.69 $ 17.09 $ 16.62
Cash dividends........ $ .51 $ .46 $ .40 $ .40 $ .34
Number of common shares
outstanding (Note A)--
Weighted average
during the year
Basic............... 17,362 17,179 17,105 17,171 17,030
Diluted............. 17,785 17,325 17,105 17,171 17,030
End of year........... 17,374 17,331 17,117 17,093 17,072
Title orders opened
(Note C)............... 1,173 1,027 894 873 1,218
Title orders closed
(Note C)............... 886 775 667 723 933
Number of employees..... 12,930 11,611 10,149 9,033 10,679
</TABLE>
- --------
Note A--After adjustment for 3-for-2 stock split effected January 15, 1998,
and restatement for the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings per Share."
Note B--Per share information relating to net income is based on the weighted
average number of shares outstanding for the years presented. Per share
information relating to stockholders' equity is based on shares
outstanding at the end of each year.
Note C--Title order volumes are those processed by the direct title operations
of the Company and do not include orders processed by agents.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS.
Any statements in this document looking forward in time involve risks and
uncertainties, including but not limited to the following risks: the effect of
interest rate fluctuations; changes in the performance of the real estate
markets; the effect of changing economic conditions; and the demand for and the
acceptance of the Company's products.
Results of Operations
OVERVIEW--As with all providers of real estate-related financial and
information services, the Company's revenues depend, in large part, upon the
level of real estate activity and the cost and availability of mortgage funds.
The majority of the Company's revenues for the title insurance and real estate
information segments result from resales and refinancings of residential real
estate and, to a lesser extent, from commercial transactions and the
construction and sale of new properties. Revenues for the Company's home
warranty segment result primarily from residential resale activity and do not
benefit from refinancings. Traditionally, the greatest volume of real estate
activity, particularly residential resale, has occurred in the spring and summer
months. However, in recent years, interest rate adjustments by the Federal
Reserve Board, as well as other economic factors, have caused unusual
fluctuations in the traditional pattern of real estate activity. During 1994 the
Federal Reserve Board raised interest rates. This, coupled with the persistently
poor real estate economy in California and the effects of the traditional
seasonal real estate cycle, resulted in a low inventory of open transactions
going into 1995. As a result, 1995 first quarter operating revenues experienced
a 30% decline when compared with the same period of the prior year. In response
to the severe decline in new orders, the Company instituted personnel
reductions. However, the cost-cutting measures lagged the revenue declines,
resulting in losses for the first quarter 1995. Mortgage interest rates peaked
in January 1995 and decreased throughout the remainder of the year and into
1996. This decrease, as well as increased consumer confidence, contributed
significantly to an improved national real estate economy during the second half
of 1995, and resulted in a 26% improvement in operating revenues when compared
to the first half of 1995. This resurgence in real estate activity generated a
high inventory of open transactions going into 1996, which, together with the
continuation of lower mortgage interest rates, the improved national real estate
economy (including the beginnings of a recovery in California) and the Company's
successful integration of its diverse businesses, resulted in strong revenues
and profits for 1996. These favorable conditions continued into 1997,
contributing to record-setting residential resale transactions, an increase in
new home sales and renewed commercial activity. In addition, stability in the
marketplace prompted an increase in refinance and home equity transactions,
primarily towards the latter part of the year. These factors, as well as market
share increases in all of the Company's primary business segments, culminated in
1997 being the best year overall in the Company's history.
OPERATING REVENUES--A summary by segment of the Company's operating revenues
is as follows:
<TABLE>
<CAPTION>
1997 % 1996 % 1995 %
----------- --- ---------- --- ---------- ---
(IN THOUSANDS, EXCEPT PERCENT)
<S> <C> <C> <C> <C> <C> <C>
Title Insurance:
Direct Operations............... $ 761,774 41 $ 626,314 40 $ 517,616 42
Agency Operations............... 700,193 38 641,919 41 517,173 42
----------- --- ---------- --- ---------- ---
1,461,967 79 1,268,233 81 1,034,789 84
Real Estate Information........... 331,372 18 246,745 16 145,755 12
Home Warranty..................... 46,859 2 38,351 2 32,531 3
Trust and Banking................. 20,007 1 17,839 1 14,110 1
----------- --- ---------- --- ---------- ---
$ 1,860,205 100 $1,571,168 100 $1,227,185 100
=========== === ========== === ========== ===
</TABLE>
Operating revenues from direct title operations increased 21.6% in 1997
over 1996 and 21.0% in 1996 over 1995. These increases were attributable to
increases in the number of title orders closed by the Company's direct
operations, as well as increases in the average revenues per order closed. The
Company's direct operations closed 885,600, 775,100 and 667,200 title orders
during 1997, 1996 and 1995, respectively, representing increases of 14.3% in
1997 over 1996 and 16.2% in 1996 over 1995. These increases were primarily due
to the continuation of lower mortgage interest rates, the improved national real
estate economy (including California, a state highly concentrated with direct
operations) and an increase in the Company's national market share. The average
revenues per order closed were $860, $808 and $776 for 1997, 1996 and 1995,
respectively, representing increases of 6.4% in 1997 over 1996 and 4.1% in 1996
over 1995. These increases were primarily attributable to an increased mix of
residential resale activity, appreciating home values and a resurgence in
commercial real estate activity. Operating revenues from agency operations
increased 9.1% in 1997 over 1996 and 24.1% in 1996 over 1995. These fluctuations
were primarily attributable to the same factors affecting direct operations
mentioned above, compounded by the inherent delay in the reporting by agents.
Real estate information operating revenues increased 34.3% in 1997 over
1996 and 69.3% in 1996 over 1995. These increases were primarily attributable to
the same factors affecting title insurance mentioned above and $53.8 million and
$11.3 million of operating revenues contributed by new acquisitions in 1997 and
1996, respectively.
Home warranty operating revenues increased 22.2% in 1997 over 1996 and
17.9% in 1996 over 1995. These increases were primarily attributable to
improvements in certain of the residential resale markets in which this segment
operates, successful geographic expansion, increased consumer awareness and
increases in the number of annual renewals.
INVESTMENT AND OTHER INCOME--Investment and other income increased 3.3% in
1997 over 1996. This increase was primarily attributable to a 4.8% increase in
the average investment portfolio balance and increased equity in earnings of
unconsolidated subsidiaries, offset in part by an increase of $0.9 million in
losses from the sales of fixed assets. Investment and other income increased
14.6% in 1996 over 1995. This increase was primarily attributable to an increase
in realized investment gains of $1.7 million, as well as an increase in fixed
income securities, offset in part by a 5.4% decrease in the average investment
portfolio balance.
SALARIES AND OTHER PERSONNEL COSTS--A summary by segment of the Company's
salaries and other personnel costs is as follows:
<TABLE>
<CAPTION>
1997 % 1996 % 1995 %
-------- --- -------- --- -------- ---
(IN THOUSANDS, EXCEPT PERCENT)
<S> <C> <C> <C> <C> <C> <C>
Title Insurance....................... $498,424 77 $413,164 78 $352,745 82
Real Estate Information............... 119,856 18 90,559 17 57,738 13
Home Warranty......................... 11,430 2 9,075 2 7,714 2
Trust and Banking..................... 7,061 1 6,621 1 4,799 1
Corporate............................. 10,979 2 11,831 2 8,988 2
-------- --- -------- --- -------- ---
$647,750 100 $531,250 100 $431,984 100
======== === ======== === ======== ===
</TABLE>
The Company's title insurance segment is labor intensive; accordingly, a
major variable expense component is salaries and other personnel costs. This
expense component is affected by two competing factors: the need to monitor
personnel changes to match corresponding or anticipated new orders, and the need
to provide quality service. In addition, the Company's growth in operations
which specialize in builder and lender business has created ongoing fixed costs
required to service accounts.
Title insurance personnel expenses increased 20.6% in 1997 over 1996 and
17.1% in 1996 over 1995. These increases were primarily attributable to the
costs incurred servicing the increasing volume of title orders and, to a lesser
extent, acquisition activity and salary increases. Contributing to the increase
for 1997 was an increased mix of more labor intensive residential resale
transactions. The Company's direct operations opened 1,173,300, 1,026,900 and
894,400 title orders in 1997, 1996 and 1995, respectively, representing
increases of 14.3% in 1997 over 1996 and 14.8% in 1996 over 1995.
Real estate information personnel expenses increased 32.4% in 1997 over
1996 and 56.8% in 1996 over 1995. These increases were primarily attributable to
costs incurred servicing the increase in business volume, costs associated with
in-house development of new electronic communications delivery systems for
information-based products, and approximately $20.7 million and $8.6 million of
costs attributable to company acquisitions for 1997 and 1996, respectively.
Home warranty personnel expenses increased 26.0% in 1997 over 1996 and
17.6% in 1996 over 1995. These increases were primarily due to the additional
personnel required to service the increased business volume in the states this
segment currently services, as well as new geographic expansion and modest
salary increases.
<PAGE>
PREMIUMS RETAINED BY AGENTS--A summary of agent retention and agent revenues
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT
PERCENT)
<S> <C> <C> <C>
Agent Retention................................... $563,137 $516,593 $413,444
======== ======== ========
Agent Revenues.................................... $700,193 $641,919 $517,173
======== ======== ========
% Retained by Agents.............................. 80% 80% 80%
======== ======== ========
</TABLE>
The premium split between underwriter and agents is in accordance with
their respective agency contracts and can vary from region to region due to
divergencies in real estate closing practices as well as rating structures. As a
result, the percentage of title premiums retained by agents may vary due to the
geographical mix of revenues from agency operations.
OTHER OPERATING EXPENSES--A summary by segment of the Company's other
operating expenses is as follows:
<TABLE>
<CAPTION>
1997 % 1996 % 1995 %
-------- --- -------- --- -------- ---
(IN THOUSANDS, EXCEPT PERCENT)
<S> <C> <C> <C> <C> <C> <C>
Title Insurance....................... $247,579 60 $216,514 67 $186,876 72
Real Estate Information............... 142,985 35 91,249 29 59,527 23
Home Warranty......................... 2,071 1,323 1,843 1
Trust and Banking..................... 8,093 2 6,982 2 5,650 2
Corporate............................. 10,591 3 6,641 2 3,927 2
-------- --- -------- --- -------- ---
$411,319 100 $322,709 100 $257,823 100
======== === ======== === ======== ===
</TABLE>
Title insurance other operating expenses increased 14.3% in 1997 over 1996
and 15.9% in 1996 over 1995. These increases were primarily the result of the
impact created by the changes in incremental costs (i.e., office supplies,
document reproduction, messenger services, plant maintenance and title search
costs) associated with the relative changes in title order volume. Also
contributing to the increases were marginal price level increases, offset in
part by successful cost-containment programs.
Real estate information other operating expenses increased 56.7% in 1997
over 1996 and 53.3% in 1996 over 1995. These increases were primarily
attributable to costs incurred servicing the increased business activity, as
well as $33.5 million and $7.0 million of other operating costs relating to
acquisitions in 1997 and 1996, respectively, offset in part by cost- containment
programs. Contributing to the increases were costs incurred developing and
enhancing new electronic communications delivery systems for information-based
products and costs associated with assimilating and expanding this segment's
increased operations.
Provision for title losses and other claims--A summary by segment of the
Company's provision for title losses and other claims is as follows:
<TABLE>
<CAPTION>
1997 % 1996 % 1995 %
------- --- ------- --- ------- ---
(IN THOUSANDS, EXCEPT PERCENT)
<S> <C> <C> <C> <C> <C> <C>
Title Insurance.......................... $52,924 59 $58,909 68 $68,338 76
Real Estate Information.................. 9,874 11 4,453 5 3,166 3
Home Warranty............................ 27,338 30 23,055 27 18,857 21
Trust and Banking........................ 187 70 26
------- --- ------- --- ------- ---
$90,323 100 $86,487 100 $90,387 100
======= === ======= === ======= ===
</TABLE>
<PAGE>
The provision for title insurance losses expressed as a percentage of title
insurance operating revenues was 3.6% in 1997, 4.6% in 1996, and 6.6% in 1995.
These decreases reflect an ongoing improvement in the Company's claims
experience. The provision for home warranty losses as a percentage of home
warranty operating revenues was 58.3% in 1997, 60.1% in 1996 and 58.0% in 1995.
These fluctuations were primarily attributable to the relative changes in the
average number of claims per contract experienced during these periods.
Depreciation and amortization--Depreciation and amortization as well as
capital expenditures are summarized in Note 16 to the consolidated financial
statements.
Interest--Interest expense increased 108.4% in 1997 over 1996 and decreased
23.2% in 1996 when compared with 1995. The increase in 1997 was primarily due to
$5.7 million of interest expense related to the Company's junior subordinated
deferrable interest debentures, offset in part by a 23.7% reduction in the
average outstanding debt balance. The decrease in 1996 was primarily
attributable to a 13.5% reduction in the average outstanding debt balance and a
reduced interest rate option on the Company's variable rate indebtedness. For
descriptions of the Company's borrowings under its bank credit agreement and its
junior subordinated deferrable interest debentures, see Notes 8 and 13 to the
consolidated financial statements, respectively.
Minority interests--Minority interests in net income of consolidated
subsidiaries increased 40.1% in 1997 over 1996 and 23.1% in 1996 over 1995.
These increases were attributable to the relatively strong operating results of
the Company's less than 100% owned subsidiaries, offset in part by purchases of
shares from minority shareholders.
Pretax profits--A summary by segment of the Company's pretax profits is as
follows:
<TABLE>
<CAPTION>
1997 % 1996 % 1995 %
-------- --- -------- --- ------- ---
(IN THOUSANDS, EXCEPT PERCENT)
<S> <C> <C> <C> <C> <C> <C>
Title Insurance..................... $ 95,636 62 $ 66,056 51 $17,540 37
Real Estate Information............. 45,317 29 52,581 40 19,690 42
Home Warranty....................... 9,741 6 8,178 6 6,828 14
Trust and Banking................... 4,062 3 3,728 3 3,304 7
-------- --- -------- --- ------- ---
154,756 100 130,543 100 47,362 100
-------- === -------- === ------- ===
Corporate........................... (31,643) (24,678) (19,948)
-------- -------- -------
$123,113 $105,865 $27,414
======== ======== =======
</TABLE>
The Company's profit margins and pretax profits vary according to a number
of factors, including the volume, composition (residential or commercial) and
type (resale, refinancing or new construction) of real estate activity. For
example, in title insurance operations, commercial transactions tend to generate
higher revenues and greater profit margins than residential transactions.
Further, profit margins from refinancing activities are lower than those from
resale activities because in many states there are premium discounts on, and
cancellation rates are higher for, refinancing transactions. Cancellations of
title orders adversely affect pretax profits because costs are incurred in
opening and processing such orders but revenues are not generated. Also, the
Company's direct title insurance business has significant fixed costs in
addition to its variable costs. Accordingly, profit margins from the Company's
direct title insurance business improve as the volume of title orders closed
increases. Title insurance profit margins are also affected by the percentage of
operating revenues generated by agency operations. Profit margins from direct
operations are generally higher than from agency operations due primarily to the
large portion of the premium that is retained by the agent. Real estate
information pretax profits are generally unaffected by the type of real estate
activity but increase as the volume of residential real estate loan transactions
increases. Home warranty pretax profits improve as the volume of residential
resales increases. In general, the title insurance business is a lower margin
business when compared to the Company's other segments. The lower margins
reflect the high fixed cost of producing title evidence whereas the
corresponding revenues are subject to regulatory and competitive pricing
constraints.
<PAGE>
The increases in corporate expenses were primarily attributable to
increased costs associated with supporting the overall growth of the Company's
businesses, as well as additional unallocated interest expense for 1997
associated with the Company's junior subordinated deferrable interest
debentures, and certain unallocated expenses in 1996 associated with employee
benefit plans.
PREMIUM TAXES--A summary by pertinent segment of the Company's premium
taxes is as follows:
<TABLE>
<CAPTION>
1997 % 1996 % 1995 %
------- --- ------- --- ------- ---
(IN THOUSANDS, EXCEPT PERCENT)
<S> <C> <C> <C> <C> <C> <C>
Title Insurance......................... $16,034 95 $15,927 96 $13,016 96
Home Warranty........................... 870 5 749 4 611 4
------- --- ------- --- ------- ---
$16,904 100 $16,676 100 $13,627 100
======= === ======= === ======= ===
</TABLE>
Insurers are generally not subject to state income or franchise taxes.
However, in lieu thereof, a "premium" tax is imposed on certain operating
revenues, as defined by statute. Tax rates and bases vary from state to state;
accordingly, the total premium tax burden is dependent upon the geographical mix
of title insurance and home warranty operating revenues. The Company's
underwritten title company (non-insurance) subsidiaries are subject to state
income tax and do not pay premium tax. Accordingly, the Company's total tax
burden at the state level is composed of a combination of premium taxes and
state income taxes. Premium taxes as a percentage of title insurance operating
revenues were 1.1% in 1997 and 1.3% in 1996 and 1995. The decrease in the
current year was attributable to changes in the geographical mix of title
insurance revenues, as well as changes in the Company's non-insurance
subsidiaries' contribution to revenues.
INCOME TAXES--The Company's effective income tax rate, which includes a
provision for state income and franchise taxes for non-insurance subsidiaries,
was 39.1%, 39.9% and 45.0% for 1997, 1996 and 1995, respectively. The
differences in effective rate were primarily due to changes in the ratio of
permanent differences to income before income taxes and changes in state income
and franchise taxes resulting from fluctuations in the Company's non- insurance
subsidiaries' contribution to pretax profits. Information regarding items
included in the reconciliation of the effective rate with the federal statutory
rate is contained in Note 9 to the consolidated financial statements.
NET INCOME--Net income and per share information, which has been restated
for the 3-for-2 stock split effected January 15, 1998, and the adoption of
Statement of Financial Accounting Standards No. 128, "Earnings per Share," are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income............................................ $64,709 $53,589 $7,587
======= ======= ======
Net income per share:
Basic............................................... $ 3.73 $ 3.12 $ 0.44
======= ======= ======
Diluted............................................. $ 3.64 $ 3.09 $ 0.44
======= ======= ======
Weighted average shares:
Basic............................................... 17,362 17,179 17,105
======= ======= ======
Diluted............................................. 17,785 17,325 17,105
======= ======= ======
</TABLE>
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities amounted to $111.2 million, $112.8
million and $38.5 million for 1997, 1996 and 1995, respectively, after claim
payments of $81.6 million, $78.0 million and $66.6 million, respectively. The
principal non-operating uses of cash and cash equivalents for the three-year
period ended December 31, 1997, were for additions to the investment portfolio,
capital expenditures, company acquisitions and the repayment of debt. The most
significant nonoperating sources of cash and cash equivalents were proceeds from
the sales and maturities of certain investments and, in 1997, proceeds from the
issuance of junior subordinated deferrable interest debentures. The net effect
of all activities on total cash and cash equivalents were increases of $8.1
million and $27.5 million for 1997 and 1996, respectively, and a decrease of
$8.3 million for 1995.
Notes and contracts payable as a percentage of total capitalization as of
December 31, 1997, was 7.3% as compared with 16.0% as of the prior year end. The
decrease was primarily attributable to an increase in the capital base due to
the issuance of junior subordinated deferrable interest debentures, net income
for the year, and a net decrease in debt. The Company maintains a $75.0 million
revolving line of credit which remained unused as of December 31, 1997. Notes
and contracts payable are more fully described in Note 8 to the consolidated
financial statements.
Pursuant to various insurance and other regulations, the maximum amount of
dividends, loans and advances available to the Company in 1998 from its
principal subsidiary, First American Title Insurance Company, is $52.1 million.
Such restrictions have not had, nor are they expected to have, an impact on the
Company's ability to meet its cash obligations.
The Company is evaluating the Year 2000 issue as it relates to its internal
computer systems and third party computer systems with which the Company
interacts. The Company expects to incur internal staff costs as well as
consulting and other expenses related to this issue; these costs will be
expensed as incurred. At this time the Company is unable to reasonably estimate
the total costs for this issue.
Due to the Company's significant liquid asset position and its consistent
ability to generate cash flows from operations, management believes that its
resources are sufficient to satisfy its anticipated operational cash
requirements. The Company's strong financial position will enable management to
react to future opportunities for acquisitions or other investments in support
of the Company's continued growth and expansion.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Separate financial statements for subsidiaries not consolidated and 50% or
less owned persons accounted for by the equity method have been omitted because,
if considered in the aggregate, they would not constitute a significant
subsidiary.
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
Report of Independent
Accountants.............. 21
Financial Statements:
Consolidated Balance
Sheets................. 22
Consolidated Statements
of Income.............. 24
Consolidated Statements
of Stockholders'
Equity................. 25
Consolidated Statements
of Cash Flows.......... 26
Notes to Consolidated
Financial Statements... 27
Unaudited Quarterly
Financial Data........... 43
Financial Statement
Schedules:
I. Summary of
Investments--Other than
Investments in Related
Parties................ 44
II. Condensed Financial
Information of
Registrant............. 45
III. Supplementary
Insurance Information.. 49
IV. Reinsurance......... 51
V. Valuation and
Qualifying Accounts.... 52
</TABLE>
Financial statement schedules not listed are either omitted because they
are not applicable or the required information is shown in the consolidated
financial statements or in the notes thereto.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The First American Financial Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of The
First American Financial Corporation and its subsidiaries at December 31, 1997
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; 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 generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Costa Mesa, California
February 9, 1998
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1997 1996
-------------- ------------
<S> <C> <C>
ASSETS
------
Cash and Cash Equivalents........................ $ 181,531,000 $173,439,000
-------------- ------------
Accounts and Accrued Income Receivable, less
allowances ($7,602,000 and $5,351,000).......... 128,017,000 89,355,000
-------------- ------------
Investments:
Deposits with savings and loan associations and
banks......................................... 29,029,000 21,674,000
Debt securities................................ 151,503,000 130,576,000
Equity securities.............................. 13,904,000 8,517,000
Other long-term investments.................... 35,047,000 30,414,000
-------------- ------------
229,483,000 191,181,000
-------------- ------------
Loans Receivable................................. 63,378,000 54,256,000
-------------- ------------
Property and Equipment, at cost:
Land........................................... 17,059,000 15,869,000
Buildings...................................... 84,935,000 77,265,000
Furniture and equipment........................ 221,071,000 164,762,000
Less--accumulated depreciation................. (122,688,000) (100,258,000)
-------------- ------------
200,377,000 157,638,000
-------------- ------------
Title Plants and Other Indexes................... 100,626,000 94,226,000
-------------- ------------
Assets Acquired in Connection with Claim
Settlements..................................... 21,119,000 24,270,000
-------------- ------------
Deferred Income Taxes............................ 31,563,000 38,401,000
-------------- ------------
Goodwill and Other Intangibles, less accumulated
amortization ($13,093,000 and $11,116,000)...... 132,361,000 87,189,000
-------------- ------------
Deferred Policy Acquisition Costs................ 25,016,000 24,753,000
-------------- ------------
Other Assets..................................... 54,673,000 45,086,000
-------------- ------------
$1,168,144,000 $979,794,000
============== ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1997 1996
-------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Demand Deposits.................................... $ 62,475,000 $ 51,321,000
-------------- ------------
Accounts Payable and Accrued Liabilities:
Accounts payable................................. 12,220,000 7,218,000
Salaries and other personnel costs............... 55,973,000 37,270,000
Pension costs.................................... 39,431,000 32,592,000
Other............................................ 60,509,000 53,245,000
-------------- ------------
168,133,000 130,325,000
-------------- ------------
Deferred Revenue................................... 104,124,000 104,133,000
-------------- ------------
Reserve for Known and Incurred But Not Reported
Claims............................................ 250,826,000 245,245,000
-------------- ------------
Income Taxes Payable............................... 3,987,000 2,554,000
-------------- ------------
Notes and Contracts Payable........................ 41,973,000 71,257,000
-------------- ------------
Minority Interests in Consolidated Subsidiaries.... 25,214,000 22,494,000
-------------- ------------
Commitments and Contingencies (Note 12)
Guaranteed Preferred Beneficial Interests in
Company's Junior Subordinated Deferrable Interest
Debentures (Note 13).............................. 100,000,000
--------------
Stockholders' Equity:
Preferred stock, $1 par value
Authorized--500,000 shares
Outstanding--None
Common stock, $1 par value (Note 14)
Authorized--36,000,000 shares
Outstanding--17,374,000 and 17,331,000 shares.. 17,374,000 17,331,000
Additional paid-in capital....................... 43,953,000 43,643,000
Retained earnings................................ 344,645,000 288,754,000
Net unrealized gain on securities................ 5,440,000 2,737,000
-------------- ------------
Total Stockholders' Equity................... 411,412,000 352,465,000
-------------- ------------
$1,168,144,000 $979,794,000
============== ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues
Operating revenues............. $1,860,205,000 $1,571,168,000 $1,227,185,000
Investment and other income.... 27,256,000 26,398,000 23,031,000
-------------- -------------- --------------
1,887,461,000 1,597,566,000 1,250,216,000
-------------- -------------- --------------
Expenses
Salaries and other personnel
costs......................... 647,750,000 531,250,000 431,984,000
Premiums retained by agents.... 563,137,000 516,593,000 413,444,000
Other operating expenses....... 411,319,000 322,709,000 257,823,000
Provision for title losses and
other claims.................. 90,323,000 86,487,000 90,387,000
Depreciation and amortization.. 38,149,000 27,242,000 20,790,000
Interest....................... 9,994,000 4,796,000 6,242,000
Minority interests............. 3,676,000 2,624,000 2,132,000
-------------- -------------- --------------
1,764,348,000 1,491,701,000 1,222,802,000
-------------- -------------- --------------
Income before premium and income
taxes........................... 123,113,000 105,865,000 27,414,000
Premium taxes.................... 16,904,000 16,676,000 13,627,000
-------------- -------------- --------------
Income before income taxes....... 106,209,000 89,189,000 13,787,000
Income taxes..................... 41,500,000 35,600,000 6,200,000
-------------- -------------- --------------
Net income....................... $ 64,709,000 $ 53,589,000 $ 7,587,000
============== ============== ==============
Net income per common share (Note
1):
Basic.......................... $ 3.73 $ 3.12 $ 0.44
Diluted........................ $ 3.64 $ 3.09 $ 0.44
Weighted average common shares
outstanding (Note 1):
Basic.......................... 17,362,000 17,179,000 17,105,000
Diluted........................ 17,785,000 17,325,000 17,105,000
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
ADDITIONAL GAIN (LOSS)
COMMON PAID-IN RETAINED ON
SHARES STOCK CAPITAL EARNINGS SECURITIES
---------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1994, as previously
reported............... 11,395,000 $11,395,000 $44,013,000 $242,356,000 $(5,654,000)
3-for-2 stock split
(Note 14).............. 5,698,000 5,698,000 (5,698,000)
---------- ----------- ----------- ------------ -----------
Balance at December 31,
1994, as restated...... 17,093,000 17,093,000 38,315,000 242,356,000 (5,654,000)
Net income for 1995..... 7,587,000
Cash dividends on common
shares................. (6,850,000)
Shares issued in
connection with company
acquisitions........... 157,000 157,000 2,555,000
Shares issued in
connection with benefit
and savings plans...... 98,000 98,000 1,055,000
Purchase of Company
shares................. (231,000) (231,000) (3,361,000)
Net unrealized gain on
securities............. 9,647,000
---------- ----------- ----------- ------------ -----------
Balance at December 31,
1995................... 17,117,000 17,117,000 38,564,000 243,093,000 3,993,000
Net income for 1996..... 53,589,000
Cash dividends on common
shares................. (7,928,000)
Shares issued in
connection with company
acquisitions........... 300,000 300,000 7,258,000
Shares issued in
connection with benefit
and savings plans...... 75,000 75,000 1,195,000
Purchase of Company
shares................. (161,000) (161,000) (3,374,000)
Net unrealized loss on
securities............. (1,256,000)
---------- ----------- ----------- ------------ -----------
Balance at December 31,
1996................... 17,331,000 17,331,000 43,643,000 288,754,000 2,737,000
Net income for 1996..... 64,709,000
Cash dividends on common
shares................. (8,818,000)
Shares issued in
connection with company
acquisitions........... 16,000 16,000 532,000
Shares issued in
connection with benefit
and savings plan....... 209,000 209,000 4,759,000
Purchase of Company
shares................. (182,000) (182,000) (4,981,000)
Net unrealized gain on
securities............. 2,703,000
---------- ----------- ----------- ------------ -----------
Balance at December 31,
1997................... 17,374,000 $17,374,000 $43,953,000 $344,645,000 $ 5,440,000
========== =========== =========== ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income......................... $ 64,709,000 $ 53,589,000 $ 7,587,000
Adjustments to reconcile net
income to cash provided by
operating activities--
Provision for title losses and
other claims.................... 90,323,000 86,487,000 90,387,000
Depreciation and amortization.... 38,149,000 27,242,000 20,790,000
Minority interests in net income. 3,676,000 2,624,000 2,132,000
Other, net....................... 933,000 (366,000) 207,000
Changes in assets and liabilities
excluding effects of company
acquisitions and noncash
transactions--
Claims paid, including assets
acquired, net of recoveries..... (81,603,000) (78,048,000) (66,639,000)
Net change in income tax
accounts........................ 11,974,000 381,000 10,777,000
Increase in accounts and accrued
income receivable............... (25,704,000) (11,324,000) (22,943,000)
Increase in accounts payable and
accrued liabilities............. 17,708,000 34,314,000 11,190,000
Decrease in deferred revenue..... (9,000) (426,000) (13,588,000)
Other, net....................... (9,001,000) (1,630,000) (1,418,000)
------------- ------------ ------------
Cash provided by operating
activities.................... 111,155,000 112,843,000 38,482,000
------------- ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Net cash effect of company
acquisitions...................... (49,336,000) (12,097,000) (31,054,000)
Net (increase) decrease in
deposits with banks............... (7,355,000) (3,037,000) 901,000
Purchases of debt and equity
securities........................ (80,241,000) (68,498,000) (19,513,000)
Proceeds from sales of debt and
equity securities................. 39,240,000 46,506,000 41,066,000
Proceeds from maturities of debt
securities........................ 18,842,000 31,291,000 19,278,000
Net (increase) decrease in other
long-term investments............. (1,117,000) (2,575,000) 2,761,000
Net increase in loans receivable... (9,122,000) (8,122,000) (5,588,000)
Capital expenditures............... (74,486,000) (48,785,000) (29,643,000)
Net proceeds from sale of property
and equipment..................... 1,646,000 3,245,000 757,000
------------- ------------ ------------
Cash used for investing
activities.................... (161,929,000) (62,072,000) (21,035,000)
------------- ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net increase in demand deposits.... 11,154,000 7,903,000 4,723,000
Repayment of debt.................. (40,940,000) (19,674,000) (20,060,000)
Proceeds from the issuance of
junior subordinated deferrable
interest debentures............... 100,000,000
Purchase of Company shares......... (5,163,000) (3,535,000) (3,592,000)
Proceeds from exercise of stock
options........................... 1,653,000
Proceeds from issuance of stock to
employee savings plan............. 980,000
Cash dividends..................... (8,818,000) (7,928,000) (6,850,000)
------------- ------------ ------------
Cash provided by (used for)
financing activities.......... 58,866,000 (23,234,000) (25,779,000)
------------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents................... 8,092,000 27,537,000 (8,332,000)
Cash and cash equivalents--Beginning
of year............................ 173,439,000 145,902,000 154,234,000
------------- ------------ ------------
Cash and cash equivalents--End of
year............................... $ 181,531,000 $173,439,000 $145,902,000
============= ============ ============
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Interest......................... $ 8,223,000 $ 5,044,000 $ 6,108,000
Premium taxes.................... $ 18,103,000 $ 14,146,000 $ 14,048,000
Income taxes..................... $ 31,292,000 $ 36,682,000 $ 6,580,000
Noncash investing and financing
activities:
Shares issued for benefits plan.. $ 2,335,000 $ 1,270,000 $ 1,153,000
Company acquisitions in exchange
for common stock................ $ 548,000 $ 7,558,000 $ 2,712,000
Net unrealized gain (loss) on
securities...................... $ 2,703,000 $ (1,256,000) $ 9,647,000
Liabilities in connection with
company acquisitions............ $ 48,294,000 $ 32,180,000 $ 20,345,000
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
DESCRIPTION OF THE COMPANY:
The First American Financial Corporation ("the Company"), through its
subsidiaries, is engaged in the business of providing real estate-related
financial and information services to real property buyers and mortgage lenders.
These services include title insurance, tax monitoring, credit reporting,
property data services, flood certification, field inspection services,
appraisal services, mortgage loan servicing systems, mortgage document
preparation and home warranties. The Company also provides investment, trust and
thrift services.
SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The consolidated financial statements include the accounts of The First
American Financial Corporation and all majority-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated. Certain
1995 and 1996 amounts have been reclassified to conform with the 1997
presentation.
Cash equivalents
The Company considers cash equivalents to be all short-term investments
which have an initial maturity of 90 days or less and are not restricted for
statutory deposit or premium reserve requirements. The carrying amount for cash
equivalents is a reasonable estimate of fair value due to the short-term
maturity of these investments.
Investments
Deposits with savings and loan associations and banks are short-term
investments with initial maturities of more than 90 days. The carrying amount of
these investments is a reasonable estimate of fair value due to their short-term
nature.
Debt securities are carried at fair value and consist primarily of
investments in obligations of the United States Treasury, various corporations
and certain state and political subdivisions.
Equity securities are carried at fair value and consist primarily of
investments in marketable common stocks of corporate entities in which the
Company's ownership does not exceed 20%.
Other long-term investments consist primarily of investments in affiliates,
which are accounted for under the equity method of accounting, and notes
receivable, which are carried at the lower of cost or fair value less costs to
sell.
The Company classifies its debt and equity securities portfolio as
available-for-sale and, accordingly, includes unrealized gains and losses, net
of related tax effects, as a separate component of stockholders' equity.
Realized gains and losses on investments are determined using the specific
identification method.
Property and equipment
Furniture and equipment includes computer software acquired and developed
for internal use and for use with the Company's products. Software development
costs are capitalized from the time technological feasibility is established
until the software is ready for use. Capitalized development costs for internal
use software include only incremental payments to third parties.
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation on buildings and on furniture and equipment is computed using
the straight-line method over estimated useful lives of 25 to 45 and 3 to 10
years, respectively. Capitalized software costs are amortized using the
straight-line method over estimated useful lives of 3 to 10 years.
Title plants and other indexes
Title plants and other indexes are carried at original cost. Appraised
values are used in conjunction with the acquisition of purchased subsidiaries.
The cost of daily maintenance (updating) of these plants and other indexes are
charged to expense as incurred. Because properly maintained title plants and
other indexes have indefinite lives and do not diminish in value with the
passage of time, no provision has been made for depreciation.
Assets acquired in connection with claim settlements
In connection with settlement of title insurance and other claims, the
Company sometimes purchases mortgages, deeds of trust, real property, or
judgment liens. These assets, sometimes referred to as "salvage assets," are
carried at the lower of cost or fair value less costs to sell.
Goodwill and other intangibles
Goodwill recognized in business combinations is amortized over its
estimated useful life ranging from 20 to 40 years. Other intangibles, which
include customer lists, covenants not to compete and organization costs, are
amortized over their estimated useful lives, ranging from 3 to 20 years.
Impairment of goodwill, loans receivable and other long-lived assets
The Company periodically reviews the carrying value of goodwill, loans
receivable and other long-lived assets for impairment when events or
circumstances warrant such a review.
To the extent that the undiscounted cash flows related to the businesses
underlying the goodwill are less than the carrying value of the related
goodwill, such goodwill will be reduced to the amount of the undiscounted cash
flows.
A loan is impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Impaired loans receivable are
measured at the present value of expected future cash flows discounted at the
loan's effective interest rate. As a practical expedient, the loan may be valued
based on its observable market price or the fair value of the collateral, if the
loan is collateral dependent.
To the extent that the undiscounted cash flows related to other long-lived
assets are less than the assets' carrying value, the carrying value of such
assets is reduced to the assets' fair value.
Deferred policy acquisition costs
Deferred policy acquisition costs are directly related to the procurement
of tax service and home warranty contracts. These costs are deferred and
amortized to expense in the same manner as contract fees are recognized as
revenues.
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reserve for known and incurred but not reported claims
The Company provides for title insurance losses based upon its historical
experience by a charge to expense when the related premium revenue is
recognized. Title insurance losses and other claims associated with ceded
reinsurance are provided for as the Company remains contingently liable in the
event that the reinsurer does not satisfy its obligations. The reserve for known
and incurred but not reported claims reflects management's best estimate of the
total costs required to settle all claims reported to the Company and claims
incurred but not reported. The process applied to estimate claims costs is
subject to many variables, including changes and trends in the type of title
insurance policies issued, the real estate market and the interest rate
environment. It is reasonably possible that a change in the estimate will occur
in the future.
The Company provides for claim losses relating to its home warranty
business based on the average cost per claim as applied to the total of new
claims incurred. The average cost per claim is calculated using the average of
the most recent 12 months of claims experience.
Operating revenues
Title premiums on policies issued directly by the Company are recognized on
the effective date of the title policy and escrow fees are recorded upon close
of the escrow. Revenues from title policies issued by independent agents are
recorded when notice of issuance is received from the agent.
Revenues from tax service contracts are recognized over the estimated
duration of the contracts as the related servicing costs are estimated to occur.
Revenues from home warranty contracts are recognized ratably over the 12-
month duration of the contracts.
Interest on loans with the Company's thrift subsidiary is recognized on the
outstanding principal balance on the accrual basis. Loan origination fees and
related direct loan origination costs are deferred and recognized over the life
of the loan.
Premium taxes
Title insurance and home warranty companies, like other types of insurers,
are generally not subject to state income or franchise taxes. However, in lieu
thereof, most states impose a tax based primarily on insurance premiums written.
This premium tax is reported as a separate line item in the consolidated
statements of income in order to provide a more meaningful disclosure of the
taxation of the Company.
Income taxes
Taxes are based on income for financial reporting purposes and include
deferred taxes applicable to temporary differences between the financial
statement carrying amount and the tax basis of certain of the Company's assets
and liabilities.
Earnings per share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No.
128 became effective for 1997 and requires the presentation of basic and diluted
earnings per share on the face of the income statement. Basic earnings per share
are computed by dividing net income available to common stockholders by the
weighted-average number of
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
common shares outstanding. The computation of diluted earnings per share is
similar to the computation of basic earnings per share except that the
weighted-average number of common shares outstanding is increased to include the
number of additional common shares that would have been outstanding if potential
dilutive common shares had been issued.
The Company's only potential dilutive common shares are stock options (see
Note 11). Stock options are reflected in diluted earnings per share by
application of the treasury stock method. All earnings per share amounts
presented have been restated to reflect the adoption of SFAS No. 128.
Risk of real estate market
Real estate activity is cyclical in nature and is affected greatly by the
cost and availability of long-term mortgage funds. Real estate activity and, in
turn, the Company's revenue base, can be adversely affected during periods of
high interest rates and/or limited money supply.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the statements. Actual results could differ from the
estimates and assumptions used.
Fiduciary assets and liabilities
Assets and liabilities of the trusts and escrows administered by the
Company are not included in the consolidated balance sheets.
NOTE 2.
STATUTORY RESTRICTIONS ON STOCKHOLDERS' EQUITY AND INVESTMENTS:
Pursuant to insurance and other regulations of the various states in which
the Company's title insurance subsidiary, First American Title Insurance Company
(FATICO), operates, the amount of dividends, loans and advances available to the
parent company from FATICO is limited, principally for the protection of
policyholders. Under such statutory regulations, the maximum amount of
dividends, loans and advances available to the parent company from FATICO in
1998 is $52.1 million. Investments carried at $16.5 million were on deposit with
state treasurers in accordance with statutory requirements for the protection of
policyholders at December 31, 1997. FATICO maintained statutory capital and
surplus of $210.3 million and $208.3 million at December 31, 1997 and 1996,
respectively. Statutory net income for the years ended December 31, 1997, 1996
and 1995 was $35.9 million, $34.6 million and $11.4 million, respectively.
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3.
DEBT AND EQUITY SECURITIES:
The amortized cost and estimated fair value of investments in debt
securities are as follows:
<TABLE>
<CAPTION>
GROSS
UNREALIZED ESTIMATED
AMORTIZED ------------- FAIR
COST GAINS LOSSES VALUE
--------- ------ ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1997
U.S. Treasury securities.................. $ 38,972 $ 792 $ (46) $ 39,718
Corporate securities...................... 54,884 717 (22) 55,579
Obligations of state and political
subdivisions............................. 38,977 1,092 40,069
Mortgage-backed securities................ 16,186 36 (85) 16,137
-------- ------ ----- --------
$149,019 $2,637 $(153) $151,503
======== ====== ===== ========
December 31, 1996
U.S. Treasury securities.................. $ 42,956 $ 621 $(146) $ 43,431
Corporate securities...................... 37,636 87 (165) 37,558
Obligations of state and political
subdivisions............................. 38,544 290 (23) 38,811
Mortgage-backed securities................ 11,038 37 (299) 10,776
-------- ------ ----- --------
$130,174 $1,035 $(633) $130,576
======== ====== ===== ========
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1997, by contractual maturities, are as follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less.................................. $ 17,055 $ 17,220
Due after one year through five years.................... 63,304 63,726
Due after five years through ten years................... 47,268 49,102
Due after ten years...................................... 5,206 5,318
-------- --------
132,833 135,366
Mortgage-backed securities............................... 16,186 16,137
-------- --------
$149,019 $151,503
======== ========
</TABLE>
The cost and estimated fair value of investments in equity securities are
as follows:
<TABLE>
<CAPTION>
GROSS
UNREALIZED
------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
------ ------ ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1997
Common stocks:
Corporate securities....................... $7,941 $5,856 $(82) $13,715
Other...................................... 78 111 189
------ ------ ---- -------
$8,019 $5,967 $(82) $13,904
====== ====== ==== =======
December 31, 1996
Common stocks:
Corporate securities....................... $4,614 $3,838 $(82) $ 8,370
Other...................................... 91 56 147
------ ------ ---- -------
$4,705 $3,894 $(82) $ 8,517
====== ====== ==== =======
</TABLE>
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Sales of debt and equity securities resulted in realized gains of $706,000,
$3,257,000 and $1,316,000 and realized losses of $348,000, $646,000 and $358,000
for the years ended December 31, 1997, 1996 and 1995, respectively. The fair
value of debt and equity securities was estimated using quoted market prices.
NOTE 4.
LOANS RECEIVABLE:
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Real estate--mortgage.................................... $65,384 $55,835
Assigned lease payments.................................. 50 81
Other.................................................... 36 139
------- -------
65,470 56,055
------- -------
Unearned income on lease contracts....................... (18) (33)
Allowance for loan losses................................ (1,185) (1,050)
Participations sold...................................... (481) (140)
Deferred loan fees, net.................................. (408) (576)
------- -------
(2,092) (1,799)
------- -------
$63,378 $54,256
======= =======
</TABLE>
Real estate loans are secured by properties located in Southern California.
The average yield on the Company's loan portfolio was 11% for the years ended
December 31, 1997 and 1996. Average yields are affected by amortization of
discounts on loans purchased from other institutions, prepayment penalties
recorded as income, loan fees amortized to income and the market interest rates
charged by thrift and loan institutions.
The fair value of loans receivable was $64.2 million and $54.3 million at
December 31, 1997 and 1996, respectively, and was estimated based on the
discounted value of the future cash flows using the current rates being offered
for loans with similar terms to borrowers of similar credit quality.
The allowance for loan losses is maintained at a level that is considered
appropriate by management to provide for known and inherent risks in the
portfolio.
NOTE 5.
ASSETS ACQUIRED IN CONNECTION WITH CLAIM SETTLEMENTS:
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Notes receivable........................................... $12,177 $11,083
Real estate................................................ 5,013 7,156
Judgments and other........................................ 3,929 6,031
------- -------
$21,119 $24,270
======= =======
</TABLE>
The above amounts are net of valuation reserves of $11.1 million and $10.3
million at December 31, 1997 and 1996, respectively.
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of notes receivable was $12.5 million and $10.1 million at
December 31, 1997 and 1996, respectively, and was estimated based on the
discounted value of the future cash flows using the current rates at which
similar loans would be made to borrowers of similar credit quality.
The activity in the valuation reserve is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of year............................. $10,278 $11,246
Provision for losses..................................... 4,678 4,948
Dispositions............................................. (3,821) (5,916)
------- -------
Balance at end of year................................... $11,135 $10,278
======= =======
</TABLE>
NOTE 6.
DEMAND DEPOSITS:
Passbook and investment certificate accounts are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Passbook.................................................... $13,209 $13,335
Certificate accounts:
Less than one year........................................ 28,798 23,753
One to five years......................................... 20,468 14,233
------- -------
$62,475 $51,321
======= =======
Annualized interest rates:
Passbook.................................................. 5% 5%
Certificate accounts...................................... 6%-8% 5%-8%
</TABLE>
The carrying value of the passbook accounts approximates fair value due to
the short-term nature of this liability. The fair value of investment
certificate accounts was $49.4 million and $38.0 million at December 31, 1997
and 1996, respectively, and was estimated based on the discounted value of the
future cash flows using a discount rate approximating current market for similar
liabilities.
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7.
RESERVE FOR KNOWN AND INCURRED BUT NOT REPORTED CLAIMS:
Activity in the reserve for known and incurred but not reported claims is
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year................... $245,245 $238,161 $206,743
-------- -------- --------
Provision related to:
Current year................................. 85,645 81,539 82,632
Prior years.................................. 4,678 4,948 7,755
-------- -------- --------
Total provision................................ 90,323 86,487 90,387
-------- -------- --------
Payments related to:
Current year................................. 39,934 29,680 25,039
Prior year................................... 39,745 43,967 40,934
-------- -------- --------
Total payments................................. 79,679 73,647 65,973
-------- -------- --------
Other.......................................... (5,063) (5,756) 7,004
-------- -------- --------
Balance at end of year......................... $250,826 $245,245 $238,161
======== ======== ========
</TABLE>
"Other" primarily represents reclassifications to the reserve for assets
acquired in connection with claim settlements. Included in 1995 is $10.0 million
in purchase accounting adjustments. Claims activity associated with reinsurance
is not material and, therefore, not presented separately.
NOTE 8.
NOTES AND CONTRACTS PAYABLE:
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Secured notes payable pursuant to amended credit agreement.. $ 5,320 $37,250
Trust deed notes with maturities through 2017, secured by
land and buildings with a net book value of $11,739,
average rate of 8 1/2%..................................... 7,359 8,630
Other notes and contracts payable with maturities through
2005, average rate of 7 1/2%............................... 29,294 25,377
------- -------
$41,973 $71,257
======= =======
</TABLE>
In April 1997, the Company paid off the variable rate indebtedness portion
of the amended credit agreement with proceeds received from its junior
subordinated interest debentures (see Note 13).
At December 31, 1997, the Company's remaining borrowings under its amended
bank credit agreement consisted of fixed rate indebtedness of $5.3 million,
maturing in April 1999 and bearing interest at 9.38% per annum.
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During July 1997, the Company amended the credit agreement to relax and/or
eliminate certain restrictive covenants and increase the revolving line of
credit to $75.0 million which was unused as of December 31, 1997. In November
1997, the Company further amended the credit agreement to issue a letter of
credit in the amount of $5.7 million to secure its fixed rate obligation and
release as security the capital stock of its wholly owned subsidiaries.
Pursuant to the terms of the credit agreement, the Company is required to
maintain minimum levels of capital and earnings and meet predetermined debt to
capitalization ratios.
The aggregate annual maturities for notes and contracts payable in each of
the five years after December 31, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................. $13,503
1999............................................................. $11,813
2000............................................................. $ 5,599
2001............................................................. $ 4,381
2002............................................................. $ 1,723
</TABLE>
The fair value of notes and contracts payable was $44.3 million and $70.6
million at December 31, 1997 and 1996, respectively, and was estimated based on
the current rates offered to the Company for debt of the same remaining
maturities. The weighted average interest rate for the Company's notes and
contracts payable was 8% and 7% at December 31, 1997 and 1996, respectively.
NOTE 9.
INCOME TAXES:
Income taxes are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................... $27,234 $28,535 $3,442
State............................................. 3,925 6,038 1,810
------- ------- ------
31,159 34,573 5,252
------- ------- ------
Deferred:
Federal........................................... 9,747 232 70
State............................................. 594 795 878
------- ------- ------
10,341 1,027 948
------- ------- ------
$41,500 $35,600 $6,200
======= ======= ======
</TABLE>
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income taxes differ from the amounts computed by applying the federal
income tax rate of 35%. A reconciliation of this difference is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Taxes calculated at federal rate................ $37,173 $31,216 $4,825
Tax exempt interest income...................... (651) (669) (719)
Tax effect of minority interests................ 1,286 918 746
State taxes, net of federal benefit............. 3,706 4,442 2,456
Exclusion of certain meals and entertainment
expenses....................................... 2,889 2,429 2,391
Change in tax reserves.......................... (2,301)
Other items, net................................ (2,903) (2,736) (1,198)
------- ------- ------
$41,500 $35,600 $6,200
======= ======= ======
</TABLE>
The primary components of temporary differences which give rise to the
Company's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Deferred revenue.......................................... $23,066 $25,709
Employee benefits......................................... 11,021 9,811
Title claims and related salvage.......................... 3,183 11,934
Bad debt reserves......................................... 4,952 3,382
Acquisition reserve....................................... 3,970 2,254
State taxes............................................... 346 441
Other..................................................... 7,009 4,261
------- -------
Total deferred tax assets............................... 53,547 57,792
======= =======
Deferred tax liabilities:
Depreciable and amortizable assets........................ 15,116 13,611
Unrealized gain on securities............................. 2,929 1,475
Sale leaseback............................................ 1,327 1,462
Other..................................................... 2,612 2,843
------- -------
Total deferred tax liabilities.......................... 21,984 19,391
------- -------
Net deferred tax asset...................................... $31,563 $38,401
======= =======
</TABLE>
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10.
EMPLOYEE BENEFIT PLANS:
The Company has pension and other retirement benefit plans covering
substantially all employees. The Company's principal pension plan, amended to be
noncontributory effective January 1, 1995, is a qualified defined benefit plan
with benefits based on the employee's years of service and the highest five
consecutive years' compensation during the last ten years of employment. The
Company's policy is to fund all accrued pension costs. Contributions are
intended to provide not only for benefits attributable to past service, but also
for those benefits expected to be earned in the future. The Company also has
nonqualified unfunded supplemental benefit plans covering certain key management
personnel. Benefits under these plans are intended to be funded with proceeds
from life insurance policies purchased by the Company on the lives of the
executives.
Net pension cost for the Company's pension and other retirement benefit
plans includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits
earned during the year. $ 10,550 $ 9,186 $ 7,798
Interest cost on
projected benefit
obligation............. 11,178 9,764 8,741
Actual gain on plan
assets................. (20,555) (10,517) (9,636)
Net amortization and
deferral............... 14,531 5,810 4,674
-------- -------- -------
Net periodic pension
cost.................... $ 15,704 $ 14,243 $11,577
======== ======== =======
</TABLE>
The following table sets forth the plans' status at:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1997 1996
----------------------- ----------------------
UNFUNDED UNFUNDED
FUNDED SUPPLEMENTAL FUNDED SUPPLEMENTAL
PENSION BENEFIT PENSION BENEFIT
PLANS PLANS PLANS PLANS
--------- ------------ -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Present value of benefit
obligation:
Vested benefits............... $ 97,463 $19,766 $ 74,536 $17,137
Non-vested benefits........... 8,619 5,303 7,479 5,068
--------- ------- -------- -------
Accumulated benefit obligation.. 106,082 25,069 82,015 22,205
Value of future pay increases... 35,607 7,065 29,663 7,046
--------- ------- -------- -------
Total projected benefit
obligation..................... 141,689 32,134 111,678 29,251
Plan assets at fair value....... (109,357) (87,096)
--------- ------- -------- -------
Plan assets less than projected
benefits obligation............ 32,332 32,134 24,582 29,251
Unrecognized net (asset)
obligation at transition....... 255 (1,441) 307 (1,801)
Prior service cost not yet
recognized..................... 457 (1,614) 503 (1,802)
Unrecognized net loss........... (18,682) (6,280) (15,005) (5,419)
Adjustment to recognize minimum
liability...................... 2,270 1,976
--------- ------- -------- -------
Accrued pension costs........... $ 14,362 $25,069 $ 10,387 $22,205
========= ======= ======== =======
</TABLE>
The rate of increase in future compensation levels for the plans of 4 1/2%
and the weighted average discount rates of 7 1/4% and 7 3/4% were used in
determining the actuarial present value of the projected benefit obligation at
December 31, 1997 and 1996, respectively. The majority of pension plan assets
are invested in U.S. government securities, time deposits and common stocks with
projected long-term rates of return of 9%.
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's principal profit sharing plan was amended effective January
1, 1995, to discontinue future contributions. The plan holds 2,192,000 and
2,391,000 shares of the Company's common stock, representing 13% and 14% of the
total shares outstanding at December 31, 1997, and 1996 respectively.
The Company also has a Stock Bonus Plan for key employees pursuant to which
86,000, 75,000 and 98,000 common shares were awarded for 1997, 1996 and 1995,
respectively, resulting in a charge to operations of $2.2 million, $1.3 million
and $1.2 million, respectively. The Plan, as amended December 9, 1992, provides
that a total of up to 450,000 common shares may be awarded in any one year.
Effective January 1, 1995, the Company adopted The First American Financial
Corporation 401(k) Savings Plan ("The Savings Plan"), which is available to
substantially all employees. The Savings Plan allows for employee elective
contributions up to the maximum deductible amount as determined by the Internal
Revenue Code.
NOTE 11.
STOCK OPTION PLANS:
On April 24, 1996, the Company implemented The First American Financial
Corporation 1996 Stock Option Plan ("the Stock Option Plan"). Under the Stock
Option Plan, options are granted to certain employees to purchase the Company's
common stock at a price no less than the market value of the shares on the date
of the grant. The maximum number of shares that may be subject to options is
1,875,000. Currently outstanding options become exercisable one to five years,
and expire 10 years, from the grant date. On April 24, 1997, the Company
implemented The First American Financial Corporation 1997 Directors' Stock Plan
("the Directors' Plan"). The Directors' Plan is similar to the employees' Stock
Option Plan, except that the maximum number of shares that may be subject to
options is 600,000 and the maximum number of shares that may be purchased
pursuant to options granted shall not exceed 2,250 shares during any
12-consecutive-month period.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
In accounting for its plan, the Company, in accordance with the provisions of
SFAS No. 123, applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." As a result of this election, the Company does
not recognize compensation expense for its stock option plans. Had the Company
determined compensation cost based on the fair value for its stock options at
grant date, as set forth under SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS,
EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Net income:
As reported................................................ $64,709 $53,589
Pro forma.................................................. $63,909 $53,070
Earnings per share:
As reported
Basic.................................................... $ 3.73 $ 3.12
Diluted.................................................. $ 3.64 $ 3.09
Pro forma
Basic.................................................... $ 3.68 $ 3.09
Diluted.................................................. $ 3.59 $ 3.06
</TABLE>
38
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of each option grant is estimated at the grant date using
the Black-Scholes option-pricing method with the following weighted-average
assumptions used for grants in 1997 and 1996, respectively: dividend yield of
1.2% and 1.9%; expected volatility of 38.1% and 41.0%; risk-free interest rate
of 6.3% and 6.5%; and expected life of six years. The weighted-average fair
value of options granted during 1997 and 1996 was $12.79 and $6.57,
respectively.
Transactions involving stock options are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OUTSTANDING PRICE
----------- --------
(IN THOUSANDS,
EXCEPT WEIGHTED-
AVERAGE EXERCISE
PRICE)
<S> <C> <C>
Balance at December 31, 1995............................
Granted during 1996..................................... 1,005 $17.08
----- ------
Balance at December 31, 1996............................ 1,005 $17.08
Granted during 1997..................................... 69 $31.50
Exercised during 1997................................... 97 $17.08
Forfeited during 1997................................... 44 $17.08
----- ------
Balance at December 31, 1997............................ 933 $18.15
===== ======
</TABLE>
At December 31, 1997, the range of exercise prices was $17.08--$39.83 and
the weighted-average remaining contractual life of outstanding options was six
years. The number of options exercisable was 104,250 and the weighted-average
exercise price of those options was $17.08. There were no options exercisable at
December 31, 1996.
NOTE 12.
COMMITMENTS AND CONTINGENCIES:
The Company leases certain office facilities, automobiles and equipment
under operating leases, which for the most part are renewable. The majority of
these leases also provide that the Company will pay insurance and taxes. In
1994, the Company entered into a sale-leaseback agreement with regard to certain
furniture and equipment. Under the agreement, the Company agreed to lease the
equipment for four years with minimum annual lease payments of $8.3 million.
Future minimum rental payments under operating leases that have initial or
remaining noncancelable lease terms in excess of one year as of December 31,
1997, are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................ $ 71,522
1999............................................................ 53,280
2000............................................................ 31,836
2001............................................................ 21,535
2002............................................................ 16,889
Later Years..................................................... 43,015
--------
$238,077
========
</TABLE>
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total rental expense for all operating leases and month-to-month rentals
was $78.3 million, $63.9 million and $58.6 million for 1997, 1996 and 1995,
respectively.
The Company is involved in various routine legal proceedings related to its
operations. While the ultimate disposition of each proceeding is not
determinable, the Company does not believe that any of such proceedings will
have a materially adverse effect on its financial condition or results of
operations.
NOTE 13.
JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES:
On April 22, 1997, the Company issued and sold $100.0 million of 8.5% trust
preferred securities, due in 2012, through its wholly owned subsidiary, First
American Capital Trust I. In connection with the subsidiary's issuance of the
preferred securities, the Company issued to the subsidiary trust 8.5%
subordinated interest notes, due 2012. The sole assets of the subsidiary are and
will be the subordinated interest notes. The Company's obligations under the
subordinated interest notes and related agreements, taken together, constitute a
full and unconditional guarantee by the Company of the subsidiary's obligations
under the preferred securities. Distributions payable on the securities are
included as interest expense in the Company's consolidated income statement.
NOTE 14.
STOCKHOLDERS' EQUITY:
On October 23, 1997, the Company adopted a Shareholder Rights Plan. Under
the Rights Plan, after the close of business on November 15, 1997, each holder
of the Company's common shares received a dividend distribution of one Right for
each common share held. Each Right entitles the holder thereof to buy a
preferred share fraction equal to 1/100,000 of a share of Series A Junior
Participating Preferred Shares of the Company at an exercise price of $265 per
preferred share fraction. Each fraction is designed to be equivalent in voting
and dividend rights to one common share.
The Rights will be exercisable and will trade separately from the common
shares only if a person or group, with certain exceptions, acquires beneficial
ownership of 15% or more of the Company's common shares or commences a tender or
exchange offer that would result in such person or group beneficially owning 15%
or more of the common shares then outstanding. The Company may redeem the Rights
at $0.001 per Right at any time prior to the occurrence of one of these events.
All Rights expire on October 23, 2007.
Each Right will entitle its holder to purchase, at the Right's then-current
exercise price, preferred share fractions (or other securities of the Company)
having a value of twice the Right's exercise price. This amounts to the right to
buy preferred share fractions of the Company at half price. Rights owned by the
party triggering the exercise of Rights will be void and therefore will not be
exercisable.
In addition, if after any person has become a 15%-or-more stockholder, the
Company is involved in a merger or other business combination transaction with
another person in which the Company's common shares are changed or converted, or
if the Company sells 50% or more of its assets or earning power to another
person, each Right will entitle its holder to purchase, at the Right's then-
current exercise price, common stock of such other person (or its parent) having
a value of twice the Right's exercise price.
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On January 15, 1998, the Company distributed a 3-for-2 common stock split
in the form of a 50% stock dividend. This resulted in an increase of 5,791,492
common shares outstanding with the par value of these additional shares being
capitalized by a transfer from additional paid-in capital to the common stock
account. This stock split has been reflected in the consolidated statements of
stockholders' equity on a retroactive basis as of December 31, 1994. In order to
effect the stock split, the Company increased its authorized shares from
24,000,000 to 36,000,000. All references in the consolidated financial
statements with regards to common stock, additional paid-in capital, number of
shares of common stock and per share amounts have been restated to reflect the
stock split.
NOTE 15.
SUBSEQUENT EVENTS:
On January 1, 1998, the Company formed a limited liability corporation
("LLC") with Experian Group ("Experian"). The purpose of the LLC is to combine
certain operations of the Company's subsidiary, First American Real Estate
Information Services, Inc., with Experian's Real Estate Solutions division
("RES"). The LLC is 80% owned by the Company and 20% owned by Experian. RES is a
supplier of core real estate data, providing, among other things, property
valuation information, title insurance, tax information and imaged title
documents.
This business combination has been accounted for under the purchase method
of accounting and, accordingly, the purchase price will be allocated to the
assets acquired and liabilities assumed based on the estimated fair values at
January 1, 1998. In addition, as a result of the transaction, the Company will
recognize a pretax gain of $33.0 million in the first quarter 1998. The
operating results of the LLC will be included in the Company's consolidated
financial statements commencing January 1, 1998.
NOTE 16.
SEGMENT FINANCIAL INFORMATION:
The Company's operations include four reportable segments: title insurance,
real estate information, home warranty and trust and banking. The title
insurance segment issues policies which are insured statements of the condition
of title to real property. The real estate information segment provides to
lender customers the status of tax payments on real property securing their
loans, credit information derived from at least two credit bureau sources, flood
zone determination reports which provide information on whether or not a
property is in a special flood hazard area, as well as other real estate-related
information services. The home warranty segment issues one-year warranties which
protect homeowners against defects in home fixtures. The trust and banking
segment provides full-service trust and depository services, accepts deposits
and makes real estate secured loans.
The title insurance and real estate information segments operate through
networks of offices nationwide. The Company provides its title services through
both direct operations and agents throughout the United States. It also offers
title services abroad in Australia, the Bahama Islands, Canada, Guam, Mexico,
Puerto Rico, the U.S. Virgin Islands and the United Kingdom. Home warranty
services are available in Arizona, California, Nevada, North Carolina, South
Carolina, Texas, Utah and Washington. The trust, banking and thrift businesses
operate in Southern California.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement is effective for 1998 and
requires certain information about a company's operating segments and products
and services. The Company believes that the adoption of SFAS No. 131 will not
materially alter its segment disclosures and related information.
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Selected financial information about the Company's operations by segment
for each of the past three years is as follows:
<TABLE>
<CAPTION>
DEPRECIATION
PRETAX AND CAPITAL
REVENUES PROFIT (LOSS) ASSETS AMORTIZATION EXPENDITURES
---------- ------------- ---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1997
Title Insurance......... $1,482,993 $ 95,636 $ 656,622 $23,501 $39,190
Real Estate Information. 331,152 45,317 312,666 12,369 33,602
Home Warranty........... 51,005 9,741 81,444 424 768
Trust and Banking....... 20,007 4,062 83,423 604 676
Corporate............... 2,304 (31,643) 33,989 1,251 250
---------- -------- ---------- ------- -------
$1,887,461 $123,113 $1,168,144 $38,149 $74,486
========== ======== ========== ======= =======
1996
Title Insurance......... $1,288,947 $ 66,056 $ 584,800 $17,236 $30,082
Real Estate Information. 247,810 52,581 225,527 8,281 17,060
Home Warranty........... 41,927 8,178 67,622 296 277
Trust and Banking....... 17,839 3,728 72,473 438 1,366
Corporate............... 1,043 (24,678) 29,372 991
---------- -------- ---------- ------- -------
$1,597,566 $105,865 $ 979,794 $27,242 $48,785
========== ======== ========== ======= =======
1995
Title Insurance......... $1,052,823 $ 17,540 $ 532,697 $13,356 $20,321
Real Estate Information. 147,004 19,690 182,499 6,205 7,984
Home Warranty........... 35,531 6,828 56,637 289 149
Trust and Banking....... 14,110 3,304 63,416 331 1,189
Corporate............... 748 (19,948) 38,529 609
---------- -------- ---------- ------- -------
$1,250,216 $ 27,414 $ 873,778 $20,790 $29,643
========== ======== ========== ======= =======
</TABLE>
Corporate consists primarily of unallocated interest expense, minority
interests, equity in earnings of affiliated companies and personnel and other
operating expenses associated with the Company's home office facilities.
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Revenues.......................... $382,877 $450,374 $501,848 $552,362
======== ======== ======== ========
Income before income taxes........ $ 4,766 $ 30,216 $ 33,572 $ 37,655
======== ======== ======== ========
Net income........................ $ 2,866 $ 18,516 $ 20,572 $ 22,755
======== ======== ======== ========
Net income per share (Note A):
Basic........................... $ .17 $ 1.06 $ 1.19 $ 1.31
======== ======== ======== ========
Diluted......................... $ .16 $ 1.05 $ 1.16 $ 1.27
======== ======== ======== ========
Year Ended December 31, 1996
Revenues.......................... $347,376 $413,374 $411,304 $425,512
======== ======== ======== ========
Income before income taxes........ $ 14,982 $ 32,827 $ 23,569 $ 17,811
======== ======== ======== ========
Net income........................ $ 8,582 $ 19,427 $ 13,769 $ 11,811
======== ======== ======== ========
Net income per share (Note A):
Basic........................... $ .50 $ 1.13 $ 0.80 $ 0.69
======== ======== ======== ========
Diluted......................... $ .50 $ 1.13 $ 0.79 $ 0.67
======== ======== ======== ========
</TABLE>
The Company's primary business segments are cyclical in nature, with the
spring and summer months historically being the strongest. However, interest
rate adjustments by the Federal Reserve Board, as well as other economic
factors, can cause unusual fluctuations in the Company's quarterly operating
results. See Management's Discussion and Analysis in Part 1, Item 7 of this
report for further discussion of the Company's results of operations.
Note A--After adjustment for 3-for-2 stock split effected January 15, 1998,
and restatement for the adoption of Statement of Financial Accounting Standards
No. 128, "Earnings per Share."
<PAGE>
SCHEDULE I
1 OF 1
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
-------- ------------ ------------ ---------------
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST MARKET VALUE BALANCE SHEET
------------------ ------------ ------------ ---------------
<S> <C> <C> <C>
Deposits with savings and loan
associations and banks:
Registrant........................ $ 50,000 $ 50,000 $ 50,000
------------ ------------ ------------
Consolidated...................... $ 29,029,000 $ 29,029,000 $ 29,029,000
------------ ------------ ------------
Debt securities:
Registrant--None
Consolidated
U.S. Treasury securities........ $ 38,972,000 $ 39,718,000 $ 39,718,000
Corporate securities............ 54,884,000 55,579,000 55,579,000
Obligations of states and
political subdivisions......... 38,977,000 40,069,000 40,069,000
Mortgage-backed securities...... 16,186,000 16,137,000 16,137,000
------------ ------------ ------------
$149,019,000 $151,503,000 $151,503,000
------------ ------------ ------------
Equity securities:
Registrant--None
Consolidated...................... $ 8,019,000 $ 13,904,000 $ 13,904,000
------------ ------------ ------------
Other long-term investments:
Registrant--None
Consolidated...................... $ 35,047,000 $ 35,047,000 $ 35,047,000
------------ ------------ ------------
Total Investments:
Registrant........................ $ 50,000 $ 50,000 $ 50,000
============ ============ ============
Consolidated...................... $221,114,000 $229,483,000 $229,483,000
============ ============ ============
</TABLE>
<PAGE>
SCHEDULE II
1 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents.......................... $ 9,657,000 $ 8,983,000
------------ ------------
Stock of subsidiaries, at equity................... 624,690,000 532,128,000
------------ ------------
Deposits with savings and loan associations and
banks............................................. 50,000 0,000
------------ ------------
Property and equipment, at cost:
Land............................................. 425,000 425,000
Buildings and building improvements.............. 5,006,000 5,006,000
Less--accumulated depreciation................... (4,628,000) (4,442,000)
------------ ------------
803,000 989,000
------------ ------------
Other assets....................................... 5,217,000 4,471,000
------------ ------------
$640,417,000 546,621,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Dividends payable.................................. $ 2,376,000 $ 2,118,000
------------ ------------
Accrued expenses................................... 1,798,000 322,000
------------ ------------
Payable to subsidiaries............................ 114,143,000 146,268,000
------------ ------------
Notes and contracts payable........................ 10,688,000 45,448,000
------------ ------------
Guaranteed preferred beneficial interests in
Company's junior subordinated deferrable interest
debentures........................................ 100,000,000
------------
Stockholders' equity:
Preferred stock, $1 par value; Authorized--
500,000 shares;
Outstanding--None
Common stock, $1 par value; Authorized--
36,000,000 shares;
Outstanding--17,374,000 and 17,331,000 shares... 17,374,000 17,331,000
Additional paid-in capital....................... 43,953,000 43,643,000
Retained earnings................................ 344,645,000 288,754,000
Net unrealized gain on securities................ 5,440,000 2,737,000
------------ ------------
Total stockholders' equity..................... 411,412,000 352,465,000
------------ ------------
$640,417,000 $546,621,000
============ ============
</TABLE>
See Notes to Parent Company Financial Statements
45
<PAGE>
SCHEDULE II
2 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Interest and other income................. $ 501,000 $ 891,000 $ 837,000
Equity in earnings of subsidiaries........ 94,479,000 75,696,000 25,803,000
----------- ----------- -----------
94,980,000 76,587,000 26,640,000
----------- ----------- -----------
Expenses:
Interest.................................. 7,450,000 3,635,000 5,040,000
Depreciation.............................. 186,000 186,000 185,000
Other administrative expenses............. 22,635,000 19,177,000 13,828,000
----------- ----------- -----------
30,271,000 22,998,000 19,053,000
----------- ----------- -----------
Net income.................................. $64,709,000 $53,589,000 $ 7,587,000
=========== =========== ===========
Net income per share:
Basic..................................... $ 3.73 $ 3.12 $ 0.44
=========== =========== ===========
Diluted................................... $ 3.64 $ 3.09 $ 0.44
=========== =========== ===========
Weighted Average Shares:
Basic..................................... 17,362,000 17,179,000 17,105,000
=========== =========== ===========
Diluted................................... 17,785,000 17,325,000 17,105,000
=========== =========== ===========
</TABLE>
See Notes to Parent Company Financial Statements
<PAGE>
SCHEDULE II
3 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................... $ 64,709,000 $ 53,589,000 $ 7,587,000
Adjustments to reconcile net income
to cash (used for) provided by
operating activities--
Depreciation..................... 186,000 186,000 185,000
Expense relating to stock plans.. 2,335,000 1,270,000 1,153,000
Equity in earnings of
subsidiaries, net of dividends.. (76,808,000) (63,697,000) (25,802,000)
Other............................ (225,000)
Changes in assets and liabilities,
excluding effects of company
acquisitions and noncash
transactions--
(Increase) decrease in other
assets.......................... (746,000) 453,000 503,000
Increase in dividends payable and
accrued expenses................ 1,734,000 174,000 7,000
(Decrease) increase in
intercompany accounts........... (23,286,000) 23,369,000 40,509,000
------------ ------------ ------------
Cash (used for) provided by
operating activities.......... (31,876,000) 15,344,000 23,917,000
------------ ------------ ------------
Cash flows from investing activities:
Capital contribution to subsidiary. (21,342,000)
Net increase in deposits with
banks............................. (50,000)
Sales of equity securities......... 1,933,000
------------ ------------
Cash (used for) provided by
investing activities.......... (21,342,000) 1,883,000
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of junior
subordinated debentures........... 100,000,000
Proceeds from exercise of stock
options........................... 1,653,000
Proceeds from issuance of stock to
employee savings plan............. 980,000
Repayment of debt.................. (34,760,000) (14,313,000) (11,121,000)
Purchase of Company shares......... (5,163,000) (3,535,000) (3,592,000)
Cash dividends..................... (8,818,000) (7,928,000) (6,850,000)
------------ ------------ ------------
Cash provided by (used for)
financing activities.......... 53,892,000 (25,776,000) (21,563,000)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................... 674,000 (10,432,000) 4,237,000
Cash and cash equivalents--
Beginning of year.................. 8,983,000 19,415,000 15,178,000
------------ ------------ ------------
End of year........................ $ 9,657,000 $ 8,983,000 $ 19,415,000
============ ============ ============
Supplementary information:
Cash paid during the year for
interest.......................... $ 5,973,000 $ 3,835,000 $ 4,986,000
Noncash investing and financing
activities:
Shares issued for benefits plans... $ 2,185,000 $ 1,270,000 $ 1,153,000
Company acquisitions in exchange
for common stock.................. $ 548,000 $ 7,558,000 $ 2,712,000
</TABLE>
See Notes to Parent Company Financial Statements
<PAGE>
SCHEDULE II
4 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
NOTE A
The composition of Notes and Contracts Payable consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
Secured notes payable to financial institutions.... $ 5,320,000 $37,250,000
Trust deed notes with maturities through 2002,
average rate of 10%. Secured by land and buildings
with an aggregate net book
value of $872,000................................. 623,000 759,000
Other notes and contracts payable with maturities
through 2000,
average rate of 7%................................ 4,745,000 7,439,000
----------- -----------
$10,688,000 $45,448,000
=========== ===========
</TABLE>
The aggregate annual maturities for notes and contracts payable in each of
the five years after December 31, 1997, are $5,711,000, $4,180,000, $582,000,
$136,000, and $79,000, respectively.
NOTE B
The parent company files a consolidated tax return with its subsidiary
companies in which it owns 80% or more of the outstanding stock. The current and
cumulative tax effects relating to the operations of the parent company are
reflected in the accounts of First American Title Insurance Company.
<PAGE>
SCHEDULE III
1 OF 2
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INSURANCE INFORMATION
BALANCE SHEET CAPTIONS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
- -------- ----------------- ------------ ------------
DEFERRED POLICY CLAIMS DEFERRED
SEGMENT ACQUISITION COSTS RESERVES REVENUES
- ------- ----------------- ------------ ------------
<S> <C> <C> <C>
1997
Title Insurance..................... $238,141,000 $ 2,151,000
Real Estate Information............. $19,700,000 9,238,000 75,391,000
Home Warranty....................... 5,316,000 3,357,000 26,582,000
Trust and Banking................... 90,000
Corporate...........................
----------- ------------ ------------
Total............................. $25,016,000 $250,826,000 $104,124,000
=========== ============ ============
1996
Title Insurance..................... $237,596,000 $ 4,396,000
Real Estate Information............. $20,889,000 4,880,000 79,401,000
Home Warranty....................... 3,864,000 2,769,000 20,336,000
Trust and Banking...................
Corporate...........................
----------- ------------ ------------
Total............................. $24,753,000 $245,245,000 $104,133,000
=========== ============ ============
</TABLE>
<PAGE>
SCHEDULE III
2 OF 2
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INSURANCE INFORMATION
INCOME STATEMENT CAPTIONS
<TABLE>
<CAPTION>
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J
-------- -------------- ----------- ----------- ------------ ------------
AMORTIZATION
OF DEFERRED
NET POLICY OTHER
OPERATING INVESTMENT LOSS ACQUISITION OPERATING
SEGMENT REVENUES INCOME PROVISION COSTS EXPENSES
------- -------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1997
Title Insurance......... $1,461,967,000 $21,026,000 $52,924,000 $247,579,000
Real Estate Information. 331,372,000 (220,000) 9,874,000 $7,532,000 135,453,000
Home Warranty........... 46,859,000 4,146,000 27,338,000 562,000 1,509,000
Trust and Banking....... 20,007,000 187,000 8,093,000
Corporate............... 2,304,000 10,591,000
-------------- ----------- ----------- ---------- ------------
Total................. $1,860,205,000 $27,256,000 $90,323,000 $8,094,000 $403,225,000
============== =========== =========== ========== ============
1996
Title Insurance......... $1,268,233,000 $20,714,000 $58,909,000 $216,091,000
Real Estate Information. 246,745,000 1,065,000 4,453,000 $7,113,000 84,136,000
Home Warranty........... 38,351,000 3,576,000 23,055,000 665,000 658,000
Trust and Banking....... 17,839,000 70,000 6,982,000
Corporate............... 1,043,000 7,064,000
-------------- ----------- ----------- ---------- ------------
Total................. $1,571,168,000 $26,398,000 $86,487,000 $7,778,000 $314,931,000
============== =========== =========== ========== ============
1995
Title Insurance......... $1,034,789,000 $18,034,000 $68,338,000 $186,876,000
Real Estate Information. 145,755,000 1,249,000 3,166,000 $5,891,000 53,636,000
Home Warranty........... 32,531,000 3,000,000 18,857,000 1,748,000 95,000
Trust and Banking....... 14,110,000 26,000 5,650,000
Corporate............... 748,000 3,927,000
-------------- ----------- ----------- ---------- ------------
Total................. $1,227,185,000 $23,031,000 $90,387,000 $7,639,000 $250,184,000
============== =========== =========== ========== ============
</TABLE>
<PAGE>
SCHEDULE IV
1 OF 1
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
REINSURANCE
<TABLE>
<CAPTION>
TITLE
INSURANCE
OPERATING TITLE PERCENTAGE
REVENUES CEDED TO ASSUMED INSURANCE OF AMOUNT
BEFORE OTHER FROM OTHER OPERATING ASSUMED TO
SEGMENT REINSURANCE COMPANIES COMPANIES REVENUES OPERATING REVENUES
- ------- -------------- ---------- ---------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
1997.... $1,461,551,000 $3,609,000 $4,025,000 $1,461,967,000 0.3%
============== ========== ========== ============== ===
1996.... $1,267,309,000 $2,094,000 $3,018,000 $1,268,233,000 0.2%
============== ========== ========== ============== ===
1995.... $1,034,435,000 $2,840,000 $3,194,000 $1,034,789,000 0.3%
============== ========== ========== ============== ===
</TABLE>
<PAGE>
SCHEDULE V
1 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ ----------------------- ----------- ------------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND OTHER FROM END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVE PERIOD
----------- ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Reserve deducted from
accounts receivable:
Registrant--None
Consolidated.......... $ 5,351,000 $ 4,510,000 $ 2,259,000(A) $ 7,602,000
============ =========== =========== ============
Reserve for title losses
and other claims:
Registrant--None
Consolidated.......... $245,245,000 $90,323,000 $(4,633,000)(B) $80,109,000(C) $250,826,000
============ =========== =========== =========== ============
Reserve deducted from
loans receivable:
Registrant--None
Consolidated.......... $ 1,050,000 $ 243,000 $ 108,000(A) $ 1,185,000
============ =========== =========== ============
Reserve deducted from
assets acquired in
connection with claim
settlements:
Registrant--None
Consolidated.......... $ 10,278,000 $ 4,678,000 $ 3,821,000(D) $ 11,135,000
============ =========== =========== ============
Reserve deducted from
deferred income taxes:
Registrant--None
Consolidated.......... $ 438,000 $ 438,000(E)
============ ===========
Reserve deducted from
other assets:
Registrant--None
Consolidated.......... $ 1,387,000 $ 640,000 $ 220,000(D) $ 1,807,000
============ =========== =========== ============
</TABLE>
- --------
Note A--Amount represents accounts written off, net of recoveries.
Note B--Amount represents $45,000 in purchase accounting adjustments, net of a
reclassification of $4,678,000 to the reserve for assets acquired in
connection with claim settlements.
Note C--Amount represents claim payments, net of recoveries.
Note D--Amount represents elimination of reserve in connection with
disposition and/or revaluation of the related asset.
Note E--Amount represents elimination of reserve in connection with the
expiration of the related temporary differences.
<PAGE>
SCHEDULE V
2 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ ----------------------- ------------ ------------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS FROM RESERVE PERIOD
----------- ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Reserve deducted from
accounts receivable:
Registrant--None
Consolidated......... $ 5,970,000 $ 4,386,000 $ 5,005,000(A) $ 5,351,000
============ =========== =========== ============
Reserve for title losses
and other claims:
Registrant--None
Consolidated......... $238,161,000 $86,487,000 $(4,915,000)(B) $74,488,000(C) $245,245,000
============ =========== =========== =========== ============
Reserve deducted from
loans receivable:
Registrant--None
Consolidated......... $ 1,344,000 $ 433,000 $ 727,000(A) $ 1,050,000
============ =========== =========== ============
Reserve deducted from
other investments:
Registrant--None
Consolidated......... $ 353,000 $ 353,000(D)
============ ===========
Reserve deducted from
assets acquired in
connection with claim
settlements:
Registrant--None
Consolidated......... $ 11,246,000 $ 4,948,000 $ 5,916,000(D) $ 10,278,000
============ =========== =========== ============
Reserve deducted from
deferred income taxes:
Registrant--None
Consolidated......... $ 856,000 $ 418,000(E) $ 438,000
============ =========== ============
Reserve deducted from
other assets:
Registrant--None
Consolidated......... $ 1,420,000 $ 2,000 $ 35,000(D) $ 1,387,000
============ =========== =========== ============
</TABLE>
- --------
Note A--Amount represents accounts written off, net of recoveries.
Note B--Amount represents $33,000 in purchase accounting adjustments, net of a
reclassification of $4,948,000 to the reserve for assets acquired in
connection with claim settlements.
Note C--Amount represents claim payments, net of recoveries.
Note D--Amount represents elimination of reserve in connection with
disposition and/or revaluation of the related asset.
Note E--Amount represents elimination of reserve in connection with the
expiration of the related temporary differences.
<PAGE>
SCHEDULE V
3 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ ---------------------- ----------- ------------
ADDITIONS
----------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND OTHER FROM END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVE PERIOD
----------- ------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Reserve deducted from
accounts receivable:
Registrant--None
Consolidated......... $ 4,022,000 $ 2,965,000 $ 1,017,000(A) $ 5,970,000
============ =========== =========== ============
Reserve for title losses
and other claims:
Registrant--None
Consolidated......... $206,743,000 $90,387,000 $7,004,000(B) $65,973,000(C) $238,161,000
============ =========== ========== =========== ============
Reserve deducted from
loans receivable:
Registrant--None
Consolidated......... $ 950,000 $ 562,000 $ 168,000(A) $ 1,344,000
============ =========== =========== ============
Reserve deducted from
other investments:
Registrant--None
Consolidated......... $ 353,000 $ 353,000
============ ============
Reserve deducted from
assets acquired in
connection with claim
settlements:
Registrant--None
Consolidated......... $ 12,354,000 $3,019,000 $ 4,127,000(D) $ 11,246,000
============ ========== =========== ============
Reserve deducted from
deferred income taxes:
Registrant--None
Consolidated......... $ 2,880,000 $ 2,024,000(E) $ 856,000
============ =========== ============
Reserve deducted from
other assets:
Registrant--None
Consolidated......... $ 1,342,000 $ 84,000 $ 6,000 $ 1,420,000
============ =========== =========== ============
</TABLE>
- --------
Note A--Amount represents accounts written off, net of recoveries.
Note B--Amount represents $10,023,000 in purchase accounting adjustments, net
of a reclassification of $3,019,000 to the reserve for assets acquired
in connection with claim settlements.
Note C--Amount represents claim payments, net of recoveries.
Note D--Amount represents elimination of reserve in connection with
disposition and/or revaluation of the related asset.
Note E--Amount represents elimination of reserve in connection with the
expiration of the related temporary differences.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
The information required by Items 10 through 13 of this report is set forth
in the sections entitled "Security Ownership of Certain Beneficial Owners,"
"Election of Directors," "Security Ownership of Management," "Executive
Compensation," "Report of the Compensation Committee on Executive Compensation,"
"Comparative Cumulative Total Return to Shareholders," "Executive Officers" and
"Compliance With Section 16(a) of the Securities Exchange Act of 1934" in the
Company's definitive proxy statement, which sections are incorporated in this
report and made a part hereof by reference. The definitive proxy statement will
be filed no later than 120 days after close of Registrant's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. & 2. Financial Statements and Financial Statement Schedules
The Financial Statements and Financial Statement Schedules filed as
part of this report are listed in the accompanying index at page 20
in "Item 8" of Part II of this report.
3. Exhibits (Each management contract or compensatory plan or arrangement
in which any director or named executive officer of The First American
Financial Corporation, as defined by Item 402(a)(3) of Regulation S-K
(17 C.F.R. (S)229.402(a)(3)), participates that is included among the
exhibits listed below is identified by an asterisk (*).)
<TABLE>
<C> <S>
(3)(a) Restated Articles of Incorporation of The First American Financial
Corporation dated January 1, 1998.
(4)(a) Amended and Restated Credit Agreement dated as of July 29, 1997,
incorporated by reference herein from Exhibit (4.4) of Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997.
(4)(b) Amendment No. 1 dated as of November 10, 1997, to Amended and
Restated Credit Agreement dated as of July 29, 1997, incorporated by
reference herein from Exhibit (4.1) of Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997.
(4)(c) Rights Agreement, dated as of October 23, 1997, incorporated by
reference herein from Exhibit 4 of Registration Statement on Form 8-A
dated November 7, 1997.
(4)(d) Junior Subordinated Indenture, dated as of April 22, 1997,
incorporated by reference herein from Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997.
(4)(e) Form of New 8.50% Junior Subordinated Deferrable Interest Debenture,
incorporated by reference herein from Exhibit 4.2 of Registration
Statement on Form S-4 dated September 18, 1997.
(4)(f) Certificate of Trust of First American Capital Trust I, incorporated
by reference herein from Exhibit 4.3 of Registration Statement on
Form S-4 dated September 18, 1997.
(4)(g) Declaration of Trust of First American Capital Trust I dated as of
April 11, 1997, incorporated by reference herein from Exhibit 4.4 of
Registration Statement on Form S-4 dated September 18, 1997.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
(4)(h) Amended and Restated Declaration of Trust of First American Capital
Trust I dated as of April 22, 1997, incorporated by reference
herein from Exhibit 4.3 of Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
(4)(i) Form of New 8.50% Capital Security (Liquidation Amount $1,000 per
Capital Security), incorporated by reference herein from Exhibit
4.6 of Registration Statement on Form S-4 dated September 18, 1997.
(4)(j) Form of New Guarantee Agreement, incorporated by reference herein
from Exhibit 4.7 of Registration Statement on Form S-4 dated
September 18, 1997.
*(10)(a) Description of Stock Bonus Plan, as amended, incorporated by
reference herein from Exhibit (10)(a) of Annual Report on Form 10-K
for the fiscal year ended December 31, 1992.
*(10)(b) Executive Supplemental Benefit Plan dated April 10, 1986, and
Amendment No. 1 thereto dated October 1, 1986, incorporated by
reference herein from Exhibit (10)(b) of Annual Report on Form 10-K
for the fiscal year ended December 31, 1988.
*(10)(c) Amendment No. 2, dated March 22, 1990, to Executive Supplemental
Benefit Plan, incorporated by reference herein from Exhibit (10)(c)
of Annual Report on Form 10-K for the fiscal year ended December
31, 1989.
*(10)(d) Management Supplemental Benefit Plan dated July 20, 1988,
incorporated by reference herein from Exhibit (10) of Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992.
*(10)(e) Pension Restoration Plan (effective as of January 1, 1994),
incorporated by reference herein from Exhibit (10)(e) of Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
*(10)(f) 1996 Stock Option Plan, incorporated by reference herein from
Exhibit 4 of Registration Statement on Form S-8 dated December 30,
1996.
*(10)(g) 1997 Directors' Stock Plan, incorporated by reference herein from
Exhibit 4.1 of Registration Statement on Form S-8 dated December
11, 1997.
(10)(h) Registration Rights Agreement dated April 22, 1997, incorporated by
reference herein from Exhibit (10.1) of Quarterly Report on Form
10-Q for the quarter ended June 30, 1997.
(21) Subsidiaries of the registrant.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
During the last quarter of the period covered by this report, the Company
filed a Current Report on Form 8-K dated November 7, 1997, reporting that the
Company has adopted a shareholder rights plan and, in connection therewith,
declared a dividend of Rights to Purchase $1.00 par value Series A Junior
Participating Preferred Shares.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE FIRST AMERICAN FINANCIAL
CORPORATION (Registrant)
/s/ Parker S. Kennedy
By: ______________________________________
Parker S. Kennedy
President
(Principal Executive Officer)
Date: March 20, 1998
/s/ Thomas A. Klemens
By: ______________________________________
Thomas A. Klemens
Executive Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 20, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ D.P. Kennedy Chairman and Director March 20, 1998
____________________________________
D.P. Kennedy
/s/ Parker S. Kennedy President and Director March 20, 1998
____________________________________
Parker S. Kennedy
/s/ Thomas A. Klemens Executive Vice President, March 20, 1998
____________________________________ Chief Financial Officer
Thomas A. Klemens
Director
____________________________________
George L. Argyros
/s/ Gary J. Beban Director March 20, 1998
____________________________________
Gary J. Beban
/s/ J. David Chatham Director March 20, 1998
____________________________________
J. David Chatham
/s/ William G. Davis Director March 20, 1998
____________________________________
William G. Davis
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ James L. Doti Director March 20, 1998
____________________________________
James L. Doti
/s/ Lewis W. Douglas, Jr. Director March 20, 1998
____________________________________
Lewis W. Douglas, Jr.
/s/ Paul B. Fay, Jr. Director March 20, 1998
____________________________________
Paul B. Fay, Jr.
/s/ Dale F. Frey Director March 20, 1998
____________________________________
Dale F. Frey
/s/ Anthony R. Moiso Director March 20, 1998
____________________________________
Anthony R. Moiso
Director
____________________________________
Rudolph J. Munzer
/s/ Frank E. O'Bryan Director March 20, 1998
____________________________________
Frank E. O'Bryan
/s/ Roslyn B. Payne Director March 20, 1998
____________________________________
Roslyn B. Payne
Director
____________________________________
D. Van Skilling
/s/ Virginia M. Ueberroth Director March 20, 1998
____________________________________
Virginia M. Ueberroth
</TABLE>
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
(3)(a) Restated Articles of Incorporation of The First
American Financial Corporation dated January 1, 1998.
(4)(a) Amended and Restated Credit Agreement dated as of July
29, 1997, incorporated by reference herein from
Exhibit (4.4) of Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
(4)(b) Amendment No. 1 dated as of November 10, 1997, to
Amended and Restated Credit Agreement dated as of July
29, 1997, incorporated by reference herein from
Exhibit (4.1) of Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
(4)(c) Rights Agreement, dated as of October 23, 1997,
incorporated by reference herein from Exhibit 4 of
Registration Statement on Form 8-A dated November 7,
1997.
(4)(d) Junior Subordinated Indenture, dated as of April 22,
1997, incorporated by reference herein from Quarterly
Report on Form 10-Q for the quarter ended June 30,
1997.
(4)(e) Form of New 8.50% Junior Subordinated Deferrable
Interest Debenture, incorporated by reference herein
from Exhibit 4.2 of Registration Statement on Form S-4
dated September 18, 1997.
(4)(f) Certificate of Trust of First American Capital Trust
I, incorporated by reference herein from Exhibit 4.3
of Registration Statement on Form S-4 dated September
18, 1997.
(4)(g) Declaration of Trust of First American Capital Trust I
dated as of April 11, 1997, incorporated by reference
herein from Exhibit 4.4 of Registration Statement on
Form S-4 dated September 18, 1997.
(4)(h) Amended and Restated Declaration of Trust of First
American Capital Trust I dated as of April 22, 1997,
incorporated by reference herein from Exhibit 4.3 of
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.
(4)(i) Form of New 8.50% Capital Security (Liquidation Amount
$1,000 per Capital Security), incorporated by
reference herein from Exhibit 4.6 of Registration
Statement on Form S-4 dated September 18, 1997.
(4)(j) Form of New Guarantee Agreement, incorporated by
reference herein from Exhibit 4.7 of Registration
Statement on Form S-4 dated September 18, 1997.
*(10)(a) Description of Stock Bonus Plan, as amended,
incorporated by reference herein from Exhibit (10)(a)
of Annual Report on Form 10-K for the fiscal year
ended December 31, 1992.
*(10)(b) Executive Supplemental Benefit Plan dated April 10,
1986, and Amendment No. 1 thereto dated October 1,
1986, incorporated by reference herein from Exhibit
(10)(b) of Annual Report on Form 10-K for the fiscal
year ended December 31, 1988.
*(10)(c) Amendment No. 2, dated March 22, 1990, to Executive
Supplemental Benefit Plan, incorporated by reference
herein from Exhibit (10)(c) of Annual Report on Form
10-K for the fiscal year ended December 31, 1989.
*(10)(d) Management Supplemental Benefit Plan dated July 20,
1988, incorporated by reference herein from Exhibit
(10) of Quarterly Report on Form 10-Q for the quarter
ended June 30, 1992.
*(10)(e) Pension Restoration Plan (effective as of January 1,
1994), incorporated by reference herein from Exhibit
(10)(e) of Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.
<PAGE>
EXHIBIT INDEX--(CONTINUED)
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
*(10)(f) 1996 Stock Option Plan, incorporated by reference
herein from Exhibit 4 of Registration Statement on
Form S-8 dated December 30, 1996.
*(10)(g) 1997 Directors' Stock Plan, incorporated by reference
herein from Exhibit 4.1 of Registration Statement on
Form S-8 dated December 11, 1997.
(10)(h) Registration Rights Agreement dated April 22, 1997,
incorporated by reference herein from Exhibit (10.1)
of Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.
(21) Subsidiaries of the registrant.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule.
EXHIBIT 3(a)
RESTATED ARTICLES OF INCORPORATION
OF
THE FIRST AMERICAN FINANCIAL CORPORATION
Thomas A. Klemens certifies that:
1. He is an executive vice president and the chief financial officer of
The First American Financial Corporation, a California corporation.
2. The entire text of the articles of incorporation of said corporation
as amended to date is amended and restated as follows:
FIRST: That the name of said Corporation shall be The First American
Financial Corporation.
SECOND: The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation Law of California other than the banking business, the trust
company business or the practice of a profession permitted to be
incorporated by the California Corporations Code.
THIRD: That the place where the principal business of said
Corporation is to be transacted is Santa Ana, Orange County, State of
California.
FOURTH: This Corporation shall have perpetual existence.
FIFTH: The number of directors of this Corporation shall be no less
than nine (9) nor more than seventeen (17).
SIXTH: This Corporation is authorized to issue two classes of shares,
to be designated Common and Preferred, respectively. The number of Common
shares authorized to be issued is 36,000,000. The aggregate par value of
such Common shares is $36,000,000 and the par value of each such share is
$1.00. Each Common share shall have one vote per share. Each $1.00 par
value Common share outstanding immediately preceding the effective date of
these Restated Articles of Incorporation is split up and converted into one
and one-half (1.5) $1.00 par value Common shares. The number of Preferred
shares authorized to be issued is 500,000. The aggregate par value of such
Preferred shares is $500,000 and the par value of each such share is $1.00.
The Board of Directors may fix by resolution the rights, preferences,
privileges and restrictions of any wholly unissued class or series of
shares other than the Common shares, and the series designation and number
of shares to constitute any series (which number may thereafter in the same
manner be increased or decreased), and a certificate of determination shall
then be filed with the California Secretary of State.
Pursuant to the authority vested in the Board of Directors of
this Corporation in accordance with the provisions of this Article Sixth of
these Restated Articles of Incorporation, the Board of Directors has
created a series of preferred shares of the Corporation, the amount,
designation, rights, preferences and privileges of which are as follows:
Section 1. Designation and Amount. The shares of such series shall
----------------------
be designated as "Series A Junior Participating Preferred Shares" and
----------------------------------------------
the number of shares constituting such series shall initially be one
thousand (1,000), $1.00 par value, such number of shares to be subject
to increase or decrease by action of the Board of Directors as
evidenced by a certificate of determination.
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders
of any shares of any series of preferred shares ranking prior and
superior to the shares of Series A Junior Participating Preferred
Shares with respect to dividends, the holders of Series A Junior
Participating Preferred Shares shall be entitled to receive,
when, as and if declared by the Board of Directors out of funds
legally available for the purpose, quarterly dividends payable in
cash on the last day of March, June, September and December in
each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a
share or fraction of a share of Series A Junior Participating
Preferred Shares, in an amount per share (rounded to the nearest
cent) equal to the greater of (a) $10.00 or (b) subject to the
provision for adjustment hereinafter set forth, 100,000 times the
aggregate per share amount of all cash dividends, and 100,000
times the aggregate per share amount (payable in kind) of all
non-cash dividends or other distributions other than a dividend
payable in Common Shares or a subdivision of the outstanding
Common Shares (by reclassification or otherwise), declared on the
common shares, $1.00 par value, of the Corporation (the "Common
------ Shares") since the immediately preceding Quarterly
Dividend ------ Payment Date, or, with respect to the first
Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series A Junior Participating
Preferred Shares. In the event the Corporation shall at any time
after October 23, 1997 (the "Rights Declaration Date") (i)
declare any dividend on ----------------------- Common Shares
payable in Common Shares, (ii) subdivide the outstanding Common
Shares, or (iii) combine the outstanding Common Shares into a
smaller number of shares, then in each such case the amount to
which holders of Series A Junior Participating Preferred Shares
were entitled immediately prior to such event under clause (b) of
the preceding sentence shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of
Common Shares outstanding immediately after such event and the
denominator of which is the number of Common Shares that were
outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution
on the Series A Junior Participating Preferred Shares as provided
in paragraph (A) above immediately after it declares a dividend
or distribution on the Common Shares (other than a dividend
payable in Common Shares); provided that, in the event no
dividend or distribution shall have been declared on the Common
Shares during the period between any Quarterly Dividend Payment
Date and the next subsequent Quarterly Dividend Payment Date, a
dividend of $10.00 per share on the Series A Junior Participating
Preferred Shares shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding Series A Junior Participating Preferred Shares from
the Quarterly Dividend Payment Date next preceding the date of
issue of such Series A Junior Participating Preferred Shares,
unless the date of issue of such share is prior to the record
date for the first Quarterly Dividend Payment Date, in which case
dividends on such shares shall begin to accrue from the date of
issue of such shares, or unless the date of issue is a Quarterly
Dividend Payment Date or is a date after the record date for the
determination of holders of Series A Junior Participating
Preferred Shares entitled to receive a quarterly dividend and
before such Quarterly Dividend Payment Date, in either of which
events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the Series A
Junior Participating Preferred Shares in an amount less than the
total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders
of Series A Junior Participating Preferred Shares entitled to
receive payment of a dividend or distribution declared thereon,
which record date shall be no more than 30 days prior to the date
fixed for the payment thereof.
Section 3. Voting Rights. The holders of Series A Junior
Participating Preferred Shares shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each Series A Junior Participating Preferred Share shall
entitle the holder thereof to 100,000 votes on all matters
submitted to a vote of the shareholders of the Corporation. In
the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Shares
payable in Common Shares, (ii) subdivide the outstanding Common
Shares, or (iii) combine the outstanding Common Shares into a
smaller number of shares, then in each such case the number of
votes per share to which holders of Series A Junior Participating
Preferred Shares were entitled immediately prior to such event
shall be adjusted by multiplying such number by a fraction the
numerator of which is the number of Common Shares outstanding
immediately after such event and the denominator of which is the
number of Common Shares that were outstanding immediately prior
to such event.
(B) Except as otherwise provided herein or by law, the
holders of Series A Junior Participating Preferred Shares and the
holders of Common Shares shall vote together as one class on all
matters submitted to a vote of shareholders of the Corporation.
(C) (i) If at any time dividends on any Series A Junior
Participating Preferred Shares shall be in arrears in an
amount equal to six (6) quarterly dividends thereon, the
occurrence of such contingency shall mark the beginning of a
period (herein called a "default period") which shall extend
until such time when all accrued and unpaid dividends for
all previous quarterly dividend periods and for the current
quarterly dividend period on all Series A Junior
Participating Preferred Shares then outstanding shall have
been declared and paid or set apart for payment. During each
default period, the right to elect two (2) of the
Corporation's directors then authorized pursuant to Article
Fifth of the Corporation's Restated Articles of
Incorporation shall become vested in the holders of
preferred shares (including holders of the Series A Junior
Participating Preferred Shares) (collectively, the
"Preferred Shares") with dividends in arrears in an amount
equal to (6) quarterly dividends thereon, voting as a class
and irrespective of series.
(ii) During any default period, such voting right of
the holders of Series A Junior Participating Preferred
Shares may be exercised initially at a special meeting
called pursuant to subparagraph (iii) of this Section 3(C)
or at any annual meeting of shareholders, and thereafter at
annual meetings of shareholders, provided that such voting
right shall not be exercised unless the holders of ten
percent in number of Preferred Shares outstanding shall be
present in person or by proxy. The absence of a quorum of
the holders of Common Shares shall not affect the exercise
by the holders of Preferred Shares of such voting right. At
any meeting at which the holders of Preferred Shares shall
exercise such voting right initially during an existing
default period, they shall have the right, voting as a
class, to fill such vacancies, if any, in the Board of
Directors as may then exist up to two (2) Directors or, if
such right is exercised at an annual meeting, to elect two
(2) Directors. If the number of Directors which may be so
elected at any special meeting exceeds the vacancies, if
any, then existing in the Board of Directors, the terms of
one (1) or two (2), as the case may be, of the Directors
having served as such for the least amount of time shall
terminate in order to permit the election by the holders of
the Preferred Shares the required number of Directors. After
the holders of the Preferred Shares shall have exercised
their right to elect Directors in any default period and
during the continuance of such period, the number of
Directors shall not be increased or decreased except by vote
of the holders of Preferred Shares as herein provided or
pursuant to the rights of any equity securities ranking
senior to or pari passu with Series A Junior Participating
Preferred Shares.
(iii) Unless the holders of Preferred Shares shall,
during an existing default period, have previously exercised
their right to elect Directors, the Board of Directors may
order, or any shareholder or shareholders owning in the
aggregate not less than ten percent (10)% of the total
number of Preferred Shares outstanding, irrespective of
series, may request, the calling of a special meeting of the
holders of Preferred Shares, which meeting shall thereupon
be called by the Chairman of the Board, the President or the
Secretary of the Corporation. Notice of such meeting and of
any annual meeting at which holders of Preferred Shares are
entitled to vote pursuant to this paragraph (C)(iii) shall
be given to each holder of record of Preferred Shares by
mailing a copy of such notice to him at his last address as
the same appears on the books of the Corporation. Such
meeting shall be called for a time not earlier than 10 days
and not later than 60 days after such order or request, such
meeting may be called on similar notice by any shareholder
or shareholders owning in the aggregate not less than ten
percent (10)% of the total number of Preferred Shares
outstanding. Notwithstanding the provisions of this
paragraph (C)(iii), no such special meeting shall be called
during the period within 60 days immediately preceding the
date fixed for the next annual meeting of the shareholders.
(iv) In any default period, the holders of Common
Shares, and other classes of stock of the Corporation if
applicable, shall continue to be entitled to elect the whole
number of Directors until the holders of Preferred Shares
shall have exercised their right to elect two (2) Directors
voting as a class, after the exercise of which right (x) the
Directors so elected by the holders of Preferred Shares
shall continue in office until their successors shall have
been elected by such holders or until the expiration of the
default period, and (y) any vacancy in the Board of
Directors may (except as provided in paragraph (C)(ii) of
this Section 3) be filled by vote of a majority of the
remaining Directors theretofore elected by the holders of
the class of stock which elected the Director whose office
shall have become vacant. References in this paragraph (C)
to Directors elected by the holders of a particular class of
stock shall include Directors elected by such Directors to
fill vacancies as provided in clause (y) of the foregoing
sentence.
(v) Immediately upon the expiration of a default
period, (x) the right of the holders of Preferred Shares as
a class to elect Directors shall cease and (y) the term of
any Directors elected by the holders of Preferred Shares as
a class shall terminate. Any vacancies in the Board of
Directors effected by clause (y) in the preceding sentence
may be filled by a majority of the remaining Directors.
(D) Except as provided in this Section 3, in Section
10, or as required by law, holders of Series A Junior
Participating Preferred Shares shall have no special voting
rights and their consent shall not be required (except to
the extent they are entitled to vote with holders of Common
Shares as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Junior Participating
Preferred Shares as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on Series A Junior
Participating Preferred Shares outstanding shall have been paid
in full, the Corporation shall not:
(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire
for consideration any shares of stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding
up) to the Series A Junior Participating Preferred Shares;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Junior Participating Preferred
Shares, except dividends paid ratably on the Series A Junior
Participating Preferred Shares and all such parity stock on
which dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such shares
are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Junior Participating Preferred
Shares, provided that the Corporation may at any time
redeem, purchase or otherwise acquire shares of any such
parity stock in ex change for shares of any stock of the
Corporation ranking junior (either as to dividends or upon
disso lution, liquidation or winding up) to the Series A
Junior Participating Preferred Shares; or
(iv) redeem or purchase or otherwise acquire for
consideration any Series A Junior Participating Preferred
Shares, or any shares of stock ranking on a parity with the
Series A Junior Participating Preferred Shares, except in
accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all
holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of
the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the
respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration
any shares of stock of the Corporation unless the Corporation
could, under paragraph (A) of this Section 4, purchase or
otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any Series A Junior Participating
Preferred Shares purchased or otherwise acquired by the Corporation in
any manner whatsoever shall be retired and cancelled promptly after
the acquisition thereof. All such shares upon their cancellation
become authorized but unissued Preferred Shares and may be reissued as
part of a new series of Preferred Shares to be created by resolution
or resolutions of the Board of Directors, subject to the conditions
and restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise),
dissolution or winding up of the Corporation, no distribution
shall be made to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Participating Preferred Shares
unless, prior thereto, the holders of Series A Junior
Participating Preferred Shares shall have received $100,000 per
share, plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of
such payment (the "Series A Liquidation Preference"). Following
the payment of the full amount of the Series A Liquidation
Preference, no additional distributions shall be made to the
holders of Series A Junior Participating Preferred Shares unless,
prior thereto, the holders of Common Shares shall have received
an amount per share (the "Common Adjustment") equal to the
quotient obtained by dividing (i) the Series A Liquidation
Preference by (ii) 100,000 (as appropriately adjusted as set
forth in subparagraph C below to reflect such events as stock
splits, stock dividends and recapitalizations with respect to the
Common Shares) (such number in clause (ii), the "Adjustment
Number"). Following the payment of the full amount of the Series
A Liquidation Preference and the Common Adjustment in respect of
all outstanding Series A Junior Participating Preferred Shares
and Common Shares, respectively, holders of Series A Junior
Participating Preferred Shares and holders of Common Shares shall
receive their ratable and proportionate share of the remaining
assets to be distributed in the ratio of the Adjustment Number to
1 with respect to such Preferred Shares and Common Shares, on a
per share basis, respectively.
(B) In the event, however, that there are not sufficient
assets available to permit payment in full of the Series A
Liquidation Preference and the liquidation preferences of all
other series of preferred stock, if any, which rank on a parity
with the Series A Junior Participating Preferred Shares, then
such remaining assets shall be distributed ratably to the holders
of such parity shares in proportion to their respective
liquidation preferences. In the event, however, that there are
not sufficient assets available to permit payment in full of the
Common Adjustment, then such remaining assets shall be
distributed ratably to the holders of Common Shares.
(C) In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Shares
payable in Common Shares, (ii) subdivide the outstanding Common
Shares, or (iii) combine the outstanding Common Shares into a
smaller number of shares, then in each such case the Adjustment
Number in effect immediately prior to such event shall be
adjusted by multiplying such Adjustment Number by a fraction the
numerator of which is the number of Common Shares outstanding
immediately after such event and the denominator of which is the
number of Common Shares that were outstanding immediately prior
to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction
in which the Common Shares are exchanged for or changed into other
stock or securities, cash and/or any other property, then in any such
case the Series A Junior Participating Preferred Shares shall at the
same time be similarly exchanged or changed in an amount per share
(subject to the provision for adjustment hereinafter set forth) equal
to 100,000 times the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into
which or for which each Common Share is changed or exchanged. In the
event the Corporation shall at any time after the Rights Declaration
Date (i) declare any dividend on Common Shares payable in Common
Shares, (ii) subdivide the outstanding Common Shares, or (iii) combine
the outstanding Common Shares into a smaller number of shares, then in
each such case the amount set forth in the preceding sentence with
respect to the exchange or change of Series A Junior Participating
Preferred Shares shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of Common Shares
outstanding immediately after such event and the denominator of which
is the number of Common Shares that were outstanding immediately prior
to such event.
Section 8. No Redemption. The Series A Junior Participating Preferred
Shares shall not be redeemable.
Section 9. Ranking. The Series A Junior Participating Preferred Shares
shall rank junior to all other series of the Corporation's Preferred
Shares as to the payment of dividends and the distribution of assets,
unless the terms of any such series shall provide otherwise.
Section 10. Amendment. The Restated Articles of Incorporation of the
Corporation and this Certificate of Determination shall not be
amended, nor shall any other Certificate of Determination be issued or
amended, as the case may be, so as to materially and adversely alter
or change the powers, preferences or special rights of the Series A
Junior Participating Preferred Shares without the affirmative vote of
the holders of two-thirds (2/3) or more of the outstanding Series A
Junior Participating Preferred Shares, voting separately as a class.
Section 11. Fractional Shares. Series A Junior Participating Preferred
Shares may be issued in fractions of a share which shall entitle the
holder, in proportion to such holder's fractional shares, to exercise
voting rights, receive dividends, participate in distributions and to
have the benefit of all other rights of holders of Series A Junior
Participating Preferred Shares.
SEVENTH: That the amount of said capital stock which has been actually
subscribed is one hundred and thirty-five thousand Dollars and the
following are the names of the persons by whom the same has been
subscribed, and the amount subscribed by each of them, to wit:
<PAGE>
<TABLE>
<CAPTION>
NAMES OF SUBSCRIBERS NO. OF SHARES AMOUNT
- -------------------- ------------- ------
<S> <C> <C>
W. S. Bartlett 50 $ 5,000.00
W. S. Bartlett, Trustee 10 1,000.00
Hiram Mabury
by W.S. Bartlett, his agent 100 10,000.00
M. M. Crookshank 30 3,000.00
C. W. Humphreys 20 2,000.00
Thos. McKeever 10 1,000.00
Victor Montgomery 30 3,000.00
Bank of America,
by Geo. H. Stewart, Cash 50 5,000.00
Frank A. Gibson 22 2,200.00
Mrs. Mary E. Fox 75 7,500.00
C. E. DeCamp 30 3,000.00
Fred 'k Stephens 20 2,000.00
C. W. Wilcox 10 1,000.00
Geo. W. Minter 20 2,000.00
C. F. Mansur 5 500.00
Joseph Yoch 20 2,000.00
The First National Bank of
Santa Ana, Cal., by J. A.
Turner, Cash 10 1,000.00
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
H. J. Blee 5 500.00
J. F. Kendall 5 500.00
H. K. Snow 10 1,000.00
A. Guy Smith 10 1,000.00
Bank of Anaheim, by W. S.
Bartlett, its Pres. 10 1,000.00
James McFadden 30 3,000.00
O. F. Brant 140 14,000.00
F. G. Smythe 10 1,000.00
C. H. Parker 184 18,400.00
Geo. Taylor 10 1,000.00
C. E. Parker 428 42,800.00
A. B. Harris 96 9,600.00
</TABLE>
EIGHTH: The Corporation elects to be governed by all of the provisions
of the California General Corporation Law of 1977 not otherwise applicable
to it under Chapter 23 thereof.
NINTH: The liability of the directors of the Corporation for monetary
damages shall be eliminated to the fullest extent permissible under
California law.
Any repeal of modification of the provisions of this Article by the
shareholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such
repeal or modification.
TENTH: The Corporation is authorized to provide indemnification of
agents (as defined in Section 317 of the Corporations Code) for breach of
duty to the Corporation and its shareholders through bylaw provisions or
through agreements with the agents, or both, in excess of the
indemnification otherwise permitted by Section 317 of the Corporations
Code, subject to the limits on such excess indemnification set forth in
Section 204 of the Corporations Code.
Any repeal of modification of the provisions of this Article by the
shareholders of the Corporation shall not adversely affect any right or
protection of a director or other agent of the Corporation existing at the
time of such repeal of modification.
3. The foregoing amendment and restatement of the articles of incorporation
has been duly approved by the board of directors.
4. The Company has only one class of shares outstanding, its $1.00 par
value Common shares. No Series A Junior Participating Preferred Shares have been
issued. The amendment to Article Sixth effects only a stock split and
incorporation of prior amendments and certificates of determination and is an
amendment that may be adopted with approval by the Board of Directors alone
pursuant to Sections 902(c) and 910 of the California Corporations Code.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Certificate on
December 31, 1997.
/s/ THOMAS A. KLEMENS
-------------------------------------------
Thomas A. Klemens, Executive Vice President
/s/ THOMAS A. KLEMENS
-------------------------------------------
Thomas A. Klemens, Chief Financial Officer
The undersigned, Thomas A. Klemens, an Executive Vice President and the Chief
Financial Officer of The First American Financial Corporation, declares under
penalty of perjury that the matters set out in the foregoing Certificate are
true of his own knowledge.
Executed at Santa Ana, California on December 31, 1997.
/s/ THOMAS A. KLEMENS
-------------------------------------------
Thomas A. Klemens, Executive Vice President
/s/ THOMAS A. KLEMENS
-------------------------------------------
Thomas A. Klemens, Chief Financial Officer
EXHIBIT (21)
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
PERCENT OF STOCK
OWNED BENEFICIALLY
STATE OR COUNTRY UNDER BY COMPANY OR
NAME OF SUBSIDIARY LAWS OF WHICH ORGANIZED SUBSIDIARY
- -------------------------------------------------------------------------------------------------------------------
Consolidated subsidiaries of:
Registrant --
<S> <C> <C>
Docs Acquisition Corporation Nevada 100%
First American Loan Servicing Corporation Texas 100%
First American Management Company Washington 100%
First American Property Data Services, Inc. California 100%
First American Real Estate Information Services, Inc. California 100%
First American Title Insurance Company California 100%
First American Trust Company California 100%
First American Capital Management, Inc. Delaware 100%
Property Financial Services of New England, Inc. Delaware 100%
SMS Settlement Services, Inc. California 100%
Strategic Mortgage Services, Inc. Ohio 100%
Consolidated subsidiaries of First American Title Insurance
Company--
Alachua County Abstract Company Florida 100%
Albany County Title, Inc. Wyoming 100%
Attorneys Abstract, Inc. New York 100%
Attorneys Title Corporation District of Columbia 100%
Bienville Properties, Inc. Louisiana 100%
Burton Abstract & Title Company Michigan 100%
Consolidated Title and Abstract Co. Minnesota 100%
Eaton County Abstract & Title Company Michigan 100%
Eureka Title Company California 100%
First American Abstract Company Mississippi 100%
First American Abstract Company of Louisiana Louisiana 100%
First American Abstract Company of South Carolina, Inc. South Carolina 100%
First American Affiliates, Inc. Florida 100%
First American Equity Loan Services, Inc. Ohio 100%
First American Exchange Corporation of the Southeast Louisiana 100%
First American Holdings CBA, Inc. Minnesota 100%
First American Title Agency, Inc. Virginia 100%
First American Title Company California 100%
First American Title Company of Alaska Alaska 100%
First American Title Company of Bellingham Washington 100%
First American Title Company of Clark County Washington 100%
First American Title Company of Colorado Colorado 100%
First American Title Company of Dallas Texas 100%
First American Title Company of Florida, Inc. Florida 100%
First American Title Company of Idaho, Inc. Idaho 100%
First American Title Company of Modesto California 100%
First American Title Company of Nevada Nevada 100%
First American Title Company of New Mexico New Mexico 100%
First American Title Company of St. Lucie County, Inc. Florida 100%
First American Title Company of Thurston County Washington 100%
First American Title Ins. Company of Australia Pty. Ltd. Australia 100%
First American Title Ins. Company of North Carolina North Carolina 100%
First American Title Insurance Agency of Coconino, Inc. Arizona 100%
First American Title Insurance Agency of Gila, Inc. Arizona 100%
First American Title Insurance Agency of Yuma, Inc. Arizona 100%
</TABLE>
<PAGE>
EXHIBIT (21)
SUBSIDIARIES OF THE REGISTRANT (Continued)
<TABLE>
<CAPTION>
PERCENT OF STOCK
OWNED BENEFICIALLY
STATE OR COUNTRY UNDER BY COMPANY OR
NAME OF SUBSIDIARY LAWS OF WHICH ORGANIZED SUBSIDIARY
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First American Title Insurance Company Ltd. (UK) England 100%
First American Title Insurance Company of New York New York 100%
First American Title Insurance Company of Texas Texas 100%
First Australian Title Company Pty. Ltd. Australia 100%
First Canadian Title Company Limited Canada 100%
First Exchange Corporation California 100%
First Exchange of Arizona, Inc. Arizona 100%
Fremont County Title Company Wyoming 100%
Grand Valley Title Company Michigan 100%
Guardian Title Company of Maryland Maryland 100%
Illini Title Services, Inc. Illinois 100%
Land Title Associates, Inc. Oklahoma 100%
Land Title Company of St. Louis, Inc. Missouri 100%
Latin Title, Inc. Florida 100%
Massachusetts Abstract Company, Inc. Massachusetts 100%
Memphis Title Company Tennessee 100%
Midland Title Security, Inc. Ohio 100%
Miller Abstract Company, Inc. Missouri 100%
Mineral Point Title Company, Ltd. Wisconsin 100%
National Lenders Title Guaranty Co. Inc. Illinois 100%
New York Abstract Company, Inc. New York 100%
Northern Michigan Title Company of Emmet County Michigan 100%
Ohio Title Corporation Ohio 100%
Orange County Title Company California 100%
Pekin Abstract & Title Company Illinois 100%
Pioneer of Philadelphia, Ltd., Inc. Pennsylvania 100%
Port Lawrence National Agency, Inc. Ohio 100%
Republic Title of Texas, Inc. Texas 100%
San Mateo County Title Company California 100%
Service Standard Title & Trust, Ltd. Virgin Islands 100%
Settlers Abstract Company, L.P. Pennsylvania 100%
Settlers Title Agency, Inc. New Jersey 100%
Standard Title Insurance Company, Inc. Oklahoma 100%
Sterling Title Company of Sandoval County New Mexico 100%
The Inland Empire Service Corporation California 100%
The Port Lawrence Agency, Inc. Ohio 100%
The Port Lawrence Title and Trust Company Ohio 100%
Ticore, Inc. Oregon 100%
Universal Title Company Minnesota 100%
Utah First Exchange Utah 100%
Washakie Abstract Company Wyoming 100%
Woodford County Abstract & Title Company, Inc. Illinois 100%
First American Auto Title Transfer, L.L.C. Louisiana 99%
First American Title & Trust Company Oklahoma 99%
Land Title Insurance Company of St. Louis Missouri 99%
Peoples Abstract Company Iowa 99%
First American Title Insurance Agency of Pinal Arizona 98%
First American Title Guaranty Agency of Cheyenne Wyoming 93%
First American Abstract & Title Services, Inc. South Carolina 85%
First American Title Insurance Agency of Mohave, Inc. Arizona 88%
First American Title Insurance Agency, Inc. (Navajo) Arizona 85%
</TABLE>
<PAGE>
EXHIBIT (21)
SUBSIDIARIES OF THE REGISTRANT (Continued)
<TABLE>
<CAPTION>
PERCENT OF STOCK
OWNED BENEFICIALLY
STATE OR COUNTRY UNDER BY COMPANY OR
NAME OF SUBSIDIARY LAWS OF WHICH ORGANIZED SUBSIDIARY
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First American Title Insurance Agency of Yavapai, Inc. Arizona 84%
Converse Land Title Company (a partnership) Wyoming 80%
First American Long & Melone Title Company, Ltd. Hawaii 80%
First American Title Company of Spokane Washington 80%
First American Title Guaranty Holding Company California 80%
First American Title Guaranty of Hot Springs Wyoming 80%
Territorial Abstract and Title Company, Inc. New Mexico 80%
First American Home Buyers Protection Corporation California 79%
First American Title Guaranty of Carbon County Wyoming 79%
First American Title Guaranty of Sublette County Wyoming 79%
First American Title Guaranty Agency of Crook County Wyoming 78%
Teton Land Title Company Wyoming 76%
Muni-Law, Inc. Massachusetts 75%
First American Title Company of Magic Valley, Inc. Idaho 70%
Goshen County Abstract & Title Wyoming 69%
Big Horn Land Title Company Wyoming 62%
Mid Valley Title and Escrow Company California 59%
Campbell County Abstract Company Wyoming 58%
Wyoming Land Title Company Wyoming 56%
First American Title Company of Mendocino County California 54%
Grand Valley Title Company Wyoming 52%
Shoshone Title Insurance and Abstract Company Wyoming 52%
Johnson County Title Company, Inc. Wyoming 51%
Evans Title Companies, Inc. Wisconsin 50%
First American Homebuyers Protection Corp. Delaware 50%
North American Title Insurance Company California 50%
Consolidated subsidiaries of First American Real Estate
Information Services, Inc. --
Excelis, Inc. Florida 100%
First American Appraisal Consulting Services, Inc. California 100%
First American Appraisal Services, Inc. Florida 100%
First American CREDCO, Inc. Washington 100%
First American Credit Services, Inc. New York 100%
First American Equity Loan Services, Inc. Ohio 100%
First American Field Services, Inc. New Jersey 100%
First American Flood Data Services, Inc. Texas 100%
First American Property Services, Inc. New York 100%
First American Real Estate Tax Service, Inc. Florida 100%
Masada, Inc., dba: The Robertson Company California 100%
Pasco Enterprises, Inc. Texas 100%
Prime Credit Reports, Inc. California 100%
Realty Tax & Service Company California 100%
First American Nationwide Docoments, L.P. Texas 59%
Consolidated subsidiary of First American Equity Loan Services,
Inc.
Docu-Search, Inc. Kentucky 100%
First American Equity Loan Services, Inc. Delaware 100%
</TABLE>
<PAGE>
EXHIBIT (21)
SUBSIDIARIES OF THE REGISTRANT (Continued)
<TABLE>
<CAPTION>
PERCENT OF STOCK
OWNED BENEFICIALLY
STATE OR COUNTRY UNDER BY COMPANY OR
NAME OF SUBSIDIARY LAWS OF WHICH ORGANIZED SUBSIDIARY
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Consolidated subsidiary of Mid Valley Title & Escrow Company -
Mt. Shasta Title & Escrow Company California 65%
Consolidated subsidiaries of Ticore, Inc. --
Eagle Exchange Corporation Oregon 100%
Escrow Automated Systems, Inc. Oregon 100%
Title Insurance Company of Oregon Oregon 100%
Consolidated subsidiaries of Title Insurance Company of Oregon
--
Deschutes County Title Company Oregon 100%
Willamette Valley Title Company Oregon 100%
Consolidated subsidiary of Massachusetts Abstract Comp., Inc. --
Massachusetts Title Insurance Company Massachusetts 65%
Consolidated subsidiary of First American Abstract Company of
Louisiana
Abstracts by Godail Louisiana 100%
Consolidated subsidiaries of First American Title Guaranty
Holding Company --
First Escrow Accounting Services Company California 100%
First Guaranty Bancorp California 100%
First Guaranty Exchange Company California 100%
Superior Trustee's Services Company, Inc. California 100%
First American Title Guaranty Company California 99%
Harrison-Webster Investment Group (a partnership) California 75%
Stanley Building Associates (a partnership) California 75%
Consolidated subsidiary of First American Title Insurance
Company of North Carolina
Fidelity Title and Guaranty Co. Florida 100%
Consolidated subsidiaries of First Guaranty Bancorp --
F.S.T. Financial Services California 100%
First Security Thrift Company California 100%
Consolidated subsidiary of Land Title Associates, Inc. --
First American Title & Abstract Co. Oklahoma 100%
Consolidated subsidiaries of Midland Title Security, Inc. --
Colonial Title Company Ohio 100%
Commerce Title Agency, Inc. Ohio 100%
Lawyers Mortgage and Title Company, Inc. Ohio 100%
Midland Exchange Services, Inc. Ohio 100%
National Survey Services, Inc. Delaware 100%
R.E. Services, Inc. Ohio 100%
MCM Title Services, Inc. Ohio 67%
Environmental Title Services, Inc. Ohio 50%
</TABLE>
<PAGE>
EXHIBIT (21)
SUBSIDIARIES OF THE REGISTRANT (Continued)
<TABLE>
<CAPTION>
PERCENT OF STOCK
OWNED BENEFICIALLY
STATE OR COUNTRY UNDER BY COMPANY OR
NAME OF SUBSIDIARY LAWS OF WHICH ORGANIZED SUBSIDIARY
- ------------------------------------------------------------------------------------------------------------------
Consolidated subsidiary of First American Home Buyers
Protection Company --
<S> <C> <C>
First American Home Buyers Protection Corp. Delaware 50%
Consolidated subsidiary of Land Title Insurance Company of St.
Louis --
Property Data, Inc. Missouri 100%
The Trust Company of St. Louis County Missouri 99%
Consolidated subsidiaries of First American Title Insurance
Company of Texas --
Corpus Christi Title Company Texas 100%
Fort Bend Title Company Texas 100%
The Donegan Abstract Company Texas 100%
Consolidated subsidiaries of First American Title Insurance
Company of New York --
First American Exchange Corporation New York 100%
Mortgage Guarantee & Title Company Rhode Island 100%
Preferred Land Title Services, Inc. New York 100%
Consolidated subsidiaries of Republic Title of Texas, Inc. --
American Escrow Company Texas 100%
Texas Escrow Company Texas 100%
Title Software Corporation Texas 100%
Consolidated subsidiary of First American Title & Trust Comp. --
Southwest Title Land Company Oklahoma 100%
Consolidated subsidiaries of Territorial Abstract and Title
Company, Inc.
Territorial Escrow Services New Mexico 100%
Title de Santa Fe New Mexico 100%
Consolidated subsidiary of Universal Title Company
Universal Partnerships, Inc. Minnesota 100%
Consolidated subsidiary of First American Long and Melone Title
Company, Ltd.
First American Long & Melone Exchange, Ltd. Hawaii 100%
Consolidated subsidiary of Docs Acquisition Corp.
First American Nationwide Documents, L.P. Texas 59%
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-8 (Nos. 33-19065 and
333-41993) and Form S-4 (Nos. 333-35945 and 333-45459) of The First American
Financial Corporation of our report dated February 9, 1998 appearing on page 19
of this Form 10-K.
Price Waterhouse LLP
Costa Mesa, California
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 151,503,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 13,904,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 229,483,000
<CASH> 181,531,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 25,016,000
<TOTAL-ASSETS> 1,168,144,000
<POLICY-LOSSES> 250,826,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 41,973,000
0
0
<COMMON> 17,374,000
<OTHER-SE> 394,038,000
<TOTAL-LIABILITY-AND-EQUITY> 1,168,144,000
1,860,205,000
<INVESTMENT-INCOME> 27,755,000
<INVESTMENT-GAINS> (499,000)
<OTHER-INCOME> 0
<BENEFITS> 90,323,000
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 106,209,000
<INCOME-TAX> 41,500,000
<INCOME-CONTINUING> 64,709,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,709,000
<EPS-PRIMARY> 3.73
<EPS-DILUTED> 3.64
<RESERVE-OPEN> 245,245,000
<PROVISION-CURRENT> 84,645,000
<PROVISION-PRIOR> 4,678,000
<PAYMENTS-CURRENT> 39,934,000
<PAYMENTS-PRIOR> 39,745,000
<RESERVE-CLOSE> 250,826,000
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE>
Exhibit (10)(a)
================================================================================
CONTRIBUTION AND JOINT VENTURE AGREEMENT
By and Among
THE FIRST AMERICAN FINANCIAL CORPORATION,
FIRST AMERICAN REAL ESTATE INFORMATION SERVICES, INC.,
FIRST AMERICAN APPRAISAL SERVICES, INC.,
FIRST AMERICAN APPRAISAL CONSULTING SERVICES, INC.,
FIRST AMERICAN CREDCO, INC.,
FIRST AMERICAN FIELD SERVICES, INC.,
FIRST AMERICAN FLOOD DATA SERVICES, INC.,
FIRST AMERICAN PROPERTY SERVICES, INC.,
FIRST AMERICAN REAL ESTATE TAX SERVICE, INC.,
PASCO ENTERPRISES, INC.,
PRIME CREDIT REPORTS, INC.,
PROPERTY FINANCIAL SERVICES OF NEW ENGLAND, INC.,
DOCS ACQUISITION CORP.,
STRATEGIC MORTGAGE SERVICES, INC. (TEXAS),
and
EXPERIAN INFORMATION SOLUTIONS, INC.
November 30, 1997
================================================================================
<PAGE>
TABLE OF CONTENTS(1)
-----------------
Page
----
ARTICLE I
DEFINITIONS............................................................ 2
1.01. Defined Terms............................................ 2
1.02. Principles of Construction............................... 8
ARTICLE II
ORGANIZATION OF NEWCO;
CLOSING; SCOPE OF BUSINESS............................................. 8
2.01. Organization............................................. 8
2.02. Capital Contributions; Closing........................... 9
2.03. Certain Obligations Not Transferred...................... 10
2.04. Effective Time........................................... 10
2.05. Instruments of Transfer and Conveyance................... 10
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF EXPERIAN............................. 11
3.01. Authorization and Validity of Agreement.................. 11
3.02. Existence and Good Standing.............................. 11
3.03. EXPERIAN Financial Statements............................ 12
3.04. Title to Interests....................................... 12
3.05. Leases................................................... 12
3.06. Real Property............................................ 12
3.07. Material Contracts....................................... 13
3.08. Consents and Approvals; No Violations.................... 13
3.09. Litigation............................................... 14
3.10. Taxes.................................................... 14
3.11. Conduct of Business...................................... 15
3.12. Compliance with Laws; Permits............................ 15
3.13. Intellectual Properties.................................. 16
3.14. Labor Matters............................................ 17
3.15. Employee Benefit Plans................................... 17
3.16. Environmental Laws and Regulations....................... 17
3.17. Books and Records........................................ 18
3.18. Nature of Investment..................................... 18
3.19. Transactions with Affiliates............................. 18
3.20. Broker's or Finder's Fees................................ 18
(1) This Table of Contents is provided for convenience only, and does not
form a part of the attached Contribution and Joint Venture Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE FAFCO PARTIES.................... 19
4.01. Authorization and Validity of Agreement.................. 19
4.02. Existence and Good Standing.............................. 19
4.03. FAFCO Financial Statements............................... 20
4.04. Title to Interests....................................... 20
4.05. Leases................................................... 20
4.06. Real Property............................................ 20
4.07. Material Contracts....................................... 21
4.08. Consents and Approvals; No Violations.................... 21
4.09. Litigation............................................... 22
4.10. Taxes.................................................... 22
4.11. Conduct of Business...................................... 23
4.12. Compliance with Laws; Permits............................ 24
4.13. Intellectual Properties.................................. 24
4.14. Labor Matters............................................ 25
4.15. Employee Benefit Plans................................... 25
4.16. Environmental Laws and Regulations....................... 25
4.17. Books and Records........................................ 26
4.18. Nature of Investment..................................... 26
4.19. Transactions with Affiliates............................. 26
4.20. Broker's or Finder's Fees................................ 26
ARTICLE V
COVENANTS.............................................................. 26
5.01. Ordinary Course.......................................... 26
5.02. NEWCO Business Opportunities............................. 27
5.03. Best Efforts............................................. 28
5.04. Consents and Further Assurances.......................... 28
5.05. Notices of Certain Events................................ 29
5.06. Access to Information Concerning Business and Records.... 30
5.07. Exclusive Dealing........................................ 30
5.08. FAFCO Board Representation............................... 31
5.09. Guarantees............................................... 31
5.10. Certain Fees............................................. 31
5.11. Certain Covenants........................................ 31
ARTICLE VI
EXPERIAN PUT OPTION; FAFCO CALL OPTION.............................. 32
6.01. EXPERIAN Put Option...................................... 32
6.02. FAFCO Call Option........................................ 33
6.03. FAFCO Change of Control Put Option....................... 34
6.04. EXPERIAN Change of Control Call Option................... 35
6.05. Extraordinary Put Option................................. 35
6.06. Put/Call Adjustment...................................... 36
6.07. General Put/Call Provisions.............................. 36
6.08. Dispute Resolution....................................... 37
ARTICLE VII
CONDITIONS PRECEDENT................................................... 38
7.01. Conditions Precedent to the Obligations of Each of the
Parties.................................................. 38
7.02. Conditions Precedent to the Obligations of the FAFCO
Parties.................................................. 40
7.03. Conditions Precedent to the Obligations of EXPERIAN...... 41
ARTICLE VIII
SURVIVAL OF REPRESENTATION; INDEMNIFICATION............................ 43
8.01. Survival of Representations.............................. 43
8.02. Indemnification.......................................... 43
8.03. Post-Effective-Time Tax Indemnification.................. 43
ARTICLE IX
TERMINATION............................................................ 44
9.01. Events of Termination.................................... 44
9.02. Effect of Termination.................................... 44
ARTICLE X
MISCELLANEOUS.......................................................... 44
10.01. Fees and Expenses........................................ 44
10.02. Extension; Waiver........................................ 44
10.03. Confidentiality.......................................... 44
10.04. Public Announcements..................................... 45
10.05. Records Retained by FAFCO, EXPERIAN and NEWCO............ 45
10.06. Notices.................................................. 45
10.07. Entire Agreement......................................... 46
10.08. Binding Effect; Benefit; Assignment...................... 46
10.09. Amendment and Modification............................... 47
10.10. Further Actions.......................................... 47
10.11. Counterparts............................................. 47
10.12. Applicable Law; Submission to Jurisdiction............... 47
10.13. Severability............................................. 47
SCHEDULES
SCHEDULE 2.02(a) FAFCO MEMBERS Excluded Assets and Liabilities
SCHEDULE 2.02(b) EXPERIAN Excluded Assets and Liabilities
SCHEDULE 3.03 Material Adverse Effect (EXPERIAN)
SCHEDULE 3.04 Title to Interests (EXPERIAN)
SCHEDULE 3.05 Leases (EXPERIAN)
SCHEDULE 3.06 Real Property (EXPERIAN)
SCHEDULE 3.07(a) Material Contracts (EXPERIAN)
SCHEDULE 3.07(c) Existing or Potential Defaults (EXPERIAN)
SCHEDULE 3.08 Necessary Consents (EXPERIAN)
SCHEDULE 3.09 Litigation (EXPERIAN)
SCHEDULE 3.10 Tax Matters (EXPERIAN)
SCHEDULE 3.13(b) Copyrights (EXPERIAN)
SCHEDULE 3.13(d) Adverse Claims (EXPERIAN)
SCHEDULE 3.14 Labor (EXPERIAN)
SCHEDULE 3.15 Employee Benefit Plans (EXPERIAN)
SCHEDULE 3.17 Books and Records (EXPERIAN)
SCHEDULE 3.19 Transactions with Affiliates (EXPERIAN)
SCHEDULE 4.03 Material Adverse Effect (FAFCO)
SCHEDULE 4.04 Title to Interests (FAFCO)
SCHEDULE 4.05 Leases (FAFCO)
SCHEDULE 4.06 Real Property (FAFCO)
SCHEDULE 4.07(a) Material Contracts (FAFCO)
SCHEDULE 4.07(c) Existing or Potential Defaults (FAFCO)
SCHEDULE 4.08 Necessary Consents (FAFCO)
SCHEDULE 4.09 Litigation (FAFCO)
SCHEDULE 4.10 Tax Matters (FAFCO)
SCHEDULE 4.13(b) Copyrights (FAFCO)
SCHEDULE 4.13(d) Adverse Claims (FAFCO)
SCHEDULE 4.14 Labor (FAFCO)
SCHEDULE 4.15 Employee Benefit Plans (FAFCO)
SCHEDULE 4.17 Books and Records (FAFCO)
SCHEDULE 4.19 Transactions with Affiliates (FAFCO)
SCHEDULE 5.01 Approved Transactions
EXHIBITS
Exhibit A Form of $3MM Note
Exhibit B Form of Operating Agreement
Exhibit C-1 Form of Experian Transition Agreement
Exhibit C-2 Form of FAFCO Transition Agreement
Exhibit D Form of Data License Agreement
Exhibit E Form of EXPERIAN/CREDCO Agreement
Exhibit F Form of Trademark License Agreement
Exhibit G Form of Interim Operating Agreement
<PAGE>
CONTRIBUTION AND JOINT VENTURE AGREEMENT, made as of November 30, 1997
(this "Agreement"), by and among THE FIRST AMERICAN FINANCIAL CORPORATION, a
California corporation ("FAFCO"), FIRST AMERICAN REAL ESTATE INFORMATION
SERVICES, INC., a California corporation, ("FAREISI"), FIRST AMERICAN APPRAISAL
SERVICES, INC., a California corporation ("FAREISI Subsidiary 1"), FIRST
AMERICAN APPRAISAL CONSULTING SERVICES, INC., a California corporation ("FAREISI
Subsidiary 2"), FIRST AMERICAN CREDCO, INC., a Washington corporation ("FAREISI
Subsidiary 3"), FIRST AMERICAN FIELD SERVICES, INC., a New Jersey corporation
("FAREISI Subsidiary 4"), FIRST AMERICAN FLOOD DATA SERVICES, INC., a Texas
corporation ("FAREISI Subsidiary 5"), FIRST AMERICAN PROPERTY SERVICES, INC., a
New York corporation ("FAREISI Subsidiary 6"), FIRST AMERICAN REAL ESTATE TAX
SERVICE, INC., a Florida corporation ("FAREISI Subsidiary 7"), PASCO
ENTERPRISES, INC., a Texas corporation ("FAREISI Subsidiary 8"), PRIME CREDIT
REPORTS, INC., a California corporation ("FAREISI Subsidiary 9"), PROPERTY
FINANCIAL SERVICES OF NEW ENGLAND, INC., a Delaware corporation ("FAREISI
Subsidiary 10"), DOCS ACQUISITION CORP., a Nevada corporation ("DOCS"),
STRATEGIC MORTGAGE SERVICES, INC. (TEXAS), a Texas corporation ("SMS"), and
EXPERIAN INFORMATION SOLUTIONS, INC., an Ohio corporation ("EXPERIAN").
W I T N E S S E T H :
WHEREAS, FAFCO, FAREISI, FAREISI Subsidiary 1, FAREISI Subsidiary 2,
FAREISI Subsidiary 3, FAREISI Subsidiary 4, FAREISI Subsidiary 5, FAREISI
Subsidiary 6, FAREISI Subsidiary 7, FAREISI Subsidiary 8, FAREISI Subsidiary 9,
FAREISI Subsidiary 10, DOCS, SMS (FAREISI, the foregoing FAREISI Subsidiaries,
DOCS and SMS, collectively, the "FAFCO Members"), and EXPERIAN (each a "Party"
and, collectively, the "Parties") desire to combine the FAREISI Business and the
RES Business;
WHEREAS, the Parties desire that EXPERIAN and each of the FAFCO Members
become the joint owners of a California limited liability company to be formed
pursuant to Section 2.01 of this Agreement ("NEWCO") to own and operate the
combined FAREISI Business and RES Business;
WHEREAS, to effectuate their intent the Parties deem it advisable for
EXPERIAN and each of the FAFCO Members to make a contribution of certain assets
and liabilities to NEWCO; and
WHEREAS, in order to set forth certain terms and conditions upon which
NEWCO will be owned and operated, the Parties desire to enter into this
Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the Parties agree as follows:
ARTICLE
I
DEFINITIONS
1.01. Defined Terms. As used in this Agreement, the following terms shall
have the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
"Adjusted Earnings" means, for any period, the profits of NEWCO for such
period, assuming an effective tax rate of 40% (which percentage the Parties may
from time to time hereafter agree to adjust to reflect material changes in tax
rates), as determined in accordance with US GAAP and excluding extraordinary
gains and charges, restructuring charges and other unusual or infrequently
occurring items.
"Affiliate" shall mean and include, with reference to any Person, any other
Person, other than NEWCO, Controlling, Controlled by or under common Control
with such Person.
"Agreement" shall mean this Contribution and Joint Venture Agreement, as
the same may be amended, modified and/or supplemented from time to time.
"Balance Sheet Date" shall mean September 30, 1997 in the case of FAFCO and
November 19, 1997 in the case of EXPERIAN.
"Business" shall mean the FAREISI Business and/or the RES Business, as
the context may require.
"Business Day" shall mean any day, excluding Saturday, Sunday or any day
which shall be a legal holiday in the State of California.
"Business Record" shall have the meaning set forth in Section 10.05.
"Call Election Notice" has the meaning given thereto in Section 6.02(a)
hereof.
"Call Exercise Date" has the meaning given thereto in Section 6.02(a)
hereof.
"Call Option" has the meaning given thereto in Section 6.02(a) hereof.
"Call Price" has the meaning given thereto in Section 6.02(b) hereof.
"Capital Account" shall have the meaning given thereto in Section 1.01 of
the Operating Agreement.
"Closing" shall mean the closing of the transactions contemplated herein
and shall take place at the offices of White & Case, 633 West Fifth Street, Los
Angeles, California 90071, at 10:00 A.M. local time on a Business Day occurring
not more than ten Business Days after the satisfaction or waiver of all the
conditions to the effectiveness of this Agreement set forth in Article VII or
such other place or time as the Parties may agree, not later than November 30,
1997 (the date of the Closing being referred to as the "Closing Date"); it being
understood that the Parties anticipate that the Closing will occur on or before
November 30, 1997.
"Code" shall have the meaning set forth in Section 3.15.
"Commission" shall mean the U.S. Securities and Exchange Commission.
"Control" shall mean the power to vote more than 50% of the Voting
Interests of an Entity or to otherwise control the management and affairs of
such Entity (including by way of the power to veto any material act or
decision).
"Effective Date" shall mean January 1, 1998.
"Effective Time" shall mean 00:01 (local time) on January 1, 1998.
"Encumbrances" shall mean all liens, encumbrances, restrictions and claims
of every kind and character.
"End Date" shall have the meaning set forth in Section 6.01(a).
"Environmental Claims" shall have the meaning set forth in Section 3.16.
"Environmental Laws" shall have the meaning set forth in Section 3.16.
"Entity" shall mean any Person that is not a natural Person.
"ERISA" shall have the meaning set forth in Section 3.15.
"Exchange Act" shall mean the U.S. Securities Exchange Act of 1934, as
amended.
"EXPERIAN" shall have the meaning set forth in the introductory paragraph
of this Agreement.
"EXPERIAN Change of Control" means an event as a result of which (a) any
Person or group of Persons (within the meaning of Section 13 or 14 of the
Exchange Act) shall have acquired beneficial ownership (within the meaning of
Rule 13d-3 promulgated by the Commission under the Exchange Act) of 51% or more
of the outstanding shares of common stock of Great Universal Stores, Inc.
("GUS") (on a fully diluted basis), other than existing shareholders of GUS
beneficially holding as of the date hereof in the aggregate more than 5% of the
outstanding shares of common stock of GUS, or (b) GUS shall fail to own,
directly or indirectly, at least 51% of the economic and voting interest in the
capital stock of EXPERIAN other than as a result of a public offering of the
capital stock of EXPERIAN; provided, however, that an EXPERIAN Change of Control
- -------- ------- shall not occur as a result of the merger of EXPERIAN into GUS
or an Affiliate of GUS so long as (x) EXPERIAN is the surviving entity or (y)
the surviving entity, in the event that EXPERIAN is not the surviving entity,
shall have expressly assumed in writing each obligation of EXPERIAN under this
Agreement, the Operating Agreement and each other agreement relating to NEWCO to
which EXPERIAN is a party.
"EXPERIAN Change of Control Notice" has the meaning given thereto in
Section 6.04 hereof.
"EXPERIAN Interests" shall have the meaning set forth in Section 2.02(b).
"EXPERIAN Plan" and "EXPERIAN Plans" shall have the meaning set forth in
Section 3.15.
"FAFCO" shall have the meaning set forth in the introductory paragraph of
this Agreement.
"FAFCO Balance Sheet" shall have the meaning set forth in Section 4.03(a).
"FAFCO Change of Control" means an event as a result of which (a) any
Person or group of Persons (within the meaning of Section 13 or 14 of the
Exchange Act) shall have acquired beneficial ownership (within the meaning of
Rule 13d-3 promulgated by the Commission under the Exchange Act) of 51% or more
of the outstanding shares of common stock of FAFCO (on a fully diluted basis) or
(b) FAFCO shall fail to own, directly or indirectly, at least 51% of the
economic and voting interest in the capital stock of each of the FAFCO Members.
"FAFCO Change of Control Notice" has the meaning given thereto in Section
6.03 hereof.
"FAFCO Financial Statements" shall have the meaning set forth in Section
4.03(a).
"FAFCO Interests" shall have the meaning set forth in Section 2.02(a).
"FAFCO Member" shall have the meaning given thereto in the first WHEREAS
clause of this Agreement.
"FAFCO Plan" and "FAFCO Plans" shall have the meaning set forth in Section
4.15.
"FAREISI" shall have the meaning set forth in the introductory paragraph of
this Agreement.
"FAREISI Business" shall mean the collective businesses of each of the
FAFCO Members.
"FAREISI Material Contract" shall have the meaning set forth in Section
4.07(b).
"FAREISI Permitted Encumbrances" shall have the meaning set forth in
Section 4.04.
"FAREISI Pro-Forma Balance Sheet" shall have the meaning set forth in
Section 4.03(a).
"FAREISI Property" shall have the meaning set forth in Section 4.16.
"Hazardous Materials" shall have the meaning set forth in Section 3.16.
"Implementing Agreements" shall have the meaning set forth in Section
7.01(d).
"Indemnifiable Taxes" shall have the meaning set forth in Section 8.03(a).
"Intellectual Property" means all patents, patent applications, registered
and unregistered trademarks and service marks, registered and unregistered
copyrights, computer programs, databases, trade secrets and proprietary
information.
"Interests" shall mean the FAFCO Interests and/or the EXPERIAN Interests,
as the context may require.
"Interim Operating Agreement" shall mean an Interim Operating Agreement by
and among FAFCO, each of the FAFCO Members and EXPERIAN in substantially the
form of Exhibit G attached hereto.
"License" shall have the meaning set forth in Section 3.12.
"Losses" shall have the meaning set forth in Section 8.02.
"Major Exchange" shall mean any one of the following securities exchanges
or quotation systems: New York Stock Exchange, NASDAQ, American Stock Exchange
or Pacific Stock Exchange.
"Management Committee" shall have the meaning given thereto in Section 1.01
of the Operating Agreement.
"Manager" shall have the meaning given thereto in Section 1.01 of the
Operating Agreement.
"Material Adverse Effect" shall have the meaning set forth in Section 3.02.
"Membership Interest" shall mean, with respect to each of the FAFCO Members
and EXPERIAN, its respective interest in NEWCO as determined in accordance with
the Operating Agreement.
"NEWCO" shall mean the California limited liability company to be formed
pursuant to Article II.
"NEWCO Development Opportunity" shall have the meaning given to the term
"Company Development Opportunity" in Section 1.01 of the Operating Agreement.
"NEWCO Business" shall mean the business owned and operated by NEWCO after
the Closing which shall include, without limitation, the combined FAREISI
Business and the RES Business.
"Notes" shall have the meaning set forth in Section 2.02(a).
"Notice Date" has the meaning given thereto in Section 6.06(c) hereof.
"Operating Agreement" shall mean an Operating Agreement by and among each
of the FAFCO Members and EXPERIAN in substantially the form of Exhibit B
attached hereto.
"Panel" shall have the meaning set forth in Section 6.08(b).
"Panel Date" shall have the meaning set forth in Section 6.08(b).
"Party" and "Parties" shall have the meaning set forth in the first WHEREAS
clause of this Agreement.
"Percentage Interest" shall mean, with respect to EXPERIAN, the percentage
set forth in Section 2.02(f) of the Operating Agreement with respect to
EXPERIAN, as such percentage may be adjusted from time to time pursuant to the
terms of the Operating Agreement.
"Permitted Encumbrances" shall mean the FAREISI Permitted Encumbrances
and/or the RES Permitted Encumbrances, as the context may require.
"Person" shall mean and include any individual, partnership, association,
joint stock company, joint venture, corporation, trust, limited liability
company, unincorporated organization, government, agency or political
subdivision thereof.
"Pre-Closing Period" shall have the meaning set forth in Section 3.10(a).
"Prime Rate" means, as of any date of determination, the per annum rate of
interest specified as the Prime Rate in the Wall Street Journal published on
such date, provided that for any date on which the Wall Street Journal is not
published, "Prime Rate" means the per annum rate of interest specified as the
Prime Rate in the Wall Street Journal last published before such date.
"Put Election Notice" has the meaning given thereto in Section 6.01(a)
hereof.
"Put Exercise Date" has the meaning given thereto in Section 6.01(a)
hereof.
"Put Option" has the meaning given thereto in Section 6.01(a) hereof.
"Put Price" has the meaning given thereto in Section 6.01(b) hereof.
"Registration Date" shall have the meaning set forth in Section 6.01(a).
"Release" shall have the meaning set forth in Section 3.16.
"RES Business" shall mean the business of EXPERIAN commonly known as
Experian Real Estate Solutions (including, without limitation, the businesses
commonly known as Experian Title Information Services and Experian Property
Data).
"RES Material Contract" shall have the meaning set forth in Section
3.07(b).
"RES Permitted Encumbrances" shall have the meaning set forth in Section
3.04.
"RES Pro-Forma Balance Sheet" shall have the meaning set forth in Section
3.03(a).
"RES Pro-Forma Financials" shall have the meaning set forth in Section
3.03(a).
"RES Property" shall have the meaning set forth in Section 3.16.
"Returns" shall have the meaning set forth in Section 3.10(a).
"Securities Act" shall mean the U.S. Securities Act of 1933, as amended.
"Subsidiary" shall mean, with respect to any Person, (a) any partnership of
which such Person is a general partner or of which such Person's Subsidiary is a
general partner or (b) any other Entity which, at the time as of which any
determination is being made, is Controlled by such Person; provided, that for
- -------- purposes of this Agreement, Excelis, Inc. and shall not be deemed to be
a Subsidiary of FAREISI.
"Taxes" shall mean all taxes, assessments, charges, duties, fees, levies or
other governmental charges, including, without limitation, all Federal, state,
county, local, foreign and other income, franchise, profits, capital gains,
capital stock, transfer, sales, use, occupation, property, excise, severance,
windfall profits, stamp, license, payroll, 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 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 or other entity.
"Transactional Taxes" shall have the meaning set forth in Section
2.01(b)(ii).
"Trigger Date" shall mean November 30, 2002.
"US GAAP" means United States generally accepted accounting principles
applied on a consistent basis.
"Voting Interest" shall mean with respect to any Entity, any equity
interest of such Entity having general voting power under ordinary circumstances
to participate in the election of a majority of the governing body of such
Entity (irrespective of whether at the time any other class or classes of equity
interest of such Entity shall have or might have voting power by reason of the
happening of any contingency).
"$3MM Note" shall have the meaning set forth in Section 2.02(b).
"$25MM Note" shall have the meaning set forth in Section 7.01(e)(ii).
1.02. Principles 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 US GAAP.
(c) 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."
(d) The Table of Contents hereto and the Article and Section headings
herein are for convenience only and shall not affect the construction hereof.
(e) This Agreement and the Implementing Agreements are the result of
negotiations among and have been reviewed by counsel to the Parties and are the
products of all Parties. Accordingly, they shall not be construed against any
Party merely because of such Party's involvement in their preparation.
ARTICLE II
ORGANIZATION OF NEWCO;
CLOSING; SCOPE OF BUSINESS
2.01. Organization.
(a) NEWCO shall be a limited liability company established under the laws
of the State of California, (i) having as its registered name such name as from
time to time is set forth in NEWCO's Articles of Organization and (ii) having
its principal offices located in St. Petersburg, Florida or such location as
from time to time is set forth in NEWCO's Articles of Organization.
(b) (i) All out-of-pocket costs of the establishment of NEWCO as a limited
liability company as contemplated by Section 2.01(a) (including organizational
changes and amendments to organizational documents that may be made on or before
the Closing Date) shall be shared eighty percent (80%) by the FAFCO Members and
twenty percent (20%) by EXPERIAN.
(ii) Except as otherwise provided in clause (iii) below, each Party shall
bear its own (A) costs incurred as a result of the transfer of any Interests to
NEWCO, including payments to third parties, if any, to obtain their consent to
such transfer (it being understood and agreed that each Party shall determine,
in its sole discretion, whether or not to obtain any such consent), (B)
attorneys' fees and related costs incurred by it in connection with the
preparation, execution and delivery of this Agreement and the Implementing
Agreements and the transactions contemplated hereby or thereby, except as may
otherwise expressly be provided herein or therein and (C) sales, use, transfer,
conveyance, bulk transfer, business and occupation, value added or income taxes,
or other taxes, duties, excises or governmental charges imposed by any taxing
jurisdiction with respect to the transfer, assignment or conveyance of its
Interests or otherwise on account of this agreement or the transactions
contemplated hereby including, without limitation, those arising from its
corporate reorganizations and intercompany transactions in contemplation of such
transactions (the foregoing taxes described in this clause (C) being hereinafter
referred to as "Transactional Taxes").
(iii) Notwithstanding anything in this Section 2.01(b) to the contrary, the
Parties hereby agree to share as provided in Section 2.01(b)(i) the reasonable
legal fees and expenses of White & Case in connection with the establishment of
NEWCO as a limited liability company.
2.02. Capital Contributions; Closing.
(a) At or prior to the Effective Time, FAFCO and FAREISI shall cause each
FAFCO Member to transfer to NEWCO, and each FAFCO Member shall transfer to
NEWCO, free and clear of all Encumbrances, other than FAREISI Permitted
Encumbrances, all of the assets (which assets will include, without limitation,
cash in an amount that, when aggregated with the cash, if any, contributed by
all other FAFCO Members, will not be less than $15,000,000), properties, rights,
services and interests constituting its share of the FAREISI Business (other
than such assets, properties, rights, services and interests set forth on Part 1
of Schedule 2.02(a) attached hereto under the name of such FAFCO Member),
together with all liabilities and obligations of any nature of such FAFCO
Member, whether absolute, accrued, contingent or otherwise, and whether due or
to become due, arising out of or relating to such assets, properties, rights,
services and interests (other than the liabilities and obligations set forth in
Part 2 of Schedule 2.02(a) attached hereto under the name of such FAFCO Member)
(all such assets, properties, rights, services, liabilities, obligations and
interests being transferred are hereinafter collectively referred to as the
"FAFCO Interests"). In consideration for such transfer, NEWCO shall in
accordance with Section 2.02 of the Operating Agreement, credit the respective
Capital Accounts of the FAFCO Members and issue to the FAFCO Members Membership
Interests in NEWCO in an aggregate amount equal to 80% of the Membership
Interests to be issued at the Effective Time.
(b) At or prior to the Effective Time, EXPERIAN shall transfer or cause to
be transferred to NEWCO, (i) free and clear of all Encumbrances, other than RES
Permitted Encumbrances, all of the assets (which assets will include, without
limitation, not less than $3,000,000 in cash), properties, rights, services and
interests constituting the RES Business (other than such assets, properties,
rights, services and interests set forth in Part 1 of Schedule 2.02(b) attached
hereto), together with all liabilities and obligations of any nature of
EXPERIAN, whether absolute, accrued, contingent or otherwise, and whether due or
to become due, arising out of or relating to such assets, properties, rights,
services and interests (other than the liabilities and obligations set forth in
Part 2 of Schedule 2.02(b) attached hereto) (all such assets, properties,
rights, services, liabilities, obligations and interests being transferred
hereunder are hereinafter referred to as the "EXPERIAN Interests") and (ii) cash
in the amount of $10,000,000, by wire transfer of immediately available funds to
an account designated by NEWCO. In consideration of such transfer, NEWCO shall
(x) in accordance with Section 2.02 of the Operating Agreement, credit the
Capital Account of EXPERIAN and issue to EXPERIAN a Membership Interest in NEWCO
equal to 20% of the Membership Interests to be issued at the Effective Time and
(y) deliver or cause to be delivered to EXPERIAN a promissory note, dated the
Effective Date, in the principal amount of $3,000,000 in the form attached
hereto as Exhibit A duly executed by NEWCO (the "$3MM Note").
2.03. Certain Obligations Not Transferred. Notwithstanding Sections 2.02(a)
and 2.02(b) hereof, any obligation of FAFCO, FAREISI, EXPERIAN or any other
FAFCO Member, or their respective Affiliates, to lend money, extend credit, make
advances to, purchase or acquire any securities or other interest in or make any
capital contribution to any other Person, which requires FAFCO, FAREISI,
EXPERIAN or such other FAFCO Member, or such Affiliates, to advance funds prior
to the Effective Time in full or partial satisfaction of such obligation, shall,
to the extent of such requirement to lend money, extend credit, make advance to,
purchase or acquire any securities or other interest in or make any capital
contribution to any other Person prior to the Effective Time, remain the sole
obligation of FAFCO, FAREISI, EXPERIAN or such other FAFCO Member, or such
Affiliates, as the case may be, and shall not be directly or indirectly assumed
by NEWCO.
2.04. Effective Time. The transactions referred to in Sections 2.02(a),
2.02(b) and 2.03 shall be deemed, as between the Parties, to occur at the
Effective Time.
2.05. Instruments of Transfer and Conveyance. The sale, transfer and
conveyance of the Interests shall be effected by delivery on or prior to the
Closing Date by each Party hereto of such deeds, transfers in registrable form,
endorsements, assurances, conveyances, releases, discharges, assignments,
certificates, drafts, checks or other instruments of transfer and conveyance,
duly executed by such Party or such other Person, as the case may be, as any
other Party reasonably deems necessary to vest in NEWCO all right, title and
interest in and to the Interests, free and clear of any Encumbrance of any kind,
except Permitted Encumbrances.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF EXPERIAN
EXPERIAN hereby represents and warrants to FAFCO, FAREISI and each of the
other FAFCO Members and to NEWCO (which shall be an intended beneficiary of such
representations and warranties upon its acknowledgement of this Agreement) as
follows:
3.01. Authorization and Validity of Agreement.
(a) It has full corporate power and authority to execute and deliver this
Agreement and each of the Implementing Agreements to which it is a party, to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. The execution, delivery and
performance by it of this Agreement and the Implementing Agreements to which it
is a party and the consummation of the transactions contemplated hereby and
thereby, have been duly authorized and approved by its Board of Directors and,
if applicable, shareholder(s), and no other corporate or shareholder action is
necessary to authorize the execution, delivery and performance by it of this
Agreement and the Implementing Agreements to which it is a party and the
consummation of the transactions contemplated hereby and thereby. This Agreement
and each of the Implementing Agreements to which it is a party have been duly
executed and delivered by it and, assuming the due execution of this Agreement
and each of the Implementing Agreements by the other parties hereto and thereto,
are valid and binding obligations of it, enforceable against it in accordance
with their terms, except to the extent that their en forceability may be subject
to applicable bankruptcy, insolvency, reorganization, moratorium and similar
laws affecting the enforcement of creditors' rights generally and to general
equitable principles.
(b) Each document and instrument (including, but not limited to, the
Implementing Agreements) executed by it as contemplated by this Agreement, when
executed and delivered by it in accordance with the terms hereof, shall have
been duly executed and delivered by it and, assuming due execution and delivery
by the other parties thereto, shall be valid and binding upon it and enforceable
against it in accordance with its terms, except to the extent that its
enforceability may be subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting the enforcement of
creditors' rights generally and to general equitable principles.
3.02. Existence and Good Standing. It is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization and has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business as now being conducted.
It 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 it or the nature of the business conducted by it
makes such qualification necessary, except where the failure to be so duly
qualified or licensed would not have a material adverse effect on the business,
properties, assets, liabilities, condition (financial or otherwise), results of
operations or prospects (a "Material Adverse Effect") of the RES Business, taken
as a whole.
3.03. EXPERIAN Financial Statements.
(a) EXPERIAN has heretofore furnished FAFCO with its pro-forma balance
sheet as at November 19, 1997 (such balance sheet being hereinafter referred to
as the "RES Pro-Forma Balance Sheet"), and related pro-forma statements of
operations and cash flows for the period then ended, together with all
explanatory notes thereto, for the RES Business showing the effects of the
elimination of EXPERIAN's businesses and operations not included in the EXPERIAN
Interests being transferred to NEWCO (such pro-forma statements, together with
the RES Pro-Forma Balance Sheet, the "RES Pro-Forma Financials"). The RES Pro-
Forma Financials, including the footnotes thereto, are based upon currently
available information and upon certain assumptions therein disclosed that
EXPERIAN believes in good faith to be reasonable under current circumstances.
(b) Except as set forth on Schedule 3.03 attached hereto, since the Balance
Sheet Date, the RES Business has experienced no Material Adverse Effect.
3.04. Title to Interests. It possesses good and marketable title to all of
the properties and assets (real and personal, tangible or intangible) comprising
the EXPERIAN Interests, free and clear of all Encumbrances, except for
Encumbrances which (i) are set forth on Schedule 3.04, (ii) are for taxes,
assessments or governmental charges not yet due, (iii) were incurred in the
ordinary course of business and which do not in the aggregate materially detract
from the value of the EXPERIAN Interests or materially impair the use thereof in
the operation of the RES Business or (iv) are reflected on the RES Pro-Forma
Financial Statements, as the case may be. Encumbrances of the type described in
clauses (i) through (iv) are sometimes referred to as "RES Permitted
Encumbrances".
3.05. Leases. Except as otherwise set forth in Schedule 3.05, each lease to
which it is a party included in the RES Business is in full force and effect;
all rents and additional rents due to date from it on each such lease have been
paid; in each case, it has not received notice that it is in material default
thereunder; and, to its knowledge, there exists no material event, occurrence,
condition or act (including the transactions contemplated by this Agreement)
which, with the giving of notice, the lapse of time or the happening of any
further event or condition, would constitute a material default by it or any
other party under such lease.
3.06. Real Property. Schedule 3.06 attached hereto contains a list of all
real property owned by it constituting part of the RES Business and includes the
name of the record title holder thereof and a list of all indebtedness secured
by a lien, mortgage or deed of trust thereon. It has good and marketable title
in fee simple to all the real property specified as owned by it in Schedule
3.06, free and clear of all Encumbrances, except for RES Permitted Encumbrances
or as set forth on Schedule 3.06. All of the buildings, structures and
appurtenances situated on the real property listed on Schedule 3.06 are in good
operating condition and in a state of good maintenance and repair (normal wear
and tear excepted) and are adequate and suitable for the purposes for which they
are presently being used.
3.07. Material Contracts.
(a) Schedule 3.07(a) attached hereto sets forth a complete list of all RES
Material Contracts related to the operation of the RES Business.
(b) Except as set forth in Schedule 3.07(a) attached hereto, in connection
with the ownership or operation of the RES Business, it neither has nor is bound
by (i) any agreement or contract relating to the employment of any Person with
total annual compensation in excess of $300,000, or any bonus, deferred
compensation, pension, profit sharing, stock option, employee stock purchase,
retirement or other employee benefit plan, (ii) any agreement, indenture or
other instrument which contains restrictions with respect to payment of
dividends or any other distribution tion, (iii) any agreement, contract or
commitment relating to capital expenditures in excess of $1,000,000, (iv) any
loan or advance to, or investment in, any Person or 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 of business), (vi) any management service,
consulting or any other similar type contract which is not cancelable without
penalty within 30 days and involves estimated payments in excess of $50,000 in
any twelve-month period, (vii) any agreement, contract or commitment limiting
the ability of the RES Business 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 of business which is not cancelable without penalty
within 30 days or (ix) any agreement, contract or commitment which is reasonably
expected to have a Material Adverse Effect on the RES Business, taken as a whole
(each of the agreements, contracts or commitments in clauses (i) to (ix) above,
a "RES Material Contract").
(c) Except as set forth on Schedule 3.07(c), each contract or agreement set
forth on Schedule 3.07(a) (or required to be set forth thereon) is in full force
and effect and there exists no default or event of default or event, occurrence,
condition or act (including the transfer of the EXPERIAN Interests hereunder)
attributable to it or of which it has knowledge 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 thereunder. It has not violated any
of the terms or conditions of any contract or agreement set forth on Schedule
3.07(a) (or required to be set forth thereon) in any material respect, and, to
its knowledge, all of the covenants to be performed by any other party thereto
have been fully performed.
3.08. Consents and Approvals; No Violations. Assuming the making and/or
obtaining, to the reasonable satisfaction of the Parties, of such applications,
registrations, declarations, filings, authorizations, orders, consents and
approvals as are set forth in Schedule 3.08 hereto, the execution and delivery
of this Agreement and the Implementing Agreements by it and the consummation of
the transactions contemplated hereby and thereby (a) will not violate the
provisions of the Articles of Incorporation or By-Laws or similar organizational
documents of it, (b) will not violate any statute, rule, regulation, order or
decree of any public body or authority applicable to it or by which its
Interests may be bound, (c) will not 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, and (d) will not result in a violation or breach by
it of, conflict with, constitute (with or without due notice or lapse of time or
both) a default by it under, or result in the creation of any Encumbrance upon
any of the EXPERIAN Interests under, any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, license, franchise, permit, agreement,
lease, franchise agreement or any other instrument or obligation to which it is
a party, or by which the EXPERIAN Interests may be bound, excluding from the
foregoing clauses (c) and (d) filings, notices, permits, consents and approvals
the absence of which, and violations, breaches, defaults, conflicts and liens
which, individually, would not have a Material Adverse Effect on the RES
Business, taken as a whole.
3.09. Litigation. Except as set forth in Schedule 3.09 attached hereto,
there is no action, suit or proceeding at law or in equity by any Person, or any
arbitration or any administrative or other proceeding by or before or, to its
knowledge, any investigation by, any governmental body, instrumentality or
agency, pending or to its knowledge threatened, against it which, if adversely
determined, would have a Material Adverse Effect on the RES Business, taken as a
whole. Except as set forth in Schedule 3.09 attached hereto, it is not subject
to any judgment, order or decree entered in any lawsuit or proceeding which may
have a Material Adverse Effect on the RES Business, taken as a whole. There are
no such suits, actions, claims, proceedings or investigations pending or, to its
knowledge, threatened, seeking to prevent or challenging the transactions
contemplated by this Agreement or the Implementing Agreements.
3.10. Taxes. (a) Tax Returns. It has timely filed or caused to be timely
filed with the appropriate taxing authorities all returns, statements, forms and
reports for Taxes ("Returns") that are required to be filed by, or with respect
to, the RES Business on or prior to the Closing Date. The Returns have
accurately reflected all liability for Taxes of the RES Business for the periods
covered thereby.
(b) Payment of Taxes. Except as set forth on Schedule 3.10, all Taxes and
Tax liability ities of EXPERIAN (to the extent attributable to the RES Business)
for all taxable years or periods that end on or before the Closing Date and,
with respect to any taxable year or period beginning before and ending after the
Closing Date, the portion of such taxable year or period ending on and including
the Closing Date ("Pre-Closing Period") have been timely paid or accrued and ade
quately disclosed and fully provided for on the books and records of EXPERIAN in
accordance with US GAAP.
(c) Other Tax Matters.
(i) Except as set forth on Schedule 3.10, EXPERIAN has not been the
subject of an audit or other examination of Taxes by the tax authorities of
any nation, state or locality nor has EXPERIAN or the RES Business received
any notices from any taxing authority relating to any issue which could
affect the Tax liability of the RES Business.
(ii) Except as set forth on Schedule 3.10, as of the Closing Date,
EXPERIAN (A) has not entered into an agreement or waiver or been requested
to enter into an agreement or waiver extending any statute of limitations
relating to the payment or collection of Taxes of the RES Business or (B)
is not presently contesting the Tax liability of the RES Business before
any court, tribunal or agency.
(iii) Except as set forth on Schedule 3.10, EXPERIAN has not been
included in any "consolidated," "unitary" or "combined" Return provided for
under the law of the United States, any foreign jurisdiction or any state
or locality with respect to Taxes for any taxable period for which the
statute of limitations has not expired.
(iv) All Taxes related to the RES Business which EXPERIAN or the RES
Business is (or was) required by law to withhold or collect have been duly
withheld or collected, and have been timely paid over to the proper
authorities to the extent due and payable.
(v) None of the RES Business consists of any United States real
property interests within the meaning of Section 897 of the Code and
EXPERIAN is not a United States real property holding company within the
meaning of Section 897(c)(2) of the Code.
(vi) There are no tax sharing, allocation, indemnification or similar
agreements in effect under which the RES Business could be liable for any
Taxes or other claims of any party.
(vii) EXPERIAN has not applied for, been granted, or agreed to any
accounting method change for which the RES Business will be required to
take into account any adjustment under Section 481 of the Code or any
similar provision of the Code or the corresponding tax laws of any nation,
state or locality.
(viii) The RES Business is not a party to any agreement that would
require it to make any payment that would constitute an "excess parachute
payment" for purposes of Sections 280G and 4999 of the Code.
3.11. Conduct of Business. Since the Balance Sheet Date, except as
contemplated or expressly required or permitted by this Agreement or as set
forth on Schedule 3.11 attached hereto, (i) the RES Business has been conducted
only in the ordinary course; (ii) the RES Business has not incurred any material
liabilities (direct, contingent or otherwise) or engaged in any material
transaction or entered into any material agreement outside the ordinary course
of business; (iii) it has not increased the compensation of any officer or
granted any general salary or benefits increase to the employees of the RES
Business other than in the ordinary course of business; and (iv) it has not
taken any action which, if taken subsequent to the execution of this Agreement
and on or prior to the Closing Date, would constitute a breach of its agreements
set forth in Section 5.01.
3.12. Compliance with Laws; Permits.
(a) Subject to the qualifications set forth on Schedule 3.12(a) attached
hereto, it is in compliance with all applicable laws, regulations, orders,
judgments and decrees relating to the RES Business except where the failure to
so comply would not have a Material Adverse Effect on the RES Business, taken as
a whole.
(b) EXPERIAN possesses all franchises, licenses, certificates of authority,
permits or other authorizations (each, a "License") necessary for the RES
Business, except where the failure to possess such a License would not have a
Material Adverse Effect on the RES Business, taken as a whole. All such Licenses
are in full force and effect and it has not received any written notice of any
event, inquiry, investigation or proceeding threatening the validity of such
Licenses, except where the failure of such Licenses to be in full force and
effect or such event, inquiry, investigation or proceeding would not have a
Material Adverse Effect on its RES Business, taken as a whole.
3.13. Intellectual Properties.
(a) The operation of the RES Business as currently conducted requires no
rights under patents, registered or unregistered trademarks or registered or
unregistered service marks other than rights under patents, trademarks and
service marks owned by EXPERIAN (or its predecessors-in-interest), and rights
granted for the benefit of the RES Business pursuant to license agreements that
are in full force and effect. Within the three-year period immediately preceding
the date of this Agreement, the RES Business made use of no rights under any
patents, trademarks or service marks other than those owned by EXPERIAN (or its
predecessors-in-interest), and rights granted for the benefit of the RES
Business under license agreements.
(b) Except as disclosed on Schedule 3.13(b) attached hereto, the operation
of the RES Business as currently conducted requires no rights under copyrights,
other than rights under copyrights owned by EXPERIAN, and rights granted for the
benefit of the RES Business pursuant to license agreements that are in full
force and effect. Within the three-year period immediately preceding the date of
this Agreement, the RES Business made no use of rights under any copyright,
other than those owned by EXPERIAN (or its predecessors-in-interest), and rights
granted for the benefit of the RES Business under license agreements.
(c) To the best of its knowledge, the operation, development and
maintenance of the RES Business as currently conducted requires no rights under
trade secrets or proprietary information (including but not limited to those in
computer software and databases and to those disclosed in patent applications)
other than rights under trade secrets and proprietary information owned by
EXPERIAN, and rights granted for the benefit of the RES Business pursuant to
license agreements that are in full force and effect. To the best of its
knowledge, within the three-year period immediately preceding the date of this
Agreement, the RES Business made use of no rights under any trade secret or
proprietary information other than those owned by EXPERIAN (or its predecessors-
in-interest), and rights granted for the benefit of the RES Business under
license agreements.
(d) Except as set forth on Schedule 3.13(d), no claim adverse to its or the
RES Business' interests in the Intellectual Property used in the RES Business or
its license agreements with respect thereto has been made in litigation. To the
best of its knowledge, no such claim has been threatened or asserted, no
reasonable basis exists for any such claim, and no Person has infringed or
otherwise violated its or the RES Business' right in any of such Intellectual
Property or its license agreements with respect thereto.
3.14. Labor Matters. No work stoppage involving the RES Business is pending
or, to its knowledge, threatened which reasonably could be expected to have a
Material Adverse Effect on the RES Business. It is not involved in, or
threatened with or affected by, any labor dispute, arbitration, law suit or
administrative proceeding relating to the RES Business which reasonably could be
expected to have a Material Adverse Effect on the RES Business. Except as set
forth on Schedule 3.14 attached hereto, it is not a party to any collective
labor agreement or similar agreement.
3.15. Employee Benefit Plans. Each "employee benefit plan" (as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) maintained or contributed to by it and/or any organization which
together with it would be treated as a "single employer" within the meaning of
Section 414(b) or (c) of the Internal Revenue Code of 1986, as amended (the
"Code"), or to which it or any such organization has an obligation to contribute
(each, an "EXPERIAN Plan" and collectively, the "EXPERIAN Plans") is listed on
Schedule 3.15 attached hereto. Except as set forth in such Schedule 3.15, or to
the extent that any breach of the representations set forth in this sentence
would not have a Material Adverse Effect on the RES Business, taken as a whole:
(a) each EXPERIAN Plan is in compliance with applicable law and has been
administered and operated in accordance with its terms; (b) each EXPERIAN Plan
which is intended to be "qualified" (within the meaning of Section 401(a) of the
Code) has received a favorable determination letter from the Internal Revenue
Service and, to its knowledge, no event has occurred and no condition exists
which could reasonably be expected to result in the revocation of any such
determination letter; (c) no EXPERIAN Plan is covered by Title IV of ERISA or
subject to Section 412 of the Code or Section 302 of ERISA; (d) to its
knowledge, no "disqualified person" or "party in interest" (as defined in
Section 4975(e)(2) of the Code and Section 3(14) of ERISA, respectively) has
engaged in any transaction in connection with an EXPERIAN Plan that could
reasonably be expected to result in the imposition of a penalty pursuant to
Section 502(i) of ERISA or a tax pursuant to Section 4975(a) of the Code; and
(e) no liability, claim, action or litigation, has been made, commenced or, to
its knowledge, threatened with respect to any EXPERIAN Plan (other than routine
claims for benefits payable submitted in the ordinary course and appeals of such
claims).
3.16. Environmental Laws and Regulations. Except as set forth on Schedule
3.16:
(a) Hazardous Materials have not been (i) generated, used, treated or
stored on, or transported to or from, any RES Property by it, or (ii) Released
or disposed of on any RES Property by it, except in the case of clause (i) or
(ii) in compliance with Environmental Law and so as not to give rise to an
Environmental Claim;
(b) The RES Business is in compliance with all applicable Environmental
Laws and with the requirements of any permits issued under such laws; and
(c) There are no past, pending or, to its knowledge, threatened
Environmental Claims against the RES Business and, to the best of its knowledge
after, there are no facts, circumstances, conditions or occurrences that could
reasonably be anticipated to form the basis of a claim under or a violation of,
or require the expenditure of funds for compliance with, any Environmental Law
that individually or in the aggregate could have a Material Adverse Effect on
the RES Business, taken as a whole.
For purposes of this Agreement, the following terms shall have the
following meanings: (A) "RES Property" means any real property and improvements
owned, leased, or operated by EXPERIAN in connection with the RES Business; (B)
"Hazardous Materials" means (i) any petroleum or petroleum products, radioactive
materials or friable asbestos; (ii) any chemicals, materials or substances
defined as "hazardous substances," under the Comprehensive Environmental
Response Compensation and Liability Act of 1980, as amended, 42 U.S.C. (S) 9601
et seq. ("CERCLA"); (C) "Environmental Law" means any federal, state or local --
- ---- statute, law, rule, regulation, ordinance or code in effect and in each
case as amended as of the Closing Date, relating to the environment or Hazardous
Materials, including without limitation CERCLA, the Resource Conservation and
Recovery Act, as amended, 42 U.S.C. (S) 6901 et seq.; the Federal Water -- ----
Pollution Control Act, as amended, 33 U.S.C. (S) 1251 et seq.; the Toxic -- ----
Substances Control Act, 15 U.S.C. (S) 2601 et seq.; the Clean Air Act, 42 U.S.C.
- -- ---- (S) 7401 et seq.; the Safe Drinking Water Act, 42 U.S.C. (S) 3808 et
seq.; and -- ---- -- ---- (D) "Environmental Claims" means regulatory or
judicial actions, suits, claims, notices of noncompliance or violation, or
proceedings arising under Environmental Law (for purposes of this subclause (D),
"Claims") including (i) Claims by governmental or regulatory authorities for
enforcement, cleanup, removal, response, remedial actions or damages pursuant to
applicable Environmental Law and (ii) Claims by any third party seeking damages,
contribution, indemnification, cost recovery, compensation or injunctive relief
resulting from Hazardous Materials or arising from injury the environment; and
(E) "Release" means disposing, discharging, injecting, spilling, leaking,
leaching, dumping, emitting, escaping, emptying, seeping, placing and the like,
into or upon any land or water or air, or otherwise entering into the
environment.
3.17. Books and Records. Except as set forth on Schedule 3.17 attached
hereto, the RES Business has no 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 RES Business.
3.18. Nature of Investment. EXPERIAN is acquiring its Membership Interest
in NEWCO for its own account, for investment only and not with a view to, or
sale in connection with, a distribution thereof within the meaning of the
Securities Act.
3.19. Transactions with Affiliates. Schedule 3.19 attached hereto
identifies all contracts, commitments and agreements in effect as of the date
hereof by and between the RES Business on the one hand and EXPERIAN or any of
its Affiliates (other than the RES Business) on the other.
3.20. Broker's or Finder's Fees. No agent, broker, Person or firm acting on
behalf of it is, or will be, entitled to any commission or broker's or finder's
fees from any of the Parties hereto, or from any Affiliate of any of the Parties
hereto, in connection with any of the transac tions contemplated hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE FAFCO PARTIES
Each of FAFCO, FAREISI and each other FAFCO Member hereby represents and
warrants, jointly and severally, to EXPERIAN and to NEWCO (which shall be an
intended benefi ciary of such representations and warranties upon its
acknowledgement of this Agreement) as follows:
4.01. Authorization and Validity of Agreement.
(a) It has full corporate power and authority to execute and deliver this
Agreement and each of the Implementing Agreements to which it is a party, to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. The execution, delivery and
performance by it of this Agreement and the Implementing Agreements to which it
is a party and the consummation of the transactions contemplated hereby and
thereby, have been duly authorized and approved by its Board of Directors and,
if applicable, shareholder(s), and no other corporate or shareholder action is
necessary to authorize the execu tion, delivery and performance by it of this
Agreement and the Implementing Agreements to which it is a party it and the
consummation of the transactions contemplated hereby and thereby. This Agreement
and each of the Implementing Agreements to which it is a party have been duly
executed and delivered by it and, assuming the due execution of this Agreement
and of each of the Implementing Agreements by the other parties hereto and
thereto, are valid and binding obliga tions of it, enforceable against it in
accordance with their terms, except to the extent that their en forceability may
be subject to applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws affecting the enforcement of creditors' rights generally and to
general equitable principles.
(b) Each document and instrument (including, but not limited to, the
Implementing Agreements) executed by it as contemplated by this Agreement, when
executed and delivered by it in accordance with the terms hereof shall have been
duly executed and delivered by it and, assuming due execution and delivery by
the other parties thereto, shall be valid and binding upon it and enforceable
against it in accordance with its terms, except to the extent that its
enforceability may be subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting the enforcement of
creditors' rights generally and to general equitable principles.
4.02. Existence and Good Standing. It is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization and has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business as now being conducted.
It 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 it or the nature of the business conducted by it
makes such qualification necessary, except where the failure to be so duly
qualified or licensed would not have a Material Adverse Effect on the FAREISI
Business, taken as a whole.
4.03. FAFCO Financial Statements.
(a) FAFCO has heretofore furnished EXPERIAN with its balance sheet as at
December 31, 1996 (such balance sheet being hereinafter referred to as the
"FAFCO Balance Sheet"), and related statements of operations, stockholders'
equity, and cash flows for the period then ended, together with all explanatory
notes thereto (such statements, together with the FAFCO Balance Sheet, the
"FAFCO Financial Statements"), audited by Price Waterhouse LLP. Such FAFCO
Financial Statements, including the footnotes thereto, except as indicated
therein, have been prepared in accordance with US GAAP, and fairly present in
all material respects the consolidated financial condition and consolidated
results of operations of FAFCO and the changes in the consolidated financial
position of FAFCO at such dates and for the period(s) covered thereby.
Additionally, FAFCO has heretofore furnished EXPERIAN with its pro-forma balance
sheet as at September 30, 1996 together with all explanatory notes thereto, for
the FAREISI Business showing the effects of the elimination of operations not
included in the FAFCO Interests being transferred to NEWCO (such balance sheet
being hereinafter referred to as the "FAREISI Pro-Forma Balance Sheet"). The
FAREISI Pro-Forma Balance Sheet, including the footnotes thereto, are based upon
currently available information and upon certain assumptions therein disclosed
that FAFCO believes in good faith to be reasonable under current circumstances.
(b) Except as set forth on Schedule 4.03 attached hereto, since the Balance
Sheet Date, the FAREISI Business has experienced no Material Adverse Effect.
4.04. Title to Interests. The FAFCO Members possess good and marketable
title to all of the properties and assets (real and personal, tangible or
intangible) comprising the FAFCO Interests, free and clear of all Encumbrances,
except for Encumbrances which (i) are set forth on Schedule 4.04 attached
hereto, (ii) are for current taxes, assessments or governmental charges not yet
due, (iii) were incurred in the ordinary course of business and which do not in
the aggregate materially detract from the value of the FAFCO Interests or
materially impair the use thereof in the operation of the FAREISI Business or
(iv) are reflected on the FAREISI Pro-Forma Balance Sheet, as the case may be.
Encumbrances of the type described in clauses (i) through (iv) are sometimes
referred to as "FAREISI Permitted Encumbrances.
4.05. Leases. Except as otherwise set forth in Schedule 4.05 attached
hereto, each lease to which it is a party that is included in the FAREISI
Business is in full force and effect; all rents and additional rents due to date
from it on each such lease have been paid; in each case, it has not received
notice that it is in material default thereunder; and, to its knowledge, there
exists no material event, occurrence, condition or act (including the
transactions contemplated by this Agreement) which, with the giving of notice,
the lapse of time or the happening of any further event or condition, would
constitute a material default by it or any other party under such lease.
4.06. Real Property. Schedule 4.06 attached hereto contains a list of all
real property owned by it constituting part of the FAREISI Business and includes
the name of the record title holder thereof and a list of all indebtedness
secured by a lien, mortgage or deed of trust thereon. Each FAFCO Member has good
and marketable title in fee simple to all the real property specified as owned
by it in Schedule 4.06, free and clear of all Encumbrances, except for FAREISI
Permitted Encumbrances or as set forth on Schedule 4.06. All of the buildings,
structures and appurtenances situated on the real property listed on Schedule
4.06 are in good operating condition and in a state of good maintenance and
repair (normal wear and tear excepted) and are adequate and suitable for the
purposes for which they are presently being used.
4.07. Material Contracts.
(a) Schedule 4.07(a) attached hereto sets forth a complete list of all
FAREISI Material Contracts related to the operation of the FAREISI Business.
(b) Except as set forth in Schedule 4.07(a) attached hereto, in connection
with the ownership or operation of the FAREISI Business, it neither has nor is
bound by (i) any agreement or contract relating to the employment of any Person
with total annual compensation in excess of $300,000, or any bonus, deferred
compensation, pension, profit sharing, stock option, employee stock purchase,
retirement or other employee benefit plan, (ii) any agreement, indenture or
other instrument which contains restrictions with respect to payment of
dividends or any other distribu tion, (iii) any agreement, contract or
commitment relating to capital expenditures in excess of $1,000,000, (iv) any
loan or advance to, or investment in, any Person or 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 of business), (vi) any management service,
consulting or any other similar type contract which is not cancelable without
penalty within 30 days and involves estimated payments in excess of $50,000 in
any twelve-month period, (vii) any agreement, contract or commitment limiting
the ability of the FAREISI Business 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 of business which is not cancelable without
penalty within 30 days or (ix) any agreement, contract or commitment which is
reasonably expected to have a Material Adverse Effect on the FAREISI Business,
taken as a whole (each of the agreements, contracts or commitments in clauses
(i) to (ix) above, a "FAREISI Material Contract").
(c) Except as set forth on Schedule 4.07(c), each contract or agreement set
forth on Schedule 4.07(a) (or required to be set forth thereon) is in full force
and effect and there exists no default or event of default or event, occurrence,
condition or act (including the transfer of the FAFCO Interests hereunder)
attributable to it or of which it has knowledge 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 thereunder. It has not violated any
of the terms or conditions of any contract or agreement set forth on Schedule
4.07(a) (or required to be set forth thereon) in any material respect, and, to
its knowledge, all of the covenants to be performed by any other party thereto
have been fully performed.
4.08. Consents and Approvals; No Violations. Assuming the making and/or
obtaining, to the reasonable satisfaction of the Parties, of such applications,
registrations, declarations, filings, authorizations, orders, consents and
approvals as are set forth in Schedule 4.08 hereto, the execution and delivery
of this Agreement and the Implementing Agreements by it and the consummation of
the transactions contemplated hereby and thereby (a) will not violate the
provisions of the Articles of Incorporation or By-Laws or similar organizational
documents of it, (b) will not violate any statute, rule, regulation, order or
decree of any public body or authority applicable to it or by which its
Interests may be bound, (c) will not 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, and (d) will not result in a violation or breach by
it of, conflict with, constitute (with or without due notice or lapse of time or
both) a default by it under, or result in the creation of any Encumbrance upon
any of the FAFCO Interests under, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, license, franchise, permit, agreement,
lease, franchise agreement or any other instrument or obligation to which it is
a party, or by which the FAFCO Interests may be bound, excluding from the
foregoing clauses (c) and (d) filings, notices, permits, consents and approvals
the absence of which, and violations, breaches, defaults, conflicts and liens
which, individually, would not have a Material Adverse Effect on the FAREISI
Business, taken as a whole.
4.09. Litigation. Except as set forth in Schedule 4.09 attached hereto,
there is no action, suit or proceeding at law or in equity by any Person, or any
arbitration or any administrative or other proceeding by or before or, to its
knowledge, any investigation by, any governmental body, instrumentality or
agency, pending or to its knowledge threatened, against it which, if adversely
determined, would have a Material Adverse Effect on the FAREISI Business, taken
as a whole. Except as set forth in Schedule 4.09 attached hereto, it is not
subject to any judgment, order or decree entered in any lawsuit or proceeding
which may have a Material Adverse Effect on the FAREISI Business, taken as a
whole. There are no such suits, actions, claims, proceedings or in vestigations
pending or, to its knowledge, threatened, seeking to prevent or challenging the
transactions contemplated by this Agreement or the Implementing Agreements.
4.10. Taxes. (a) Tax Returns. It has timely filed or caused to be timely
filed with the appropriate taxing authorities all Returns that are required to
be filed by, or with respect to, the FAREISI Business on or prior to the Closing
Date. The Returns have accurately reflected all lia bility for Taxes of the
FAREISI Business for the periods covered thereby.
(b) Payment of Taxes. All Taxes and Tax liabilities of FAFCO and the FAFCO
Members (to the extent attributable to the FAREISI Business) for all taxable
years or periods that end on or before the Closing Date and with respect to the
Pre-Closing Period have been timely paid or accrued and adequately disclosed and
fully provided for on the books and records of the FAREISI Business in
accordance with US GAAP.
(c) Other Tax Matters.
(i) Except as set forth on Schedule 4.10, none of the FAFCO Members
has been the subject of an audit or other examination of Taxes by the tax
authorities of any nation, state or locality nor have the FAFCO Members or
the FAREISI Business received any notices from any taxing authority
relating to any issue which could affect the Tax liability of the FAREISI
Business.
(ii) Except as set forth on Schedule 4.10, none of the FAFCO Members
has, as of the Closing Date, (A) entered into an agreement or waiver or
been requested to enter into an agreement or waiver extending any statute
of limitations relating to the payment or collection of Taxes of the
FAREISI Business or (B) is presently contesting the Tax liability of the
FAREISI Business before any court, tribunal or agency.
(iii) Except as set forth on Schedule 4.10, none of the FAFCO Members
has been included in any "consolidated," "unitary" or "combined" Return
provided for under the law of the United States, any foreign jurisdiction
or any state or locality with respect to Taxes for any taxable period for
which the statute of limitations has not expired.
(iv) All Taxes which FAFCO, the FAFCO Members or the FAREISI Business
are (or were) required by law to withhold or collect have been duly
withheld or collected, and have been timely paid over to the proper
authorities to the extent due and payable.
(v) None of the FAREISI Business consists of any United States real
property interests within the meaning of Section 897 of the Code and none
of the FAFCO Members is a United States real property holding company
within the meaning of Section 897(c)(2) of the Code.
(vi) There are no tax sharing, allocation, indemnification or similar
agreements in effect under which the FAREISI Business could be liable for
any Taxes or other claims of any party.
(vii) None of the FAFCO Members has applied for, been granted, or
agreed to any accounting method change for which the FAREISI Business will
be required to take into account any adjustment under Section 481 of the
Code or any similar provision of the Code or the corresponding tax laws of
any nation, state or locality.
(viii) The FAREISI Business is not a party to any agreement that would
require it to make any payment that would constitute an "excess parachute
payment" for purposes of Sections 280G and 4999 of the Code.
4.11. Conduct of Business. Since the Balance Sheet Date, except as
contemplated or expressly required or permitted by this Agreement or as set
forth on Schedule 4.11 attached hereto, (i) the FAREISI Business has been
conducted only in the ordinary course; (ii) the FAREISI Business has not
incurred any material liabilities (direct, contingent or otherwise) or engaged
in any material transaction or entered into any material agreement outside the
ordinary course of business; (iii) it has not increased the compensation of any
officer or granted any general salary or benefits increase to the employees of
the FAREISI Business other than in the ordinary course of business; and (iv) it
has not taken any action which, if taken subsequent to the execution of this
Agreement and on or prior to the Closing Date, would constitute a breach of its
agreements set forth in Section 5.01.
4.12. Compliance with Laws; Permits.
(a) Subject to the qualifications set forth on Schedule 4.12(a), it is in
compliance with all applicable laws, regulations, orders, judgments and decrees
relating to the FAREISI Business except where the failure to so comply would not
have a Material Adverse Effect on the FAREISI Business, taken as a whole.
(b) The FAFCO Members possess all Licenses necessary for the FAREISI
Business, except where the failure to possess such a License would not have a
Material Adverse Effect on the FAREISI Business, taken as a whole. All such
Licenses are in full force and effect and it has not received any written notice
of any event, inquiry, investigation or proceeding threatening the validity of
such Licenses, except where the failure of such Licenses to be in full force and
effect or such event, inquiry, investigation or proceeding would not have a
Material Adverse Effect on the FAREISI Business, taken as a whole.
4.13. Intellectual Properties.
(a) The operation of the FAREISI Business as currently conducted requires
no rights under patents, registered or unregistered trademarks or registered or
unregistered service marks other than rights under patents, trademarks and
service marks owned by the FAFCO Members, and rights granted for the benefit of
the FAREISI Business pursuant to license agreements that are in full force and
effect. Within the three-year period immediately preceding the date of this
Agreement, the FAREISI Business made use of no rights under any patents,
trademarks or service marks other than those owned by the FAFCO Members, and
rights granted for the benefit of the FAREISI Business under license agreements.
(b) Except as disclosed on Schedule 4.13(b) attached hereto, the operation
of the FAREISI Business as currently conducted requires no rights under
copyrights other than rights under copyrights owned by the FAFCO Members, and
rights granted for the benefit of the FAREISI Business pursuant to license
agreements that are in full force and effect. Within the three-year period
immediately preceding the date of this Agreement, the FAREISI Business made no
use of rights under any copyright other than those owned by the FAFCO Members,
and rights granted for the benefit of the FAREISI Business under license
agreements.
(c) To the best of its knowledge, the operation, development and
maintenance of the FAREISI Business as currently conducted requires no rights
under trade secrets or proprietary information (including but not limited to
those in computer software and databases and to those disclosed in patent
applications) other than rights under trade secrets and proprietary information
owned by the FAFCO Members, and rights granted for the benefit of the FAREISI
Business pursuant to license agreements that are in full force and effect. To
the best of its knowledge, within the three-year period immediately preceding
the date of this Agreement, the FAREISI Business made use of no rights under any
trade secret or proprietary information other than those owned by the FAFCO
Members, and rights granted for the benefit of the FAREISI Business under
license agreements.
(d) Except as set forth on Schedule 4.13(d), no claim adverse to the FAFCO
Members' or the FAREISI Business' interests in the Intellectual Property used in
the FAREISI Business or the FAFCO Members' license agreements with respect
thereto has been made in litigation. To the best of its knowledge, no such claim
has been threatened or asserted, no reasonable basis exists for any such claim,
and no Person has infringed or otherwise violated the FAFCO Members' or the
FAREISI Business' rights in any of such Intellectual Property or the FAFCO
Members' license agreements with respect thereto.
4.14. Labor Matters. No work stoppage involving the FAREISI Business is
pending or, to its knowledge, threatened which reasonably could be expected to
have a Material Adverse Effect on the FAREISI Business. It is not involved in,
or threatened with or affected by, any labor dispute, arbitration, law suit or
administrative proceeding relating to the FAREISI Business which reasonably
could be expected to have a Material Adverse Effect on the FAREISI Business.
Except as set forth on Schedule 4.14 attached hereto, it is not a party to any
collective labor agreement or similar agreement.
4.15. Employee Benefit Plans. Each "employee benefit plan" (as defined in
Section 3(3) of ERISA) maintained or contributed to by it and/or any
organization which together with it would be treated as a "single employer"
within the meaning of Section 414(b) or (c) of the Code or to which it or any
such organization has an obligation to contribute (each, a "FAFCO Plan" and
collectively, the "FAFCO Plans") is listed on Schedule 4.15 attached hereto.
Except as set forth in such Schedule 4.15, or to the extent that any breach of
the representations set forth in this sentence would not have a Material Adverse
Effect on the FAREISI Business, taken as a whole: (a) each FAFCO Plan is in
compliance with applicable law and has been administered and operated in
accordance with its terms; (b) each FAFCO Plan which is intended to be
"qualified" (within the meaning of Section 401(a) of the Code) has received a
favorable determination letter from the Internal Revenue Service and, to its
knowledge, no event has occurred and no condition exists which could reasonably
be expected to result in the revocation of any such determination letter; (c) no
FAFCO Plan is covered by Title IV of ERISA or subject to Section 412 of the Code
or Section 302 of ERISA; (d) to its knowledge, no "disqualified person" or
"party in interest" (as defined in Section 4975(e)(2) of the Code and Section
3(14) of ERISA, respectively) has engaged in any transaction in connection with
a FAFCO Plan that could reasonably be expected to result in the imposition of a
penalty pursuant to Section 502(i) of ERISA or a tax pursuant to Section 4975(a)
of the Code; and (e) no liability, claim, action or litigation, has been made,
commenced or, to its knowledge, threatened with respect to any FAFCO Plan (other
than routine claims for benefits payable submitted in the ordinary course and
appeals of such claims).
4.16. Environmental Laws and Regulations. (a) Hazardous Materials have not
been (i) generated, used, treated or stored on, or transported to or from, any
FAREISI Property by it, or (ii) Released or disposed of on any FAREISI Property
by it, except in the case of clause (i) or (ii) in compliance with Environmental
Law and so as not to give rise to an Environmental Claim.
(b) The FAREISI Business is in compliance with all applicable Environmental
Laws and with the requirements of any permits issued under such laws.
(c) There are no past, pending or, to its knowledge, threatened
Environmental Claims against the FAREISI Business and, to the best of its
knowledge, there are no facts, circumstances, conditions or occurrences that
could reasonably be anticipated to form the basis of a claim under or a
violation of, or require the expenditure of funds for compliance with, any
Environmental Law that individually or in the aggregate could have a Material
Adverse Effect on the FAREISI Business, taken as a whole.
For purposes of this Agreement, the term "FAREISI Property" means any real
property and improvements owned, leased, or operated by any of the FAFCO MEMBERS
in the FAREISI Business.
4.17. Books and Records. Except as set forth on Schedule 4.17 attached
hereto, the FAREISI Business has no 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 FAREISI Business.
4.18. Nature of Investment. Each of the FAFCO Members represents for itself
that it is acquiring its Membership Interest in NEWCO for its own account, for
investment only and not with a view to, or sale in connection with, a
distribution thereof within the meaning of the Securities Act.
4.19. Transactions with Affiliates. Schedule 4.19 attached hereto
identifies all contracts, commitments and agreements in effect as of the date
hereof relating to the FAREISI Business by and between any FAFCO Member on the
one hand and FAFCO or any of its Affiliates (other than the other FAFCO Members)
on the other.
4.20. Broker's or Finder's Fees. No agent, broker, Person or firm acting on
behalf of it is, or will be, entitled to any commission or broker's or finder's
fees from any of the Parties hereto, or from any Affiliate of any of the Parties
hereto, in connection with any of the transactions contemplated hereby.
ARTICLE V
COVENANTS
5.01. Ordinary Course. Each of FAFCO and EXPERIAN hereby covenants and
agrees that, except as set forth on Schedule 5.01 attached hereto or as
otherwise permitted, required or specifically contemplated by this Agreement and
the Interim Operating Agreement or as otherwise consented to or approved by each
of the other Parties, during the period commencing on the date hereof and ending
on the Effective Date, it will operate or cause to be operated its Business
substantially as presently operated and only in the ordinary course (which shall
include the ordinary course payment of accounts payable and billing and
collection of accounts receivable consistent with the current operations of its
Business), and consistent with such operation, will use its reasonable best
efforts to maintain present business organizations and relationships with
persons having business dealings with its Business and to retain the services of
its key operating employees engaged in operating its Business (it being
understood and agreed that operation of the Businesses during the period
commencing on the date hereof and ending on the Effective Date in accordance
with the terms of the Interim Operating Agreement shall be in compliance with
the terms of this Section 5.01). Each of FAFCO and EXPERIAN hereby further
covenants and agrees that from the date hereof to the Effective Date, in
connection with the operation of its Business, except as provided in the
immediately preceding sentence, it will not, and it will not permit any of its
Subsidiaries to, without the consent of each of the other Parties (which consent
shall not unreasonably be withheld), (a) enter into any material transactions,
other than those in the ordinary course of its Business as theretofore conducted
and those set forth on Schedule 5.01 attached hereto, (b) create or otherwise
become liable with respect to money borrowed or purchase money indebted ness, or
voluntarily incur any other material liability or obligation (direct or
contingent), except liabilities in the ordinary course of the operation of its
Business, (c) increase the rate of compensation payable or to become payable to
any employee employed in its Business, who would receive, after giving effect to
such increase, aggregate compensation at an annual rate exceeding $300,000, or
make any material increase in any bonus, insurance, profit sharing or other
employee benefit plan, grant any general wage or salary increase, except as
required by amendments to plans applicable to its employees generally and which
are applicable to employees of its Business only as a consequence thereof, (d)
make any capital expenditures in excess of $500,000 individually or $1,000,000
in the aggregate, (e) terminate or waive any right of substantial value to its
Business, (f) make any material change in accounting methods except as required
by law or applicable generally accepted accounting principles, (g) settle,
compromise or admit liability in any material action, suit or proceeding at law
or equity or any material arbitration or any material administrative or other
proceeding before any administrative or governmental body in respect of its
Business or (h) agree to do any of the foregoing, whether or not in writing.
5.02. NEWCO Business Opportunities. Each of the Parties expressly
acknowledges that, as a result of the development of the RES Business and the
FAREISI Business, respectively, certain business opportunities may arise after
the execution of this Agreement but prior to the Effective Date that would be
within the scope of NEWCO's business (as described in the Operating Agreement).
If any business opportunity which, if the Operating Agreement were in
effect, would constitute a NEWCO Development Opportunity, arises prior to the
Effective Date, the Party to whom such business opportunity is presented
promptly shall notify the other Parties in writing of such business opportunity
and shall confer with the other Parties regarding whether or not such business
opportunity should be contributed to NEWCO on the Effective Date. If, however, a
business opportunity arises prior to the Effective Date which would not
constitute a NEWCO Development Opportunity, the Party to whom such business
opportunity is presented may, at its option, notify the other Parties in writing
of such business opportunity and, if such notice is delivered, shall confer with
the other Parties regarding whether or not such business opportunity should be
contributed to NEWCO on the Effective Date.
In either event, if the Parties agree that such business opportunity should
be contributed to NEWCO, then such business opportunity shall be contributed to
NEWCO on the Effective Date and the Parties shall adjust the principal amount of
the promissory notes to be payable by NEWCO to FAFCO or EXPERIAN, as the case
may be, as follows: (i) if such business opportunity is contributed to NEWCO on
the Effective Date by FAFCO or any FAFCO Member, then the principal amount of
the $25MM Note shall be increased by an amount equal to the fair market value of
any capital contributions and development costs made or incurred by FAFCO or any
of its Affiliates with respect to such opportunity prior to the Effective Date
and (ii) if such business opportunity is contributed to NEWCO on the Effective
Date by EXPERIAN, then the principal amount of the $3MM Note shall be increased
by an amount equal to the fair market value of capital contributions and other
development costs made or incurred by EXPERIAN or any of its Affiliates with
respect to such opportunity prior to the Effective Date. If the Parties cannot
agree within 20 days after the delivery of such notice on whether or not the
business opportunity should be contributed, then, notwithstanding anything to
the contrary contained in any Implementing Agreement, the Party possessing such
business opportunity shall be free to pursue such business opportunity in such
manner as such Party determines and neither NEWCO nor the other Parties shall
have any right, claim or interest in or to any revenues resulting therefrom.
5.03. Best Efforts. Except to the extent specifically provided in Section
5.04, each Party shall, and shall cause its respective Subsidiaries and
Affiliates to, cooperate and use its respective reasonable best efforts to take,
or cause to be taken, all appropriate action and to make, or cause to be made,
all filings necessary, proper or advisable under applicable laws and regulations
to consummate and make effective the transactions contemplated by this
Agreement, including, without limitation, its respective reasonable best efforts
to obtain, prior to the Closing, all Licenses, consents, approvals,
authorizations, qualifications and orders of governmental authorities and,
subject to the last sentence of Section 5.04(a), parties to contracts with or
affecting, in the case of EXPERIAN, the RES Business, and in the case of FAFCO,
FAREISI and the other FAFCO Members, the FAREISI Business, as are necessary for
consummation of the transactions contemplated by this Agreement and to fulfill
the conditions to the Closing; provided, that, except as otherwise specifically
- -------- required by this Agreement, no loan agreement or contract for borrowed
money shall be repaid except as currently required by its terms, in whole or in
part, and no contract shall be amended to increase the amount payable thereunder
or otherwise to be more burdensome to the RES Business or the FAREISI Business
in order to obtain any such consent, approval or authorization without first
obtaining the written approval of the other Parties and no Party shall be
required to make any cash payment, provide any guaranty or relinquish any
property or contractual rights to obtain any such consent, approval or
authorization except for filing fees and fees and expenses of attorneys,
accountants and other professional advisors and payments in accordance with the
terms of contracts in existence as of the date hereof.
5.04. Consents and Further Assurances.
(a) Subject to the proviso to Section 5.03, the Parties agree that they
will use their best efforts to obtain the written consent of any other necessary
party to the assignment of any contract, lease, commitment, sales order,
purchase order or undertaking constituting a part of any Interest to be
transferred hereunder and, to the extent that any such contract, lease,
commitment, sales order, purchase order or undertaking requiring such consent is
transferred or assigned pursuant to the terms of this Agreement without such
consent, the Parties will cooperate with each other and with NEWCO in any lawful
arrangement designed to provide each Party and NEWCO the benefits under any such
Interest. Notwithstanding Section 5.03 and any other provision of this Section
5.04(a) to the contrary, (i) none of FAFCO, FAREISI or any other FAFCO Member
shall be required to seek the consent to the transfer of the FAFCO Interests of
any party to a contract with FAFCO, FAREISI or any other FAFCO Member pursuant
to which a consent is required, provided that, in lieu of seeking and obtaining
any such required consent, FAFCO agrees to indemnify and hold NEWCO harmless
from all Losses suffered or paid, directly or indirectly, through application of
NEWCO's assets or otherwise, as a result of or arising out of the failure of
FAFCO, FAREISI or any other FAFCO Member to seek or obtain any such required
consent and (ii) FAFCO may request that EXPERIAN not seek the consent to the
transfer of the EXPERIAN Interests of any party to a contract with EXPERIAN
pursuant to which a consent is required, and, so long as FAFCO agrees to
indemnify and hold EXPERIAN harmless from all Losses suffered or paid, directly
or indirectly, through application of EXPERIAN's assets or otherwise, as a
result of or arising out of the failure of EXPERIAN to seek or obtain any such
required consent in accordance with the FAFCO request, EXPERIAN will not seek
the consent of such party to the transfer of the EXPERIAN Interests unless it
determines, in its sole and absolute discretion, that obtaining such consent is
in the best interests of its businesses other than the RES Business.
(b) Subject to the proviso to Section 5.03, on or after the Closing Date
and without further consideration, each Party 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 NEWCO or any other Party
may reasonably request for the more effective conveyance, assignment and
transfer to NEWCO of any of the Interests, and each Party shall lend its
assistance to NEWCO or any other Party in the collection and reduction to
possession of the Interests, in the exercise of rights with respect thereto and
otherwise in the effectuation of the intentions and purposes of this Agreement.
5.05. Notices of Certain Events. Each Party hereto shall promptly notify
the other Parties of:
(a) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement or the Implementing Agreements;
(b) any notice or other communication from any governmental entity in
connection with the transactions contemplated by this Agreement or the
Implementing Agreements;
(c) any actions, suits, claims (or to its knowledge, investigations)
or proceedings commenced or, to its knowledge threatened against, relating
to or involving or otherwise affecting the consummation of the transactions
contemplated by this Agreement or the Implementing Agreements; and
(d) such Party's obtaining knowledge of the occurrence, or failure to
occur, of any event which occurrence or failure to occur will be likely to
cause (i) any representation or warranty contained in this Agreement
(including, without limitation, the representations contained in Sections
3.03(b) and 4.03(b)), or in the Implementing Agreements to be untrue and
inaccurate in any material respect, or (ii) any material failure of any
Party to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it under this Agreement or the Implementing
Agreements; provided, that no such notification shall affect the
representations, warranties or obligations of the Parties or the conditions
to the obligations of the Parties hereunder or thereunder.
5.06. Access to Information Concerning Business and Records. During the
period commencing on the date hereof and ending on the Closing Date, each Party
shall, upon reasonable notice, afford to the other and the other's counsel,
accountants and other authorized representatives, full access during normal
business hours to the employees, properties, books and records of itself and its
Subsidiaries relating to the RES Business or the FAREISI Business, respectively,
in order that they may have the opportunity to make such reasonable
investigations as they shall desire of the affairs of each such business. Each
Party agrees to cause its officers and employees to furnish such additional
financial and operating data and other information and respond to such inquiries
concerning the RES Business or the FAREISI Business, respectively, as any other
Party shall from time to time reasonably request. Any such investigation or
review, however, shall not affect the representations and warranties made by the
Parties in this Agreement or any Implementing Agreement or any remedy for breach
of any such representations and warranties.
5.07. Exclusive Dealing. Until the Effective Date, neither FAFCO nor
EXPERIAN shall, directly or indirectly, take (and neither FAFCO nor EXPERIAN
shall authorize or permit its or its Subsidiaries' officers, directors,
employees, representatives, investment bankers, attorneys, accountants or other
agents, to so take) any action to encourage, solicit, initiate or, subject to
the fiduciary duties of its respective Board of Directors under applicable law
as advised by counsel, participate in any way in discussions or negotiations
with, or furnish any information to, any Person (other than the Parties hereto
or their respective officers, directors, representatives, agents, affiliates or
associates) in connection with any possible or proposed (a) merger or other
business combination, sale or other disposition of assets constituting the RES
Business or the FAREISI Business, as the case may be, (b) sale of shares of
capital stock if, as a result of such sale of shares of capital stock, an
EXPERIAN Change of Control or a FAFCO Change of Control would occur or (c)
similar transactions involving (i) in the case of EXPERIAN, the EXPERIAN
Interests or the RES Business and (ii) in the case of FAFCO, FAREISI or the
other FAFCO Members, the FAFCO Interests or the FAREISI Business; provided, that
- -------- nothing contained in this Section 5.07 shall restrict or prohibit any
disclosure by any Party that is required on the advice of counsel in any
document to be filed with the Commission after the date of this Agreement or any
disclosure that, in the opinion of the Chief Executive Officer of such Party on
advice of counsel, is otherwise required under applicable law. Each of FAFCO and
EXPERIAN will promptly communicate to the other Parties the terms of any
proposal or inquiry that it may receive in respect of any such transaction, or
of any such information requested from it or of any such negotiations or
discussions being sought to be initiated with it.
5.08. FAFCO Board Representation. So long as EXPERIAN shall own at least a
10% Membership Interest in NEWCO, FAFCO will recommend one nominee of EXPERIAN
to the FAFCO Board of Directors nominating committee as a candidate for election
to the Board of Directors of FAFCO.
5.09. Guarantees. If, in accordance with Section 4.03(l) of the Operating
Agreement, NEWCO requests that FAFCO and EXPERIAN provide a guaranty to a third
party in order to secure NEWCO's obligations to such third party, FAFCO and
EXPERIAN shall provide such guaranty on a several basis, with FAFCO guaranteeing
that portion of NEWCO's obligations equal to the sum of the Membership Interests
held by the FAFCO Members, and EXPERIAN guaranteeing that portion of NEWCO's
obligations equal to its Membership Interest.
5.10. Certain Fees. NEWCO, by its execution of the acknowledgment on the
signature page hereto, agrees to pay the following fees:
(a) so long as any FAFCO Member is a Member of NEWCO, a fee to FAFCO in
respect of management services provided by FAFCO from time to time by NEWCO in
an amount equal to 0.80% of NEWCO's gross revenues, as determined in accordance
with US GAAP, which fee shall be paid in arrears for each calendar quarter
within 30 days of the conclusion of the previous quarter; and
(b) so long as EXPERIAN is a Member of NEWCO, a fee to EXPERIAN in respect
of management services provided by EXPERIAN from time to time by NEWCO in an
amount equal to 0.20% of NEWCO's gross revenues, as determined in accordance
with US GAAP, less the amount of any royalty payments payable by ---- NEWCO
pursuant to Section 3 of the Trademark License Agreement, which fee, if any,
shall be paid in arrears for each calendar quarter within 30 days of the
conclusion of the previous quarter.
5.11. Certain Covenants. (a) FAREISI Subsidiary 8 hereby covenants and
agrees that, upon the request of EXPERIAN at any time prior to the Effective
Date, it shall transfer and convey to NEWCO on the Effective Date or promptly
thereafter, all of the real property (or any portion thereof so requested) owned
by it and listed under its name on Part 1(I) of Schedule 2.02(a) attached
hereto, free and clear of all Encumbrances, except for FAREISI Permitted
Encumbrances and, in connection therewith, it shall deliver to NEWCO such deeds
in recordable form, endorsements, assurances, conveyances, releases, discharges,
assignments, certificates or other instruments of transfer and conveyance, duly
executed by FAREISI Subsidiary 8 or such other Person, as the case may be, as
NEWCO and/or EXPERIAN reasonably deems necessary to vest in NEWCO all right,
title and interest in and to such real property, free and clear of any
Encumbrance of any kind, except FAREISI Permitted Encumbrances.
(b) FAREISI Subsidiary 7 hereby covenants and agrees that, upon the request
of EXPERIAN at any time prior to the Effective Date, it shall transfer and
convey to NEWCO on the Effective Date or promptly thereafter, all of the assets
(or any portion thereof so requested) owned by it and listed under its name on
Part 1(H) of Schedule 2.02(a) attached hereto, free and clear of all
Encumbrances, except for FAREISI Permitted Encumbrances and, in connection
therewith, it shall deliver to NEWCO such endorsements, assurances, conveyances,
releases, discharges, assignments, certificates or other instruments of transfer
and conveyance, duly executed by FAREISI Subsidiary 7 or such other Person, as
the case may be, as NEWCO and/or EXPERIAN reasonably deems necessary to vest in
NEWCO all right, title and interest in and to such assets, free and clear of any
Encumbrance of any kind, except FAREISI Permitted Encumbrances.
ARTICLE VI
EXPERIAN PUT OPTION; FAFCO CALL OPTION
6.01. EXPERIAN Put Option.
(a) EXPERIAN shall have the right, at any one time (and only once)
following the Trigger Date, so long as FAFCO has not exercised the Call Option
pursuant to Section 6.02 and so long as the value of the Membership Interest
then owned by EXPERIAN is greater than $80,000,000 and less than $160,000,000
(such value determined, as at such date, in accordance with the formula set
forth in the last sentence of Section 6.01(b) below), to sell to FAFCO (the "Put
Option") 100% of the Membership Interest then owned by EXPERIAN by delivering to
FAFCO a written notice specifying its election to exercise the Put Option
hereunder (the "Put Election Notice"). At any time thereafter as FAFCO shall
elect, FAFCO shall deliver to EXPERIAN a written notice specifying (i) the date,
not later than 30 days after the date of such notice to EXPERIAN, on which the
Put Option shall be exercised (the "Put Exercise Date"), (ii) the aggregate Put
Price determined in accordance with Section 6.01(b) below, and (iii) FAFCO's
election, in its sole and unfettered discretion, to pay the Put Price (w) in
cash, (x) by delivering to EXPERIAN its unsecured promissory note in an
aggregate principal amount equal to the Put Price, which promissory note shall
have a three year maturity, shall bear interest at the Prime Rate, shall be
payable in equal quarterly installments of principal, together with accrued
interest thereon, shall be subject to acceleration upon default and shall
otherwise be in a form reasonably acceptable to EXPERIAN, (y) by delivering to
EXPERIAN unrestricted registered shares of FAFCO common stock then listed on a
Major Exchange and having a value (determined by reference to the closing price
of the FAFCO common stock on the New York Stock Exchange (or, if not listed
thereon, on such other securities exchange or quotation system upon which such
common stock is listed or quoted) for the Business Day immediately preceding the
Put Exercise Date) on the Put Exercise Date equal to the Put Price, provided
- -------- that if the Put Exercise Date occurs at any time within the 120-day
period following the date of the Put Election Notice, then FAFCO may deliver to
EXPERIAN unregistered shares of FAFCO common stock having a value as aforesaid
together with an undertaking (1) to cause the registration of such FAFCO common
stock under the Securities Act and the listing of such stock on a Major Exchange
within the 90-day period following the Put Exercise Date and (2) to deliver to
EXPERIAN on the date the registration and listing of such FAFCO common stock is
effective (the "Registration Date"), in the event that the Put Price exceeds the
value of such registered FAFCO common stock (determined by reference to the
closing price of the FAFCO common stock on the New York Stock Exchange (or, if
not listed thereon, on such other securities exchange or quotation system upon
which such common stock is listed or quoted) for the Business Day immediately
preceding the Registration Date) on the Registration Date, its unsecured
promissory note in a principal amount equal to such excess, which promissory
note shall have the same terms as set forth in clause (x) above and shall
otherwise be in a form reasonably acceptable to EXPERIAN, or (z) any combination
of cash and FAFCO common stock in accordance with the foregoing; provided, that
- -------- in no event shall FAFCO specify a Put Exercise Date occurring later
than two years after the date of delivery of the Put Election Notice; provided,
further, -------- ------- that in the event that FAFCO fails to deliver such
written notice, the Put Exercise Date shall occur on the date (the "End Date")
which is two years after the date of delivery of the Put Election Notice (it
being understood and agreed that EXPERIAN may, not earlier than 30 days prior to
the End Date, request that FAFCO specify in writing the consideration that FAFCO
will use to pay the Put Price and, unless FAFCO notifies EXPERIAN of its
election within 10 days after its receipt of EXPERIAN's request, FAFCO shall be
deemed to have elected to pay the Put Price in cash).
(b) On the Put Exercise Date, (i) EXPERIAN shall deliver to FAFCO the
certificates, if any, properly endorsed, representing 100% of the Membership
Interest of EXPERIAN, together with such other duly executed instruments of
transfer reasonably requested by FAFCO to give effect to the purchase and sale
of EXPERIAN's Membership Interest pursuant to this Section 6.01, (ii) FAFCO
shall deliver to EXPERIAN, in immediately available funds or as otherwise
permitted in paragraph (a) above, the applicable Put Price, (iii) EXPERIAN shall
be released from, or otherwise indemnified to its reasonable satisfaction
against, any liabilities in respect of guarantees provided by EXPERIAN in
accordance with Section 5.09 and (iv) any and all indebtedness of NEWCO to
EXPERIAN shall be paid to NEWCO in immediately available funds. For purposes of
this Section 6.01(b), the "Put Price" shall be an amount equal to (A)(1) the
Percentage Interest of EXPERIAN subject to the Put Option multiplied by (2) the
- ---------- -- product of (I) the average annualized Adjusted Earnings for the
eight fiscal quarters immediately preceding the Notice Date for which financial
information has been reported multiplied by (II) 12.5; plus (B) any
distributions on the ---------- -- ---- Membership Interest of EXPERIAN which
have been declared or have accrued but have not been paid as of the Put Exercise
Date; provided that, in the event that -------- the Put Price as determined in
accordance with the foregoing formula is less than $80,000,000, is understood
and agreed that the Put Price shall be $80,000,000.
6.02. FAFCO Call Option.
(a) FAFCO shall have the right, at any one time (and only once) following
the Trigger Date, so long as EXPERIAN has not exercised the Put Option pursuant
to Section 6.01, to purchase from EXPERIAN (the "Call Option") 100% of the
Membership Interest then owned by EXPERIAN by delivering to EXPERIAN a written
notice specifying its election to exercise the Call Option hereunder (the "Call
Election Notice"). At any time thereafter as EXPERIAN shall elect, EXPERIAN
shall deliver to FAFCO a written notice specifying (i) the date, not later than
30 days after the date of such notice to FAFCO, on which the Call Option shall
be exercised (the "Call Exercise Date") and (ii) the Call Price; provided, that
- -------- in no event shall EXPERIAN specify a Call Exercise Date occurring later
than two years after the date of delivery of the Call Election Notice; provided,
further, -------- ------- that in the event that EXPERIAN fails to deliver such
written notice, the Call Exercise Date shall occur on the date which is two
years after the date of delivery of the Call Election Notice.
(b) On the Call Exercise Date (i) EXPERIAN shall deliver to FAFCO the
certificates, if any, properly endorsed, representing 100% of the Membership
Interest of EXPERIAN, together with such other duly executed instruments of
transfer reasonably requested by FAFCO to give effect to the purchase and sale
of EXPERIAN's Membership Interest pursuant to this Section 6.02, (ii) FAFCO
shall deliver to EXPERIAN, in immediately available funds, the applicable Call
Price in cash, (iii) EXPERIAN shall be released from, or otherwise indemnified
to its reasonable satisfaction against, any liabilities in respect of guarantees
provided by EXPERIAN in accordance with Section 5.09 and (iv) any and all
indebtedness of NEWCO to EXPERIAN shall be paid to NEWCO in immediately
available funds. For purposes of this Section 6.02(b) the "Call Price" shall be
an amount equal to (A) (1) the Percentage Interest of EXPERIAN subject to the
Call Option multiplied by (2) the product of (I) the average annualized Adjusted
Earnings for the eight fiscal quarters immediately preceding the Notice Date
multiplied by (II) 12.5; plus (B) any distributions on the Membership Interest
of EXPERIAN which have been declared or have accrued but have not been paid as
of the Call Exercise Date; provided that, in the event that the Call Price as
determined in accordance with the foregoing formula is less than $80,000,000, is
understood and agreed that the Call Price shall be $80,000,000.
(c) Notwithstanding anything to the contrary contained in this Section
6.02, in the event that the Experian Managers (as such term is defined in the
Operating Agreement) fail to consent to any proposed acquisition described in
clause (a) of such Section 4.03 of the Operating Agreement, FAFCO shall have the
right, for the 90-day period immediately following the date upon which such
consent was withheld, to exercise the Call Option with respect to all (but not
less than all) of the Membership Interest then owned by EXPERIAN in accordance
with the provisions of Section 6.02(a) and (b) above, without regard to the two-
year period provided for therein; provided that if such Call Option is exercised
at any time prior to the completion of eight fiscal quarters by NEWCO, the
applicable Call Price shall be determined utilizing the average annualized
Adjusted Earnings for that number of fiscal quarters completed prior to the
Notice Date; provided, further, that the applicable Call Price shall be paid in
cash in immediately available funds.
6.03. FAFCO Change of Control Put Option. Promptly (and in any event within
five (5) days) following the occurrence of a FAFCO Change of Control, FAFCO
shall give written notice thereof (a "FAFCO Change of Control Notice") to
EXPERIAN and NEWCO. From the occurrence of any such FAFCO Change of Control
through the thirty (30) day period following EXPERIAN's receipt of a FAFCO
Change of Control Notice, EXPERIAN shall have the right to sell to FAFCO 100% of
the Membership Interest then owned by EXPERIAN by delivering to FAFCO and NEWCO
written notice thereof specifying (i) EXPERIAN's election to sell to FAFCO 100%
of its Membership Interest pursuant to this Section 6.03 and (ii) the cash price
at which such Membership Interest is to be purchased (which price shall be
determined, as of the close of business on the business day immediately
preceding the date on which such FAFCO Change of Control occurred, in accordance
with the formula set forth in the last sentence of Section 6.01(b) above and
without regard to the proviso thereto). In the event EXPERIAN elects to sell its
Membership Interest pursuant to this Section 6.03, EXPERIAN shall deliver the
certificates, if any, representing such Membership Interest, in proper form for
transfer (together with such other duly executed instruments of transfer
reasonably requested by FAFCO to give effect to the purchase and sale of
EXPERIAN's Membership Interest pursuant to this Section 6.03), to FAFCO against
receipt of the purchase price therefor in immediately available funds no later
than five (5) days after such election is made.
6.04. EXPERIAN Change of Control Call Option. Promptly (and in any event
within five (5) days) following the occurrence of an EXPERIAN Change of Control,
EXPERIAN shall give written notice thereof (an "EXPERIAN Change of Control
Notice") to FAFCO and NEWCO. From the occurrence of any such EXPERIAN Change of
Control through the thirty (30) day period following FAFCO's receipt of an
EXPERIAN Change of Control Notice, FAFCO shall have the right to purchase from
EXPERIAN 100% of the Membership Interest then owned by EXPERIAN by delivering to
EXPERIAN and NEWCO written notice thereof specifying (i) FAFCO's election to
purchase from EXPERIAN 100% of its Membership Interest pursuant to this Section
6.04 and (ii) the cash price at which such Membership Interest is to be
purchased (which price shall be determined, as of the close of business on the
business day immediately preceding the date on which such EXPERIAN Change of
Control occurred, in accordance with the formula set forth in the last sentence
of Section 6.02(b) above and without regard to the proviso thereto). In the
event FAFCO elects to purchase from EXPERIAN its Membership Interest pursuant to
this Section 6.04, EXPERIAN shall deliver the certificates, if any, representing
such Membership Interest, in proper form for transfer (together with such other
duly executed instruments of transfer reasonably requested by FAFCO to give
effect to the purchase and sale of EXPERIAN's Membership Interest pursuant to
this Section 6.03), to FAFCO against receipt of the purchase price therefor in
immediately available funds no later than five (5) days after such election is
made.
6.05. Extraordinary Put Options.
(a) Notwithstanding anything to the contrary contained in this Article VI,
in the event that on the third anniversary of the Closing Date the value of the
Membership Interest then owned by EXPERIAN (such value determined, as at such
date, in accordance with the formula set forth in the last sentence of Section
6.01(b) above) is less than $80,000,000 solely as a result of damages, costs,
payments, losses, interest, fines and penalties suffered or paid by NEWCO as a
result of or arising out of the matters set forth in Items 2, 3 and 4 on
Schedule 4.09 hereto, EXPERIAN shall have the right, at any one time during the
forty-five (45) day period thereafter, so long as FAFCO has not exercised the
Call Option pursuant to Section 6.04, to sell to FAFCO 100% of the Membership
Interest then owned by EXPERIAN by delivering to FAFCO a written notice
specifying (i) EXPERIAN's election to sell to FAFCO 100% of its Membership
Interest pursuant to this Section 6.05(a) and (ii) the date, not earlier than 45
days and not later than 60 days after the date of such notice, on which the sale
hereunder shall be exercised. Upon the date specified by EXPERIAN in accordance
with clause (ii) of the preceding sentence, (w) FAFCO shall deliver to EXPERIAN
the cash purchase price in the amount of $80,000,000 in immediately available
funds, (x) EXPERIAN shall deliver to FAFCO the certificates, if any,
representing 100% of the Membership Interest then owned by EXPERIAN, in proper
form for transfer, together with such other duly executed instruments of
transfer reasonably requested by FAFCO to give effect to the purchase and sale
of EXPERIAN's Membership Interest pursuant to this Section 6.05(a), (y) EXPERIAN
shall be released from, or otherwise indemnified to its reasonable satisfaction
against, any liabilities in respect of guarantees provided by EXPERIAN in
accordance with Section 5.09 and (z) any and all indebtedness of NEWCO to
EXPERIAN shall be paid to NEWCO in immediately available funds.
(b) Notwithstanding anything to the contrary contained in this Article VI,
in the event that at any time on of after the Trigger Date the value of the
Membership Interest then owned by EXPERIAN (such value determined, as at such
date, in accordance with the formula set forth in the last sentence of Section
6.01(b) above) is less than $80,000,000 solely as a result of damages, costs,
payments, losses, interest, fines and penalties suffered or paid by NEWCO as a
result of or arising out of the matters (or any of them) set forth in Items 2, 3
and 4 on Schedule 4.09 hereto, EXPERIAN shall have the right, at any one time
(and only once), so long as FAFCO has not exercised the Call Option pursuant to
Section 6.02 or 6.04, to sell to FAFCO 100% of the Membership Interest then
owned by EXPERIAN by delivering to FAFCO a written notice specifying (i)
EXPERIAN's election to sell to FAFCO 100% of its Membership Interest pursuant to
this Section 6.05(b) and (ii) the date, not earlier than 45 days and not later
than 60 days after the date of such notice, on which the sale hereunder shall be
exercised. Upon the date specified by EXPERIAN in accordance with clause (ii) of
the preceding sentence, (w) FAFCO shall deliver to EXPERIAN the cash purchase
price in the amount of $80,000,000 in immediately available funds, (x) EXPERIAN
shall deliver to FAFCO the certificates, if any, representing 100% of the
Membership Interest then owned by EXPERIAN, in proper form for transfer,
together with such other duly executed instruments of transfer reasonably
requested by FAFCO to give effect to the purchase and sale of EXPERIAN's
Membership Interest pursuant to this Section 6.05(b), (y) EXPERIAN shall be
released from, or otherwise indemnified to its reasonable satisfaction against,
any liabilities in respect of guarantees provided by EXPERIAN in accordance with
Section 5.09 and (z) any and all indebtedness of NEWCO to EXPERIAN shall be paid
to NEWCO in immediately available funds.
6.06. Put/Call Adjustment Upon a Major Acquisition. In the event that NEWCO
consummates any acquisition of any business of another Person, or of any
property, securities, rights or other assets in one or a series of related
transactions for consideration (including, without limitation, the reasonably
estimated present value of deferred purchase compensation) exceeding, in the
aggregate, US $50,000,000, each of the Parties hereto agrees to negotiate in
good faith to amend, modify or supplement the provisions of this Article VI
(which may include adjusting the Put Price, the Call Price, the Trigger Date,
the Put Option ceiling set forth in Section 6.01(c) and the Call Option floor
set forth in Section 6.02(c)), taking into account any such acquisition and the
accounting treatment thereof, in order to give effect to the Put Option and the
Call Option and each of the parties respective rights relating thereto on
economic terms comparable to those set forth herein.
6.07. General Put/Call Provisions.
(a) In the event NEWCO is subject to any voluntary or involuntary
bankruptcy proceeding at any time after the Trigger Date (unless, in the case of
any involuntary proceeding, such proceeding is dismissed within 60 days), the
Put Option and the Call Option, respectively, shall terminate.
(b) The place of payment of the Put Price or the Call Price, as the case
may be, shall be the principal offices of NEWCO or at such other location as
shall be agreed upon in writing by EXPERIAN and FAFCO no later than 3 Business
Days prior to the time of payment.
(c) For purposes of this Article VI, a "Notice Date" shall be the date on
which any notice hereunder specifying the Put Exercise Date or the Call Exercise
Date, as the case may be, is given or deemed given in accordance with the
provisions of Section 10.06.
6.08. Dispute Resolution.
(a) In the event of any dispute arising out of or relating to this Article
VI (including, without limitation, any dispute involving (i) the determination
of the Put Price, the Call Price or any other amount (including, without
limitation, the Adjusted Earnings upon which the Put Price, the Call Price or
any such other amount is based) to be paid in connection with the purchase of
Experian's Membership Interest pursuant to any provision of this Article VI or
(ii) appropriate amendments, modifications or supplements to the provisions of
this Article VI in accordance with Section 6.06), FAFCO or EXPERIAN, as the case
may be, shall provide written notice to the other party of the dispute, which
notice shall specify the notifying party's position. Each of FAFCO and EXPERIAN
agree to attempt in good faith to resolve any such dispute within 30 days
following the receipt of the written notice thereof.
(b) If the dispute cannot be resolved within the 30 day period described in
Section 6.08(a) above, either FAFCO or EXPERIAN may, by delivering written
notice to the other, submit any such dispute to the following resolution
procedure. A panel (the "Panel") shall be created to resolve the dispute and
shall be composed of three members who shall be appointed as follows: (i) one
Panel member shall be appointed by each of FAFCO and EXPERIAN as designated by
written notice to the other within 15 days after receipt of the notice
submitting the disputes to the resolution procedure and (ii) the third, who
shall serve as chairperson, shall be appointed by the two Panel members so
appointed pursuant to preceding clause (i) within 10 days after the second
appointment pursuant to such clause (i). If a Person, or Persons, entitled to
appoint a Panel member fails to appoint such Panel member within the time period
permitted therefor, such Panel member shall at the written request of either
Party be appointed by the American Arbitration Association. The date on which
all Panel members shall have been selected is hereinafter referred to as the
"Panel Date". The place of the dispute resolution proceedings and all other
matters to be determined by the Panel will be determined by the majority vote of
the Panel. Except as provided in Section 6.08(c) below, each of FAFCO and
EXPERIAN shall bear their respective costs and expenses (including attorneys'
fees) in connection with the dispute resolution proceedings and shall be
responsible for one-half of the fees, costs and expenses of the Panel.
(c) The Panel shall render a written decision with reasons therefor within
30 days of the Panel Date. The Panel may award fees, costs and expenses
(including attorneys' fees and Panel costs) to the prevailing Party and may
award interest on any amount determined to be owing. Any determination by the
Panel shall be final and binding upon the Parties and may be enforced by any
court of competent jurisdiction in the same manner as a judgment in such court.
(d) Notwithstanding anything to the contrary contained in this Section
6.08, each of FAFCO and EXPERIAN hereby covenant and agree that, in the event of
a dispute involving the determination of the Put Price, the Call Price or any
other amount to be paid in connection with the purchase of Experian's Membership
Interest pursuant to any provision of this Article VI, (i) each such Party
shall, within the time limit prescribed in Section 6.08(b)(i) above, appoint a
representative from its independent certified public accountants as its Panel
member and (ii) the third Panel member shall, within the time limit prescribed
in Section 6.08(b)(ii) above, be appointed by the two Panel members appointed by
the Parties pursuant to clause (i) of this Section 6.08(d) from a firm of
independent certified public accountants of nationally recognized standing. If a
Person, or Persons, entitled to appoint a Panel member pursuant to this Section
6.08(d) failsto appoint such Panel member within the time period permitted
therefor, such Panel member shall at the written request of either Party be
appointed by the American Arbitration Association.
ARTICLE VII
CONDITIONS PRECEDENT
7.01. Conditions Precedent to the Obligations of Each of the Parties. The
obligation of each of the Parties to consummate the transactions contemplated
hereby is subject to the satisfaction or waiver by such Party on or before the
Closing, of the following conditions precedent:
(a) Formation of NEWCO.
(i) NEWCO shall have been duly established under the laws of the
State of California and, in connection therewith, the Articles of
Organization of NEWCO and any amendments thereto shall have been filed
with the Secretary of State of the State of California; and
(ii) On or prior to the Closing Date, the Management Committee of
NEWCO shall be appointed in accordance with the terms of the Operating
Agreement.
(b) No Injunction. No preliminary or permanent injunction or other
order shall have been issued by any court or by any governmental or
regulatory agency, body or authority which prohibits the consummation of
the transactions contemplated by this Agreement or the Implementing
Agreements or has the effect of making the transactions contemplated by
this Agreement or the Implementing Agreements illegal and which is in
effect at the Closing Date (each Party agreeing to use its reasonable best
efforts to have any such injunction or order lifted).
(c) Statutes. No statute, rule, regulation, executive order, decree or
order of any kind shall have been enacted, entered, promulgated or enforced
by any court or governmental authority which prohibits the consummation of
the transactions contemplated by this Agreement or the Implementing
Agreements or has the effect of making the transactions contemplated by
this Agreement or the Implementing Agreements illegal.
(d) Implementing Agreements; Assignments. On or before the Closing
Date, the following agreements (all such agreements, the "Implementing
Agreements") shall have been duly executed and delivered by each of the
respective parties thereto:
(i) the Operating Agreement in substantially the form of Exhibit
B;
(ii) the Experian Transition Agreement in substantially the form
of Exhibit C-1;
(iii) the FAFCO Transition Agreement in substantially the form of
Exhibit C-2;
(iv) the Data License Agreement in substantially the form of
Exhibit D;
(v) the EXPERIAN/CREDCO Agreement in substantially the form of
Exhibit E;
(vi) the Trademark License Agreement in substantially the form of
Exhibit F; and
(vii) the Interim Operating Agreement in substantially the form
of Exhibit G.
(e) Assumption of FAFCO Notes. NEWCO shall have duly executed and
delivered to FAFCO an assumption agreement, in form and substance
reasonably satisfactory to FAFCO and EXPERIAN, pursuant to which NEWCO
shall assume all liabilities of FAREISI under (i) that certain promissory
note, dated November 19, 1997, made by FAREISI and payable to FAFCO in the
principal amount of $10,000,000 and (ii) that certain promissory note,
dated November 30, 1997, made by FAREISI and payable to FAFCO in the
principal amount of $25,000,000 (the "$25MM Note"), and FAFCO shall have
duly executed and delivered to NEWCO an acknowledgement, in form and
substance reasonably satisfactory to NEWCO and EXPERIAN, pursuant to which
FAFCO shall acknowledge that all rights of FAFCO to amounts payable by
NEWCO under such $25,000,000 promissory note shall be subject and
subordinate to the prior payment in full of all amounts payable by NEWCO to
EXPERIAN under the $3MM Note.
(f) Chase Waiver. The Chase Manhattan Bank ("Chase") shall have
delivered to FAFCO its written waiver of the covenant(s) contained in its
agreement(s) with FAFCO that limit or prohibit FAFCO from consummating the
transactions contemplated by this Agreement and the Implementing
Agreements.
7.02. Conditions Precedent to the Obligations of the FAFCO Parties. The
obligation of each of FAFCO, FAREISI and the other FAFCO Members to consummate
the transactions contemplated hereby and in the Implementing Agreements is
additionally subject to the satisfaction or waiver on or before the Closing Date
of the following conditions precedent (other than the condition precedent
specified in clause (h) below which shall be satisfied at or prior to the
Effective Time):
(a) Accuracy of Representations and Warranties. All representations
and warranties of EXPERIAN contained herein and in each of the Implementing
Agreements shall be true and correct in all material respects as of the
date hereof and at and as of the Closing Date, with the same force and
effect as though made on and as of the Closing Date.
(b) Performance by EXPERIAN. EXPERIAN shall have performed in all
material respects all obligations and agreements, and complied in all
material respects with all covenants and conditions, contained in this
Agreement and the Implementing Agreements to be performed or complied with
by it prior to the Closing Date.
(c) Consents and Approvals. All consents, approvals and other action
by, all notices to and all filings with all Persons, including all courts
and administrative and governmental bodies that are required to have been
obtained, taken or made to consummate the transactions contemplated by this
Agreement and the Implementing Agreements (including those disclosed in
Schedule 3.08 attached hereto) shall have been obtained, undertaken or
made, except for such consents, approvals, notices and filings, the failure
to obtain which would not have a Material Adverse Effect on NEWCO after
giving effect to the transactions contemplated hereby and by the
Implementing Agreements.
(d) No Material Adverse Effect. Prior to the Closing, no event shall
have occurred or failed to occur, which occurrence, or failure to occur, as
the case may be, has had or is reasonably likely to have a Material Adverse
Effect on the EXPERIAN Interests or the RES Business, taken as a whole,
whether as a result of any legislative or regulatory change, revocation of
any license or rights to do business, fire, explosion, accident, casualty,
labor trouble, flood, drought, riot, storm, condemnation or act of God or
other public force or otherwise.
(e) Good Standing and Other Certificates. EXPERIAN shall have
delivered to FAFCO (i) copies of EXPERIAN's charter or similar
organizational documents, including all amendments thereto, in each case
certified by the appropriate official of their respective jurisdiction of
organization, (ii) a certificate from the appropriate official of their
respective jurisdictions of organization to the effect that EXPERIAN is in
good standing or subsisting in such jurisdiction and listing all charter or
similar organizational documents of EXPERIAN on file and (iii) a
certificate as to the tax status of EXPERIAN from the appropriate official
in its respective jurisdiction of organization.
(f) Officer's Certificate. EXPERIAN shall have delivered to FAFCO a
certificate of the President or any Vice President of EXPERIAN, dated the
Closing Date certifying that the conditions specified in Sections 7.01(b),
7.02(a), 7.02(b) and 7.02(d) have been satisfied.
(g) Cash Transfer. At or before the Effective Time, EXPERIAN shall
have delivered US $10,000,000 to NEWCO by wire transfer of immediately
available funds to an account designated by NEWCO.
(h) Due Diligence Completed. On or prior to the Closing Date, FAFCO
shall have completed its due diligence review of the RES Business and shall
be satisfied, it its sole and unfettered discretion, with all aspects
thereof.
(i) Proceedings. All proceedings to be taken in connection with the
transactions contemplated by this Agreement and all documents incident
thereto shall be satisfactory in form and substance to FAFCO and its
counsel, and FAFCO shall have received copies of all such documents and
other evidences as it or its counsel may reasonably request in order to
establish the consummation of such transactions and the taking of all
proceedings in connection therewith.
7.03. Conditions Precedent to the Obligations of EXPERIAN. The obligation
of EXPERIAN to consummate the transactions contemplated hereby and in the
Implementing Agreements is additionally subject to the satisfaction, at or
before the Closing, of the following conditions precedent:
(a) Accuracy of Representations and Warranties. All representations
and warranties of FAFCO, FAREISI and each of the other FAFCO Members
contained herein, and in each of the Implementing Agreements, shall be true
and correct in all material respects as of the date hereof and on and as of
the Closing Date, with the same force and effect as though made on and as
of the Closing Date.
(b) Performance by the FAFCO Parties. Each of FAFCO, FAREISI and each
of the other FAFCO Members shall have performed in all material respects
all obligations and agreements, and complied in all material respects with
all covenants and conditions, contained in this Agreement and the
Implementing Agreements to be performed or complied with by it prior to the
Closing Date.
(c) Consents and Approvals. All consents, approvals and other action
by, all notices to and all filings with all Persons, including all courts
and administrative and governmental bodies that are required to have been
obtained, taken or made to consummate the transactions contemplated by this
Agreement and the Implementing Agreements (including those disclosed in
Schedule 4.08 attached hereto) shall have been obtained, undertaken or
made, except for such consents, approvals, notices and filings, the failure
to obtain which (i) would not have a Material Adverse Effect on NEWCO,
after giving effect to the transactions contemplated hereby and by the
Implementing Agreements and/or (ii) is the subject of the indemnification
obligation of FAFCO contained in Section 5.04(a).
(d) No Material Adverse Effect. Prior to the Closing Date no event
shall have occurred or failed to occur, which occurrence, or failure to
occur, as the case may be, has had, or is reasonably likely to have, a
Material Adverse Effect on the FAFCO Interests or the FAREISI Business,
taken as a whole, whether as a result of any legislative or regulatory
change, revocation of any license or rights to do business, fire,
explosion, accident, casualty, labor trouble, flood, drought, riot, storm,
condemnation or act of God or other public force or otherwise.
(e) Charter Documents; Good Standing and Other Certificates. FAFCO
shall have delivered to EXPERIAN (i) copies of FAFCO'S charter or similar
organizational documents and the charter or similar organizational
documents of FAREISI and each of the other FAFCO Members, including all
amendments thereto, in each case certified by the appropriate official of
its jurisdiction of organization, (ii) a certificate from the appropriate
official of their respective jurisdictions of organization to the effect
that each of FAFCO, FAREISI and each of the other FAFCO Members are in good
standing or subsisting in such jurisdiction and listing all charter or
similar organizational documents of FAFCO, FAREISI and each of the other
FAFCO Members on file and (iii) a certificate as to the tax status of each
of FAFCO, FAREISI and each of the other FAFCO Members from the appropriate
official in its respective jurisdiction of organization.
(f) Officer's Certificate. FAFCO shall have delivered to EXPERIAN a
certificate of the President or any Vice President of FAFCO, dated the
Closing Date certifying that the conditions set forth in Sections 7.01(b),
7.03(a), 7.03(b) and 7.03(d) have been satisfied.
(g) EXPERIAN Note. EXPERIAN shall have received the $3MM Note, duly
authorized and executed by NEWCO and dated the Effective Date.
(h) Due Diligence Completed. On or prior to the Closing Date, EXPERIAN
shall have completed its due diligence review of the FAREISI Business and
shall be satisfied, it its sole and unfettered discretion, with all aspects
thereof.
(i) Proceedings. All proceedings to be taken in connection with the
transactions contemplated by this Agreement and all documents incident
thereto shall be satisfactory in form and substance to EXPERIAN and its
counsel, and EXPERIAN shall have received copies of all such documents and
other evidences as it or its counsel may reasonably request in order to
establish the consummation of such transactions and the taking of all
proceedings in connection therewith.
ARTICLE VII
SURVIVAL OF REPRESENTATION; INDEMNIFICATION
8.01. Survival of Representations. The respective representations and
warranties of the Parties hereto contained in this Agreement or in any Schedule,
Exhibit or certificate delivered together herewith or pursuant hereto shall
survive until January 1, 1999; provided, that the representations contained in
Sections 3.10 and 4.10 shall survive until the applicable statutes of
limitations under the Code have expired; provided further, that the obligations
to indemnify specified in Section 8.02 hereof shall not terminate at the time
provided above if, prior to such time, a notice of claim relating to Losses
specifying in detail the nature thereof (although the amount of Losses, if not
yet determinable, need not be specified) has been given to FAFCO or EXPERIAN, as
the case may be; and provided further, that the obligations to indemnify
specified in Section 8.03 hereof shall not terminate until such time as the
liability for Taxes of NEWCO and each Party hereto has been conclusively
determined.
8.02. Indemnification.
(a) The EXPERIAN Parties and the FAFCO Parties agree to indemnify and hold
NEWCO and each other Party harmless from all claims, expenses, obligations,
damages, costs, payments, liabilities, losses, interest, fines and penalties,
including, without limitation, costs and expenses of litigation (including costs
of investigation), reasonable attorney's fees and reasonable consultants' fees,
but excluding any special or consequential or indirect damages (collectively,
"Losses") suffered or paid, directly or indirectly, through application of
NEWCO's or the other indemnified party's assets or otherwise, as a result of or
arising out of the failure of any representation and warranty contained in this
Agreement made by the FAFCO Parties or the EXPERIAN Parties, as the case may be,
to be true and correct in all material respects as of the date of this Agreement
and as of the Closing Date; it being understood that NEWCO's right to
indemnification under this Section 8.02 shall terminate at such time as FAFCO's
and EXPERIAN's rights under this Section 8.02 shall terminate.
(b) Each Party's and NEWCO's right to indemnification pursuant to this
Section 8.02 shall not be limited in amount, except that each Party shall only
have liability in respect of any Losses in excess of $1,000,000 in the
aggregate.
8.03. Post-Effective-Time Tax Indemnification.
(a) All Taxes relating or attributable to the RES Business and the FAREISI
Business (other than Transactional Taxes) ("Indemnifiable Taxes") for all
periods from or after the Effective Time shall be for the account of NEWCO.
(b) The Parties agree that they shall take all necessary action to cause
NEWCO to indemnify and hold the Parties harmless from all Indemnifiable Taxes
relating or attributable to the RES Business and the FAREISI Business for all
periods from or after the Effective Time, through application of NEWCO's assets
or otherwise.
(c) Upon signing the acknowledgment required by Section 10.08(b) hereof,
and as partial consideration for receiving the benefits of this Agreement, NEWCO
shall become bound by the obligations of Section 5.10 and this Section 8.03 as
if a party hereto.
ARTICLE IX
TERMINATION
9.01. Events of Termination. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Closing by mutual consent of the Parties.
9.02. Effect of Termination. In the event that this Agreement shall be
terminated pursuant to Section 9.01, all further obligations of the Parties
hereto under this Agreement shall terminate without further liability or
obligation of either Party to the other Parties hereunder; provided, however,
that no Party shall be released from liability hereunder if this Agreement is
terminated and the transactions abandoned by reason of (i) willful failure of
such Party to have performed its obligations hereunder or (ii) any knowing
misrepresentation made by such Party of any matter set forth herein.
ARTICLE X
MISCELLANEOUS
10.01. Fees and Expenses. Except as provided in Section 2.01 above, all
costs and expenses incurred in connection with this Agreement and the
Implementing Agreements and the consummation of the transactions contemplated
hereby and thereby shall be paid by the Party incurring such costs and expenses.
10.02. Extension; Waiver. At any time prior to the Closing, the Parties
hereto, by action taken by or on behalf of the respective Boards of Directors or
other governing body of such Parties, may (i) extend the time for the
performance of any of the obligations or other acts of the other Parties hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any of the Implementing Agreements of the other Parties or in any
document, certificate or writing delivered pursuant hereto or thereto by the
other Parties or (iii) waive compliance with any of the agreements or conditions
contained herein. Any agreement on the part of any Party to any such extension
or waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such Party.
10.03. Confidentiality. Subject to the requirements of applicable law, each
Party shall maintain in confidence all information (i) transferred to NEWCO by
reason of the transfer of Interests and (ii) all information received from the
other Party as a result of any due diligence investigation conducted relative to
the execution of the Agreement and shall use such information only for the
benefit of NEWCO and or in connection with evaluating the transactions
contemplated hereby, except in accordance with the immediately succeeding
sentence, shall not disclose any such information to a third party or make any
unauthorized use thereof. The obligation of confidentiality and non-use shall
not apply to any information which (a) is or becomes generally available to the
public through no fault of the receiving party, (b) is independently developed
by the receiving party or (c) is received in good faith from a third party who
is lawfully in possession of such information and has the lawful right to
disclose or use it.
10.04. Public Announcements. The Parties agree to consult promptly with
each other prior to issuing any press release or otherwise making any public
statement with respect to the transactions contemplated hereby or by the
Implementing Agreements, and shall not issue any such press release or make any
such public statement prior to such consultation and review by the other Party
of a copy of such release or statement, unless required by applicable law.
10.05. Records Retained by FAFCO, EXPERIAN and NEWCO. Except as may
otherwise be provided in this Agreement, FAFCO and EXPERIAN shall transfer and
deliver, or cause to be transferred and delivered, and FAFCO and EXPERIAN shall
cause their Affiliates to transfer and deliver to NEWCO after the Closing all
data, records and other information which pertain to its respective Interests
(with the exception of documents created for this transaction) including,
without limitation, tax records and personnel records necessary for NEWCO to
conduct the NEWCO Business (all of the foregoing being hereinafter called the
"Business Records"). To the extent that the original copies of any such Business
Records also contain information relating to any Party or any of its
Subsidiaries not relating to its Interests, said Party may deliver to NEWCO
copies deleting such information but shall not destroy the original Business
Records except in accordance with normal record retention policies (or otherwise
take action to make such original Business Records unavailable to NEWCO). Any
Business Records which any Party requires in connection with pending or
threatened litigation, or which are otherwise subject to hold orders as provided
in said Party's record retention and protection policies, may be retained by
said Party and copies thereof delivered to NEWCO.
10.06. 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 or
by mail, postage prepaid, sent by telecopier, as follows:
(a) if to EXPERIAN, to it at:
Experian Information Solutions, Inc.
505 City Parkway West
Orange, California 92868
Telephone: (714) 385-8296
Telecopier: (714) 938-2513
Attention: General Counsel
(b) if to FAFCO, FAREISI or any other FAFCO Member, to it at:
The First American Financial Corporation
114 East Fifth Street
Santa Ana, California 92702
Telephone: (714) 558-3211
Telecopier: (714) 647-2242
Attention: Parker S. Kennedy
with a copy to:
White & Case
633 West Fifth Street, 19th Floor
Los Angeles, California 90071
Telephone: (213) 620-7700
Telecopier: (213) 687-0758
Attention: Neil W. Rust
or to such other Person or address as any Party shall specify by notice in
writing to each of the other Parties. 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 Business Days after deposit in the
U.S. mail, postage prepaid; (ii) if sent by FedEx or other overnight delivery
service, two Business Days after delivery to such service; (iii) if sent by
personal courier, upon receipt; and (iv) if sent by facsimile, upon receipt.
10.07. Entire Agreement. This Agreement and the Schedules, Exhibits and
other documents referred to herein or delivered pursuant hereto, collectively
contain the entire understanding of the Parties hereto with respect to the
subject matter contained herein and supersede all prior agreements and
understandings, oral and written, with respect thereto unless specifically set
forth to the contrary herein.
10.08. Binding Effect; Benefit; Assignment.
(a) This Agreement shall inure to the benefit of and be binding upon the
Parties hereto and their respective successors and permitted assigns, but
neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned by any of the Parties hereto without the prior written consent
of each other Party. Nothing in this Agreement, expressed or implied, is
intended to confer on any Person other than the Parties hereto or their
respective successors and permitted assigns, any rights, remedies, obligations
or liabilities under or by reason of this Agreement.
(b) Notwithstanding anything stated in the foregoing paragraph (a), upon
acknowledging this Agreement by its execution of the signature page hereto,
NEWCO will be, for all purposes, treated as third party beneficiary to the
representations and warranties of each Party in this Agreement, and subject to
the limitations of Sections 8.01 and 8.02 shall be entitled to the benefits of
Article VIII with respect to any breach thereof; provided, that NEWCO may not
assign such benefits without the written consent of each Party.
10.09. Amendment and Modification. Subject to applicable law, this
Agreement may be amended, modified and supplemented in writing by the Parties
hereto in any and all respects before the Closing (notwithstanding any
shareholder approval), by action taken by the respective Boards of Directors of
such Parties, or by the respective officers authorized by such Boards of
Directors, provided, that after any such shareholder approval, no amendment may
be made which by law requires further approval by such shareholders without such
further approval.
10.10. Further Actions. Each of the Parties hereto agrees that, subject to
its legal obligations, it will use its reasonable best efforts to fulfill all
conditions precedent specified herein, to the extent that such conditions are
within its control, and to do all things reasonably necessary to consummate the
transactions contemplated hereby.
10.11. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument.
10.12. Applicable Law; Submission to Jurisdiction.
(a) This Agreement and the legal relations between the Parties hereto shall
be governed by and construed in accordance with the laws of the State of
California, without regard to the conflict of laws rules thereof.
(b) Each of the Parties agrees that any legal action or proceeding with
respect to this Agreement may be brought in the Courts of the State of
California or the United States District Court for the Central District of
California and, by execution and delivery of this Agreement, each Party hereby
irrevocably submits itself in respect of its property, generally and
unconditionally to the non-exclusive jurisdiction of the aforesaid courts in any
legal action or proceeding arising out of this Agreement. Each of the Parties
hereby irrevocably waives any objection which it may now or hereafter have to
the laying of venue of any of the aforesaid actions or proceedings arising out
of or in connection with this Agreement brought in the courts referred to in the
preceding sentence. Each Party consents to process being served in any such
action or proceeding by the mailing of a copy thereof to the address for notices
to it set forth in Section 10.06 and agrees that such service upon receipt shall
constitute good and sufficient service of process or notice thereof. Nothing in
this paragraph shall affect or eliminate any right to serve process in any other
matter permitted by law.
10.13. Severability. If any term, provision, covenant or restriction
contained in this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void, unenforceable or against its regulatory
policy, the remainder of the terms, provisions, covenants and restrictions
contained in this Agreement shall remain in full force and effect and shall in
no way be affected, impaired or invalidated.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly
executed in their respective corporate names by their respective officers, each
of whom is duly and validly authorized and empowered, all as of the day and year
first above written.
THE FIRST AMERICAN FINANCIAL
CORPORATION
By /s/ Parker S. Kennedy
------------------------------------
Name: Parker S. Kennedy
Title:
FIRST AMERICAN REAL ESTATE
INFORMATION SERVICES, INC.
By /s/ John Long
------------------------------------
Name: John Long
Title:
FIRST AMERICAN APPRAISAL SERVICES,
INC.
By /s/ Anand Nallathambi
------------------------------------
Name: Anand Nallathambi
Title:
FIRST AMERICAN APPRAISAL CONSULTING
SERVICES, INC.
By /s/ Anand Nallathambi
------------------------------------
Name: Anand Nallathambi
Title:
FIRST AMERICAN CREDCO, INC.
By /s/ Donald A. Robert
------------------------------------
Name: Donald A. Robert
Title: President
FIRST AMERICAN FIELD SERVICES, INC.
By /s/ Shari Nott
------------------------------------
Name: Shari Nott
Title: Vice President
FIRST AMERICAN FLOOD DATA
SERVICES, INC.
By /s/ Robert Douglas
------------------------------------
Name: Robert Douglas
Title: Senior Vice President
FIRST AMERICAN PROPERTY SERVICES,
INC.
By /s/ John Long
------------------------------------
Name: John Long
Title:
FIRST AMERICAN REAL ESTATE TAX
SERVICE, INC.
By /s/ David C. Yavorsky
------------------------------------
Name: David C. Yavorsky
Title: President
PASCO ENTERPRISES, INC.
By /s/ John Long
------------------------------------
Name: John Long
Title:
PRIME CREDIT REPORTS, INC.
By /s/ Donald A. Robert
------------------------------------
Name: Donald A. Robert
Title: Senior Vice President
PROPERTY FINANCIAL SERVICES OF NEW
ENGLAND, INC.
By /s/ Anand Nallathambi
------------------------------------
Name: Anand Nallathambi
Title:
DOCS ACQUISITION CORP.
By /s/ John Long
------------------------------------
Name: John Long
Title:
STRATEGIC MORTGAGE SERVICES,
INC. (TEXAS)
By /s/ Mark B. Rogers
------------------------------------
Name: Mark B. Rogers
Title: President
EXPERIAN INFORMATION SOLUTIONS, INC.
By /s/ D.V. Skilling
------------------------------------
Name: D. Van Skilling
Title:
ACKNOWLEDGED AND AGREED TO:
FIRST AMERICAN REAL ESTATE SOLUTIONS LLC
By /s/ Parker S. Kennedy
-------------------------------------
Name: Parker S. Kennedy
Title:
<PAGE>
Exhibit (10)(b)
================================================================================
OPERATING AGREEMENT
FOR
FIRST AMERICAN REAL ESTATE SOLUTIONS LLC,
A CALIFORNIA LIMITED LIABILITY COMPANY
By and Among
FIRST AMERICAN REAL ESTATE INFORMATION SERVICES, INC.,
FIRST AMERICAN APPRAISAL CONSULTING SERVICES, INC.,
FIRST AMERICAN APPRAISAL SERVICES, INC.,
FIRST AMERICAN CREDCO, INC.,
FIRST AMERICAN FIELD SERVICES, INC.,
FIRST AMERICAN FLOOD DATA SERVICES, INC.,
FIRST AMERICAN PROPERTY SERVICES, INC.,
FIRST AMERICAN REAL ESTATE TAX SERVICE, INC.,
PASCO ENTERPRISES, INC.,
PRIME CREDIT REPORTS, INC.,
PROPERTY FINANCIAL SERVICES OF NEW ENGLAND, INC.,
DOCS ACQUISITION CORP.,
STRATEGIC MORTGAGE SERVICES, INC. (TEXAS)
and
EXPERIAN INFORMATION SOLUTIONS, INC.
Dated as of November 30, 1997
================================================================================
<PAGE>
TABLE OF CONTENTS(1)
--------------------
Page
----
ARTICLE I
DEFINED TERMS; CONSTRUCTION ............................................... 2
1.01. Defined Terms .................................................. 2
1.02. Construction ................................................... 6
ARTICLE II
ORGANIZATIONAL MATTERS .................................................... 7
2.01. Formation of the Company....................................... 7
2.02. Capital Contributions; Membership Interests.................... 7
2.03. Name of the Company............................................ 8
2.04. Effectiveness; Term............................................ 9
2.05. Principal Office and Registered Agent.......................... 9
2.06. Addresses of the Members and the Managers...................... 9
2.07. Purpose and Business of the Company............................ 9
ARTICLE III
THE MEMBERS................................................................. 9
3.01. Limited Liability.............................................. 9
3.02. Admission of Additional Members................................ 9
3.03. Termination of Membership Interest............................. 9
3.04. Absence of Management Powers................................... 9
3.05. Unanimous Consent of Members................................... 10
ARTICLE IV
MANAGEMENT COMMITTEE; MAJOR DECISIONS....................................... 10
4.01. Management By Management Committee............................. 10
4.02. Management Committee Representation; Officers.................. 10
4.03. Major Decisions................................................ 11
4.04. Acquisition Approval; Additional Capital....................... 13
4.05. Voluntary Loans................................................ 14
ARTICLE V
ALLOCATIONS OF NET PROFITS AND NET LOSSES; DISTRIBUTIONS.................... 15
5.01. Allocations of Net Profit and Net Loss......................... 15
5.02. Special Allocations............................................ 15
5.03. Code Section 704(c) Allocations................................ 17
- ---------------------------
(1) This Table of Contents is provided for convenience only, and does not
form a part of the attached Operating Agreement.
5.04. Allocations of Net Profits and Losses and Distributions
in Respect of a Transferred Interest........................... 17
5.05. Distributions by the Company................................... 18
5.06. Form of Distribution........................................... 18
5.07. Restriction on Distributions................................... 19
5.08. Return of Distributions........................................ 19
ARTICLE VI
MEMBERSHIP INTEREST TRANSFER RESTRICTIONS................................... 19
6.01. Transfer Restrictions.......................................... 19
6.02. Further Restrictions on Transfer of Interests.................. 20
6.03. Void Transfer.................................................. 20
6.04. Permitted Transfers............................................ 20
6.05. Third-Party Offers............................................. 21
ARTICLE VII
BUSINESS OPPORTUNITIES...................................................... 22
7.01. Business Opportunities......................................... 22
ARTICLE VIII
CONSEQUENCES OF DISSOLUTION EVENTS;
TERMINATION OF MEMBERSHIP INTEREST.......................................... 23
8.01. Dissolution Event.............................................. 23
8.02. Withdrawal..................................................... 23
8.03. Purchase Price................................................. 23
8.04. Notice of Intent to Purchase................................... 23
8.05. Purchase Pro Rata.............................................. 23
8.06. Winding Up the Company......................................... 24
8.07. Final Statement................................................ 24
ARTICLE IX
BOOKS AND RECORDS; TAX RETURNS; ACCESS BY MEMBERS........................... 24
9.01. Company Books and Records...................................... 24
9.02. Tax Returns.................................................... 24
ARTICLE X
MISCELLANEOUS............................................................... 26
10.01. Specific Performance........................................... 26
10.02. Amendments and Modifications................................... 26
10.03. Notices........................................................ 26
10.04. Attorneys' Fees................................................ 27
10.05. Further Assurances............................................. 27
10.06. Counterparts................................................... 27
10.07. Governing Law.................................................. 27
10.08. Successors..................................................... 27
10.09. Severability................................................... 28
10.10. Entire Agreement................................................ 28
10.11. Confidentiality................................................. 28
SCHEDULES
Schedule 1 Officers
Schedule 2 Approved Transactions
Schedule 3 Existing Borrowing Facilities
<PAGE>
OPERATING AGREEMENT
FOR
FIRST AMERICAN REAL ESTATE SOLUTIONS LLC,
A CALIFORNIA LIMITED LIABILITY COMPANY
OPERATING AGREEMENT FOR FIRST AMERICAN REAL ESTATE SOLUTIONS LLC, a
California limited liability company (the "Company"), dated as of November 30,
1997, by and among FIRST AMERICAN REAL ESTATE INFORMATION SERVICES, INC., a
California corporation ("FAREISI"), FIRST AMERICAN APPRAISAL CONSULTING
SERVICES, INC., a California corporation ("FAREISI Subsidiary 1"), FIRST
AMERICAN APPRAISAL SERVICES, INC., a California corporation ("FAREISI Subsidiary
2"), FIRST AMERICAN CREDCO, INC., a Washington corporation ("FAREISI Subsidiary
3"), FIRST AMERICAN FIELD SERVICES, INC., a New Jersey corporation ("FAREISI
Subsidiary 4"), FIRST AMERICAN FLOOD DATA SERVICES, INC., a Texas corporation
("FAREISI Subsidiary 5"), FIRST AMERICAN PROPERTY SERVICES, INC., a New York
corporation ("FAREISI Subsidiary 6"), FIRST AMERICAN REAL ESTATE TAX SERVICE,
INC., a Florida corporation ("FAREISI Subsidiary 7"), PASCO ENTERPRISES, INC., a
Texas corporation ("FAREISI Subsidiary 8"), PRIME CREDIT REPORTS, INC., a
California corporation ("FAREISI Subsidiary 9"), PROPERTY FINANCIAL SERVICES OF
NEW ENGLAND, INC., a Delaware corporation ("FAREISI Subsidiary 10"), DOCS
ACQUISITION CORP., a Nevada corporation ("DOCS"), STRATEGIC MORTGAGE SERVICES,
INC. (TEXAS), a Texas corporation ("SMS") and EXPERIAN INFORMATION SOLUTIONS,
INC., an Ohio corporation ("EXPERIAN").
W I T N E S S E T H:
WHEREAS, pursuant to that certain Contribution and Joint Venture Agreement,
dated as of November 30, 1997 (the "JV Agreement"), by and among The First
American Financial Corporation, a California corporation ("FAFCO"), FAREISI,
FAREISI Subsidiary 1, FAREISI Subsidiary 2, FAREISI Subsidiary 3, FAREISI
Subsidiary 4, FAREISI Subsidiary 5, FAREISI Subsidiary 6, FAREISI Subsidiary 7,
FAREISI Subsidiary 8, FAREISI Subsidiary 9, FAREISI Subsidiary 10, DOCS, SMS,
(FAREISI, the foregoing FAREISI Subsidiaries, DOCS and SMS, collectively, the
"FAFCO Members") and EXPERIAN, the parties thereto have agreed that the FAFCO
Members and EXPERIAN shall become the joint owners of the Company which is being
formed hereunder to own and operate the combined FAREISI Business and RES
Business (each such term used herein as defined in the JV Agreement);
WHEREAS, in furtherance of the transactions contemplated in the JV
Agreement, the Company, the FAFCO Members and EXPERIAN desire to define in this
Agreement certain of their rights, duties and obligations with respect to the
ownership, operation and management of the Company;
NOW, THEREFORE, in order to carry out their intent as expressed above, and
in consideration of the mutual covenants and agreements hereinafter contained,
the parties hereto hereby covenant and agree as follows:
ARTICLE I
DEFINED TERMS; CONSTRUCTION
1.011. Defined Terms. As used in this Agreement, the following terms shall
have the following meanings:
"Act" means the Beverly-Killea Limited Liability Company Act, codified in
the California Corporations Code, Section 17000 et seq., as the same may be --
amended from time to time.
"Adjusted Capital Account Deficit" shall mean, with respect to any Member,
the deficit balance, if any, in such Member's Capital Account as of the end of
the applicable Fiscal Year after (i) crediting thereto any amounts which such
Member is, or is deemed to be, obligated to restore pursuant to Treasury
Regulations (S) 1.704-2(g)(1) and (S) 1.704-2(i)(5) and (ii) debiting such
Capital Account by the amount of the items described in Treasury Regulations (S)
1.704-1(b)(2)(ii)(d)(4), (5) and (6). The foregoing definition of Adjusted
Capital Account Deficit is intended to comply with the provisions of Treasury
Regulation (S) 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently
therewith.
"Affiliate" has the meaning given thereto in Section 1.01 of the JV
Agreement.
"Agreement" means this Operating Agreement, as the same may be amended,
modified and/or supplemented from time to time.
"Articles" means the Articles of Organization for the Company originally
filed with the California Secretary of State and as amended from time to time.
"Bankruptcy" means, with respect to any Person, the occurrence of one or
more of the following events: (i) such Person commences a voluntary case
concerning itself under Title 11 of the United States Code entitled
"Bankruptcy," as now or hereafter in effect, or any successor thereto (the
"Bankruptcy Code"); (ii) an involuntary case is commenced against such Person
and the petition is not controverted within 10 days, or is not dismissed within
60 days, after commencement of the case; (iii) a custodian (as defined in the
Bankruptcy Code) is appointed for, or takes charge of, all or substantially all
of the property of, such Person; (iv) such Person commences any other proceeding
under any reorganization, arrangement, adjustment of debt, relief of debtors,
dissolution, insolvency or liquidation or similar law of any jurisdiction
whether now or hereafter in effect; (v) there is commenced against such Person
any such proceeding which remains undismissed for a period of 60 days; (vi) such
Person is adjudicated insolvent or bankrupt or any order of relief or other
order approving any such case or proceeding is entered; (vi) such Person suffers
the appointment of a custodian or the like for it or any substantial part of its
property to continue undischarged or unstayed for a period of 60 days; (vii)
such Person makes a general assignment for the benefit of creditors; or (viii)
any corporate or partnership action is taken by such Person for the purpose of
effecting any of the foregoing.
"Business Day" shall mean any day, excluding Saturday, Sunday or any day
which shall be a legal holiday in the State of California.
"By-Laws" means the By-Laws as initially adopted by the Management
Committee and as the same may be amended from time to time.
"Capital Account" means with respect to any Member the capital account
which the Company establishes and maintains for such Member pursuant to Section
2.02(b).
"Capital Contribution" means, with respect to any Member, the total amount
of cash and the fair market value of property contributed (net of liabilities
secured by such contributed property that the Company is considered to assume or
take subject to under Section 752 of the Code) to the Company by such Member.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, the provisions of any succeeding law.
"Company" has the meaning given thereto in the introductory paragraph of
this Agreement.
"Company Development Opportunity" means any business opportunity related to
real estate lending specifically involving the acquisition, development,
construction, operation or management of merged credit reporting, appraisal
services, flood compliance, real estate tax reporting, tax certification, tax
outsourcing, mortgage assignments, tax valuation, real property field services
and real estate transaction document preparation.
"Company Minimum Gain" has the meaning given to the term "partnership
minimum gain" in the Regulations Sections 1.704-2(b)(2) and 1.704-2(d).
"Corporations Code" means the California Corporations Code, as amended from
time to time, and the provisions of succeeding law.
"Dissolution Event" means, with respect to any Member, the withdrawal from
this Agreement, the Bankruptcy, the dissolution or the termination of such
Member.
"Distributable Cash" means the amount of cash which the Management
Committee deems available for distribution to the Members, taking into account
all debts, liabilities, and obligations of the Company then due, and working
capital and other amounts which the Management Committee deems necessary for the
Company's business or to place into reserves for customary and usual claims with
respect to such business.
"Effective Time" has the meaning given thereto in Section 1.01 of the JV
Agreement.
"EXPERIAN" has the meaning given thereto in the first WHEREAS clause of
this Agreement.
"Experian Managers" has the meaning given thereto in Section 4.02(a)
hereof.
"FAFCO" has the meaning given thereto in the first WHEREAS clause of this
Agreement.
"FAFCO Managers" has the meaning given thereto in Section 4.02(a) hereof.
"FAFCO Members" has the meaning given thereto in the first WHEREAS clause
of this Agreement.
"Fiscal Year" means the Company's fiscal year, which shall be the calendar
year.
"Former Member" has the meaning given thereto in Section 8.01 hereof.
"Former Member's Interest" has the meaning given thereto in Section 8.01
hereof.
"GAAP" means generally accepted accounting principles in the United States
of America applied on a consistent basis and reasonable under the circumstances.
"JV Agreement" has the meaning given thereto in the first WHEREAS clause of
this Agreement.
"Major Decision" has the meaning given thereto in Section 4.03 hereof.
"Manager" has the meaning given thereto in Section 4.01 hereof.
"Management Committee" means the Management Committee of the Company.
"Member" means each Person who is an initial signatory to this Agreement or
has been admitted to the Company as a Member in accordance with the Articles or
this Agreement and has not become the subject of a Dissolution Event or ceased
to be a Member in accordance with Article VIII or for any other reason.
"Member Minimum Gain" shall mean an amount, determined in accordance with
Regulations Section 1.704-2(i)(3) with respect to any Member Nonrecourse Debt,
equal to the Company Minimum Gain that would result if such Member Nonrecourse
Debt were treated as a Nonrecourse Liability.
"Member Nonrecourse Debt" has the meaning given to the term "partner
nonrecourse debt" in Regulations Section 1.704-2(b)(4).
"Member Nonrecourse Deductions" has the meaning given to the term "partner
nonrecourse deductions" in Regulations Section 1.704-2(i).
"Membership Interest" means a Member's entire interest in the Company,
including, without limitation, the right to receive distributions of the
Company's assets and allocations of income, gain, loss, deduction, credit and
similar items from the Company pursuant to this Agreement and the Act, the right
to vote on or participate in the management, and the right to receive
information concerning the business and affairs, of the Company.
"Net Profits" and "Net Losses" mean, for any Fiscal Year, the net income or
net loss, respectively, of the Company for such Fiscal Year.
"Nonrecourse Deduction" has the meaning given to such term in Regulations
Section 1.704-2(b)(1).
"Nonrecourse Liability" has the meaning set forth in Regulations Section
1.752-1(a)(2).
"Offer" has the meaning given thereto in Section 6.04(c) hereof.
"Offered Interest" has the meaning given thereto in Section 6.04(c) hereof.
"Offering Price" has the meaning given thereto in Section 6.04(c) hereof.
"Offer Notice" has the meaning given thereto in Section 6.04(c) hereof.
"Offer Rejection" has the meaning given thereto in Section 6.04(d) hereof.
"Offer Terms" has the meaning given thereto in Section 6.04(c) hereof.
"Percentage Interest" means, with respect to a Member, the percentage set
forth in Section 2.02(f) with respect to such Member, as such percentage may be
adjusted from time to time pursuant to the terms of this Agreement.
"Permitted Transfer" has the meaning given thereto in Section 6.04(a)
hereof.
"Permitted Transferee" has the meaning given thereto in Section 6.04(a)
hereof.
"Person" means and includes any individual, partnership, association, joint
stock company, joint venture, corporation, trust, limited liability company,
unincorporated organization or other enterprise or any government or political
subdivision or any agency, department or instrumentality thereof.
"Prime Rate" means, as of any date of determination, the per annum rate of
interest specified as the Prime Rate in the Wall Street Journal published on
such date, provided that for any date on which the Wall Street Journal is not
published, "Prime Rate" means the per annum rate of interest specified as the
Prime Rate in the Wall Street Journal last published before such date.
"Proposed Transferee" has the meaning given thereto in Section 6.04(c)
hereof.
"Regulations" shall, unless the context clearly indicates otherwise, mean
the regulations in force as final or temporary that have been issued by the U.S.
Department of Treasury pursuant to its authority under the Code, and any
successor regulations.
"Remaining Members" has the meaning given thereto in Section 8.01 hereof.
"Requested Amount" has the meaning given thereto in Section 4.04(b) hereof.
"RES Data" has the meaning given thereto in the Data License Agreement in
the form of Exhibit D to the JV Agreement.
"Secretary" means the Secretary of the Company appointed by the Management
Committee.
"Tax Matters Member" has the meaning given thereto in Section 9.02(b)
hereof.
"Third-Party Offer" has the meaning given thereto in Section 6.05 hereof.
"Third-Party Terms" has the meaning given thereto in Section 6.05 hereof.
"Trademark License Agreement" means the Trademark License Agreement in
substantially the form of Exhibit G to the JV Agreement.
"Transfer" means any sale, transfer, assignment, donation, pledge,
hypothecation, encumbrance or other disposition in any manner whatsoever,
voluntarily or involuntarily, including, without limitation, any attachment,
assignment for the benefit of creditors or transfer by operation of law or
otherwise.
"Transfer Notice" has the meaning given thereto in Section 6.04(e) hereof.
"Voluntary Loans" has the meaning given thereto in Section 4.05(a) hereof.
"$3MM Note" has the meaning given thereto in Section 1.01 of the JV
Agreement.
"$25MM Note" has the meaning given thereto in Section 1.01 of the JV
Agreement.
1.012. Construction.
(a) To the fullest extent permissible, each of the FAFCO Members, EXPERIAN
and the Company hereby waives such provisions of the California Corporations
Code as are inconsistent with the terms hereof.
(b) 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, and Article, Section,
subsection and Schedule references are to this Agreement unless otherwise
specified.
(c) All accounting terms not specifically defined herein shall be construed
in accordance with GAAP.
(d) The meanings given to terms used herein shall be equally applicable to
both the singular and plural forms of such terms.
(e) The Table of Contents hereto and the Article and Section headings
herein are for convenience only and shall not affect the construction hereof.
(f) This Agreement is the result of negotiations among and have been
reviewed by counsel to the Members and is the product of all the Members.
Accordingly, this Agreement shall not be construed against any Member merely
because of such Member's involvement in its preparation.
ARTICLE II
ORGANIZATIONAL MATTERS
2.021. Formation of the Company. The Members have formed a California
limited liability company under the laws of the State of California by filing
the Articles with the California Secretary of State and entering into this
Agreement, which Agreement shall at the Effective Time be deemed effective as of
the date the Articles were so filed. The rights and liabilities of the Members
shall be determined pursuant to the Act and this Agreement. To the extent that
the rights or obligations of any Member are different by reason of any provision
of this Agreement than they would be in the absence of such provision, this
Agreement shall, to the extent permitted by the Act, control.
2.022. Capital Contributions; Membership Interests.
(a) Each Member or an Affiliate of such Member shall contribute to the
Company the assets and liabilities described in Section 2.02 of the JV Agreement
as its respective initial Capital Contribution. No Member shall be required to
make any additional Capital Contributions; provided, however, that the Members
may be permitted to make additional Capital Contributions if and to the extent
they so desire, in accordance with the provisions of Section 4.04.
(b) The Company shall establish and maintain a separate Capital Account for
each Member in accordance with Regulations Section 1.704-1(b)(2)(iv). Each
Member shall receive a credit to its Capital Account in the amount of (i) the
amount of any Capital Contribution made in cash, (ii) the fair market value (net
of liabilities that the Company is considered to assume, or take subject to,
under Section 752 of the Code) of any Capital Contribution made in property
other than cash, and (iii) allocations to such Member of Net Profits. Each
Member's Capital Account shall be debited with (i) the amount of any cash and
the fair market value of property distributed to such Member (net of liabilities
that such Member is considered to assume or take subject to Section 752 of the
Code), all as may be determined in accordance with this Agreement, and (ii)
allocations of Net Losses. If a Member transfers all or a part of its Membership
Interest in accordance with this Agreement, such Member's Capital Account
attributable to the transferred Membership Interest shall carry over to the new
owner of such Membership Interest pursuant to Regulations Section 1.704-
1(b)(2)(iv)(l). If any property other than cash is distributed to a Member, the
Capital Accounts of the Members shall be adjusted as if the property had instead
been sold by the Company for a price equal to its fair market value and the
proceeds distributed. Upon liquidation and winding-up of the Company, any unsold
Company property shall be valued to determine the gain or loss which would
result if such property were sold at its fair market value at the time of such
liquidation. The Capital Accounts of the Members shall be adjusted to reflect
how any such gain or loss would have been allocated under Article V if such
property had been sold at the assigned values.
(c) The Capital Accounts of the Members shall be increased or decreased in
accordance with Regulations Section 1.704-1(b)(2)(iv)(f) to reflect a
revaluation of the property of the Company on the Company's books as of the
following times: (i) the acquisition of an additional interest in the Company by
any new or existing Member in exchange for more than a de minimis capital
contribution; (ii) the distribution by the Company to a Member of more than a de
minimis amount of money or other property as consideration for an interest in
the Company; and (iii) the liquidation of the Company within the meaning of
Regulations Section 1.704-1(b)(2)(ii)(g).
(d) Except as provided herein, no Member shall be entitled to receive any
interest or other earnings on its Capital Contributions.
(e) Except upon the dissolution of the Company or as may be specifically
provided in this Agreement, no Member shall have the right to demand or receive
the return of all or any part of its Capital Account or its capital
contributions to the Company.
(f) The Percentage Interests of the Members at the Effective Time shall be
___% with respect to FAREISI Subsidiary 1, ___% with respect to FAREISI
Subsidiary 2, ___% with respect to FAREISI Subsidiary 3, ___% with respect to
FAREISI Subsidiary 4, ___% with respect to FAREISI Subsidiary 5, ___% with
respect to FAREISI Subsidiary 6, FAREISI Subsidiary 7, ___% with respect to
FAREISI Subsidiary 8, ___% with respect to FAREISI Subsidiary 9, ___% with
respect to FAREISI Subsidiary 10, ___% with respect to DOCS, ___% with respect
to SMS and 20% with respect to EXPERIAN. Immediately following any additional
Capital Contributions, the Percentage Interests shall be adjusted by the
Management Committee to reflect the new relative proportions of the Capital
Accounts of the Members.
2.023. Name of the Company. The name of the Company shall be "First
American Real Estate Solutions LLC." The business of the Company may be
conducted under that name or, upon compliance with applicable laws, any other
name that the Management Committee deems appropriate or advisable. The Managers
shall file any fictitious name certificates and similar filings, and any
amendments thereto, that the Management Committee considers appropriate or
advisable. Notwithstanding the foregoing, the Company shall not use the name
"Experian" in the conduct of its business except as expressly permitted by the
Trademark License Agreement or as otherwise agreed to in writing by EXPERIAN.
2.024 Effectiveness; Term. Notwithstanding any other provision of this
Agreement to the contrary, this Agreement shall be effective as between the
Members at the Effective Time and shall continue in effect until November 30,
2027, unless extended or sooner terminated as hereinafter provided; provided
that at the Effective Time the term of this Agreement shall be deemed to have
commenced on the filing of the Articles.
2.025. Principal Office and Registered Agent. The Company shall
continuously maintain an office and registered agent in the State of California.
The principal office of the Company shall be located at 150 Second Avenue, Suite
1600, St. Petersburg, Florida 33701 or as the Management Committee may otherwise
determine. The Company may also have such offices, anywhere within and without
the State of California, as the Management Committee may determine from time to
time, or the business of the Company may require. The registered agent shall be
as stated in the Articles or as otherwise determined by the Management
Committee.
2.026. Addresses of the Members and the Managers. The respective addresses
of the Members and the Managers are set forth on Exhibit A. A Member shall
notify the Management Committee of any change in its address by delivering
written notice thereof to the Management Committee.
2.027. Purpose and Business of the Company. The purpose of the Company is
to engage in any lawful activity for which a limited liability company may be
organized under the Act.
ARTICLE III
THE MEMBERS
3.001. Limited Liability. Except as expressly set forth in this Agreement
or required by law, no Member shall be personally liable for any debt,
obligation, or liability of the Company, whether that liability or obligation
arises in contract, tort, or otherwise.
3.002. Admission of Additional Members. Except for the admission of
substitute Members in accordance with Article VI, no additional Members shall be
admitted to the Company.
3.003. Termination of Membership Interest. Upon the transfer of a Member's
Membership Interest in violation of Article VI or the occurrence of a
Dissolution Event as to such Member which does not result in the dissolution of
the Company under Article VIII, the Membership Interest of a Member shall be
terminated by the Management Committee and thereafter that Member shall be
entitled only to the amounts set forth in Section 8.03. Each Member acknowledges
and agrees that such termination or purchase of a Membership Interest upon the
occurrence of any of the foregoing events is not unreasonable under the
circumstances existing as of the date hereof.
3.004. Absence of Management Powers. The Members shall have no power to
participate in the management of the Company except as expressly authorized by
this Agreement or the Articles and except as expressly required by the Act. No
Member, acting solely in the capacity of a Member, is an agent of the Company
nor does any Member, unless expressly and duly authorized in writing to do so by
the Management Committee, have any power or authority to bind or act on behalf
of the Company in any way, to pledge its credit, to execute any instrument on
its behalf or to render it liable for any purpose.
3.005. Unanimous Consent of Members. Notwithstanding Section 3.04 and
Article IV, the following matters shall require the unanimous vote, approval or
consent of all Members who are not the subject of a Dissolution Event:
(a) a decision to dissolve the Company or voluntarily terminate this
Agreement or voluntarily commence a case concerning itself under the
Bankruptcy Code or under any other applicable bankruptcy, insolvency or
similar law now or hereafter in effect;
(b) a decision to continue the business of the Company after the
occurrence of a Dissolution Event;
(c) any amendment of the Articles, By-Laws or, in accordance with
Section 10.02, this Agreement; and
(d) a decision to compromise the obligation of a Member to make a
Capital Contribution or return money or property paid or distributed in
violation of the Act.
ARTICLE IV
MANAGEMENT COMMITTEE; MAJOR DECISIONS
4.001. Management By Management Committee. The business, property and
affairs of the Company shall be managed exclusively by the Management Committee.
The Management Committee shall consist of ten managers (each, a "Manager").
Except for situations in which the approval of the Members is expressly required
by the Articles, the Act or this Agreement, the Management Committee shall have
full, complete and exclusive authority, power, and discretion to manage and
control the business, property and affairs of the Company, to make all decisions
regarding those matters and to perform any and all other acts or activities
customary or incident to the management of the Company's business, property and
affairs. Without limiting the generality of the foregoing, but subject to
Section 2.04 and to the express limitations set forth elsewhere in this
Agreement, the Management Committee shall have the power to exercise on behalf
and in the name of the Company all of the powers described in Corporations Code
Section 17003.
4.002. Management Committee Representation; Officers.
(a) So long as EXPERIAN shall own at least a 10% Membership Interest in the
Company, the number of Managers of the Company shall be ten, and the FAFCO
Members shall designate eight Managers (the "FAFCO Managers") and EXPERIAN shall
designate two Managers of the Company (the "Experian Managers"). The FAFCO
Members shall be entitled to remove or replace any FAFCO Manager in their sole
discretion upon written notice to EXPERIAN and the Company. EXPERIAN shall be
entitled to remove or replace any Experian Manager in its sole discretion upon
written notice to FAFCO and the Company. Each Manager of the Company so
designated shall hold office, subject to the applicable provisions of the
Articles and By-Laws of the Company, until the next annual meeting of the
Members and until their respective successors shall be duly elected or appointed
and qualified. Each member of the Management Committee shall have one vote, and
the vote of the majority of the members of the Management Committee
participating in a meeting of the Management Committee (subject to the quorum
requirements set forth in the By-Laws) shall constitute the act of the
Management Committee, unless otherwise expressly set forth herein.
(b) The Members acknowledge that the Managers are appointed to represent
and serve the interests of the Members who appointed such Managers. The Members
agree that no such Manager shall have any liability (including, without
limitation, for any claim of breach of fiduciary duty) to the Company or to any
Member as a result of taking any action as a Manager, or as an officer or
director of a Member, which action the Manager reasonably believes to be in the
best interests of the Member he or she represents.
(c) At the Effective Time, each individual listed on Schedule 1 hereto
shall become an officer of the Company holding the office(s) of the Company set
forth opposite his or her name on Schedule 1 hereto and shall, subject to the
applicable provisions of the Articles and By-Laws of the Company, hold such
office(s) until his or her successor shall be duly elected or appointed and
qualified. Without limiting the foregoing, John Long shall be elected the
President and Chief Executive Officer of the Company until his successor shall
be duly elected or appointed and qualified.
4.003. Major Decisions. Except for the transactions described on Schedule 2
which are hereby approved, so long as EXPERIAN shall own at least a 10%
Membership Interest in the Company, and subject to the provisions of Sections
4.04 and 4.05 below, the Company shall not take, or permit to occur, any action
which would constitute a Major Decision without the prior written consent of the
Experian Managers. Notwithstanding the preceding sentence, if the Company seeks
the written consent of the Experian Managers to take, or permit to occur, any
action which would constitute a Major Decision and the Experian Managers fail to
respond to such consent request by the thirtieth (30th) day after such written
consent is delivered to the Experian Managers via registered mail, return
receipt requested, then the Company shall, without further action, be entitled
to take, or permit to occur, any such action. Each of the following acts, events
or occurrences shall constitute a "Major Decision":
(a) any acquisition by the Company of any business of another Person, or of
any property, securities, rights or other assets in one or a series of related
transactions if (i) the consideration for such acquisition exceeds, in the
aggregate, US $5,000,000 or (ii) the Company is required to make a cash
down-payment in excess of $1,250,000 in connection with such acquisition
(regardless of the aggregate consideration involved in such acquisition).
(b) any sale, transfer or other disposition of assets of the Company, other
than in the ordinary course of business, with a fair market value at the time of
such sale, transfer or disposition exceeding, in the aggregate, US $5,000,000.
(c) the adoption, filing or amendment of any designation of rights,
preferences and privileges with respect to any equity security of the Company;
(d) the issuance, redemption or repurchase by the Company of any Membership
Interest or any other equity security of the Company to any Person;
(e) other than borrowings made, or permitted to be made, under the
Company's borrowing facilities listed on Schedule 3 hereto (together with any
extensions or refinancings thereof which do not increase the aggregate principal
amount of borrowings permitted to be made thereunder) and Voluntary Loans, the
borrowing of any sums of money;
(f) the creation of any liens or encumbrances on any of the Company's
assets, other than the creation of liens and encumbrances (i) securing
borrowings permitted under paragraph (e) above; (ii) liens for taxes not yet
due, or liens for taxes being contested in good faith and by appropriate
proceedings for which adequate reserves have been established; (iii) liens in
respect of property or assets of the Company imposed by law, which were incurred
in the ordinary course of business, including without limitation, carriers',
warehousemen's and mechanics' liens and other similar liens arising in the
ordinary course of business and (x) which do not in the aggregate materially
detract from the value of such property or assets or materially impair the use
thereof in the operation of the business of the Company or (y) which are being
contested in good faith by appropriate proceedings and for which adequate
reserves have been established, which proceedings have the effect of preventing
the forfeiture or sale of the property or assets subject to any such lien; (iv)
pledges or deposits in connection with worker's compensation, unemployment
insurance and other social security legislation; or (v) constituting purchase
money security interests;
(g) except as provided in paragraphs (a) and (b) of this Section 4.03, any
loan or other use of the Company's assets with a fair market value in excess of
$1,250,000 to, or the Company making an investment in, any Person not a Member
or an Affiliate of a Member; provided, however, the Company may loan or permit
the use of the Company's assets if the fair market value thereof does not
singularly or in the aggregate exceed $1,250,000;
(h) any change in the character of the business of the Company or the
undertaking of any new ventures or transactions or the engaging in any type of
business not incidental and directly related to the Company's present business;
(i) the sale or other disposition of all or substantially all of the assets
and property of the Company;
(j) the merger or consolidation of the Company with or into any other
limited liability company or any corporation or other entity;
(k) except as contemplated by Sections 4.04 and 4.05, any transaction,
whether or not evidenced by a written agreement, between the Company, on the one
hand, and FAFCO or its Affiliates, on the other hand, involving estimated
consideration in excess of $25,000 over any twelve-month period;
(l) any determination by the Company to require that each of FAFCO and
EXPERIAN provide a guaranty to a third party in accordance with the provisions
of Section 5.09 of the JV Agreement; provided that if the Experian Managers fail
to consent to a request for such guaranties, then the FAFCO Members and their
Affiliates (including, without limitation, FAFCO) shall nevertheless have the
right, but not the obligation, to provide any such guaranties upon such terms
and conditions as they (or any of them) shall determine in their (or its) sole
and absolute discretion; or
(m) any sale or other transfer by the Company of RES Data to an entity in a
market served by EXPERIAN.
4.004. Acquisition Approval; Additional Capital.
(a) Upon the approval of any acquisition described in clause (a) of Section
4.03 in accordance with the provisions of Section 4.03, any action thereafter
necessary or desirable in respect of such acquisition and any additional terms
of such acquisition (including, without limitation, the source and the nature of
the capital needed, if any), may be approved by the affirmative vote of a
majority of the Managers (whether or not such majority includes the Experian
Managers). Without limiting the generality of the foregoing, if, in connection
with any such approved acquisition, the Management Committee shall determine
that additional capital is required by the Company, the Management Committee may
request that each of the Members contribute such additional capital in
proportion to the Percentage Interests then held by each of them. Subject to
clause (b) below, the Company shall accept from each of the FAFCO Members and
EXPERIAN a contribution only in the full amount of its share of the additional
capital requested. The contribution shall be in such form, cash or otherwise, as
the Management Committee shall determine.
(b) Upon receipt by EXPERIAN of any request from the Management Committee
for an additional capital contribution pursuant to clause (a) above, EXPERIAN
shall have the option to contribute or decline to contribute such additional
capital by delivering a written notice to the Company and each of the FAFCO
Members specifying its election not more than 30 days after its receipt of such
request for additional capital (it being understood and agreed that if such
written notice is not delivered within the 30 day period provided, EXPERIAN
shall be deemed to have elected not to contribute such additional capital). In
the event that EXPERIAN elects not to contribute its proportionate share of
additional capital as requested (the "Requested Amount"), the FAFCO Members (or
any of them) shall have the right, but not the obligation, to contribute to the
Company for their (or its) own account as an additional capital contribution the
Requested Amount. EXPERIAN shall not be considered in breach of this Agreement
as a result of its election not to contribute the Requested Amount.
(c) If any of the Members makes an additional contribution as provided in
this Section 4.04, then each such Member shall receive a credit to its
respective Capital Account in the amount of any additional capital which it has
contributed to the Company. Immediately following such Capital Contributions,
the Percentage Interests of the Members shall be adjusted by the Management
Committee to reflect the new relative proportions of the Capital Accounts of the
Members. Such adjustment shall be made by: first, adjusting the Capital Accounts
of all of the Members to reflect the fair market value of the Company's assets
and shall include any unrealized income, gain, loss or deduction in Company
assets immediately prior to the additional Capital Contributions; second,
determining relative proportions of the Capital Accounts, taking into account
the new Capital Contributions; and third, adjusting the Percentage Interests to
reflect the relative portions of the Capital Accounts as so adjusted.
(d) In the event that the Experian Managers fail to consent pursuant to
Section 4.03 hereof to any acquisition described in clause (a) of such Section
4.03 that is proposed by the FAFCO Members or the FAFCO Managers, the FAFCO
Members and their Affiliates (including, without limitation, FAFCO) shall be
free to pursue such proposed acquisition and neither the Company nor EXPERIAN
nor its Affiliates shall have any right, claim or interest in or to any revenues
resulting therefrom. In the event that the FAFCO Managers fail to consent
pursuant to Section 4.03 hereof to any acquisition described in clause (a) of
such Section 4.03 that is proposed by EXPERIAN or the Experian Managers,
EXPERIAN and its Affiliates shall be free to pursue such proposed acquisition
and neither the Company nor the FAFCO Members shall have any right, claim or
interest in or to any revenues resulting therefrom. In the event that the
Company fails to diligently pursue any acquisition described in clause (a) of
Section 4.03 that is approved by the Management Committee in accordance with the
terms of such Section 4.03, then the party that proposed such acquisition to the
Company shall be free to pursue such acquisition (so long as the Company's
failure to diligently pursue such acquisition is not attributable to such
party's actions) and neither the Company nor any other Member nor any of such
Member's Affiliates shall have any right, claim or interest in or to any
revenues resulting therefrom.
4.005. Voluntary Loans.
(a) If, at any time or times hereafter, the Management Committee shall
determine that additional financing is required by the Company to conduct its
business and operations according to its ordinary and usual course of business
or in connection with any acquisition described in clause (a) of Section 4.03
and approved in accordance with the provisions of Section 4.03, the Management
Committee may request that each of the FAFCO Members and EXPERIAN make one or
more loans on a voluntary basis to the Company ("Voluntary Loans"). The timing,
terms and conditions of each such Voluntary Loan shall be subject to the
approval of each of the parties hereto; provided that in no event shall any
Voluntary Loan bear interest in excess of the Prime Rate.
(b) Notwithstanding any other provision of this Agreement, for the three
year period from and after the Effective Time until the third anniversary
thereof, the FAFCO Members (or any of them) may at any time and from time to
time, without the consent of EXPERIAN or the Experian Managers, borrow money
from or lend money to the Company. Such borrowings and loans shall bear interest
at the Prime Rate and shall be disregarded for purposes of the declaration and
payment of distributions by the Management Committee of the Company pursuant to
Section 5.05. In the event that borrowings by any FAFCO Member from the Company
exceed loans made by such FAFCO Member to the Company (in each case taking into
account accrued but unpaid interest) at the time any distribution is declared,
the amount of the distribution to such FAFCO Member shall be reduced by the
amount of such excess.
ARTICLE V.
ALLOCATIONS OF NET PROFITS AND NET LOSSES; DISTRIBUTIONS
5.001. Allocations of Net Profit and Net Loss.
(a) Net Loss. Net Loss shall be allocated to the Members in proportion to
their Percentage Interests.
Notwithstanding the previous sentence, losses allocated to a Member shall
not exceed the maximum amount of losses that can be allocated without causing a
Member to have an Adjusted Capital Account Deficit at the end of any Fiscal
Year. In the event that any Member would have an Adjusted Capital Account
Deficit as a consequence of an allocation of losses in proportion to Percentage
Interests, the amount of losses that would be allocated to such Member but for
such allocation shall be allocated to the other Members to the extent that such
allocations would not cause such other Members to have an Adjusted Capital
Account Deficit and allocated among such other Members in proportion to their
Percentage Interests. Any allocation of items of loss pursuant to this Section
5.01(a) shall be taken into account in computing subsequent allocations pursuant
to this Article V, and prior to any allocation of items in such Section so that
the net amount of any items allocated to each Member pursuant to this Article V
shall, to the maximum extent practicable, be equal to the net amount that would
have been allocated to each Member pursuant to this Article V if no reallocation
of losses had occurred under this Section 5.01(a).
(b) Net Profit. Net Profit shall be allocated to the Members in
proportion to their Percentage Interests.
5.002. Special Allocations. Notwithstanding Section 5.01, the following
special allocations shall be made in the following order:
(a) Minimum Gain Chargeback. If there is a net decrease in Company Minimum
Gain during any Fiscal Year, each Member shall be specially allocated items of
Company income and gain for such Fiscal Year (and, if necessary, in subsequent
fiscal years) in an amount equal to the portion of such Member's share of the
net decrease in Company Minimum Gain that is allocable to the disposition of
Company property subject to a Nonrecourse Liability, which share of such net
decrease shall be determined in accordance with Regulations Section
1.704-2(g)(2). Allocations pursuant to this Section 5.02(a) shall be made in
proportion to the respective amounts required to be allocated to each Member
under this Section 5.02(a). The items to be so allocated shall be determined in
accordance with Regulations Sections 1.704-2(f)(6) and 1.704-2(j)(2). This
Section 5.02(a) is intended to comply with the minimum gain chargeback
requirement contained in Regulations Section 1.704-2(f) and shall be interpreted
consistently therewith. To the extent permitted by such Regulations and for
purposes of this Section 5.02(a) only, each Member's net decrease in Company
Minimum Gain shall be determined prior to any other allocations pursuant to this
Article V with respect to such Fiscal Year and without regard to any net
decrease in Company Minimum Gain during such Fiscal Year.
(b) Chargeback of Minimum Gain Attributable to Member Nonrecourse Debt. If
there is a net decrease in Member Minimum Gain attributable to Member
Nonrecourse Debt, during any Fiscal Year, each member who has a share of the
Member Minimum Gain attributable to such Member Nonrecourse Debt (which share
shall be determined in accordance with Regulations Section 1.704-2(i)(5)) shall
be specially allocated items of Company income and gain for such Fiscal Year
(and, if necessary, in subsequent Fiscal Years) in an amount equal to that
portion of such Member's share of the net decrease in Member Minimum Gain
attributable to such Member Nonrecourse Debt that is allocable to the
disposition of Company property subject to such Member Nonrecourse Debt (which
share of such net decrease shall be determined in accordance with Regulations
Section 1.704-2(i)(5)). Allocations pursuant to this Section 5.02(b) shall be
made in proportion to the amounts required to be allocated to each Member under
this Section 5.02(b). The items to be so allocated shall be determined in
accordance with Regulations Sections 1.704-2(i)(4) and 1.704-2(j)(2)(ii). This
Section 5.02(b) is intended to comply with the minimum gain chargeback
requirement contained in Regulations Section 1.704-2(i)(4) and shall be
interpreted consistently therewith. Solely for purposes of this Section 5.02(b),
each Member's net decrease in Member Minimum Gain shall be determined prior to
any other allocations pursuant to this Article V with respect to such Fiscal
Year, other than allocations pursuant to Section 5.02(a).
(c) Qualified Income Offset. If a Member unexpectedly receives any
adjustments, allocations, or distributions described in Regulations Section
1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Company income and gain shall be
specifically allocated to such Member in an amount and manner sufficient to
eliminate such excess deficit balance as quickly as possible. Any specific
allocations of items of income and gain pursuant to this Section 5.02(c) shall
be taken into account in computing subsequent allocations of income and gain
pursuant to this Article V so that the net amount of any item so allocated and
the income, gain, and losses allocated to each Member pursuant to this Article V
to the extent possible, shall be equal to the net amount that would have been
allocated to each such Member pursuant to the provisions of this Section 5.02(c)
if such unexpected adjustments, allocations, or distributions had not occurred,
provided that an allocation pursuant to this Section 5.02(c) shall be made if
and only to the extent that such Member would have an Adjusted Capital Account
Deficit after all other allocations provided for in this Article V have been
tentatively made as if this Section 5.02(c) were not in this Agreement. The
foregoing provision is intended to comply with Regulations Section 1.704-
1(b)(2)(ii)(d) and shall be interpreted and applied in a manner consistent with
such Regulations.
(d) Gross Income Allocation. In the event that any Member has an Adjusted
Capital Account Deficit at the end of any Fiscal Year, then each such Member
shall be specially allocated items of income in the amount of such excess as
quickly as possible, provided that an allocation pursuant to this Section
5.02(d) shall be made if and only to the extent that such Member would have an
Adjusted Capital Account Deficit in excess of such sum after all other
allocations provided for in this Article V have been tentatively made as if this
Section 5.02(d) were not in this Agreement.
(e) Nonrecourse Deductions. Any nonrecourse deductions (as defined in
Regulations Section 1.704-2(b)(1)) for any Fiscal Year or other period shall be
specially allocated to the Members in proportion to their then respective
Percentage Interests.
(f) Member Nonrecourse Deductions. Those items of Company loss, deduction,
or Code Section 705(a)(2)(B) expenditures which are attributable to Member
Nonrecourse Debt for any Fiscal Year or other period shall be specially
allocated to the Member who bears the economic risk of loss with respect to the
Member Nonrecourse Debt to which such items are attributable in accordance with
Regulations Section 1.704-2(i).
(g) Section 754 Adjustments. To the extent an adjustment to the adjusted
tax basis of any Company asset is required to be taken into account in
determining Capital Accounts pursuant to Regulations Section 1.704-
1(b)(2)(iv)(m), the amount of such adjustment to the Capital Account shall be
treated as an item of gain (if the adjustment increases the basis of the asset)
or loss (if the adjustment decreases such basis), and such gain or loss shall be
specially allocated to the Members in a manner consistent with the manner in
which their Capital Accounts are required to be adjusted pursuant to such
Regulations Section.
(h) Subsequent Allocations. Any special allocation of items of income or
gain pursuant to Section 5.02(a), (b), (c) or (d) shall be taken into account in
computing subsequent allocations pursuant to this Article V, so that the net
amount of any items allocated to each Member shall, to the extent practicable,
be equal to the net amount that would have been allocated to each such Member
pursuant to the provisions of this Article V if such special allocations under
this Section 5.02 had not occurred.
5.03. Code Section 704(c) Allocations. Notwithstanding any other provision
in this Article V, in accordance with Code Section 704(c) and the Regulations
promulgated thereunder, income, gain, loss, and deduction with respect to any
property contributed to the capital of the Company shall, solely for tax
purposes, be allocated among the Members so as to take account of any variation
between the adjusted basis of such property to the Company for federal income
tax purposes and its fair market value on the date of contribution. Allocations
pursuant to this Section 5.03 are solely for purposes of federal, state and
local taxes. As such, they shall not affect or in any way be taken into account
in computing a Member's Capital Account or share of profits, losses, or other
items of distributions pursuant to any provision of this Agreement.
5.04. Allocations of Net Profits and Losses and Distributions in Respect of
a Transferred Interest. If any Membership Interest is transferred, or is
increased or decreased by reason of the admission of a new Member or otherwise,
during any Fiscal Year of the Company, Net Profit or Net Loss for such Fiscal
Year shall be assigned pro rata to each day in the particular period of such
Fiscal Year to which such item is attributable (i.e., the day on or during which
it is accrued or otherwise incurred) and the amount of each such item so
assigned to any such day shall be allocated to the Member based upon its
respective Membership Interest at the close of such day.
5.05. Distributions by the Company.
(a) Subject to applicable law and any limitations contained elsewhere in
this Agreement (including, without limitation, Section 4.05(b)), the Management
Committee (i) shall, at the time of any payment by the Members in respect of
their income tax obligations attributable to their respective Membership
Interests, distribute to the Members, based upon their then respective
Percentage Interests, 40% (which percentage the Management Committee may from
time to time hereafter, upon the unanimous vote of the Managers, adjust to
reflect material changes in tax rates) of the Net Profits and (ii) may, in its
sole discretion, elect from time to time to otherwise distribute Distributable
Cash to the Members; provided that, except as contemplated by clause (i), (x)
the Management Committee shall not make any distribution unless the Company's
obligation to EXPERIAN under the $3MM Note shall have been satisfied in full and
(y) subject to satisfaction of the condition set forth in preceding subclause
(x), (1) for the three year period from and after the Effective Time until the
third anniversary thereof, the Management Committee shall not make any
distribution unless (A) the Company's obligation to FAFCO under the $25MM Note
shall have been satisfied in full and (B) the Company shall have, both before
and after giving effect to such distribution, operating cash balances of not
less than $35,000,000 (as such amount may from time to time hereafter be
adjusted in good faith by the Management Committee to reflect the average
monthly expenses of the Company) and (2) for the four year period from and after
the third anniversary of the Effective Time until the seventh anniversary of the
Effective Time, the Management Committee shall distribute for each year of such
period an amount equal to not less than one-half of the difference of (A) the
Net Profits for the applicable year minus (B) any distribution made pursuant to
clause (i) above for such year.
(b) All distributions hereunder shall be made in the following order of
priority:
(i) To the Members in proportion to their unreturned Capital
Contributions until each Member has received cumulative distributions from
the Effective Date through the date of such distribution equal to its
Capital Contributions; and
(ii) To the Members in proportion to their Percentage Interests.
All such distributions shall be made only to the Persons who, according to the
books and records of the Company, are the holders of record of the Membership
Interests in respect of which such distributions are made on the actual date of
distribution.
5.06. Form of Distribution. A Member, regardless of the nature of the
Member's Capital Contribution, has no right to demand and receive any
distribution from the Company in any form other than money. Except as provided
in Article VIII, no Member may be compelled to accept from the Company a
distribution of any asset in kind in lieu of a proportionate distribution of
money being made to other Members.
5.07. Restriction on Distributions.
(a) Except for distributions to the Members in accordance with Section
5.05(a)(i), no distribution shall be made if, after giving effect to the
distribution:
(i) The Company would not be able to pay its debts as they become due
in the usual course of business; or
(ii) The Company's total assets would be less than the sum of its
total liabilities plus, unless this Agreement provides otherwise, the
amount that would be needed, if the Company were to be dissolved at the
time of the distribution, to satisfy the preferential rights of other
Members, if any, upon dissolution that are superior to the rights of the
Member receiving the distribution.
(b) The Management Committee may base a determination that a distribution
is not prohibited on any of the following:
(i) Financial statements prepared in accordance with GAAP;
(ii) A fair valuation; or
(iii) Any other method that is reasonable in the circumstances.
5.08. Return of Distributions. Members who receive distributions made in
violation of the Act or this Agreement shall return such distributions to the
Company. Except for those distributions made in violation of the Act or this
Agreement, no Member shall be obligated to return any distribution to the
Company or pay the amount of any distribution for the account of the Company or
to any creditor of the Company. The amount of any distribution returned to the
Company by a Member or paid by a Member for the account of the Company or to a
creditor of the Company shall be added to the account or accounts from which it
was subtracted when it was distributed to the Member.
ARTICLE VI
MEMBERSHIP INTEREST TRANSFER RESTRICTIONS
6.01. Transfer Restrictions. EXCEPT FOR TRANSFERS REQUIRED OR PERMITTED
PURSUANT TO ARTICLE VI OF THE JV AGREEMENT OR THIS ARTICLE VI, EACH MEMBER
AGREES THAT IT WILL NOT IN ANY WAY, DIRECTLY OR INDIRECTLY, TRANSFER ITS
MEMBERSHIP INTEREST (WHETHER NOW OWNED OR HEREAFTER ACQUIRED), OR ANY RIGHT OR
INTEREST THEREIN, WHETHER VOLUNTARILY OR BY OPERATION OF LAW.
6.02. Further Restrictions on Transfer of Interests. In addition to other
restrictions found in this Agreement, no Member shall Transfer all or any part
of its Membership Interest: without compliance with all federal and state
securities laws, and if the Membership Interest to be transferred, when added to
the total of all other Membership Interests transferred in the preceding twelve
(12) consecutive months prior thereto, would cause the tax termination of the
Company under Code Section 708(b)(1)(B).
6.03. Void Transfer. Any purported transfer of any Member's Membership
Interest in violation of Sections 6.01 and 6.02 shall be void and the Company
shall not give effect to any such purported transfer or recognize any such
purported transferee. In the event of any such purported transfer, the Company
shall continue to recognize as a Member only those persons whose names appear in
the records of the Company.
6.04. Permitted Transfers.
(a) Notwithstanding anything to the contrary contained in this Article VI,
any Member may effect a Transfer upon the terms and conditions of this Section
6.04 set forth below (each a "Permitted Transfer" and each transferee thereof, a
"Permitted Transferee").
(b) The Membership Interest of any Member may be transferred to any other
Member, subject to compliance with Section 6.02, and without the prior written
consent of the other Members or the Management Committee.
(c) If any Member desires to sell all or any part of its Membership
Interest (other than pursuant to Section 6.04(b)) and (i) is not otherwise
prohibited from doing so under this Section 6.04 and (ii) identifies a proposed
Transferee that is willing to purchase all or part of such Membership Interest
for cash (a "Proposed Transferee"), such Member shall first offer to sell the
Offered Interest to the other Members (the "Offer") by giving the other Members
written notice thereof (an "Offer Notice") specifying (A) the identity of the
Proposed Transferee, (B) the Membership Interest offered (the "Offered
Interest"), (C) the price at which the Proposed Transferee is willing to
purchase the Offered Interest (the "Offering Price") and (D) any other terms of
the Offer (the "Offer Terms"). Following its receipt of an Offer Notice, each
Member shall have a ten (10) day period during which it may elect to accept the
Offer and acquire all or a portion of the Offered Interest at the Offering Price
and upon the Offer Terms. The failure of any Member to deliver a written
election notice within the applicable period shall constitute an election on the
part of that Member not to purchase any of the Offered Interest. Each Member so
electing to acquire shall be entitled to purchase a portion of the Offered
Interest in the same proportion that the Percentage Interest of such Member
bears to the aggregate of the Percentage Interests of all of the Members
electing to so purchase the Offered Interest. In the event any Member elects to
purchase none or less than all of its pro rata share of the Offered Interest,
then each other Member can elect to purchase any such remaining portion of the
Offered Interest in the same proportion that the Percentage Interest of such
Member bears to the aggregate of the Percentage Interests of all of the Members
electing to so purchase the remaining portion of the Offered Interest.
(d) In the event the other Members elect not to purchase or obtain all of
the Offered Interest (an "Offer Rejection"), the transferring Member shall be
free, subject to compliance with the tag-along provisions of Section 6.04(e)
below, if applicable, to sell the Offered Interest to the Permitted Transferee
at the Offering Price and upon the Offer Terms. If such sale is not consummated
at the Offering Price and upon the Offer Terms within sixty (60) days from the
date of the Offer Rejection, then the provisions of Section 6.04(c) shall once
again apply.
(e) In the event that any FAFCO Member proposes to effect a Permitted
Transfer of all or any part of its Membership Interest pursuant to Section
6.04(d) above, such transferring FAFCO Member shall promptly give written notice
(such notice, a "Transfer Notice") thereof to EXPERIAN setting forth the name
of, and the portion of its Membership Interest to be purchased by, the Permitted
Transferee, the purchase price of the Membership Interest to be sold, any other
significant terms of such sale and the date such proposed sale will be
consummated. EXPERIAN shall have the right, exercisable upon irrevocable written
notice to the transferring FAFCO Member within ten (10) days after receipt of a
Transfer Notice, to participate in such sale on the same terms and conditions as
set forth in the Transfer Notice and to sell all or any portion of its
Membership Interest. EXPERIAN shall effect its participation in the sale by
delivering on the date scheduled for such sale to the transferring FAFCO Member
for delivery to the Permitted Transferee one or more certificates, if any,
representing the Membership Interest which EXPERIAN desires to sell in
accordance with this Section 6.04(e) and/or any other duly executed instruments
of transfer necessary to effect the transfer of its Membership Interest. Such
certificate or certificates and/or instruments of transfer delivered by EXPERIAN
to the transferring FAFCO Member shall be delivered on such date to such
Permitted Transferee in consummation of the sale of EXPERIAN's Membership
Interest pursuant to the terms and conditions specified in the Transfer Notice,
and the transferring FAFCO Member shall concurrently therewith remit to EXPERIAN
that portion of the sale proceeds or other consideration to which EXPERIAN is
entitled by reason of its participation in such sale. A transferring FAFCO
Member's sale of all or any portion of its Membership Interest shall be effected
on the terms and conditions set forth in the applicable Transfer Notice. In no
event shall a transferring FAFCO Member receive special consideration in such
sale. The exercise or non-exercise of the rights of EXPERIAN hereunder to
participate in one or more sales of a Membership Interest made by a FAFCO Member
shall not adversely affect its right to participate in subsequent sales of any
Membership Interest subject to this Section 6.04.
6.05. Third-Party Offers. Notwithstanding anything to the contrary
contained in this Article VI, in the event that an offer is made by an unrelated
third-party to purchase the entire Company (a "Third-Party Offer") and such
Third-Party Offer is acceptable to the FAFCO Members, then the FAFCO Members
shall first offer to sell 100% of their Membership Interests to EXPERIAN by
giving EXPERIAN written notice thereof specifying the terms of the Third-Party
Offer upon which the FAFCO Members are willing to sell their Membership
Interests (the "Third-Party Terms"). Following its receipt of such notice
pursuant to this Section 6.05, EXPERIAN shall have a thirty (30) day period
during which it may elect to acquire all of the Membership Interests of the
FAFCO Members upon the Third-Party Terms. In the event that EXPERIAN rejects the
offer of the FAFCO Members hereunder or fails to deliver a written notice
accepting such offer within the applicable period, (a) the FAFCO Members shall
be free to sell their Membership Interests to such third-party purchaser upon
the Third-Party Terms and (b) EXPERIAN shall be obligated to sell its Membership
Interest to such third-party purchaser upon the Third-Party Terms and otherwise
upon terms no less favorable than those given by the third-party purchaser to
the FAFCO Members (pro rata based upon the relative size of the Membership
Interest of EXPERIAN vis-a-vis the aggregate Membership Interests of the FAFCO
Members).
ARTICLE VII
BUSINESS OPPORTUNITIES
7.01. Business Opportunities.
(a) If the Company becomes aware of any Company Development Opportunity,
the Management Committee will give due consideration to the desirability of
pursuing such Company Development Opportunity. Except as provided in Section
7.01(c), if the Company does not promptly pursue such Company Development
Opportunity, each of the Members and their respective Affiliates shall be free
to pursue such Company Development Opportunity and the Company shall not have
any right, claim or interest in or to any revenues or assets resulting
therefrom.
(b) Should any Member or any of its Affiliates discover, develop or be
offered a Company Development Opportunity, such Person will first offer such
Company Development Opportunity to the Company. Except as provided in Section
7.01(c), if the Management Committee does not promptly pursue such Company
Development Opportunity, then the Person discovering, developing or being
offered such Company Development Opportunity and its Affiliates shall be free to
pursue such Company Development Opportunity and neither the Company nor any
other Member shall have any right, claim or interest in or to any revenues or
assets resulting therefrom.
(c) Notwithstanding anything in Sections 7.01(a) and 7.01(b) to the
contrary, no FAFCO Member nor any of its Affiliates shall be free to pursue any
Company Development Opportunity offered to but not promptly pursued by the
Company if (i) such Company Development Opportunity was offered to the Company
by a FAFCO Member or any of its Affiliates and (ii) the Experian Managers voted
to pursue such Company Development Opportunity. Notwithstanding anything in
Sections 7.01(a) and 7.01(b) to the contrary, neither EXPERIAN nor any of its
Affiliates shall be free to pursue any Company Development Opportunity offered
to but not promptly pursued by the Company if (i) such Company Development
Opportunity was offered to the Company by EXPERIAN or any of its Affiliates and
(ii) the FAFCO Managers voted to pursue such Company Development Opportunity.
(d) Notwithstanding anything in Sections 7.01(a), 7.01(b) or 7.01(c) to the
contrary, to the extent any provision of this Agreement regarding Company
Development Opportunities conflicts with the Data Services Agreement referenced
in Section 7.01(d) of the JV Agreement, the provisions of the Data Services
Agreement shall control.
ARTICLE VII
CONSEQUENCES OF DISSOLUTION EVENTS;
TERMINATION OF MEMBERSHIP INTEREST
8.01. Dissolution Event. Upon the occurrence of a Dissolution Event, the
Company shall dissolve unless the remaining Members ("Remaining Members")
holding a majority of the Percentage Interests which all Remaining Members hold,
consent within ninety (90) days of the Dissolution Event to the continuation of
the business of the Company. If the requisite majority of the Remaining Members
consents to the continuation of the business of the Company, the Company and/or
the Remaining Members shall have the right to purchase, and if such right is
exercised, the Member whose actions or conduct resulted in the Dissolution Event
("Former Member") or such Former Member's legal representative shall sell, the
Former Member's Membership Interest ("Former Member's Interest") as provided in
this Article VIII.
8.02. Withdrawal. Notwithstanding Section 8.01, upon the termination of a
Member's Membership Interest in accordance with Section 3.03, such Member shall
be treated as a Former Member, and, unless the Company is to dissolve, the
Company and/or the Remaining Members shall have the right to purchase, and if
such right is exercised, the Former Member shall sell, the Former Member's
Interest as provided in this Article VIII.
8.03. Purchase Price. The purchase price for the Former Member's Interest
shall be calculated using the formula for determining the Put Price (as defined
in the JV Agreement), provided that such purchase price shall not be subject to
the limitations contained in Sections 6.01(c) and 7.01(c) of the JV Agreement,
and shall be paid in cash.
8.04. Notice of Intent to Purchase. Within thirty (30) days after the
Management Committee has notified the Remaining Members as to the purchase price
of the Former Member's Interest determined in accordance with Section 8.03, each
Remaining Member shall notify the Management Committee in writing of its desire
to purchase all or a portion of the Former Member's Interest. The failure of any
Remaining Member to submit a notice within the applicable period shall
constitute an election on the part of such Member not to purchase any of the
Former Member's Interest. Each Remaining Member so electing to purchase shall be
entitled to purchase a portion of the Former Member's Interest in the same
proportion that the Percentage Interest of the Remaining Member bears to the
aggregate of the Percentage Interests of all of the Remaining Members electing
to purchase the Former Member's Interest.
8.05. Purchase Pro Rata. If any Remaining Member elects to purchase none or
less than all of its pro rata share of the Former Member's Interest, then each
other Remaining Member may elect to purchase any such remaining portion of the
Former Member's Interest in the same proportion that the Percentage Interest of
such Remaining Member bears to the aggregate of the Percentage Interests of all
of the Remaining Members electing to so purchase the remaining portion of the
Former Member's Interest. If the Remaining Members fail to purchase the entire
Membership Interest of the Former Member, the Company shall purchase any
remaining share of the Former Member's Interest.
8.06. Winding Up the Company. If, upon the occurrence of a Dissolution
Event, the requisite majority of the Remaining Members fails to consent to the
continuation of the business of the Company, the Management Committee shall
promptly notify the Members of such dissolution and shall wind up the affairs of
the Company and liquidate the Company assets. Such winding up and liquidation
shall be accomplished as soon as practicable giving due regard to the prudent
liquidation of the Company's assets in such a manner as to preserve the value of
the Company's assets to the extent that the Management Committee deems
practicable. Distributions made with respect to the liquidation of the Company
shall be made to the Members no later than ninety days following completion of
the liquidation. The proceeds of such liquidation shall be paid in the following
order:
(a) First, in payment of the debts and liabilities of the Company and
the expenses of liquidation;
(b) Then, to the establishment of such reserves as may be deemed
reasonably necessary by the Management Committee for any contingent or
unforeseen liabilities or obligations of the Company; and
(c) Then, after making all allocations required by Section 5.01, to
Members, in proportion to the positive balance in the Members' respective
Capital Accounts after satisfaction of each Member's obligation to the
Company.
8.07. Final Statement. Each of the Members shall be furnished with a
statement which shall set forth the assets and liabilities of the Company (as of
the date of complete liquidation) and an accounting of the manner in which the
assets of the Company were distributed.
ARTICLE IX
BOOKS AND RECORDS; TAX RETURNS; ACCESS BY MEMBERS
9.01. Company Books and Records. Proper and complete records and books of
account of the Company business shall be kept by the Company under the
supervision of the Management Committee and shall be audited by certified public
accountants selected by the Management Committee. The financial books of the
Company shall be maintained in accordance with GAAP.
9.02. Tax Returns.
(a) Preparation; Filing. At the expense of the Company, the Tax Matters
Member shall prepare or cause to be prepared all federal and state Company tax
returns required to be file. Except as otherwise expressly provided in this
Agreement, all positions and elections reflected on all Company tax returns
shall be taken, and all Company tax returns shall be filed, only after
consultation with the Members. For federal income tax purposes only, the Members
agree that their relationship under this Agreement shall constitute a
partnership within the meaning of Section 761(a) of the Code. Tax allocations
shall be made in accordance with Article V hereof. The Members agree to take all
action, including the amendment of this Agreement and the execution of other
documents as may be required to qualify for such tax treatment. Each Member
shall bear the sole expense and cost of preparing its separate tax return. Each
Member shall agree to file its separate federal income tax returns in a manner
consistent with the provisions of this Agreement and in accordance with
applicable federal income tax law. The Members shall provide each other with
copies of all correspondence or summaries of other communications with the
Internal Revenue Service or U.S. Treasury regarding any aspect of items of
Company income, gain, loss or deduction and no Member shall enter into
settlement negotiations with the Internal Revenue Service or U.S. Treasury with
respect to the federal income tax treatment of any Company item of income, gain,
loss or deduction without first giving reasonable written advance notice of such
intended action to the other Member.
(b) Tax Matters Member. FAREISI is hereby designated as the "tax matters
partner", as that term is defined in Section 6231(a)(7) of the Code (the "Tax
Matters Member"). The Tax Matters Member shall furnish promptly to the Internal
Revenue Service a written statement, in accordance with Temporary Treasury
Regulations (S) 301.6223(c)-IT (or any successor thereto) in order to cause the
Internal Revenue Service to mail to each Member all notices described in Section
6223(a) of the Code or any corresponding provision of any successor federal
internal revenue law (and comparable provisions of state and local income tax
laws).
(c) Duties of the Tax Matters Member. The Tax Matters Member shall
cooperate with the other Members and shall promptly provide the other Members
with copies of notices or other materials from, and inform the other Member of
discussions engaged in with, any federal, state, local or international taxing
authority and shall provide the other Members with notice of all scheduled
administrative proceedings, including meetings with agents of any federal,
state, local or international taxing authority, technical advice conferences and
appellate hearings, as soon as possible after receiving notice of the scheduling
of such proceedings. The Tax Matters Member will schedule such proceedings only
after consulting the other Members with a view to accommodating the reasonable
convenience of both the Tax Matters Member and the other Members. The Tax
Matters Member shall not take any action of any nature whatsoever including,
without limitation, agreeing to extend the period of limitations for
assessments, filing a petition or complaint in any court, filing a request for
an administrative adjustment of Company items after any return has been filed,
or entering into any settlement agreement with the Internal Revenue Service, the
U.S. Treasury or any other federal, state, local or international taxing
authority with respect to Company items of income, gain, loss or deduction, in
any such case without first consulting each other Member. The Tax Matters Member
may request extensions to file any tax return or statement without consulting
with, but shall so inform, the Management Committee. The provisions of this
Agreement regarding the Company's tax returns shall survive the termination of
the Company and the transfer of any Member's Membership Interest and shall
remain in effect for the period of time necessary to resolve any and all matters
regarding the federal, state, local and international income taxation of the
Company and items of Company income, gain, loss and deduction.
9.03. Inspection, Audit and Copies of Records. Each Member shall have the
right to inspect, make a separate audit and make copies of the books and records
of the Company. The Member exercising such right shall bear all expenses
incurred in the exercise of these rights.
9.04. Access. Each Member shall have access at reasonable times and upon
reasonable notice, without undue disruption of the business and operations of
the Company, to such properties, employees, agents, representatives and
information of the Company as it deems reasonably necessary in connection with
the ownership of its Membership Interest.
ARTICLE X
MISCELLANEOUS
10.01. Specific Performance. Due to the fact that the parties hereto will
be irreparably damaged in the event that this Agreement is not specifically
enforced, in the event of a breach or threatened breach of the terms, covenants
and/or conditions of this Agreement by any of the parties hereto, the other
parties shall, in addition to all other remedies, be entitled to a temporary or
permanent injunction, without showing any actual damage, and/or a decree for
specific performance, in accordance with the provisions hereof.
10.02. Amendments and Modifications. The provisions of this Agreement may
be waived, altered, amended, modified, or repealed, in whole or in part, only on
the written consent of all parties to this Agreement. Any oral representations
or modifications concerning this instrument shall be of no force or effect
unless contained in a subsequent written modification signed by all parties to
this Agreement.
10.03. 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 addressed as follows:
If to the Company:
First American Real Estate Solutions LLC
150 Second Avenue, Suite 1600
St. Petersburg, Florida 33701
Attn: Mr. John Long
Telephone: (800) 449-8732
Telecopy: (813) 895-3619
If to the FAFCO Members:
c/o The First American Financial Corporation
114 East Fifth Street (P.O. Box 267)
Santa Ana, California 92702
Attn: Mr. Parker Kennedy
Telephone: (714) 558-3211
Telecopy: (714) 647-2242
With a copy to:
White & Case
633 West Fifth Street, 19th Floor
Los Angeles, CA 90071
Attn: Neil W. Rust
Telephone: (213) 620-7700
Telecopy: (213) 687-0758
If to EXPERIAN:
Experian Information Solutions, Inc.
505 City Parkway West
Orange, California 92868
Attn: General Counsel
Telephone: (714) 385-8296
Telecopy: (714) 938-2513
or to such other Person or address as any party shall specify by notice in
writing to each of the other parties hereto. 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 Business Days after deposit in the
U.S. mail, postage prepaid; (ii) if sent by FedEx or other overnight delivery
service, two Business Days after delivery to such service; (iii) if sent by
personal courier, upon receipt; and (iv) if sent by facsimile, upon receipt.
10.04. Attorneys' Fees. Should any litigation be commenced between the
parties hereto concerning any provision of this Agreement or the rights and
duties of any person in relation thereto, the party or parties prevailing in
such litigation shall be entitled, in addition to such other relief as may be
granted, to a reasonable sum as and for attorneys' fees in such litigation.
10.05. Further Assurances. Each of the parties hereto does hereby covenant
and agree on behalf of itself and its successors and assigns, without further
consideration, to execute and deliver such other instruments, documents and
statements, and to take such other action, as may be required by law or as are
necessary effectively to carry out the purposes of this Agreement.
10.06. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument.
10.07. Governing Law. This Agreement, including its existence, validity,
construction and operating effect, and the rights of each of the parties hereto,
shall be governed by and construed in accordance with the internal laws of the
State of California.
10.08. Successors. Subject to the restrictions against Transfer as herein
contained, the provisions of this Agreement shall inure to the benefit of and
shall be binding upon the respective successors and permitted assigns of each of
the parties hereto. Nothing in this Agreement, expressed or implied, is intended
to confer on any Person other than the parties hereto or their respective
successors and permitted assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
10.09. Severability. If any term, provision, covenant, or condition of this
Agreement is held by a court of competent jurisdiction to be invalid, void, or
unenforceable, the rest of this Agreement shall remain in full force and effect
and shall in no way be affected, impaired, or invalidated.
10.10. Entire Agreement. This Agreement, including all Schedules attached
hereto and any agreements referred to herein (including, without limitation, the
JV Agreement), constitutes the entire agreement of the parties pertaining to the
subject matter hereof, and fully supersedes any and all prior agreements or
understandings between the parties pertaining to the subject matter hereof.
10.11. Confidentiality. Subject to the requirements of applicable law, each
party shall maintain in confidence all information received from the Company
and, except as may otherwise be expressly permitted by a separate written
agreement, shall use such information only for the benefit of the Company, and
shall not disclose any such information to any third party or make any
unauthorized use thereof. Each party shall treat all such information with the
same degree of care against disclosure or unauthorized use which it affords to
its own confidential information. The obligation of confidentiality and non-use
shall not apply to any information which (a) is or becomes generally available
to the public through no fault of the receiving party, (b) is independently
developed by the receiving party or (c) is received in good faith from a third
party who is lawfully in possession of such information and has the lawful right
to disclose or use it.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first written above.
FIRST AMERICAN REAL ESTATE INFORMATION
SERVICES, INC.
By /s/ John Long
------------------------------------
Name: John Long
Title:
FIRST AMERICAN APPRAISAL SERVICES,
INC.
By /s/ Anand Nallathambi
------------------------------------
Name: Anand Nallathambi
Title:
FIRST AMERICAN APPRAISAL CONSULTING
SERVICES, INC.
By /s/ Anand Nallathambi
------------------------------------
Name: Anand Nallathambi
Title:
FIRST AMERICAN CREDCO, INC.
By /s/ Donald A. Robert
------------------------------------
Name: Donald A. Robert
Title: President
FIRST AMERICAN FIELD SERVICES, INC.
By /s/ Shari Nott
------------------------------------
Name: Shari Nott
Title: Vice President
FIRST AMERICAN FLOOD DATA
SERVICES, INC.
By /s/ Robert Douglas
------------------------------------
Name: Robert Douglas
Title: Senior Vice President
FIRST AMERICAN PROPERTY SERVICES,
INC.
By /s/ John Long
------------------------------------
Name: John Long
Title:
FIRST AMERICAN REAL ESTATE TAX
SERVICE, INC.
By /s/ David C. Yavorsky
------------------------------------
Name: David C. Yavorsky
Title: President
PASCO ENTERPRISES, INC.
By /s/ John Long
------------------------------------
Name: John Long
Title:
PRIME CREDIT REPORTS, INC.
By /s/ Donald A. Robert
------------------------------------
Name: Donald A. Robert
Title: Senior Vice President
PROPERTY FINANCIAL SERVICES OF NEW
ENGLAND, INC.
By /s/ Anand Nallathambi
------------------------------------
Name: Anand Nallathambi
Title:
DOCS ACQUISITION CORP.
By /s/ John Long
------------------------------------
Name: John Long
Title:
STRATEGIC MORTGAGE SERVICES,
INC. (TEXAS)
By /s/ Mark B. Rogers
------------------------------------
Name: Mark B. Rogers
Title: President
EXPERIAN INFORMATION SOLUTIONS, INC.
By /s/ D. V. Skilling
-----------------------------------
Name: D. Van Skilling
Title:
<PAGE>
Schedule 1 to
Operating Agreement
-------------------
Officers of
First American Real Estate Solutions LLC
John W. Long -- President and Chief Executive Officer
John Lamson -- Chief Financial Officer and Treasurer
Parker Kennedy -- Senior Vice President
Craig J. Zinda -- Secretary
<PAGE>
Schedule 2 to
Operating Agreement
-------------------
Approved Transactions
1. Experian is in the process of selling the real property located at
1700/1800 N.W. 66th Avenue, Plantation, Florida.
2. Experian has amended an Agreement with COMPS Infosystems, Inc. to
provide for the sale of its C&I Data Extract Business in Florida and
Georgia.
<PAGE>
Schedule 3 to
Operating Agreement
-------------------
Existing Borrowing Facilities
1. Intercompany indebtedness in the amount of $33,500,000 owing by
FAREISI to its sister company, First American Title Insurance Company
("FATICO"), resulting in an accounts payable balance in the aforesaid
amount owing to FATICO.
<PAGE>
EXHIBIT (10)(c)
FAREISI TRANSITION AGREEMENT
This FAREISI TRANSITION AGREEMENT (this "Agreement") is made as of the 30th
day of November, 1997 by and among First American Real Estate Solutions LLC, a
California limited liability company ("NEWCO"), First American Real Estate
Information Services, Inc., a California corporation ("FAREISI"), for itself and
each of the FAFCO Members (as such term is defined in the Joint Venture
Agreement described below), and The First American Financial Corporation, a
California corporation ("FAFCO").
RECITALS
A. NEWCO was formed on or before November 30, 1997 as a limited liability
company with FAREISI, certain affiliates of FAREISI, and EXPERIAN INFORMATION
SOLUTIONS, INC. ("EXPERIAN"), as members. The FAFCO Members contributed the
assets, liabilities and going business of their respective Real Estate
Information Service businesses (collectively, the "FAREISI Business") to NEWCO
in return for issuance of an eighty percent (80%) membership interest in NEWCO.
EXPERIAN contributed the assets, liabilities and going business of its Real
Estate Solutions business (the "RES Business") and Ten Million Dollars
($10,000,000) cash to NEWCO in return for issuance of a twenty percent (20%)
membership interest in NEWCO. These contributions and membership interests are
the subject of a Contribution and Joint Venture Agreement dated as of November
30, 1997 (the "Joint Venture Agreement") and an Operating Agreement dated as of
November 30, 1997 (the "Operating Agreement").
B. The parties have agreed to enter into this Agreement to provide for
certain matters relating to the operation of the FAREISI Business by NEWCO
following the Closing Date, subject to the terms and conditions set forth
herein.
NOW, THEREFORE, in consideration for the forgoing and for other good and
valuable consideration, and intending to be legally bound hereby, the parties
hereby agree as follows:
TERMS AND CONDITIONS
ARTICLE I
Definitions and Construction
1.1 Definitions: The Joint Venture Agreement and the Operating Agreement
define certain terms. Such terms shall, to the extent not inconsistent with the
definitions contained in this Agreement have the meanings set forth in those
agreements, where used herein and identified with initial capital letters.
1.2 Other Definitions, Meanings and Interpretations: For purposes of this
Agreement, the term "parties" means (except where the context otherwise
requires) NEWCO, FAREISI and FAFCO; the term "person" includes any natural
person, firm, association, partnership, corporation, limited liability company,
governmental agency or other entity other than the parties; and the words
"hereof," "herein," "hereby" and other words of similar import refer to this
Agreement as a whole. The headings of the Articles and Sections of this
Agreement have been included herein for convenience of reference only and shall
not be deemed to affect the meaning of the operative provisions of this
Agreement. The meanings given to defined terms (whether defined herein or in the
Joint Venture and Operating Agreements) shall apply equally to both the singular
and plural forms of such terms.
1.3 Relationship with the Joint Venture and Operating Agreements: This
Agreement is intended to support and supplement the Joint Venture and Operating
Agreements. Wherever possible, this Agreement and the Joint Venture and
Operating Agreements shall be construed as being consistent. Where particular
matters are addressed expressly in this Agreement, the terms and conditions of
this Agreement, and not those of the Joint Venture or Operating Agreement, shall
govern. Otherwise, the terms and conditions of the Joint Venture and Operating
Agreements shall govern.
ARTICLE II
Human Resource Matters
2.1 Transition of Hired Employees: Except as otherwise specifically
provided in Section 2.2, all employees of the FAREISI Business shall, at the
Effective Time, automatically become employees of NEWCO as of the Effective
Time. All employees of the FAREISI Business automatically hired by NEWCO as of
the Effective Time shall be referred to herein as the "Hired Employees." Except
as otherwise specifically provided in this Agreement, no FAFCO Member shall have
any obligation with respect to the Hired Employees after the Effective Time.
2.2 Inactive Employees: Notwithstanding anything in this Agreement, the
Joint Venture Agreement or the Operating Agreement to the contrary, FAREISI
shall cause each FAFCO Member (subject to such FAFCO Member's policies and
procedures) to retain all of its employees engaged in the FAREISI Business who
are on leave of absence status (whether paid or unpaid) as of the Effective Time
(together with all liabilities related to such retained employees), until such
time as such FAFCO Member has determined, in good faith and consistent with past
practices, that any such person may return to active status. Upon making such
determination, the FAFCO Member shall promptly notify NEWCO and such employee
shall thereafter, upon reporting to work, automatically become an employee of
NEWCO and shall be treated as a Hired Employee for the purposes of this
Agreement (and all liabilities related to such employee shall then be
automatically assumed by NEWCO).
2.3 Insurance Plans: FAFCO acknowledges and agrees that NEWCO does not
intend to establish its own medical, vision, dental, life, accidental death and
dismemberment, and long-term disability plans (collectively, "Insurance Plans")
for the Hired Employees. Accordingly, from and after the Effective Time, for so
long as NEWCO desires, FAFCO shall ensure that the Hired Employees and, to the
extent NEWCO so desires, any other employees hired from time to time by NEWCO
after the Effective Time (collectively, the "NEWCO Employees") are eligible to
participate in FAFCO's Insurance Plans upon terms and conditions substantially
similar to those offered to employees of FAFCO and its subsidiaries. NEWCO
agrees to reimburse FAFCO for FAFCO's direct costs, if any, incurred in making
the Insurance Plans available to the NEWCO Employees.
2.4 Accrued Vacation: Each FAFCO Member will transfer to NEWCO the
liability for accrued vacation pay of the Hired Employees as of the Effective
Time. NEWCO will credit to each Hired Employee the accrued vacation such Hired
Employee accrued with FAREISI prior to the Effective Time.
2.5 401(k) Plans: FAFCO acknowledges and agrees the NEWCO does not intend
to establish its own 401(k) plan for the NEWCO Employees. Accordingly, from and
after the Effective Time, for so long as NEWCO desires, FAFCO shall ensure that
the NEWCO Employees are eligible to participate in FAFCO's 401(k) plan upon
substantially terms and conditions substantially similar to those offered to
employees of FAFCO and its subsidiaries. NEWCO agrees to reimburse FAFCO for
FAFCO's direct costs, if any, incurred in making the 401(k) plan available to
the NEWCO Employees.
ARTICLE III
Treasury, Banking and Tax Matters
3.1 Disbursement Accounts:
(a) During the period from the Closing Date through the Effective Time
(the "Interim Operating Period"), FAREISI shall cause each FAFCO
Member to (i) retain control over any disbursement account presently
under the control of a FAFCO Member and (ii) continue to issue checks
on behalf of the FAREISI Business in the ordinary course of business.
FAREISI shall cause each FAFCO Member to separately account for
amounts distributed by such FAFCO Member on behalf of the FAREISI
Business.
(b) In the event that NEWCO does not have a disbursement system or
disbursement bank account in place by the Effective Time, FAREISI
shall cause each FAFCO Member to assist NEWCO in processing NEWCO
payments subsequent to the Effective Time, as follows:
Prior to the Effective Time, those FAFCO Members which need to do so
will open a new disbursement bank account ("NEWCO's FAREISI
Disbursement Bank Account") to process post-Effective Time payments
relating to the FAREISI Business. Each FAFCO Member will continue to
process such accounts payable after the Effective Time and shall be
entitled to be reimbursed for its direct costs incurred in connection
therewith. The checks for these payments will be written from NEWCO's
FAREISI Disbursement Bank Account. This bank account will not be run
as a controlled disbursement account. No FAFCO Member will fund this
account. The FAFCO Members will issue checks from NEWCO's FAREISI
Disbursement Bank Account only to the extent that funding has been
provided to this account by NEWCO in advance. There will be no
interest credited to this account. All bank costs, expenses, fees and
earnings credits relating to the opening and operation of NEWCO's
FAREISI Disbursement Bank Account will be the responsibility of NEWCO
and will be charged directly to such account.
(c) Within ninety (90) days after the Effective Date (the last day of such
ninety (90) day period to be known as the "Bank Account Cut-off
Date"), NEWCO will have completed all necessary actions to transfer
the ownership of NEWCO's FAREISI Disbursement Bank Account to NEWCO.
Regardless of whether the transfer of ownership of FAREISI's NEWCO
Disbursement Bank Account to NEWCO has been completed by the Bank
Account Cut-off Date, FAREISI shall cause the FAFCO Members to cease
issuing checks from this account as of the end of the Bank Account
Cut-Off Date.
3.2 Lock Box Accounts: FAREISI shall cause the FAFCO Members to assist
NEWCO in working work with FAFCO Members' banks to cause the lock boxes and
related bank accounts of the FAREISI Business in existence on the date hereof to
transfer to NEWCO as of the Effective Time. All cleared funds received into
these lock boxes prior to the Effective Time will be the property of the FAFCO
Members; provided, however that (i) if the cleared funds received into these
accounts during the Interim Operating Period exceed the cash disbursements
(including, without limitation, payroll disbursements) of the FAREISI Business
during the Interim Operating Period, FAREISI shall cause an aggregate amount
equal to such difference to be deposited in such lock box accounts within (2)
business days following the Effective Date and such amounts will become the
property of NEWCO, or (ii) if the cleared funds received into these accounts
during the Interim Operating Period are less than the cash disbursements
(including, without limitation, payroll disbursements) of the FAREISI Business
during the Interim Operating Period, NEWCO shall within two (2) business days
following the Effective Date reimburse FAREISI for such difference. All cleared
funds received after the Effective Time will be the property of NEWCO.
3.3 Payroll Accounts:
(a) During the Interim Period, FAREISI shall cause each FAFCO Member to
retain its payroll bank accounts in existence on the date hereof.
FAREISI shall cause the FAFCO Members to (with respect to the FAREISI
Business) issue paychecks and make direct payroll deposits from this
account for the period from the Closing Date through the end of the
last payroll period ending prior to the Effective Time. All payroll
liabilities of the FAREISI Business for Hired Employees accrued after
such time will be transferred to NEWCO at the Effective Time.
(b) In the event that NEWCO does not have a payroll system or payroll bank
account in place by the Effective Time, FAREISI shall cause each FAFCO
Member to assist NEWCO in processing NEWCO's payroll related to the
FAREISI Business subsequent to the Effective Time, as follows:
Prior to the Effective Time, those FAFCO Members which need to do so
will open a new payroll bank account ("NEWCO's FAREISI Payroll Bank
Account") to process NEWCO payroll relating to the FAREISI Business.
Each FAFCO Member shall continue to process such payroll after the
Effective Time and shall be entitled to be reimbursed for its direct
costs incurred in connection therewith. These payments will be issued
from NEWCO's FAREISI Payroll Bank Account. This bank account will not
be run as a controlled disbursement account. No FAFCO Member will fund
this account. NEWCO must deposit funds into the account for payroll
taxes paid and net payroll one day before each pay day. There will be
no interest credited to this account. All bank costs, expenses, fees
and earnings credits relating to the opening and operation of NEWCO's
FAREISI Payroll Bank Account will be the responsibility of NEWCO and
will be charged directly to such account.
(c) By the Bank Account Cut-off Date, NEWCO will have completed all
necessary actions to transfer the ownership of NEWCO's FAREISI Payroll
Bank Account to NEWCO. Regardless of whether the transfer of ownership
of NEWCO's FAREISI Payroll Bank Account to NEWCO has been completed by
the Bank Account Cut-off Date, FAREISI will cause the FAFCO Members to
cease issuing checks and making payments from this account as of the
end of the Bank Account Cut-Off Date.
3.4 Escrow and Petty Cash Accounts: FAREISI shall cause the FAFCO Members
to assist NEWCO in working with FAREISI's banks to cause the escrow and petty
cash bank accounts applicable to the FAREISI Business in existence on the date
hereof to transfer to NEWCO as of the Effective Time. Funds in these accounts as
of the Effective Time will be the property of NEWCO. FAREISI shall cause the
FAFCO Members to operate and fund these accounts in the ordinary course of
business until the Effective Date.
3.5 Tax and Wage Information: Each Hired Employee will receive one W-2 and
one 1099 from each FAFCO Member by which such employee was employed for calendar
year 1997.
ARTICLE IV
Financial Coordination
----------------------
4.1 Bonuses: FAREISI shall cause the account balances of such accounts as
are kept by each FAFCO Member for the purpose of awarding bonuses and/or
commissions to such FAFCO Members' employees under any applicable bonus or
commission plans, if any, as funded through the Effective Time with respect to
the Hired Employees to be transferred to NEWCO at the Effective Time. FAREISI
shall cause each FAFCO Member to determine, in good faith and generally
consistent with past practice, the actual payout amounts for the Hired Employees
under such plans, if any, for that portion of fiscal year 1997/1998 up to the
Effective Time in accordance with that FAFCO Members' normal practices and
processes and thereafter deliver such payout information to NEWCO. NEWCO shall
distribute such bonuses/commissions, as instructed by the FAFCO Member, to the
appropriate recipients at such times as NEWCO shall determine (but in no event
prior to January 1, 1998). Within five (5) business days following any payment
of such bonuses/commissions, FAREISI shall cause the FAFCO Member to reimburse
NEWCO for the total costs related to such bonuses/commissions to the extent they
relate to the period through November 30, 1997.
4.2 Surety Bonds: As promptly as possible after the Effective time, NEWCO
shall take any and all action necessary to have each surety bond relating to the
FAREISI Business which was provided by any FAFCO Member to be replaced by a
surety bond obtained by NEWCO. If, after the Effective Time, any FAFCO Member is
required to pay any amounts under any surety bond for actions or inactions on
the part of NEWCO or any of its affiliates, then NEWCO shall reimburse such
FAFCO Member for all amounts paid by such FAFCO Member under such surety bond
within five (5) business days of receipt from the FAFCO Member of a request for
the payment of such amounts.
ARTICLE V
Corporate Purchase Agreements
5.1 Certain Existing Purchase Agreements: Prior to the Effective Date, the
FAREISI Business received goods and services pursuant to purchase agreements
entered into by the FAFCO Members on behalf of all of their business units (the
"Existing Purchase Agreements"). The Joint Venture and Operating Agreements do
not contemplate that NEWCO will be able to continue to obtain goods and services
after the Effective Time pursuant to the Existing Purchase Agreements.
Therefore, NEWCO shall use its reasonable best efforts to obtain new contracts
from such vendors or other, lenders on a stand-alone basis as promptly as
possible after the Effective Time. In the meantime, however, in order to provide
NEWCO with an opportunity to solicit new bids and negotiate new contracts for
the goods and services provided under the Existing Purchase Agreements, FAREISI
shall cause the FAFCO Members to, if and only to the extent expressly permitted
by the terms of the Existing Purchase Agreements, allow NEWCO to purchase goods
and services pursuant to the Existing Purchase Agreements for, except as
provided below, a period not to exceed one hundred eighty (180) days after the
Effective Date (the "Transition Period"). During the Transition Period, NEWCO
shall pay all vendors providing goods or services to it under the Existing
Purchase Agreements pursuant to separate purchase orders. Upon expiration of the
Transition Period, NEWCO's right to purchase goods and services pursuant to the
Existing Purchase Agreements shall terminate and FAREISI shall have no other
obligations to NEWCO with respect to such agreements.
ARTICLE VI
Additional Agreements
6.1 Excelis Agreement: During the Interim Operating Period, FAFCO, FAREISI
and NEWCO shall, subject to the terms of the Operating Agreement as incorporated
into the Interim Operating Agreement, use their best efforts to document the
relationship that Excelis, Inc. will have with NEWCO from and after the
Effective Time.
6.2 Dallas Property: During the Interim Operating Period, FAREISI and NEWCO
shall, subject to the terms of the Operating Agreement as incorporated into the
Interim Operating Agreement, use their best efforts to document the relationship
that FAREISI will have with NEWCO from and after the Effective Time in respect
of that certain real property owned by FAREISI and located at 8435 Stemmons
Freeway, Dallas, Texas (the "Dallas Property"), which relationship shall require
FAREISI (i) to sublease to NEWCO that space currently utilized in connection
with the FAREISI Business and (ii) to make available to NEWCO certain tenant
improvements at the Dallas Property, which tenant improvements shall be paid for
on a monthly basis over a ten-year period.
ARTICLE VII
General Support Services
7.1 Post-Effective Date Support Arrangements: Each of FAREISI and NEWCO
anticipate that occasional requests for services regarding tax, payroll,
treasury and other matters (including requests to answer specific questions
related thereto) may be made by the other party after the Effective Date.
Subject to the terms of the Operating Agreement, such services shall be provided
without charge unless the party receiving such request determines, in its sole
discretion, that satisfaction of such request would involve the expenditure of a
significant amount of time and/or resources, in which case, such party shall
provide to the requesting party an estimate of the costs anticipated to be
incurred in satisfying the request, which costs shall include (a) the pro rata
portion of the salary and bonus of the employees actually providing the services
requested pursuant hereto, (b) reasonable out-of-pocket expenses (evidenced by
appropriate documentation) and (c) a payroll expense charge in an amount equal
to 23% of the amount of salary billed and 11% of bonus billed, pursuant to
clause (a) above. Upon receipt of such estimate, the requesting party shall have
two (2) business days in which to notify the other party whether such party
should undertake to provide the requested services. If such services are
provided, the party providing the services shall deliver to the requesting party
an invoice on a monthly basis containing a description of the services performed
and the aggregate costs actually incurred in performing such services (which
amount may exceed the estimate provided to the requesting party, provided that
in such case, the party providing the services shall provide reasonable detail
to the requesting party as to the nature of such excess). The invoice shall be
paid by the requesting party within thirty (30) days of receipt thereof.
Notwithstanding the foregoing, FAREISI and NEWCO may from time to time require
personnel and other data from the other party related to or required in
connection with their maintenance of human resources databases, which
information shall be provided to the requesting party without charge. The
parties obligation to provide support services pursuant to this Section 6.1 is
in addition to any other specific support services commitments agreed to by the
parties pursuant to any other agreements, including the Joint Venture and
Operating Agreements, and nothing in this Section 6.1 is intended or shall be
construed to obligate any party to pay or reimburse any amounts with respect to
such other commitments.
ARTICLE VIII
Miscellaneous
8.1 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.
8.2 Enforcement Against the FAFCO Members: FAREISI shall cause each FAFCO
Member to comply with its obligations under this Agreement.
8.3 Indemnity:
(a) NEWCO agrees to defend, indemnify and hold harmless each FAFCO Member
and its subsidiaries and affiliates (including, without limitation,
their respective officers, directors, employees, shareholders and
agents) (the "FAFCO Parties") against any and all liabilities,
damages, losses, claims, costs and expenses (including, without
limitation, costs of collection and reasonable attorneys' fees)
(collectively, "Damages") arising out of or resulting from any demand,
claim, lawsuit or other cause of action brought by a third party as a
result of or in connection with the post-closing services rendered by
employees of any FAFCO Party pursuant to this Agreement, provided that
no FAFCO Party shall be entitled to indemnification in respect of its
or his own gross negligence or wilful misconduct.
(b) FAREISI hereby agrees to defend, indemnify and hold harmless NEWCO and
its subsidiaries and affiliates (including, without limitation, their
respective officers, directors, employees, shareholders and agents)
(the "NEWCO Parties") against any and all Damages arising out of or
resulting from any demand, claim, lawsuit or other cause of action
brought by a third party as a result of or in connection with the
postclosing services rendered by employees of any NEWCO Party pursuant
to this Agreement, provided that no NEWCO Party shall be entitled to
indemnification in respect of its or his own gross negligence or
wilful misconduct.
8.4 No Liability:
(a) In providing services hereunder, no FAFCO Party shall be liable to any
NEWCO Party for any error or omission except to the extent that any
such error or omission results from the willful failure of a FAFCO
Party's employee to perform the services required hereunder or from
the gross negligence or willful misconduct of any such FAFCO Party
employee. In no event shall any FAFCO Party be liable to any NEWCO
Party or any third party for any special or consequential damages,
including, without limitation, lost profits or injury to the goodwill
of any NEWCO Party, in connection with the performance, misfeasance or
nonfeasance hereunder of any FAFCO Party. Neither FAREISI nor any
FAFCO Party makes any representation or warranty under this Agreement
as to the accuracy or completeness of any information provided to
NEWCO pursuant to the terms of this Agreement; provided; however, that
nothing in this Agreement is intended to limit or otherwise affect the
representations and warranties made under the Joint Venture and
Operating Agreements or in any certificate or other document delivered
pursuant thereto.
(b) In providing services hereunder, no NEWCO Party shall be liable to any
FAFCO Party for any error or omission except to the extent than any
such error or omission results from the willful failure of a NEWCO
Party's employee to perform the services required hereunder or from
the gross negligence or willful misconduct of any such FAFCO Party
employee. In no event shall any NEWCO Party be liable to any FAFCO
Party or any third party for any special or consequential damages,
including, without limitation, lost profits or injury to the goodwill
of any FAFCO Party, in connection with the performance, misfeasance or
nonfeasance hereunder of any NEWCO Party. Neither NEWCO nor any Newco
Party makes any representation or warranty under this Agreement as to
the accuracy or completeness of any information provided to any FAFCO
Party pursuant to the terms of this Agreement; provided; however, that
nothing in this Agreement is intended to limit or otherwise affect the
representations and warranties made under the Joint Venture and
Operating Agreements or in any certificate or other document delivered
pursuant thereto.
8.5 Confidentiality: The parties acknowledge that information concerning
the business or operations of any of the other parties received as a result of
the operation of this Agreement constitutes confidential information subject to
the terms and conditions of the Joint Venture and Operating Agreements.
8.6 Severability: If any provision of this Agreement shall finally be
determined to be unlawful, then such provision shall be deemed to be severed
from this Agreement and every other provision of this Agreement shall remain in
full force and effect.
8.7 Notices: Any notice or other communication required or permitted to be
given under this Agreement shall be given in the manner provided in the Joint
Venture Agreement.
8.8 Assignment: This Agreement shall be binding upon and inure to the
benefit of the successors of each of the parties, but shall not be assigned by
any party without the prior written consent of the other parties.
8.9 No Third Parties: This Agreement is not intended to, and shall not,
create any rights in or confer any benefits upon any person other than the
parties hereto.
8.10 Governing Law: This Agreement will be governed by and construed in
accordance with the internal substantive laws of the State of California, except
where the substantive laws of another jurisdiction mandatorily apply.
8.11 Counterparts: More than one counterpart of this Agreement may be
executed by the parties hereto, and each fully executed counterpart shall be
deemed an original without production of the others.
8.12 Complete Agreement: This Agreement, together with the EXPERIAN
Transition, Joint Venture and Operating Agreements, sets forth the entire
understanding of the parties with respect to the subject matter hereof and
supersedes all prior letters of intent, agreements, covenants, arrangements,
communications, representations, or warranties, whether oral or written, by any
officer, employee, or representative or either party relating thereto.
IN WITNESS WHEREOF, the parties have each caused this Agreement to be
executed by their respective duly authorized officers as of the date first above
written.
FIRST AMERICAN REAL ESTATE
SOLUTIONS LLC
By: /s/ Parker S. Kennedy
----------------------------
Title:
-------------------------
FIRST AMERICAN REAL ESTATE
INFORMATION SERVICES, INC.
By: /s/ John Long
----------------------------
Title:
-------------------------
THE FIRST AMERICAN FINANCIAL
CORPORATION
By: /s/ Parker S. Kennedy
----------------------------
Title:
-------------------------
<PAGE>
Exhibit (10)(d)
First American Real Estate Solutions, LLC
150 Second Avenue, Suite 1600, St. Petersburg, Florida 33701
November 30, 1997
Mr. John Peace
Chief Executive
CCN Experian
Talbot House
Talbot Street
Nottingham NG1 5HF
United Kingdom
Mr. D. Van Skilling
Chairman and Chief Executive Officer
Experian
505 City Parkway West
Orange, California 92868
Dear John and Van:
This letter constitutes the data license agreement between First American Real
Estate Solutions, LLC ("Newco") and Experian Information Solutions, Inc.
("Experian").
An integral part of the creation of Newco has been the ongoing obligation of
Newco to provide to Experian the data currently held by the Real Estate
Solutions ("RES") division of Experian. We refer to this data as the RES Data.
Because it is difficult to cover all issues we may face in the future in a
document prepared today, we collectively developed a set of guiding principles
to cover the present and future issues. These principles cover (1) Access and
Royalties and (2) Limitations on Use of RES data. Each guiding principle is set
forth in bold print followed by an expansion of its meaning, where needed.
Following that are provisions relative to use restrictions, payments, disputes,
limitation of liability and disclaimer of warranties.
1. Access.
EXPERIAN WILL HAVE FULL AND FREE ACCESS TO THE RES DATA FOR USE IN ITS
CURRENT MARKETS AND/OR PRODUCTS. FOR ALL NEW MARKETS OR PRODUCTS, EXPERIAN
WILL PAY A ROYALTY.
<PAGE>
Mr. John Peace
Mr. D. Van Skilling
November 30, 1997
Page 2
Newco hereby grants to Experian and its affiliate credit reporting agencies a
nonexclusive, nontransferable right and license to use the RES Data at cost,
except in the cases where a royalty applies (as set forth below), so long as
Experian is a member of Newco and for ten years thereafter. Experian will pay
Newco the incremental costs ("Costs") incurred by Newco in the course of
reproduction and/or delivery of the RES Data. Reimbursement of these Costs is
intended to result in neither profit nor loss to Newco.
Subject to the terms of this letter, the use of the data would include the sale,
application, compilation, storage, copying, employment, exploitation,
management, manipulation, packaging, sorting or other utilization of the RES
Data. Any party who receives the RES Data from Experian may not resell such data
except in the case of an affiliate credit bureau or other authorized Experian
reseller. In providing the information, Newco reserves its rights in the RES
Data, in the software programs which compile and manipulate this data and in any
copyrights, proprietary information or trademarks which relate to the data or
software.
The RES Data will be provided to Experian at cost and for no royalty, for use by
Experian in its current markets and/or products as of the date hereof.
As detailed below, Newco may charge Experian a fair and reasonable royalty for
all other markets or products.
Where Newco is required to provide to Experian for no royalty the RES Data, the
use by Experian of the programs and systems which compile and sort the data and
put it into a usable form must also be provided to Experian at no royalty.
Experian shall not have royalty-free access to new programs which apply rules-
based technology, such as artificial intelligence, to the data. Notwithstanding,
access to Value Point and future enhancements thereof shall be provided at no
royalty.
As the RES Data is improved or enhanced, Experian's no royalty access shall
continue so long as the data bases continue to be generically similar to the RES
Data Base or any portion thereof.
For instance, the addition to the property data base of data elements not
currently taken from the tax assessor records would be generically similar,
while geographically expanded title plant data would not be.
Experian's rights to the various elements of the RES Data will continue so long
as a particular element is made available to regular commercial buyers of such
data. Newco will have the right to discontinue any element of the RES Data after
first offering to transfer the data and the updating function to Experian.
Experian shall pay Newco for the cost of such transfer.
<PAGE>
Mr. John Peace
Mr. D. Van Skilling
November 30, 1997
Page 3
The RES Data may be delivered in a variety of forms and media including, but not
limited to, magnetic tape, CPU-to-CPU access, gateway access to an on-line
service and CD Rom, so long as such form or media is regularly available to
Newco's commercial clients.
2. Limitations on Use of RES Data.
ANY SALE BY NEWCO OF RES DATA TO A COMPETITOR OF EXPERIAN IS SUBJECT TO THE
SUPER-MAJORITY RIGHTS OF EXPERIAN. EXCEPT FOR EXPERIAN'S CURRENT MARKETS
AND/OR PRODUCTS, IF EXPERIAN USES OR SELLS THE RES DATABASE IN A MARKET
SERVED BY NEWCO, EXPERIAN WILL PAY A ROYALTY.
Newco may not sell RES Data to competitors of Experian that are credit
repositories or other providers of raw credit data (such as Equi-Fax and
Transunion) or other direct marketing companies (such as Axiom or Metromail)
without Experian's approval. Experian will not sell RES Data to competitors of
Newco such as DataQuick or Datascan without paying a royalty. For instance,
Experian may not sell RES Data to the real estate industry without paying a
royalty, for instance sale to Bank of America of a product using RES Data
without paying a royalty where the product was to be used by Bank of America in
making a second mortgage loan. In no event will Experian be required to pay a
royalty for the sale of any credit report.
The "super-majority rights" referred to in the principle above are defined in
the operating agreement for Newco. As Experian and Newco enter new markets and
develop new products, we will continue to be guided by the above principles.
3. Use Restrictions.
Experian's use of the RES Data shall be subject to any third party limitations
imposed upon Newco's use of such data. Experian and its affiliates shall be
solely responsible for the security, distribution, and use of RES Data delivered
to Experian or its affiliates. Experian shall apply to the RES Data the same
compliance with laws restrictions, security, and confidentiality measures that
Experian applies to its own data.
4. Payments.
Newco will bill Experian for any royalties or Costs due under this agreement.
Experian and Newco will, upon request of the other party, cooperate in
determining the amount of royalties due.
<PAGE>
Mr. John Peace
Mr. D. Van Skilling
November 30, 1997
Page 4
5. Disputes.
In the unlikely event of a dispute under this agreement, each party will have
available to it at its unilateral request the dispute resolution procedures
established in Section 6.05 of the joint venture agreement. Whether we arbitrate
or resort to litigation, the prevailing party will be entitled to collect
attorney fees from the other party.
6. Limitation of Liability.
Neither party shall have any obligation or liability to the other hereunder for
any special, incidental, consequential or punitive damages incurred by the other
party in connection with the performance of this agreement. Experian will
indemnify, defend and hold harmless Newco, its employees, agents and
representatives from and against any losses, claims, suits, costs and/or
expenses, including attorney fees, arising out of any claim by any third party
arising out of Experian's use of the RES Data. Newco will indemnify, defend and
hold harmless Experian, its employees, agents and representatives from and
against any losses, claims, suits, costs and/or expenses, including attorney
fees, arising out of any claim by any third party that Experian does not have
the right to use the RES Data.
7. Disclaimer of Warranties.
Newco warrants to Experian that Newco has the right to license to Experian the
RES Data.
NEWCO PROVIDES NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS,
COMPLETENESS, CURRENTNESS, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
OF THE RES DATA FURNISHED BY IT OR THE MEDIA ON OR THROUGH WHICH SUCH RES DATA
IS PROVIDED.
We look forward to a long and prosperous joint venture.
FIRST AMERICAN REAL ESTATE SOLUTIONS, LLC
By: /s/ Parker S. Kennedy
--------------------------------------
Parker S. Kennedy
Senior Vice President
<PAGE>
Mr. John Peace
Mr. D. Van Skilling
November 30, 1997
Page 5
AGREED AN ACCEPTED:
EXPERIAN INFORMATION SOLUTIONS, INC.
By: D.V.Skilling
-------------------------------
Name: D. Van Skilling
-------------------------------
Its:
-------------------------------
<PAGE>
Exhibit (10)(e)
================================================================================
INTERIM OPERATING AGREEMENT
By and Among
THE FIRST AMERICAN FINANCIAL CORPORATION,
FIRST AMERICAN REAL ESTATE INFORMATION SERVICES, INC.,
and
EXPERIAN INFORMATION SOLUTIONS, INC.
Dated as of November 30, 1997
================================================================================
<PAGE>
TABLE OF CONTENTS(1)
Page
ARTICLE I
DEFINITIONS.................................................................. 2
1.01. Defined Terms........................................................ 2
1.02. Principles of Construction........................................... 3
ARTICLE II
TERM; INCORPORATION OF OPERATING AGREEMENT................................... 4
2.01. Term................................................................. 4
2.02. Incorporation of Operating Agreement By Reference.................... 4
2.03. Exceptions........................................................... 4
2.04. Controlling Document................................................. 4
ARTICLE III
MISCELLANEOUS................................................................ 5
3.01. Specific Performance................................................. 5
3.02. Amendments and Modifications......................................... 5
3.03. Notices.............................................................. 5
3.04. Attorneys' Fees...................................................... 6
3.05. Further Assurances................................................... 6
3.06. Counterparts......................................................... 6
3.07. Governing Law........................................................ 6
3.08. Successors........................................................... 6
3.09. Severability......................................................... 6
3.10. Entire Agreement..................................................... 7
3.11. Confidentiality...................................................... 7
- ---------------
(1) This Table of Contents is provided for convenience only, and does not
form a part of the attached Interim Operating Agreement.
<PAGE>
INTERIM OPERATION AGREEMENT, made as of November 30, 1997 (this "Agreement"), by
and among THE FIRST AMERICAN FINANCIAL CORPORATION, a California corporation
("FAFCO"), FIRST AMERICAN REAL ESTATE INFORMATION SERVICES, INC., a California
corporation, ("FAREISI"), and EXPERIAN INFORMATION SOLUTIONS, INC., an Ohio
corporation ("EXPERIAN") (each a "Party" and, collectively, the "Parties").
W I T N E S S E T H :
WHEREAS, FAFCO, FAREISI, First American Appraisal Consulting Services,
Inc., a California corporation ("FAREISI Subsidiary 1"), First American
Appraisal Services, Inc., a California corporation ("FAREISI Subsidiary 2"),
First American Credco, Inc., a Washington corporation ("FAREISI Subsidiary 3"),
First American Field Services, Inc., a New Jersey corporation ("FAREISI
Subsidiary 4"), First American Flood Data Services, Inc., a Texas corporation
("FAREISI Subsidiary 5"), First American Property Services, Inc., a New York
corporation ("FAREISI Subsidiary 6"), First American Real Estate Tax Service,
Inc., a Florida corporation ("FAREISI Subsidiary 7"), Pasco Enterprises, Inc., a
Texas corporation ("FAREISI Subsidiary 8"), Prime Credit Reports, Inc., a
California corporation ("FAREISI Subsidiary 9"), Property Financial Services Of
New England, Inc., a Delaware corporation ("FAREISI Subsidiary 10"), Docs
Acquisition Corp., a Nevada corporation ("DOCS"), Strategic Mortgage Services,
Inc. (Texas), a Texas corporation ("SMS") (FAREISI, FAREISI Subsidiary 1,
FAREISI Subsidiary 2, FAREISI Subsidiary 3, FAREISI Subsidiary 4, FAREISI
Subsidiary 5, FAREISI Subsidiary 6, FAREISI Subsidiary 7, FAREISI Subsidiary 8,
FAREISI Subsidiary 9, FAREISI Subsidiary 10, DOCS and SMS, collectively, the
"FAFCO Members") and EXPERIAN have entered into that certain Contribution and
Joint Venture Agreement, of even date herewith (as the same may be amended,
modified and supplemented from time to time, the "JV Agreement"; capitalized
terms used in this Agreement and not otherwise defined herein shall, unless the
context otherwise requires, have the meaning given thereto in the JV Agreement),
in order to combine the FAREISI Business and the RES Business;
WHEREAS, in connection with the JV Agreement, the FAFCO Members and
EXPERIAN have entered into that certain Operating Agreement For First American
Real Estate Solutions LLC, of even date herewith (as the same may be amended,
modified and supplemented from time to time, the "Operating Agreement"),
pursuant to which each of the FAFCO Members and EXPERIAN have established First
American Real Estate Solutions LLC, a California limited liability company
("Newco");
WHEREAS, Section 2.02 of the JV Agreement and Section 2.02(a) of the
Operating Agreement contemplate that at 00:01 (Pacific Standard Time) on January
1, 1998 (the "Effective Time") (i) the FAFCO Members will contribute the FAREISI
Business to Newco and (ii) EXPERIAN will contribute the RES Business to Newco;
and
WHEREAS, the Parties intend for Newco to commence operations from and after
the date of this Agreement as if the contributions described in the preceding
paragraph had occurred on the date of this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the Parties agree as follows:
ARTICLE I
DEFINITIONS
1.01. Defined Terms. As used in this Agreement, the following terms shall
have the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
"Agreement" shall mean this Interim Operating Agreement, as the same may be
amended, modified and/or supplemented from time to time.
"Commencement Time" shall mean 00:01 (Pacific Standard Time) on December 1,
1997.
"Effective Time" shall have the meaning set forth in the third WHEREAS
clause of this Agreement.
"EXPERIAN" shall have the meaning set forth in the introductory paragraph
of this Agreement.
"FAFCO" shall have the meaning set forth in the introductory paragraph of
this Agreement.
"FAFCO Member" shall have the meaning given thereto in the first WHEREAS
clause of this Agreement.
"FAREISI" shall have the meaning set forth in the introductory paragraph of
this Agreement.
"FAREISI Business" shall mean the collective businesses of each of the
FAFCO Members.
"Implementing Agreements" shall have the meaning set forth in Section
7.01(d) of the JV Agreement.
"Interim Period" shall have the meaning set forth in Section 2.03 hereof.
"JV Agreement" shall have the meaning set forth in the first WHEREAS clause
of this Agreement.
"Newco" shall have the meaning set forth in the second WHEREAS clause of
this Agreement.
"Operating Agreement" shall have the meaning set forth in the second
WHEREAS clause of this Agreement.
"Party" and "Parties" shall have the meaning set forth in the introductory
paragraph of this Agreement.
"Person" shall mean and include any individual, partnership, association,
joint stock company, joint venture, corporation, trust, limited liability
company, unincorporated organization, government, agency or political
subdivision thereof.
"Prime Rate" shall have the meaning set forth in the JV Agreement.
"RES Business" shall mean the business of EXPERIAN commonly known as
Experian Real Estate Solutions (including, without limitation, the businesses
commonly known as Experian Title Information Services and Experian Property
Data).
"US GAAP" means United States generally accepted accounting principles
applied on a consistent basis.
1.02. Principles 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 US GAAP.
(c) 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."
(d) The Table of Contents hereto and the Article and Section headings
herein are for convenience only and shall not affect the construction hereof.
(e) This Agreement and the Implementing Agreements are the result of
negotiations among and have been reviewed by counsel to the Parties and are the
products of all Parties. Accordingly, they shall not be construed against any
Party merely because of such Party's involvement in their preparation.
ARTICLE II
TERM; INCORPORATION OF OPERATING AGREEMENT
2.01. Term. The term of this Agreement shall commence on the date hereof
and shall end immediately prior to the Effective Time.
2.02. Incorporation of Operating Agreement By Reference. Each of FAFCO and
FAREISI, on its own behalf and on behalf of the FAFCO Members, and EXPERIAN
agrees that (a) the terms and conditions of the Operating Agreement are, by this
reference, incorporated in this Agreement in their entirety as if set forth
herein in full, together with all related defined terms, and (b) it will, except
as provided in Section 2.03, comply (and, in the case of FAFCO and FAREISI, will
cause the FAFCO Members to comply) with the terms and conditions of the
Operating Agreement as incorporated herein by reference as if (i) the Effective
Time had occurred at 00:01 (Pacific Standard Time) on December 1, 1997 (the
"Commencement Time"), (ii) the contributions contemplated by Section 2.02 of the
JV Agreement and Section 2.02(a) of the Operating Agreement had been made at the
Commencement Time, notwithstanding that such contributions will actually be made
at the Effective Time, and (iii) the references in the Operating Agreement to
the term "Effective Date" were references to "Commencement Time."
2.03. Exceptions. Notwithstanding Section 2.02(b), (a) the credits to the
Capital Accounts described in Section 2.02(b) of the Operating Agreement shall
not occur until the contributions contemplated by Section 2.02(a) of the
Operating Agreement are actually made; (b) 80% of Newco's Net Profits or Net
Loss, as the case may be, for the period from December 1, 1997 to January 1,
1998 (the "Interim Period") shall be allocated among the FAFCO Members according
to their Percentage Interests and credited to their respective Capital Accounts,
and 20% of Newco's Net Profits or Net Loss, as the case may be, for the Interim
Period shall be allocated to EXPERIAN and credited to its Capital Account; (c)
the employees of the FAFCO Members engaged in the FAREISI Business shall remain
employees of the respective FAFCO Members until the Effective Time; (d) the
employees of EXPERIAN engaged in the RES Business shall remain employees of
EXPERIAN until the Effective Time; (e) all Taxes, if any, related to the FAREISI
Business from the date hereof through the Effective Time shall be paid by the
respective FAFCO Members; (f) all Taxes, if any, related to the RES Business
from the date hereof through the Effective Time shall be paid by EXPERIAN; and
(g) until the Effective Time, no officer of the Newco may terminate the
employment of any employee of the RES Business without the prior written consent
of EXPERIAN.
2.04. Controlling Document. Prior to the Effective Time, if any conflict
exists among the terms of this Agreement and the terms of the Operating
Agreement, the terms of this Agreement shall control. From and after the
Effective Time, if any conflict exists among the terms of this Agreement and the
terms of the Operating Agreement, the terms of the Operating Agreement shall
control.
ARTICLE III
MISCELLANEOUS
3.01. Specific Performance. Due to the fact that the parties hereto will be
irreparably damaged in the event that this Agreement is not specifically
enforced, in the event of a breach or threatened breach of the terms, covenants
and/or conditions of this Agreement by any of the parties hereto, the other
parties shall, in addition to all other remedies, be entitled to a temporary or
permanent injunction, without showing any actual damage, and/or a decree for
specific performance, in accordance with the provisions hereof.
3.02. Amendments and Modifications. The provisions of this Agreement may be
waived, altered, amended, modified, or repealed, in whole or in part, only on
the written consent of all parties to this Agreement. Any oral representations
or modifications concerning this instrument shall be of no force or effect
unless contained in a subsequent written modification signed by all parties to
this Agreement.
3.03. 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 addressed as follows:
If to Newco:
First American Real Estate Solutions LLC
150 Second Avenue, Suite 1600
St. Petersburg, Florida 33701
Attn: Mr. John Long
Telephone:
Telecopy:
If to the FAFCO Members:
c/o The First American Financial Corporation
114 East Fifth Street (P.O. Box 267)
Santa Ana, California 92702
Attn: Mr. Parker Kennedy
Telephone: (714) 558-3211
Telecopy: (714) 647-2242
With a copy to:
White & Case
633 West Fifth Street, 19th Floor
Los Angeles, CA 90071
Attn: Neil W. Rust
Telephone: (213) 620-7700
Telecopy: (213) 687-0758
If to EXPERIAN:
Experian Information Solutions, Inc.
505 City Parkway West
Orange, California 92868
Attn: General Counsel
Telephone: (714) 385-8296
Telecopy: (714) 938-2513
or to such other Person or address as any party shall specify by notice in
writing to each of the other parties hereto. 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 Business Days after deposit in the
U.S. mail, postage prepaid; (ii) if sent by FedEx or other overnight delivery
service, two Business Days after delivery to such service; (iii) if sent by
personal courier, upon receipt; and (iv) if sent by facsimile, upon receipt.
3.04. Attorneys' Fees. Should any litigation be commenced between the
parties hereto concerning any provision of this Agreement or the rights and
duties of any person in relation thereto, the party or parties prevailing in
such litigation shall be entitled, in addition to such other relief as may be
granted, to a reasonable sum as and for attorneys' fees in such litigation.
3.05. Further Assurances. Each of the parties hereto does hereby covenant
and agree on behalf of itself and its successors and assigns, without further
consideration, to execute and deliver such other instruments, documents and
statements, and to take such other action, as may be required by law or as are
necessary effectively to carry out the purposes of this Agreement.
3.06. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original, and all of which together shall
be deemed to be one and the same instrument.
3.07. Governing Law. This Agreement, including its existence, validity,
construction and operating effect, and the rights of each of the parties hereto,
shall be governed by and construed in accordance with the internal laws of the
State of California.
3.08. Successors. Subject to the restrictions against transfer as
incorporated herein, the provisions of this Agreement shall inure to the benefit
of and shall be binding upon the respective successors and permitted assigns of
each of the parties hereto. Nothing in this Agreement, expressed or implied, is
intended to confer on any Person other than the parties hereto or their
respective successors and permitted assigns, any rights, remedies, obligations
or liabilities under or by reason of this Agreement.
3.09. Severability. If any term, provision, covenant, or condition of this
Agreement is held by a court of competent jurisdiction to be invalid, void, or
unenforceable, the rest of this Agreement shall remain in full force and effect
and shall in no way be affected, impaired, or invalidated.
3.10. Entire Agreement. This Agreement, including all agreements referred
to herein (including, without limitation, the Operating Agreement and the JV
Agreement), constitutes the entire agreement of the parties pertaining to the
subject matter hereof, and fully supersedes any and all prior agreements or
understandings between the parties pertaining to the subject matter hereof.
3.11. Confidentiality. Subject to the requirements of applicable law, each
party shall maintain in confidence all information received from Newco and,
except as may otherwise be expressly permitted by a separate written agreement,
shall use such information only for the benefit of Newco, and shall not disclose
any such information to any third party or make any unauthorized use thereof.
Each party shall treat all such information with the same degree of care against
disclosure or unauthorized use which it affords to its own confidential
information. The obligation of confidentiality and non-use shall not apply to
any information which (a) is or becomes generally available to the public
through no fault of the receiving party, (b) is independently developed by the
receiving party or (c) is received in good faith from a third party who is
lawfully in possession of such information and has the lawful right to disclose
or use it.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly
executed in their respective corporate names by their respective officers, each
of whom is duly and validly authorized and empowered, all as of the day and year
first above written.
THE FIRST AMERICAN FINANCIAL
CORPORATION
By /s/ Parker S. Kennedy
----------------------------
Name: Parker S. Kennedy
Title:
FIRST AMERICAN REAL ESTATE
INFORMATION SERVICES, INC.
By /s/ John Long
--------------------------------
Name: John Long
Title:
EXPERIAN INFORMATION SOLUTIONS, INC.
By /s/ D.V. Skilling
--------------------------------
Name: D. Van Skilling
Title:
<PAGE>
EXHIBIT (10)(f)
EXPERIAN TRANSITION AGREEMENT
This TRANSITION AGREEMENT ("Transition Agreement") is made as of the 30th
day of November, 1997 by and among First American Real Estate Solutions LLC, a
California limited liability company ("NEWCO"), and EXPERIAN Information
Solutions, Inc., an Ohio corporation ("EXPERIAN").
RECITALS
A. NEWCO was formed on or before November 30, 1997 as a limited liability
company with First American Real Estate Information Services, Inc. ("FAREISI")
and certain of its affiliates, and EXPERIAN, as members. EXPERIAN contributed
the assets, liabilities and going business of its Real Estate Solutions business
(the "RES Business") and Ten Million Dollars ($10,000,000) cash to NEWCO in
return for issuance of a twenty percent (20%) membership interest in NEWCO to
EXPERIAN. FAREISI and its affiliates contributed the assets, liabilities and
going business of their respective Real Estate Information Service businesses
(collectively, the "FAREISI Business") to NEWCO in return for issuance of an
eighty percent (80%) membership interest in NEWCO. These contributions and
membership interests are the subject of a Contribution and Joint Venture
Agreement dated as of November 30, 1997 (the "Joint Venture Agreement") and an
Operating Agreement dated as of November 30, 1997 (the "Operating Agreement").
B. The parties have agreed to enter into this Transition Agreement to
provide for certain matters relating to the operation of the RES Business by
NEWCO following the Closing Date, subject to the terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of the premises and of other good and
valuable consideration, and intending to be legally bound hereby, the parties
hereby agree as follows:
TERMS AND CONDITIONS
ARTICLE I
General Provisions
1.1 Definitions: The Joint Venture Agreement and the Operating Agreement
define certain terms. Such terms shall, to the extent not inconsistent with the
definitions contained in this Transition Agreement have the meanings set forth
in those agreements, where used herein and identified with initial capital
letters.
1.2 Other Definitions, Meanings and Interpretations: For purposes of this
Transition Agreement, the term "parties" means (except where the context
otherwise requires) NEWCO and EXPERIAN; the term "person" includes any natural
person, firm, association, partnership, corporation, limited liability company,
governmental agency or other entity other than the parties; and the words
"hereof," "herein," "hereby" and other words of similar import refer to this
Transition Agreement as a whole. The headings of the Articles and Sections of
this Transition Agreement have been included herein for convenience of reference
only and shall not be deemed to affect the meaning of the operative provisions
of this Transition Agreement. The meanings given to defined terms (whether
defined herein or in the Joint Venture and Operating Agreements) shall apply
equally to both the singular and plural forms of such terms.
1.3 Relationship with the Joint Venture and Operating Agreements: This
Transition Agreement is intended to amplify and supplement the Joint Venture and
Operating Agreements. Wherever possible, this Transition Agreement and the Joint
Venture and Operating Agreements shall be construed as being consistent. Where
particular matters are addressed expressly in this Transition Agreement, the
terms and conditions of this Transition Agreement, and not those of the Joint
Venture or Operating Agreement, shall govern. Otherwise, the terms and
conditions of the Joint Venture and Operating Agreements shall govern.
ARTICLE II
Human Resource Matters
2.1 Transition of Hired Employees: Except as otherwise specifically
provided in Section 2.2, all employees of the RES Business shall, at the
Effective Time, automatically become employees of NEWCO as of the Effective
Time. All employees of the RES Business automatically hired by NEWCO as of the
Effective Time shall be referred to herein as the "Hired Employees." Except as
otherwise specifically provided in this Agreement, EXPERIAN shall have no
obligations with respect to the Hired Employees after the Effective Time.
2.2 Inactive Employees: Notwithstanding anything in this Transition
Agreement, the Joint Venture Agreement or the Operating Agreement to the
contrary, EXPERIAN shall (subject to EXPERIAN's policies and procedures) retain
all employees of the RES Business who are on leave of absence status (whether
paid or unpaid) as of the Effective Time (together with all liabilities related
to such retained employees), until such time as EXPERIAN has determined, in good
faith and consistent with past practices, that any such person may return to
active status. Upon making such determination, EXPERIAN shall promptly notify
NEWCO and such employee shall thereafter, upon reporting to work, automatically
become an employee of NEWCO and shall be treated as a Hired Employee for the
purposes of this Transition Agreement (and all liabilities thereafter related to
such employee shall then be automatically assumed by NEWCO).
2.3 Flexible Spending Accounts: All amounts contributed by Hired Employees
for calendar year 1997 into their respective flexible spending accounts
maintained under EXPERIAN's Flexible Spending Account Plan (the "EXPERIAN
Flexible Spending Accounts") shall be retained as assets of EXPERIAN's Flexible
Spending Account Plan. All proper claims for costs incurred prior to the
Effective Time submitted by Hired Employees after the Effective Time with
respect to their EXPERIAN Flexible Spending Accounts shall be made to, and
processed and paid by, EXPERIAN.
2.4 Insurance Plans:
(a) On or before the Effective Time, NEWCO will have set up its own
long- medical, vision, dental, life, accidental death and
dismemberment, and term disability plans for the Hired Employees (the
"NEWCO Plans"), the terms of which plans will be substantially the
same as those offered under the insurance plans offered by EXPERIAN
(the "EXPERIAN Plans"). As of the Effective Time, EXPERIAN will cease
coverage of the Hired Employees under the EXPERIAN Plans and it shall
be NEWCO's sole responsibility to cover the Hired Employees under the
NEWCO Plans at its expense.
(b) NEWCO hereby acknowledges that neither EXPERIAN nor any of its
subsidiaries or affiliates will be at any time with respect to any
NEWCO Plan (i) a "fiduciary" (as defined in ERISA) with respect to any
NEWCO Plan or (ii) a guarantor of performance of NEWCO with respect to
any NEWCO Plan or any administrator, health maintenance organization
or other entity providing services to any NEWCO Plan.
2.5 Accrued Vacation: EXPERIAN will transfer to NEWCO the liability for
accrued vacation pay of the Hired Employees as of the Effective Time. NEWCO will
credit to each Hired Employee the accrued vacation such Hired Employee accrued
with EXPERIAN prior to the Effective Time.
2.6 401(k) Plans: As of the Effective Time, the Hired Employees will no
longer be entitled to participate in EXPERIAN's 401(k) plan. NEWCO will use its
best efforts to cause the Hired Employees to be eligible for a 401(k) plan
within ninety (90) days following the Effective Time.
ARTICLE III
Treasury, Banking and Tax Matters
3.1 Disbursement Accounts:
(a) During the period from the Closing Date through the Effective Time
(the "Interim Operating Period"), EXPERIAN shall (i) retain the
controlled disbursement account maintained by EXPERIAN at First
Chicago/National Bank of Detroit and (ii) continue to issue checks on
behalf of the RES Business in the ordinary course of business.
EXPERIAN will separately account for amounts distributed on behalf of
the RES Business.
(b) It is anticipated that NEWCO will not have a disbursement system
or disbursement bank account in place by the Effective Time. EXPERIAN
will assist NEWCO in processing NEWCO payments subsequent to the
Effective Time, as follows:
Prior to the Effective Time, EXPERIAN will open a new disbursement
bank account ("EXPERIAN's NEWCO Disbursement Bank Account") to process
post-Effective Time payments relating to the RES Business transferred
to NEWCO. EXPERIAN will continue to process such accounts payable
after the Effective Time, for a fee to be agreed by the parties prior
to the Effective Time. The checks for these payments will be written
from EXPERIAN's NEWCO Disbursement Bank Account. This bank account
will not be run as a controlled disbursement account, and EXPERIAN
will not fund this account. EXPERIAN will issue checks from EXPERIAN's
NEWCO Disbursement Bank Account only to the extent that funding has
been provided to this account by NEWCO in advance. There will be no
interest credited to this account. All bank costs and expenses, and
earnings credits, relating to the opening and operation of EXPERIAN's
NEWCO Disbursement Bank Account will be the responsibility of NEWCO
and will be charged directly to the account.
(c) Within ninety (90) days after the Effective Date (the last day of
such ninety (90) day period to be known as the "Bank Account Cut-off
Date"), NEWCO will have completed all necessary actions to transfer
the ownership of EXPERIAN's NEWCO Disbursement Bank Account to NEWCO.
Regardless of whether the transfer of ownership of EXPERIAN's NEWCO
Disbursement Bank Account to NEWCO has been completed by the Bank
Account Cut-off Date, EXPERIAN will cease issuing checks from this
account as of the end of the Bank Account Cut-Off Date.
3.2 Lock Box Accounts: EXPERIAN and NEWCO shall work with EXPERIAN's banks
to cause the lock boxes and related bank accounts of the RES Business to
transfer to NEWCO as of the Effective Time. These accounts are National City
Bank accounts No. 3793309 and No. 4886531 (for lock box 931516) and Wells Fargo
Bank accounts No. 4159403435 (for lock boxes 71147 and 77747) and No.
4159777671. All cleared funds received into these lock boxes prior to the
Effective Time will be the property of EXPERIAN; provided, however, that (i) if
- -------- ------- the cleared funds received into these accounts during the
Interim Operating Period exceed the cash disbursements (including, without
limitation, payroll disbursements) of the RES Business during the Interim
Operating Period, EXPERIAN shall cause an aggregate amount equal to such
difference to be deposited in such lock box accounts within (2) business days
following the Effective Date and such amounts will become the property of NEWCO,
or (ii) if the cleared funds received into these accounts during the Interim
Operating Period are less than the cash disbursements (including, without
limitation, payroll disbursements) of the RES Business during the Interim
Operating Period, NEWCO shall within two (2) business days following the
Effective Date reimburse EXPERIAN for such difference. All cleared funds
received after the Effective Time will be the property of NEWCO. EXPERIAN and
NEWCO will cause Wells Fargo Bank to cease the automatic transfer to EXPERIAN's
main bank account of the monies received in the Wells Fargo Bank lock box
account as of the Effective Time.
3.3 Payroll Accounts:
(a) During the Interim Period, EXPERIAN shall retain the payroll bank
account maintained by EXPERIAN with Bank of America as of the Closing
Date. EXPERIAN will (with respect to the RES Business) issue paychecks
and make direct payroll deposits from this account for the period from
the Closing Date through the end of last payroll period ending prior
to the Effective Time. All payroll liabilities of the RES Business for
Hired Employees accrued after such time will be transferred to NEWCO
at the Effective Time.
(b) It is anticipated that NEWCO will not have a payroll system or
payroll bank account in place by the Effective Time. In such event,
EXPERIAN will assist NEWCO in processing NEWCO's payroll related to
the RES Business subsequent to the Effective Time, as follows:
Prior to the Effective Time, EXPERIAN will open a new payroll bank
account ("EXPERIAN's NEWCO Payroll Bank Account") to process NEWCO
payroll relating to the RES Business. EXPERIAN will continue to
process such payroll after the Effective Time for a fee to be agreed
by the parties prior to the Effective Time. These payments will be
issued from EXPERIAN's NEWCO Payroll Bank Account. This bank account
will not be run as a controlled disbursement account, and EXPERIAN
will not fund this account. NEWCO must deposit funds into the account
for payroll taxes paid and net payroll one day before each pay day.
There will be no interest credited to this account. All bank costs and
expenses, and earnings credits, relating to the opening and operation
of EXPERIAN's NEWCO Payroll Bank Account will be the responsibility of
NEWCO and will be charged directly to the account.
(c) By the Bank Account Cut-off Date, NEWCO will have completed all
necessary actions to transfer the ownership of EXPERIAN's NEWCO
Payroll Bank Account to NEWCO. Regardless of whether the transfer of
ownership of EXPERIAN's NEWCO Payroll Bank Account to NEWCO has been
completed by the Bank Account Cut-off Date, EXPERIAN will cease
issuing checks and making payments from this account as of the end of
the Bank Account Cut-Off Date.
3.4 Petty Cash Accounts: EXPERIAN and NEWCO agree to work with EXPERIAN's
banks to cause the escrow and petty cash bank accounts applicable to the RES
Business to transfer to NEWCO as of the Effective Time. These accounts are Wells
Fargo accounts No. 4159777689, No. 4159777697 and No. 4091219493; US West
account No. 5447041194; and Texas Commerce Bank account No. 1816247. Funds in
these accounts as of the Effective Time will be the property of NEWCO. EXPERIAN
will operate and fund these accounts in the ordinary course of business until
the Effective Date.
3.5 Tax and Wage Information: Each Hired Employee will receive one W-2 and
one 1099 from EXPERIAN for calendar year 1997.
ARTICLE IV
Financial Coordination
4.1 Bonuses/Commissions: EXPERIAN's Employee Incentive Plan, Executive
Incentive Plan and Sales Compensation Plan accrual account balances through the
Effective Time with respect to the Hired Employees shall be transferred to NEWCO
at the Effective Time. EXPERIAN shall determine, in good faith and generally
consistent with past practice, the actual payout amounts for the Hired Employees
under such plans for that portion of fiscal year 1997/1998 up to the Effective
Time in accordance with EXPERIAN's normal practices and processes and thereafter
deliver such payout information to NEWCO. NEWCO shall distribute such
bonuses/commissions, as instructed by EXPERIAN, to the appropriate recipients at
such times as NEWCO shall determine (but in no event prior to January 1, 1998).
Within five (5) business days following any payment of such bonuses/commissions,
EXPERIAN shall reimburse NEWCO for the total costs related to such
bonuses/commissions to the extent they relate to the period through November 30,
1997.
4.2 Surety Bonds: As promptly as possible after the Effective Time, NEWCO
shall take any and all action necessary to have each surety bond relating to the
RES Business which was provided by EXPERIAN to be replaced by a surety bond
obtained by NEWCO. If, after the Effective Time, EXPERIAN is required to pay any
amounts under any surety bond for actions or inactions on the part of NEWCO or
any of its affiliates, then NEWCO shall reimburse EXPERIAN for all amounts paid
by EXPERIAN under such surety bond within five (5) business days of receipt from
EXPERIAN of a request for the payment of such amounts.
ARTICLE V
Corporate Purchase Agreements
5.1 Certain Existing Purchase Agreements: Prior to the Effective Date, the
RES Business received goods and services pursuant to purchase agreements entered
into by EXPERIAN on behalf of all of its business units (the "Existing Purchase
Agreements"). The Joint Venture and Operating Agreements do not contemplate that
NEWCO will be able to continue to obtain goods and services after the Effective
Time pursuant to the Existing Purchase Agreements. Therefore, NEWCO shall use
its reasonable best efforts to obtain new contracts from such vendors or other
vendors on a stand-alone basis as promptly as possible after the Effective Time.
In the meantime, however, in order to provide NEWCO with an opportunity to
solicit new bids and negotiate new contracts for the goods and services provided
under the Existing Purchase Agreements, EXPERIAN shall, if and only to the
extent expressly permitted by the terms of the Existing Purchase Agreements,
allow NEWCO to purchase goods and services pursuant to the Existing Purchase
Agreements for, except as provided below, a period not to exceed one hundred
eighty (180) days after the Effective Date (the "Transition Period"). During the
Transition Period, NEWCO shall pay all vendors providing goods or services to it
under the Existing Purchase Agreements pursuant to separate purchase orders.
Upon expiration of the Transition Period, NEWCO's right to purchase goods and
services pursuant to the Existing Purchase Agreements shall terminate and
EXPERIAN shall have no further obligations to NEWCO with respect to such
agreements. Notwithstanding the foregoing, the Existing Purchase Agreements
identified below will be subject to the following specific arrangements:
(a) EXPERIAN shall instruct American Express promptly after the Effective
Time that all American Express Corporate Cards (travel and procurement)
issued to employees of the RES Business who will become Hired Employees
shall be transferred to NEWCO effective as of the Effective Date, and that
EXPERIAN shall thereafter have no liability of any kind related to or
arising from such credit cards.
(b) The Transition Period with respect to EXPERIAN's Existing Purchase
Agreement with AT&T (AT&T Contract Tariff Order dated August 22, 1997)
shall expire on the first anniversary of the Effective Date. After the
Effective Date and prior to the expiration of the relevant Transition
Period, EXPERIAN shall provide NEWCO with an invoice on a monthly basis for
AT&T services actually used by NEWCO during such month, plus EXPERIAN's
incremental costs, if any, associated with providing the AT&T's services to
NEWCO. NEWCO shall reimburse EXPERIAN within thirty (30) days of each such
invoice therefor.
ARTICLE VI
Intercompany Contractual Arrangements
6.1 EXPERIAN Support: Prior to the Effective Date, the RES Business
purchased software development, engineering and administrative support services
from EXPERIAN. As of the Effective Time, EXPERIAN's obligations to provide such
services to the RES Business pursuant to these arrangements shall automatically
terminate. NEWCO may, however, upon written notice to EXPERIAN within five (5)
business days of the Effective Date, request to have the existing arrangements
with the RES Business converted into purchase orders with NEWCO. EXPERIAN shall
issue such purchase orders provided EXPERIAN and NEWCO agree upon the terms and
conditions of such purchase orders.
6.2 Plantation, Florida Lease: EXPERIAN is in the process of selling real
property located at 1700/1800 N.W. 66th Avenue, Plantation, Florida (two
buildings) (the "Property") to a third party ("Buyer"). The Property will be
excluded from the assets of the RES Business being transferred to NEWCO pursuant
to the terms of the JV Agreement. EXPERIAN will be leasing back the portion of
the Property located at 1800 N.W. 66th St. (approx. 57,566 square feet) (the
"1800 Building") from the Buyer. Pursuant to the term sheet executed by EXPERIAN
and the Buyer, the lease on the 1800 Building will be for a two year period
commencing on the date of the sale, with the Buyer having the ability to
terminate the lease on six months notice after the first year. The lease rate is
$7.00 per square foot per annum, triple net. EXPERIAN also will be leasing back
the portion of the Property located at 1700 N.W. 66th St. (approx. 41,250 square
feet) (the "1700 Building") from the Buyer for a ten (10) week period commencing
on the date of the sale, with an option to extend for an additional thirty (30)
day period, to be exercised at any time not later than thirty (30) days prior to
the expiration of the initial term. The lease rate on the 1700 Building also
will be $7.00 per square foot per annum, triple net. EXPERIAN anticipates that
the closing of the sale of the Property will take place prior to the Effective
Date. As part of the transfer of the EXPERIAN Interests to NEWCO, EXPERIAN's
rights as tenant under both of the above-referenced leases will be assigned to
NEWCO, and EXPERIAN will be released from all liabilities and obligations under
the leases. If the sale of the Property has not closed prior to the Effective
Date, EXPERIAN will execute leases with NEWCO substantially on the terms
provided for above, which leases will also include the right of EXPERIAN to
assign the leases to any buyer of the Property.
ARTICLE VII
General Support Services
7.1 Post-Effective Date Support Arrangements: Each of EXPERIAN and NEWCO
anticipate that occasional requests for services regarding tax, payroll,
treasury and other matters (including requests to answer specific questions
related thereto) may be made by the other party after the Effective Date. Such
services shall be provided without charge unless the party receiving such
request determines, in its sole discretion, that satisfaction of such request
would involve the expenditure of a significant amount of time and/or resources,
in which case, such party shall provide to the requesting party an estimate of
the costs anticipated to be incurred in satisfying the request, which costs
shall include (a) the pro rata portion of the salary and bonus of the employees
actually providing the services requested pursuant hereto, (b) reasonable
out-of-pocket expenses (evidenced by appropriate documentation) and (c) a
payroll expense charge in an amount equal to 23% of the amount of salary billed
and 11% of bonus billed, pursuant to clause (a) above. Upon receipt of such
estimate, the requesting party shall have two (2) business days in which to
notify the other party whether such party should undertake to provide the
requested services. If such services are provided, the party providing the
services shall deliver to the requesting party an invoice on a monthly basis
containing a description of the services performed and the aggregate costs
actually incurred in performing such services (which amount may exceed the
estimate provided to the requesting party, provided that in such case, the party
providing services shall provide reasonable detail to the requesting party as to
the nature of such excess). The invoice shall be paid by the requesting party
within thirty (30) days of receipt thereof. Notwithstanding the foregoing,
EXPERIAN and NEWCO may from time to time require personnel and other data from
the other party related to or required in connection with their maintenance of
human resources databases, which information shall be provided to the requesting
party without charge. The parties obligation to provide support services
pursuant to this Section 7.1 is in addition to any other specific support
services commitments agreed to by the parties pursuant to any other agreements,
including the Joint Venture and Operating Agreements, and nothing in this
Section 7.1 is intended or shall be construed to obligate any party to pay or
reimburse any amounts with respect to such other commitments.
ARTICLE VIII
Miscellaneous
8.1 Cooperation: The parties will cooperate in good faith to carry out the
purposes of this Transition 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.
8.2 Indemnity:
(a) NEWCO agrees to defend, indemnify and hold harmless EXPERIAN and
its subsidiaries and affiliates (including, without limitation, their
respective officers, directors, employees, shareholders and agents)
(collectively, "EXPERIAN Parties") against any and all liabilities,
damages, losses, claims, costs and expenses (including, without
limitation, costs of collection and reasonable attorneys' fees)
(collectively, "Damages") arising out of or resulting from any demand,
claim, lawsuit or other cause of action brought by a third party as a
result of or in connection with the post-closing services rendered by
employees of any EXPERIAN Party pursuant to this Transition Agreement,
provided that no EXPERIAN Party shall be entitled to indemnification
in respect of its or his gross negligence or willful misconduct.
(b) EXPERIAN hereby agrees to defend, indemnify and hold harmless
NEWCO and its subsidiaries and affiliates (including, without
limitation, their respective officers, directors, employees,
shareholders and agents) (collectively, "NEWCO Parties") against any
and all Damages arising out of or resulting from any demand, claim,
lawsuit or other cause of action brought by a third party as a result
of or in connection with the post-closing services rendered by
employees of any NEWCO Party pursuant to this Transition Agreement,
provided that no NEWCO Party shall be entitled to indemnification in
respect of its or his gross negligence or willful misconduct.
8.3 No Liability:
(a) In providing services hereunder, no EXPERIAN Party shall be liable
to any NEWCO Party for any error or omission except to the extent that
any such error or omission results from the willful failure of a
EXPERIAN Party's employee to perform the services required hereunder
or from the gross negligence or willful misconduct of any such
EXPERIAN Party employee. In no event shall any EXPERIAN Party be
liable to any NEWCO Party or any third party for any special or
consequential damages, including, without limitation, lost profits or
injury to the goodwill of any NEWCO Party, in connection with the
performance, misfeasance or nonfeasance hereunder of any EXPERIAN
Party. EXPERIAN (on behalf of itself and all EXPERIAN Parties) makes
no representation or warranty under this Transition Agreement as to
the accuracy or completeness of any information provided to NEWCO
pursuant to the terms of this Transition Agreement; provided; --------
however, that nothing in this Transition Agreement is intended to
limit or ------- otherwise affect the representations and warranties
made under the Joint Venture and Operating Agreements or in any
certificate or other document delivered pursuant thereto.
(b) In providing services hereunder, no NEWCO Party shall be liable to
any EXPERIAN Party for any error or omission except to the extent that
any such error or omission results from the willful failure of a NEWCO
Party's employee to perform the services required hereunder or from
the gross negligence or willful misconduct of any such EXPERIAN Party
employee. In no event shall any NEWCO Party be liable to any EXPERIAN
Party or any third party for any special or consequential damages,
including, without limitation, lost profits or injury to the goodwill
of any EXPERIAN Party, in connection with the performance, misfeasance
or nonfeasance hereunder of any NEWCO Party. NEWCO (on behalf of
itself and all NEWCO Parties) makes no representation or warranty
under this Transition Agreement as to the accuracy or completeness of
any information provided to any EXPERIAN Party pursuant to the terms
of this Transition Agreement; provided; however, that -------- -------
nothing in this Transition Agreement is intended to limit or otherwise
affect the representations and warranties made under the Joint Venture
and Operating Agreements or in any certificate or other document
delivered pursuant thereto.
8.4 Confidentiality: The parties acknowledge that information concerning
the business or operations of any of the other parties received as a result of
the operation of this Transition Agreement constitutes confidential information
subject to the terms and conditions of the Joint Venture and Operating
Agreements.
8.5 Severability: If any provision of this Transition Agreement shall
finally be determined to be unlawful, then such provision shall be deemed to be
severed from this Transition Agreement and every other provision of this
Transition Agreement shall remain in full force and effect.
8.6 Notices: Any notice or other communication required or permitted to be
given under this Transition Agreement shall be given in the manner provided in
the Joint Venture and Operating Agreements.
8.7 Assignment: This Transition Agreement shall be binding upon and inure
to the benefit of the successors of each of the parties, but shall not be
assignable by any party without the prior written consent of the other parties.
8.8 No Third Parties: This Transition Agreement is not intended to, and
shall not, create any rights in or confer any benefits upon any person other
than the parties hereto.
8.9 Governing Law: This Transition Agreement will be governed by and
construed in accordance with the internal substantive laws of the State of
California, except where the substantive laws of another jurisdiction
mandatorily apply.
8.10 Counterparts: More than one counterpart of this Transition Agreement
may be executed by the parties hereto, and each fully executed counterpart shall
be deemed an original without production of the others.
8.11 Complete Agreement: This Transition Agreement, together with the
FAREISI Transition, Joint Venture and Operating Agreements, sets forth the
entire understanding of the parties with respect to the subject matter hereof
and supersedes all prior letters of intent, agreements, covenants, arrangements,
communications, representations, or warranties, whether oral or written, by any
officer, employee, or representative or either party relating thereto.
IN WITNESS WHEREOF, the parties have each caused this Transition Agreement
to be executed by their respective duly authorized officers as of the date first
above written.
FIRST AMERICAN REAL ESTATE SOLUTIONS LLC
By: /s/ Parker S. Kennedy
---------------------
Title:
---------------------
EXPERIAN INFORMATION SOLUTIONS, INC.
By: /s/ T.A. Gasparini
---------------------
Title:
---------------------
<PAGE>
Exhibit (10)(g)
RESELLER SERVICES AGREEMENT
This Reseller Services Agreement (this "Agreement") is entered into
effective as of November __, 1997, by and between First American CREDCO, a
Washington corporation, having a principal address as set forth at the end of
this Agreement ("FAC"), and Experian Information Solutions, Inc., an Ohio
corporation acting through its Information Solutions Division ("Experian").
Experian and FAC agree as follows:
Article 1
Term
1.1 Term. Subject to Section 7.2 of this Agreement, this Agreement will continue
in force, without any fixed date of termination ("Term").
Article 2
Credit Reporting Services
2.1 Generally. During the Term, FAC may request that Experian provide FAC with
the services listed on the attached pricing schedule (hereinafter referred to,
together with the information therein, as the "Services") to the extent offered
from time to time by Experian and permitted by this Agreement. The Services may
consist of consumer identifying information and/or consumer credit information
on individual consumers ("Consumers"). Experian hereby grants FAC a
nonexclusive, nontransferable limited license to resell the Services consistent
with the terms and conditions of this Agreement.
2.2 Method of Performance. FAC will request the Services from Experian by
electronic means. Each such request will contain sufficient identifying
information concerning the Consumer about whom the information is requested to
enable Experian to perform the Services, and will identify in the manner
specified by Experian, the fact that the request is being made by FAC.
2.3 Status As Consumer Reporting Agency. For purposes of this Agreement, the
parties agree that FAC certifies that it is a "consumer reporting agency" as
such term is defined in the federal Fair Credit Reporting Act.
Article 3
Fees
3.1 Generally. With respect to each response from Experian (including each "no
record" response) to a request for Services made by FAC, FAC will pay Experian
the fees set forth in the attached pricing schedule. Experian and FAC agree to
renegotiate the fees on an annual basis (except as agreed on a particular
pricing schedule) during the Term based on the calendar year. FAC's payment to
Experian is due not later than thirty (30) days after FAC's receipt of
Experian's invoice. If FAC does not pay invoiced amounts within this time
period, it may, at Experian's option, also pay interest on the unpaid amount at
the rate of one and one-half percent (1.5%) per month or the maximum rate
allowed by law, whichever is less. FAC's obligation to pay invoiced amounts is
absolute and unconditional and not subject to any offset, defense or
counterclaim.
3.2 Taxes. The prices and rates for the Services do not include applicable
federal, state or local taxes. FAC will be solely responsible for all federal,
state, and local taxes levied or assessed in connection with Experian's
performance of Services, other than income taxes assessed with respect to
Experian's net income. Experian may separately reflect on its invoices to FAC
the amount of any taxes paid by Experian on FAC's behalf, and FAC shall pay
Experian for such amounts.
Article 4
Use of Experian Information
4.1 Compliance with Law. FAC certifies and warrants that it will comply with all
federal, state and local statutes, regulations, and rules applicable to it,
including, without limitation, the federal Fair Credit Reporting Act, 15 U.S.C.
(S)1681 et seq., as amended ("FCRA"). FAC further warrants that it will require
by written contract that its customers comply with the same obligations of
compliance with laws.
4.2 Use of Information. FAC agrees to comply with all of the following:
4.2.1 FAC hereby certifies that it will request the Services and the
information therein from Experian and resell such to its customers solely for
said customers' use in connection with credit granting, collections, employment,
insurance underwriting, or governmental licensing transactions between the
customer and the Consumer about whom the credit information relates, and will
not request, use or resell any such Services or information for any other
purpose, regardless of whether permitted by law. FAC will, in reselling the
Services, faithfully transmit the information accurately and in its entirety
(except to the extent as may be otherwise required by this Agreement or agreed
to by Experian in writing for approved merged reports.) FAC certifies that it
will provide Experian, at the time it requests the Services or information, the
name of the ultimate end user of the credit information and each FCRA
permissible purpose for which such information is furnished.
4.2.2 FAC agrees not to resell or otherwise transfer the Services in whole
or in part to bail bond companies, investigative companies (i.e., private
investigators), attorneys (other than attorneys whose sole and exclusive
practice is collections), news agencies or journalists, businesses which operate
out of a residence (except as permitted by Experian policies and procedures),
credit clinics, credit repair organizations, credit counseling services (except
as otherwise set forth in this Agreement), to any company or individual who is
known to have been involved in credit fraud or other unethical business
practices or to other types of organizations identified by Experian to FAC in
writing. Notwithstanding the foregoing, Experian may permit on a case-by-case
basis the resale of consumer identifying information to certain of the foregoing
in a manner consistent with Experian policy and procedure on the sale of
identifying information.
4.2.3 FAC hereby warrants that it will not, either directly or indirectly,
itself or through any agent or third party: (a) request, compile, store,
maintain or use the Services (including any of the information therein) to build
its own database (other than for file comparison purposes as approved by
Experian from time to time); (b) copy or otherwise reproduce the Services
(including any of the information therein) except to the minimal extent
necessary to provide standard consumer assistance or file comparison activities;
(c) resell or transfer the Services (including any of the information) to more
than one person or entity or to any person or entity who is not solely an end
user of the Services (including any of the information therein); (d) resell,
transmit or otherwise make available to any person the Services (including any
of the information therein) on or through the Internet or other generally
accessible network or delivery method without Experian's prior written consent;
or (e) resell or otherwise provide the Services (including any of the
information therein) pursuant to 15 U.S.C. (S)1681u (FCRA Section 625); or (f)
merge the Services (or any of the information therein) with any information from
a consumer reporting agency other than for the creation of a merged report to be
used solely for mortgage reporting, tenant screening, or consumer disclosure
pursuant to Section 4.2.5. FAC will disclose to Experian the purpose for which
the Services will be used. Based on such disclosure, the pricing set forth in
the attached Exhibit A shall apply. FAC shall be solely responsible for assuring
the delivery or transmission of information to its customers in a manner that is
secure and in compliance with this Agreement.
4.2.4 FAC agrees to verify that each customer who is provided Services is
the end user and does not intend to resell or otherwise provide or transfer the
Services in whole or in part to any other person or entity. Notwithstanding the
foregoing, Exhibit B hereto lists those agents of FAC that are permitted to
resell the Services one additional time. The parties must mutually agree in
writing to the addition of agents to Exhibit B.
4.2.5 Experian hereby grants to FAC a nonexclusive, nontransferable,
limited license to resell directly to the Consumer(s) pursuant to the terms and
conditions of the Amendment to Reseller Services Agreement For Resales to
Consumers which is attached hereto and made a part hereof. FAC may provide a
disclosure copy to a subject Consumer who has been denied a benefit and
requested disclosure; provided, however, that FAC will provide only a copy of
the information that was provided by FAC to its customer, and will not attempt
to access Experian's systems to obtain additional information or copies of the
previously provided services. FAC will refer all Customers who have questions or
disputes about information in the Services or in Experian's consumer credit
files to the telephone number and/or address for Experian's National Consumer
Assistance Center (as such are provided to FAC from time to time by Experian,
and not to Experian's telephone number for complimentary credit reports). In no
event will FAC attempt to, or hold itself out to the consumer or to the public
as being able to, handle disputes on behalf of Experian or to reinvestigate
information in Experian's files. In no event will FAC attempt to have
information on a Consumer's credit or identifying information changed or altered
in any way other than by forwarding the customer to Experian's National Consumer
Assistance Center.
4.2.6 FAC agrees to sign a "Experian Reseller Employment Report Addendum"
before reselling credit information for employment purposes, and FAC agrees to
complete and sign the "End User Investigation Requirements - Tenant Screening"
before reselling information for tenant screening. FAC certifies that reports on
its employees will only be requested by its designated representative approved
by Experian, and that its employees will not request Services relating to
themselves, their families or friends, or request consumer report information on
other persons other than as permitted by the FCRA and Experian policies.
4.2.7 FAC will not act or provide at any time or in any way, and will not
hold itself out as providing credit clinic, credit repair, credit counseling or
similar services.
4.3 Experian Policies and Procedures. In addition to the requirements set forth
in Section 4.2, FAC agrees to the following:
4.3.1 FAC agrees to comply with Experian's policies and procedures as
announced by Experian from time to time, including those attached to this
Agreement entitled "Experian Permissible Purpose Guidelines for Resellers" and
"Experian Permissible Purpose Type Codes." FAC also agrees to conduct a thorough
investigation of its customers and potential customers to confirm that each has
a "permissible purpose" for receiving the Services, and otherwise complies with
applicable laws and Experian policies. FAC's investigation will include at a
minimum all of the actions listed on the "End User Investigation Requirements"
form, a copy of which is attached hereto, before giving a customer access to the
Services. FAC agrees to provide to Experian at Experian's request all materials
and information relating to its investigations of its customers.
4.3.2 FAC acknowledges and agrees that Experian may itself, or may require
that FAC, block display of account numbers or other information to FAC and FAC's
customers, and FAC agrees to not provide such information to its customers.
4.3.3 Experian may from time to time notify FAC of additional, updated or
new requirements compliance with which will be a condition of Experian's
continued provision of Services to FAC. FAC agrees to comply with such
requirements as to which it has received notice from Experian and such shall be
incorporated into this Agreement by this reference.
4.3.4 FAC understands and agrees that Experian may require evidence,
including a certification, that FAC understands and will comply with applicable
laws and Experian policies and procedures.
4.3.5 FAC agrees to obtain at its expense such training and education
concerning applicable legal requirements and Experian policies and procedures as
Experian may reasonably request. Training made available to FAC by Experian is
provided as a service to FAC, and does not replace or waive FAC's compliance
obligations under the law or this Agreement. Such training does not constitute,
or substitute for, legal advice, and FAC should consult with its own legal
counsel.
4.3.6 FAC will institute and maintain strict procedures for assuring that
its employees do not furnish the Services (or information therein) except in
compliance with the requirements of the FCRA and this Agreement. FAC will
provide training and training materials to its customers to the extent necessary
to assure compliance with the FCRA and this Agreement. FAC will provide Experian
the opportunity to review and approve or disapprove all such materials prior to
their use. FAC will enter into written agreements executed by each of FAC's
customers requiring compliance by such customers with the terms and conditions
of this Agreement. FAC will monitor its customers on an ongoing basis to assure
the continued compliance with the requirements of this Agreement by the customer
and by FAC and will immediately discontinue the Services to any customer who is
not in compliance.
4.3.7 FAC will not mislead consumers or the public, or demean directly or
indirectly Experian Inc., its successors or assigns, the Services, other
services provided by Experian, the consumer reporting industry, direct marketing
industry or other industries in which Experian, its successors and assigns do
business. FAC will provide Experian the opportunity to review and approve or
disapprove prior to their use or dissemination any and all advertising,
marketing, sales and promotional materials, pamphlets, brochures and similar
disclosures that relate directly or indirectly to Experian Inc., its successors
or assigns, the Services, other services provided by Experian, the consumer
reporting industry, direct marketing industry or other industries in which
Experian, its successors and assigns do business, or that mention Experian by
name.
Article 5
Intellectual Property
5.1 No License. Experian does not transfer, and FAC does not obtain, any patent
rights, copyright interest or other right, claim or interest in the computer
programs, systems, forms, formats, schedules, manuals or other proprietary items
utilized or provided by Experian.
5.2 Restrictions on Use of Proprietary Designations. Neither party will use, or
permit their respective employees, agents and subcontractors to use, the
trademarks, service marks, logos, names, or any other proprietary designations
of the other party, or the other party's affiliates, whether registered or
unregistered, without such other party's prior written consent.
5.3 Ownership of Data. FAC acknowledges that Experian has expended substantial
time, effort, and funds to collect, arrange and compile Experian's consumer
information database and to create and deliver the Services (including the
information therein). The Services, the information contained therein, and the
data in Experian's consumer information databases are and will continue to be
the exclusive property of Experian. Nothing contained in this Agreement shall be
deemed to convey to FAC, or to any other party, any right, title, or interest,
including any patent, copyright, or other proprietary right, in or to the data
in Experian's consumer information database(s), any database(s) itself or
(except to the extent of the limited license granted in Section 2.1 of this
Agreement) to the Services and the information therein.
5.4 Confidential Treatment. FAC hereby acknowledges that the Services it
receives from Experian under this Agreement include personal information about
individual Consumers and, as such, require confidential treatment. In addition,
FAC acknowledges that it may receive other proprietary and confidential
information of Experian including but not limited to technical, developmental,
operating, computer system, software, performance, cost, know-how and process
information. FAC warrants to Experian that (a) except as otherwise permitted by
this Agreement, it will maintain the information obtained through Experian in
strict confidence and will not disclose such information other than to its
employees who have a need to know and (b) will use the information only for
purposes of this Agreement. Upon termination of this Agreement or at the request
of Experian, FAC will promptly return to Experian all Experian confidential
information and any copies thereof provided to it. FAC warrants that it will
require by written contract that customers receiving such information from FAC
comply with the same obligations of nondisclosure.
Article 6
Indemnification and Limitations
6.1 Disclaimer of Warranty. Because the Services involve conveying information
provided to Experian by other sources, Experian cannot and will not, for the fee
charged for the Services, be an insurer or guarantor of the accuracy or
reliability of the Services, data contained in its database, or in the Services.
EXPERIAN DOES NOT GUARANTEE OR WARRANT THE ACCURACY, TIMELINESS, COMPLETENESS,
CURRENTNESS, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE
SERVICES, INFORMATION IN THE SERVICES OR THE MEDIA ON OR THROUGH WHICH THE
SERVICES ARE PROVIDED AND SHALL NOT BE LIABLE TO RESELLER OR TO ANY OF THE
RESELLER'S CUSTOMERS FOR ANY LOSS OR INJURY ARISING OUT OF OR CAUSED IN WHOLE OR
IN PART BY EXPERIAN'S ACTS OR OMISSIONS, WHETHER NEGLIGENT OR OTHERWISE, IN
PROCURING, COMPILING, COLLECTING, INTERPRETING, REPORTING, COMMUNICATING OR
DELIVERING THE SERVICES OR INFORMATION THEREIN.
6.2 Indemnification. FAC will indemnify, defend, and hold Experian harmless from
and against any and all liabilities, damages, losses, claims, costs and
expenses, including reasonable attorneys fees, which may be asserted against or
incurred by Experian, arising out of or resulting from the use, disclosure, sale
or transfer of the Services (or information therein) by FAC or its customers, or
FAC's breach of this Agreement. FAC covenants not to sue or maintain any cause
of action, claim, demand, cross-claim, third party action or other form of
litigation or arbitration against Experian, its officer's directors, employees,
contractors, agents, affiliated bureaus or subscribers arising out of or
relating in any way to the Services (or information therein) being blocked by
Experian or not being accurate, timely, complete or current.
6.3 Limitation of Liability. FAC acknowledges that Experian maintains a
database, updated on a periodic basis, from which FAC obtains and resells
Services, and that Experian does not undertake a separate investigation for each
inquiry or request for Services made by FAC. FAC also acknowledges that the
prices Experian charges FAC for the Services are based upon Experian's
expectation that the risk of any loss or injury that may be incurred by use of
the Services will be borne by FAC and not Experian. FAC therefore agrees that it
is responsible for determining that the Services are in accordance with
Experian's obligations under this Agreement. If FAC reasonably determines that
the Services do not meet Experian's obligations under this Agreement, FAC shall
so notify Experian in writing within ten (10) days after receipt of the Services
in question. FAC's failure to so notify Experian shall mean that FAC accepts the
Services as is, and Experian will have no liability whatsoever for the Services.
If FAC so notifies Experian within ten (10) days after receipt of the Services,
then, unless Experian disputes FAC's claim, Experian will, at its option, either
reperform the Services in question or issue FAC a credit for the amount FAC paid
to Experian for the nonconforming Services. This reperformance or credit
constitutes FAC's sole remedy and Experian's maximum liability for any breach of
this Agreement by Experian. If, notwithstanding the above, liability is imposed
on Experian, then FAC agrees that Experian's total liability for any or all of
FAC's losses or injuries from Experian's acts or omissions under this Agreement,
regardless of the nature of the legal or equitable right claimed to have been
violated, shall be the lesser of the amount paid by FAC to Experian under this
Agreement during the six month period preceding the alleged breach by Experian
of this Agreement or Ten Thousand Dollars ($10,000). FAC covenants that it will
not sue Experian for any amount greater than permitted by this Agreement and
will not seek punitive damages. IN NO EVENT SHALL EXPERIAN BE LIABLE TO RESELLER
OR TO ANY CUSTOMER OR THIRD PARTY FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL OR
SPECIAL DAMAGES (INCLUDING BUT NOT LIMITED TO DAMAGES TO BUSINESS REPUTATION,
LOST BUSINESS OR LOST PROFITS), WHETHER FORESEEABLE OR NOT AND HOWEVER CAUSED,
EVEN IF EXPERIAN IS ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Article 7
Amendments and Termination
7.1 Amendments. This Agreement may be amended only by a written instrument
signed by both parties.
7.2 Termination. Notwithstanding any other term in this Agreement, (a) either
party may terminate this Agreement by providing ninety (90) days advance written
notice to the other; and (b) Experian may unilaterally terminate this Agreement
immediately, or take any lesser action Experian believes is appropriate,
including but not limited to blocking FAC's access to the Services and/or
charging FAC a fee for auditing FAC to ensure compliance, if Experian believes
in its sole judgment, that FAC has failed to comply with any of its obligations
hereunder, including any obligation under Article 4 of this Agreement.
7.3 Effect of Termination. Upon expiration or termination of this Agreement, the
license granted herein will automatically terminate, FAC will cease reselling
the Services (and the information therein) and return any Services in its
possession to Experian. No termination or expiration will relieve either party
of any liability for monetary sums owing to the other. The provisions of
Articles 3, 4, 5, 6 and 8 and Sections 7.3 shall survive the expiration or
termination of this Agreement.
Article 8
Miscellaneous
8.1 Status. The parties will perform their obligations hereunder as independent
contractors. Nothing contained in this Agreement shall be deemed to create any
association, partnership, joint venture, or relationship of principal and agent
or master and servant between the parties. The parties acknowledge that any and
all rights not expressly granted pursuant to this Agreement are reserved to the
respective party and that neither party will have any right, power or authority
to obligate the other to any contract, term or condition.
8.2 Excusable Delays. Neither party will be liable to the other for any delay or
failure in its performance of any of the acts required by this Agreement (other
than for payment obligations hereunder) if and to the extent that such delay or
failure arises beyond the reasonable control of such party, including, without
limitation, acts of God or public enemies, labor disputes, equipment
malfunctions, computer downtime, material or component shortages, supplier
failures, embargoes, earthquakes, rationing, acts of local, state or national
governments or public agencies, utility or communication failures or delays,
fire, flood, epidemics, riots and strikes.
8.3 Governing Law, Venue and Attorney's Fees. This Agreement will be governed by
and construed in accordance with the internal substantive laws of the State of
California, which are intended to supersede any choice of laws rules which might
require the application of the laws of another jurisdiction. Both parties hereby
consent to the jurisdiction of the courts of California, whether federal, state
or local, with respect to actions brought to enforce or interpret this
Agreement. Venue for all actions shall be in Orange County, California. The
prevailing party in any arbitration, or permitted legal or equitable action,
shall be entitled to an award of its reasonable attorneys' fees and costs.
8.4 Severability. This Agreement shall be deemed to be severable and, if any
provision of this Agreement shall be finally determined to be void, illegal or
unenforceable, then it is the parties' desire and intention that such provision
be deemed automatically adjusted to the minimum extent necessary to conform to
applicable requirements of validity, legality and enforceability and, as so
adjusted, be deemed a provision of this Agreement as if it were originally
included herein; provided, however, if such provision cannot be adjusted without
substantially and materially altering the rights and duties hereunder and
fundamentally depriving one party of the benefit of the bargain (taken as a
whole) contemplated by this Agreement, then the parties will seek to reform this
Agreement through the procedure outlined in Section 8.7 (Dispute Resolution)
hereof so as to restore, as nearly as possible, the parties' respective rights,
duties, and bargain. In any case, the remaining provisions of this Agreement
shall remain in effect.
8.5 Successors and Assigns. This Agreement will be binding upon and inure to the
benefit of the parties hereto and to their respective heirs, representatives,
successors, and permitted assignees. This Agreement may not be assigned,
transferred, shared or divided in whole, or in part, by FAC without Experian's
prior written consent. The dissolution, merger, consolidation, reorganization,
sale or other transfer of assets, properties, or controlling interest of FAC
constitutes an assignment of this Agreement for purposes of this Section 8.5.
8.6 Audit Rights. Experian will have the right to audit FAC and FAC's customers
to assure compliance with the terms of this Agreement. FAC will provide full
cooperation, and will be responsible for assuring full cooperation by its
employees and customers, in connection with such audits. FAC will provide
Experian or obtain for Experian access to such properties, records and personnel
as Experian may reasonably require for such purpose.
8.7 Dispute Resolution. With the exception of any action taken under Articles 4
and 5 of this Agreement, the parties will resolve any dispute arising out of or
relating to this Agreement in a binding arbitration conducted under the auspices
of the American Arbitration Association in Orange County, California.
Notwithstanding the foregoing, FAC agrees that its failure to comply with the
provisions of Articles 4 and 5 will cause irreparable harm to Experian that
cannot be adequately compensated in damages and that Experian may seek equitable
relief and pursue other remedies to prevent such noncompliance.
8.8 Waiver. Either party may at any time waive compliance by the other with any
covenant or condition contained in this Agreement, but only by written
instrument signed by the party waiving such compliance. No waiver of any
provision of this Agreement shall be deemed to be, or shall constitute, a waiver
of any other provision hereof, nor shall such waiver constitute a waiver in any
other instance.
8.9 Retention of Rights. Nothing in this Agreement is intended to or shall limit
or restrict Experian's ability to market and sell its services, the geographic
areas in which or the customers to whom Experian may market or sell its
services.
8.10 Publicity. Except as specifically permitted by Experian in writing, under
no circumstances will FAC disclose to any third party, directly or indirectly,
the terms and conditions of this Agreement.
8.11 No Third Parties. Nothing in this Agreement, whether express or implied, is
intended to confer upon any person other than the parties hereto and their
respective heirs, representatives, successors and permitted assigns, any rights
or remedies under or by reason of this Agreement, nor is anything in this
Agreement intended to relieve or discharge the liability of any party hereto.
8.12 Notice. All notices required or permitted to be provided to a party under
this Agreement must be in writing and sent to the address for the party set
forth on the last page of this Agreement, unless such address has been changed
by prior written notice to the other party to the Agreement.
8.13 Subject Headings. The subject headings or captions of the articles and
sections of this Agreement are included solely for purposes of convenience and
reference and will not be deemed to explain, modify, limit, amplify or aid in
the meaning, construction or interpretation of any of the provisions of this
Agreement.
8.14 Contract in Entirety. This Agreement (including the exhibits, amendments
and addenda hereto which are incorporated herein by this reference) sets forth
the entire understanding of the parties hereto with respect to the subject
matter hereof and supersedes all prior and contemporaneous letters of intent,
agreements, covenants, negotiations, arrangements, communications,
representations, understandings or warranties, whether oral or written, by any
officer, employee, or representative of either party relating thereto. There are
no other understandings, statements, promises or inducements, oral or otherwise,
contrary to the terms of this Agreement.
[Signatures follow]
<PAGE>
IN WITNESS WHEREOF, each of FAC and Experian has caused this Reseller
Services Agreement to be executed by its duly authorized representative as of
the date first above written.
<TABLE>
<CAPTION>
First American CREDCO Experian Information Solutions, Inc., By and
"FAC" Through Its Information Solutions Division
<S> <C>
By: /s/ Parker S. Kennedy By: D.V. Skilling
------------------------------------- ----------------------------------------
(Signature) (Signature)
Name: Parker S. Kennedy Name: D. Van Skilling
----------------------------------- -------------------------------------
(Print or Type Name of Signer) (Print or Type Name of Signer)
Title: Title:
------------------------------------ -------------------------------------
(Print or Type) (Print or Type)
Address: Address: Experian National Resource Center
------------------------------------ 425 Martingale Road, Suite 600
- -------------------------------------------- Schaumburg, Illinois 60173
- -------------------------------------------- Telephone: (800) 831-5614
- -------------------------------------------- Facsimile: (847) 240-9149
</TABLE>
<PAGE>
EXHIBIT A
TO
RESELLER SERVICES AGREEMENT
Pricing
- -------
* Risk Scores $ .09 per score
* Address Update $ .72 per unit
* Social Search $ .72 per unit
* Direct to Consumer Report $1.90
* Direct to Consumer FACS+ $ .10 (mandatory use)
* All other FACS+ $ .05
* Quest - Rates quoted 5/15/96 (No Charge if "late")
- Credit Reports
Annual Volume Per Report Rate
First 5,000,000 Reports $ .99
Next 1,500,000 Reports $ .94
Next 1,500,000 Reports $ .89
Next 1,500,000 Reports $ .84
Over 9,500,000 Reports $1.50
General Conditions
- ------------------
* Three (3) year term for this pricing schedule beginning 07/97.
* Close coordination to ensure prompt payment of receivables.
* CREDCO provides management focal point for security issues.
* CREDCO will provide two (2) years of historical Residential Mortgage Credit
Report employment data plus new RMCR employment data developed during the
term of the agreement. A mutually agreed upon format, and media will be
worked out.
* Experian will receive 10 metropolitan area file comparisons per year from
CREDCO's CBAS system.
* CREDCO will pay the Experian surcharge for Colorado reports of $1.39.
* A zip table review of Experian utilization in major U.S. markets will be
collaborated upon.
Miscellaneous
- -------------
* CREDCO acknowledges receipt of a $52,000 credit for SMS billing in May and
June of 1997.
* CREDCO acknowledges payment by Experian of all penalties due for system
outages.
Additional Terms
- ----------------
The following agreements are effective until October 31, 1998. The parties will
meet on or about July 1, 1998 to negotiate in good faith with respect to the
continuation of such provisions:
* There will be no vendor penalties to Experian for system downtime.
* Experian shall be the default vendor in the automotive single file
environment.
* The parties agree to allow for "Direct to Consumer" price negotiations in
certain competitive situations.
* The charge for all credit reports over 8,000,000 reports in annual volume will
be $0.84.
<PAGE>
EXHIBIT B
TO
RESELLER SERVICES AGREEMENT
The following agents of FAC are permitted to resell the Services one
additional time:
Reynolds & Reynolds
CreditCheck, Inc.
Comp-U-Card
American Bankers Insurance
<PAGE>
Exhibit (10)(h)
AMENDMENT TO RESELLER SERVICES AGREEMENT
----------------------------------------
FOR RESALES TO CONSUMERS
------------------------
This Amendment To Reseller Services Agreement For Resales To Consumers (the
"Amendment") is entered into effective as of November __, 1997, by and between
the undersigned FAC and the Information Solutions Division of Experian
Information Solutions, Inc.
A. WHEREAS, the parties have entered into a Reseller Services Agreement
(the "Agreement"), which prohibits FAC from selling Experian Services (and the
information contained therein) to consumers; and
B. WHEREAS, the parties wish to amend the Agreement as set forth herein.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, and intending to be legally bound, Experian and FAC
hereby agree as follows:
1. License. Section 4.2.5 of the Agreement is hereby amended such that FAC
is permitted and granted a nonexclusive, nontransferable, limited license to
resell, on the terms and conditions set forth in this Amendment, Services
obtained by FAC from Experian under the Agreement directly to the Consumer(s)
about whom the information in the Services relate (each such Consumer, the
"Inquiring Consumer").
2. Method of Delivery. FAC may only provide the Services (i) by hand
delivery to an Inquiring Consumer who is requesting his or her consumer credit
information in person at FAC's place of business or (ii) by United States mail
service or nationally recognized overnight delivery service to the then most
current address in the Experian Services for such Inquiring Consumer (or most
reliable address otherwise available from Experian or one of the other two
national consumer reporting agencies for the Inquiring Consumer). FAC is
specifically prohibited from providing the Services (a) to a person other than
the Inquiring Consumer; (b) other than to the address for the Inquiring Consumer
obtained as provided in this Amendment; or (c) by facsimile transmission,
Internet transmission or other method not expressly permitted in this Agreement
or previously approved in writing by Experian. FAC agrees to maintain trained
personnel at each of its places of business authorized to resell directly to
Consumers, and to have one or more toll free telephone numbers and lines
dedicated to supporting resales to Consumers as may be necessary to assure
prompt and proficient service levels. FAC's personnel must at a minimum meet the
training requirements established by Experian.
3. Authorization of Consumer. FAC agrees that it shall only request
Services for resale directly to an Inquiring Consumer after FAC has obtained
from the Inquiring Consumer written instructions, signed by the Inquiring
Consumer, authorizing FAC to request and receive from Experian that Consumer's
credit information for resale to the Inquiring Consumer. FAC agrees to maintain
originally executed copies of such written instructions for a minimum of two (2)
years.
4. Verification of Consumer Identity. FAC agrees to verify the identity of
the Inquiring Consumer prior to reselling or otherwise providing the Services to
such Inquiring Consumer. FAC agrees that it will follow at a minimum those
procedures for verifying identification set forth in Experian's policies and
procedures, as such are amended from time to time (or as is previously approved
in writing by Experian), including but not limited to purchasing the Experian
FACS+ Service with each inquiry.
5. Fees. For each response from Experian to a request for Services to be
resold by FAC to an Inquiring Consumer, FAC will pay to Experian the fees set
forth on the pricing schedule attached to the Agreement or to this Amendment, as
applicable. Each FAC who engages in transactions with Consumers other than or in
addition to face-to-face transactions agrees to purchase from, and to pay
Experian for, at least Two Thousand Five Hundred Dollars ($2,500.00) per month
for Services to be resold to Consumers. Payments to Experian hereunder shall be
made pursuant to the terms of Article 3 of the Agreement.
6. Restriction on Use. FAC will fully and accurately convey the Services
(and the information therein) to the Inquiring Consumer, and will do so as
quickly as reasonably possible, but in no event later than three (3) business
days after receipt of the Services from Experian. FAC will maintain, display and
furnish the Services (and the information therein) separate and distinct from
all information and services not provided by Experian unless FAC has obtained
Experian's prior written approval. FAC will not copy any of the Services (or the
information therein) provided to FAC by Experian for resale to an Inquiring
Consumer and, once the Services are provided to the Inquiring Consumer, FAC will
not retain the Services (or information therein) in any manner or form except to
the extent necessary to, and for the sole purpose of, demonstrating compliance
with legal requirements. FAC agrees and certifies that it will not reuse or use
in whole or in part for any other purpose, the Services provided to it for
resale to an Inquiring Consumer.
7. Referral of Consumer Disputes and Questions. FAC will fully comply with
the provisions of Section 4.2.5 of the Agreement related to referral of Consumer
disputes and questions.
8. Disclosures to Consumers. FAC will implement adequate safeguards and
measures to assure Consumers' privacy with respect to the Services and to inform
Consumers of their rights under the FCRA and companion state and local laws and
regulations. FAC will provide notice(s) to Consumers to the extent and in the
manner required by Experian, for example to comply with state and federal
deceptive trade practices acts or similar laws and regulations. Specifically,
FAC will provide a notice to each Inquiring Consumer, simultaneously with
providing the Services to the Inquiring Consumer, that sets forth in prominent,
bold-faced type the following:
8.1 The FCRA allows the Consumer to obtain a copy of his or her credit
report from any consumer credit reporting agency for a reasonable charge;
8.2 If the Consumer has been rejected for credit in the past thirty
(30) days as a result of his or her consumer credit report, the Consumer is
entitled to receive a disclosure of the nature and substance of all information
in his or her file directly from the consumer credit reporting agency free of
charge;
8.3 The FCRA permits Consumers to dispute inaccurate information in
their credit file. Accurate information cannot be changed;
8.4 Experian's policy is to make available to Consumers one
complimentary copy of the consumer credit report per year upon request of the
Consumer;
8.5 The Consumer does not have to purchase the Services or other
information or services from FAC to dispute inaccurate information in the
Consumer's Experian file or to receive a copy of the Consumer's Experian
consumer credit report;
8.6 Experian's National Consumer Assistance Center provides
proprietary consumer disclosure in the form of a "consumer friendly" report that
is different from the report provided by FAC as part of the Services. The
proprietary "consumer friendly" report must be obtained by the Inquiring
Consumer directly from Experian.
8.7 Consumer's residing in the States of Massachusetts, Maryland and
Vermont may receive a free copy of their consumer credit report once per year
and residents of the State of Georgia may receive two copies per year.
9. Form of Advertising. In addition to the requirements on advertising set
forth in Section 4.3.7 of the Agreement, FAC will not use scare tactics or play
upon the fears of Consumers, whether in its advertising materials or otherwise,
in an effort to directly or indirectly sell the Services or other goods or
services offered by FAC.
10. Advertising Approval. Notwithstanding the requirements in Section 4.3.7
of the Agreement, FAC will actually submit to Experian for Experian's prior
written approval, written copies of all of FAC's advertising, promotional, and
marketing materials, pamphlets, brochures and similar disclosures, and any
changes thereto, related to Experian Inc., its successors or assigns, the
Services, other services provided by Experian, the consumer reporting industry,
direct marketing industry or other industries in which Experian, its successors
and assigns do business, or that mention Experian by name. Experian may approve
or disapprove of any submission, in whole or in part, in its sole and absolute
discretion. If Experian disapproves of a submission, FAC will not continue to
resubmit the submission without changes designed to address the causes of
Experian's disapproval. FAC will not disseminate, communicate or otherwise
disclose any advertising, promotional, and marketing materials, pamphlets,
brochures and similar disclosures until it has obtained Experian's prior written
approval. FAC agrees to comply with any additional advertising policies or
related guidelines requested of it by Experian.
11. Information Suppression. Experian will have the right to block or
otherwise prevent the display or disclosure of information, including but not
limited to Experian account numbers, subcodes and social security numbers, and
to otherwise change the format of Services provided to FAC for resale to
Consumers.
12. Policies and Procedures. FAC agrees to comply with all Experian
policies and procedures as announced by Experian from time to time related to
the sale of Services directly to Consumers, even if such policies and procedures
are in addition to legal requirements and/or Experian policies and procedures
applicable to the sale of Services to other persons.
13. Training and Certification. FAC may only resell Services to Inquiring
Consumers if FAC meets the applicable requirements of the Agreement, including
all training and certification requirements. FAC understands that Experian may
require training and certification of FAC in addition to that required of FAC
under the Agreement and agrees to obtain all such training and certifications
prior to reselling or otherwise providing Services to Consumers. FAC agrees that
Experian may change such training and certification at any time, and FAC agrees
to obtain such additional training and certification as soon as reasonably
possible after request by Experian.
14. Amendment Termination. Notwithstanding any other term in this
Amendment, (a) either party may terminate this Amendment by providing thirty
(30) days advance written notice to the other; and (b) Experian may unilaterally
terminate this Amendment immediately, or take any lesser action Experian
believes is appropriate, including but not limited to blocking FAC's access to
the Services and/or charging FAC a fee for auditing FAC to ensure compliance, if
Experian believes in its sole judgment that FAC has failed to comply with any of
its obligations hereunder or under the Agreement. In the event of such
termination, FAC will cease selling or otherwise providing Services to
Consumers. Failure to cease such activities shall be a breach of the Agreement
permitting Experian to terminate the Agreement in whole or in part pursuant to
Section 7.2 thereof. In addition, this Amendment will automatically terminate
without additional action upon termination of the Agreement.
15. Miscellaneous. All terms and conditions of the Agreement not
specifically addressed in this Amendment shall remain unchanged and in full
force and effect. In the event of any express conflict or inconsistency between
the provisions of this Amendment and the provisions of the Agreement, the
provisions of this Amendment will govern and control; provided, however, that
the provisions of this Amendment will be so construed to give effect to the
applicable provisions of the Agreement to the fullest extent possible. All terms
not defined herein beginning with an initial capital letter will have the
meaning set forth in the Agreement (or an Appendix thereto).
16. Entire Agreement. This Amendment sets forth the entire understanding of
the parties with respect to the subject matter hereof and supersedes all prior
agreements (except the Agreement to the extent indicated in Section 15 above),
letters, covenants, arrangements, communications, representations, whether oral
or written, by any representative of either party.
[Signatures follow]
<PAGE>
IN WITNESS WHEREOF, each of FAC and Experian has caused this Amendment to
be executed by its respective duly authorized officer as of the date first
written above.
First American CREDCO Experian Information Solutions, Inc.
By and Through Its
Information Solutions Division
By: /s/ Parker S. Kennedy By: /s/ D.V. Skilling
--------------------- ----------------------
Signature Signature
Name: Parker S. Kennedy Name: D. Van Skilling
-------------------- ---------------------
Print or Type Print or Type
Title: Title:
------------------- --------------------
Print of Type Print or Type
<PAGE>
EXHIBIT (10)(i)
TRADEMARK LICENSE AGREEMENT
This TRADEMARK LICENSE AGREEMENT ("Agreement") is made this ___ day of
November, 1997 by and between Experian Information Solutions, Inc., an Ohio
corporation ("Licensor"), and First American Real Estate Solutions, LLC, a
California limited liability company ("Licensee").
RECITALS
WHEREAS, Licensor and The First American Financial Corporation ("FAFCO"),
First American Real Estate Information Services, Inc. ("FAREISI") and various
subsidiaries and affiliates of FAREISI (FAREISI and its subsidiaries and
affiliates are collectively referred to as the "FAFCO Members") are parties to a
Contribution and Joint Venture Agreement dated as of November ___, 1997 (the "JV
Agreement") whereby Licensor and the FAFCO Members will jointly contribute
assets to, and jointly own, Licensee; and
WHEREAS, Licensor has been engaged in developing and marketing a broad
range of information products and services, and is the owner of the "Experian"
name and the "Experian" trademark and service mark and logo associated therewith
(such Experian mark and logo and the use of the Experian mark as a prefix in a
secondary mark with another component used by Experian or its related and
affiliated entities shall hereinafter be collectively referred to as the
"Trademark") that identifies its various businesses, products and services
including those of the RES Business (as defined in the JV Agreement) and
symbolizes the goodwill and reputation of the business connected therewith
throughout the world; and
WHEREAS, Licensee recognizes the worldwide marketing value of Licensor's
goodwill and reputation as symbolized by the Trademark and is desirous of using
the Trademark in the RES Business that is being contributed to Licensee pursuant
to the JV Agreement and benefiting from its goodwill and reputation in
connection with Licensee's business; and
WHEREAS, Licensee acknowledges that the reputation and goodwill as
symbolized by the Experian name and Trademark are of great value to Licensor and
that Licensor will suffer great and irreparable damage if Licensee engages in
any activity or course of conduct which threatens to diminish or negatively
impact Licensor's goodwill or reputation; and
WHEREAS, the execution and delivery of this Agreement is a condition to the
Closing of the transactions contemplated by the JV Agreement; and
WHEREAS, Licensor has imposed certain terms and conditions as to the use of
the Trademark which Licensee has accepted in order to protect Licensor's rights;
and
WHEREAS, the Parties wish to provide formal evidence of their agreement.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, it is mutually agreed as follows:
1. Definitions. Terms defined in the JV Agreement and not otherwise defined
herein are used herein as such terms are defined in the JV Agreement.
"Products and/or Services" shall mean the products and services sold
or provided by Licensee in the conduct of the RES Business following the Closing
that are (i) the products and services sold or provided by Licensor through its
RES Business prior to the Closing, (ii) the products and services of Licensor
substantially developed by Licensor through its RES Business as of the Closing,
and (iii) with Licensor's prior written approval, products or services that are
substantially similar to the products and services sold or provided and/or
substantially developed for sale by Licensor prior to the Closing.
2. Grant of License. Subject to the terms and conditions hereinafter set
forth, Licensor hereby grants to Licensee the right to use the Trademark in
association with selling the Products and/or Services. Licensee shall during the
term of this Agreement, identify itself by stating its organized or trade name
on all the Products and/or Services and related promotions, advertising and
public announcements.
3. Royalty. So long as Licensee shall have the right to use the Trademark
as provided for herein (whether or not Licensee actually uses the Trademark),
Licensee shall pay to Licensor .2% of Licensee's gross revenues, as computed
under US GAAP. Such royalty payments shall be made each calendar quarter, within
thirty (30) days of the conclusion of the previous quarter.
4. Term. This Agreement shall continue in full force and effect so long as
Licensor or an affiliate of Licensor maintains an ownership interest in
Licensee, unless sooner terminated as provided below.
5. Limitations. Notwithstanding anything in this Agreement, expressed or
implied, to the contrary:
(a) Except as provided in Section 2, Licensee may not use the
Trademark as part of any corporate, business or trading name.
(b) Licensee may not use the Trademark other than in connection with
the Products and/or Services and as allowed under Section 2
hereof. With respect to any other products or services, Licensee
shall use its own name and marks.
(c) Licensee may not change, modify or alter the Trademark in any
manner in connection with Licensee's use of the Trademark as
provided for herein.
(d) Licensee may not assign its rights or obligations under this
Agreement to any other person or entity without the express prior
written approval of Licensor, which Licensor may withhold in its
sole and absolute discretion.
(e) Any and all use of the Trademark by Licensee shall inure to the
benefit of Licensor and Licensee acknowledges that Licensor owns
all right, title and interest to the Trademark and, except as set
forth in this Agreement, reserves all rights thereto,
specifically including, without limitation, all rights to license
or authorize use of the Trademark.
(f) Following the Closing, Licensee shall be permitted to utilize in
the conduct of the RES Business all inventories, existing as of
the Closing, of marketing materials related to the RES Business,
including brochures, product and service descriptions, catalogs
and similar material, manuals, instruction materials, packaging
and other printed material with or without modifying the same,
provided that Licensee uses reasonable efforts to advise the
users and/or recipients that the new source of such Products
and/or Services is Licensee and not Licensor.
6. Quality Control. In order to assure the quality and nature of the
Products and/or Services bearing the Trademark and protect the reputation of
Licensor:
(a) Licensor acknowledges that the quality standards, specifications,
and related policies, procedures and processes for products
and/or services bearing the Trademark as of the Closing (the
"Standards") are deemed acceptable to Licensor and, for so long
as Licensee continues to use the Trademark, Licensee agrees to
continue to maintain the quality of the Products and/or Services
bearing the Trademark consistent with Licensor's Standards in
effect prior to the Closing.
(b) For so long as Licensee continues to use the Trademark, and upon
request of Licensor, but not more than once each calendar quarter
during the term of this Agreement, Licensee shall make available
for Licensor's review copies of all material complaints, claims,
suggestions and regulatory or judicial inquiries, requests,
recommendations, actions or orders ("Comments") as to the
Products and/or Services bearing the Trademark as embodied in any
medium of tangible expression from third parties received by
Licensee, and all correspondence from or to such third party
concerning any Comments received during the preceding quarter.
(c) For so long as Licensee continues to use the Trademark, Licensor
shall have the right to enter Licensee's premises, upon
reasonable prior notice during regular business hours, and have
the right to inspect and examine the Products and/or Services
bearing the Trademark and to review all records of Licensee
relating to the quality of the Products and/or Services bearing
the Trademark. Licensor shall be able to exercise such right, as
a minimum, every four months and in any case where an event may
arise that, in its reasonable good faith judgment, requires such
on-site review. Licensor shall conduct such activities in a
manner not to interfere with Licensee's business operations.
(d) In the event that any Products and/or Services bearing the
Trademark are found by Licensor or its designee not to meet the
Standards, Licensor shall so notify Licensee in writing. Licensor
shall specify to Licensee in reasonable detail the respects in
which the Standards are not being met and, unless Licensee,
within sixty (60) days of its receipt of such notice, takes
corrective measures which reasonably rectify the deficiency,
Licensee's right to use the Trademark shall immediately terminate
upon notice to that effect from Licensor and this Agreement shall
thereupon terminate.
7. Intellectual Property Control. (i) For so long as Licensee continues to
use the Trademark, Licensee undertakes to use reasonable efforts to cooperate
with Licensor, at Licensor's expense, in protecting the Trademark. In
furtherance of such purposes Licensee shall:
(a) Use the Trademark only in accordance with the terms of this
Agreement;
(b) Affix appropriate trademark and service mark notations (e.g.,
"TM" or "(R)") and wording and otherwise make proper use of the
Trademark by using it as a proprietary trademark and/or service
mark, and indicating that the Trademark is owned by Licensor and
used by Licensee with Licensor's permission on all promotional
and advertising materials and Products and/or Services;
(c) Not use any name, mark, device, symbol, insignia, designation,
labeling or packaging in connection with the Trademark, other
than such of the foregoing as Licensee may from time to time use
in the ordinary course of Licensee's conduct of the RES Business,
without the prior written approval of Licensor, and not apply to
register the Trademark in any manner anywhere in the world, with
or without a secondary component;
(d) Comply with all applicable laws and regulations with respect to
the production, distribution and sale of the Products and/or
Services; and
(e) Execute such documents and take such reasonable actions as may be
required by Licensor in connection with the protection of the
Trademark and the registrations thereof, including, without
limitation, cooperate with Licensor in executing and filing
Registered User Agreements as necessary or desirable, and in
applying to register and renew registrations of the Trademark in
such classes and countries as Licensor may wish to do so in its
sole discretion.
(ii) For so long as Licensee continues to use the Trademark, each of Licensee
and Licensor shall promptly provide the other written notice in the event either
party becomes aware of any actual or threatened use of the Trademark by any
third party. In such event, Licensor shall have the first right at its own
expense, to take such action, including the initiation of legal proceedings, to
prevent and terminate such use. If within ninety (90) days, Licensor elects not
to pursue any action, Licensee shall then have the right, at its own expense, to
take such action, including the initiation of legal proceedings, to prevent and
terminate such use. The party conducting such action shall control its conduct
and the other party shall cooperate in any such proceeding, such cooperation to
include, without limitation, the joining of the other party as a party to the
action when either party is required to do so by law in order to bring the
action. Any recovery in any such action or proceeding shall first be paid to
reimburse the parties for their respective out-of-pocket expenses associated
with such action or proceeding (such amounts to be paid on a pro rata basis in
the event any recovery is less than the total of the parties' out-of-pocket
expenses) and any remaining recovery shall be paid to Licensor.
(iii) Licensor shall, at its own expense, file all applications, affidavits and
other documents necessary to maintain the effective registration of the
Trademark in the United States Patent and Trademark Office and in each other
country in which the Trademark is registered on the date of the Closing, but
Licensor and/or Licensee shall not apply to register any marks that include the
Trademark in connection with the RES Business.
8. Termination. Notwithstanding anything to the contrary, this Agreement
shall automatically terminate without notice immediately upon Licensor or any
affiliate of Licensor no longer having an ownership interest in Licensee, or
upon notice by Licensor to Licensee upon the occurrence of any of the following
events:
(a) Breach by Licensee of the Royalty payment provision contained in
Section 3 of this Agreement, which breach is not cured within ten (10)
days after Licensee's receipt of written notice setting forth the
particular breach.
(b) Breach by Licensee of any other term or condition of this Agreement,
which breach is not cured within sixty (60) days after Licensee's
receipt of written notice setting forth the particular breach. It is
expressly understood that breach of the Standards shall be governed by
the provisions of Section 6(d).
(c) Any assignment of Licensee's assets or business for the benefit of
creditors, or appointment of a trustee or receiver, or like official
to administer or conduct the business of Licensee or adjudication in
any legal proceeding that Licensee is either insolvent or otherwise
unable to meet its financial obligations as they become due or is a
voluntary or involuntary bankrupt.
(d) Licensee or all or substantially all of its operations or assets are
sold or assigned, or are confiscated, nationalized or expropriated or
in any other manner controlled, either directly or indirectly, by any
government, national, state or municipal, or any agency thereof.
(e) Licensee engages in any course of conduct or activities which generate
materially negative publicity asserting that Licensee's business
practices do not conform to applicable law or standard industry
practices and the Trademark or Experian name, mark and/or logo is
referenced in a negative manner in two or more print or television or
radio media over the course of any week or is the subject of
significant use on the Internet over the course of any week and which
negative publicity is not responded to by Licensee in a reasonable
period after Licensee receives notice of such from Licensor with
Licensee's press releases and written responses directly to the media
outlets creating such publicity, and if appropriate, to the customer,
consumer or government agency that is the subject of such publicity
and/or with published advertisements of Licensee. Such press releases,
responses and/or advertisements of Licensee shall (i) announce that
corrective action is being undertaken, if in Licensee's reasonable
judgment that is necessary or desirable to maintain legal and industry
standards, and (ii) clarify, among other things, that Licensee is a
separate legal entity that has acquired the RES Business which was
formerly Licensor's and which RES Business is no longer operated by
Licensor.
9. Rights Upon Termination. The parties expressly agree that upon
termination or expiration of this Agreement, Licensee's right to make any use
whatsoever of the Trademark shall immediately and permanently cease. Licensee
shall thereafter immediately and permanently discontinue any and all further use
of the Trademark and take any further steps, at Licensor's expense, reasonably
required to effectuate and confirm the exclusive rights of Licensor in and to
the Trademark throughout the world. To that end, Licensee shall immediately
execute any and all appropriate documents and shall also assist Licensor in
terminating any agreements and registrations by which any other party has used
the Trademarks. Specifically, without limitation of the foregoing, Licensee
shall cooperate fully and assist Licensor, at Licensor's expense, in protecting
the Trademark and the registrations thereof throughout the world.
10. Failure to Enforce Agreement. Any failure by Licensor to enforce at any
time or for any period of time any term or condition of this Agreement shall not
be deemed a waiver of such term or condition or of any other term or condition
or of any subsequent breach of any term or condition.
11. Notice. All notices and communications required or permitted to be
given under this Agreement will be deemed to have been duly given at the time of
receipt if delivered by hand or communicated by electronic transmission or, if
mailed, three (3) days after deposit in the U. S. mail as registered or
certified, postage prepaid and addressed to the other party at their respective
addresses set forth below, unless a different person or address shall have been
designated by notice:
To Licensee: First American Real Estate Solutions LLC
150 Second Avenue, Suite 1600
St. Petersburg, Florida 33701
Telefax: (813) 895-3619
Attention: President
To Licensor: Experian Information Solutions, Inc.
505 City Parkway West, 10th Floor
Orange, California 92868
Telefax: (714) 938-2513
Attention: General Counsel
12. Successors. This Agreement shall be binding on the successors to the
parties hereto subject to the provisions of Paragraph 5(c).
13. Entire Agreement. This Agreement, which may not be amended or modified,
except in writing executed by both parties, is the entire Agreement between the
parties with respect to its subject matter hereof and supersedes all prior
agreements, covenants, arrangements, communications, representations or
warranties between the parties with respect to the subject matter hereof,
whether written or oral.
14. Survival of Obligations. Other provisions hereof notwithstanding, any
obligation of a party incurred under this Agreement prior to the termination or
expiration hereof will survive such termination or expiration.
15. Headings. The headings and titles to the paragraphs of this Agreement
are inserted for convenience only and will not be deemed a part hereof or affect
the construction or interpretation of any provision hereof.
16. Controlling Law. This Agreement shall be construed, interpreted and
enforced according to the laws of the State of California.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the day and year first
above written.
Licensor:
Experian Information Solutions, Inc.
By: /s/ D. V. Skilling
--------------------------------
Name: D. Van. Skilling
--------------------------------
Title:
--------------------------------
Licensee:
First American Real Estate Solutions LLC
By: /s/ Parker S. Kennedy
---------------------------------
Name: Parker S. Kennedy
---------------------------------
Title:
---------------------------------
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 140,933,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 20,481,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 224,261,000
<CASH> 211,687,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 25,171,000
<TOTAL-ASSETS> 1,298,955,000
<POLICY-LOSSES> 252,927,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 39,149,000
0
0
<COMMON> 17,581,000
<OTHER-SE> 445,768,000
<TOTAL-LIABILITY-AND-EQUITY> 1,298,955,000
561,614,000
<INVESTMENT-INCOME> 7,608,000
<INVESTMENT-GAINS> 35,827,000
<OTHER-INCOME> 0
<BENEFITS> 27,328,000
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 74,365,000
<INCOME-TAX> 29,400,000
<INCOME-CONTINUING> 44,965,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,965,000
<EPS-PRIMARY> 2.57
<EPS-DILUTED> 2.49
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
ANNEX F
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): DECEMBER 11, 1997
THE FIRST AMERICAN FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Charter)
CALIFORNIA 0-3658 95-1068610
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
114 EAST FIFTH STREET, SANTA ANA, CALIFORNIA 92701-4642
(Address of Principal Executive Offices) (Zip Code)
(714) 558-3211
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former Name or Former Address, if Changed Since Last Report)
ITEM 5. OTHER EVENTS.
See the attached Exhibit.
ITEM 7. EXHIBITS.
99 Press Release of The First American Financial Corporation dated
December 12, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
THE FIRST AMERICAN FINANCIAL CORPORATION
(Registrant)
Date: January 23, 1998 By: /S/ THOMAS A. KLEMENS
Name: Thomas A. Klemens
Title: Executive Vice President and Chief
Financial Officer
<PAGE>
EXHIBIT 99
CONTACT: Thomas A. Klemens,
Chief Financial Officer
(714) 558-3211, ext. 7442
FIRST AMERICAN FINANCIAL DECLARES
STOCK SPLIT AND REGULAR QUARTERLY DIVIDEND
SANTA ANA, CALIFORNIA, DECEMBER 12, 1997
At its December meeting yesterday, the board of directors of The First American
Financial Corporation (NYSE: FAF) declared a three-for-two stock split, as well
as a regular quarterly cash dividend of 20 cents per Common share on a pre-split
basis.
The stock split will be effected in the form of a 50 percent stock dividend,
which will be distributed on January 15, 1998, to First American shareholders of
record on January 1, 1998. After the split, the number of shares outstanding
will be approximately 17,365,000. Fractional shares will be paid in cash based
on the last sale price of First American Common shares on December 31, 1997,
adjusted pro forma for the stock split.
In order to implement the stock split, the Board of Directors also approved an
amendment to the Company's certificate of incorporation, which will increase the
number of its authorized shares of capital stock from 24,000,000 to 36,000,000.
The par value of such shares will remain at $1.
The cash dividend is payable January 15, 1998, to shareholders of record on
December 31, 1997. The company has paid a cash dividend every year since 1909.
The First American Financial Corporation, based in Santa Ana, California, is the
nation's leading provider of real estate-related financial and information
services. The corporation's subsidiaries include First American Title Insurance
Company, a national and international title insurer; First American Real Estate
Information Services, Inc., which offers tax monitoring, credit reporting, flood
certification, mortgage loan servicing systems, appraisal services, mortgage
document preparation and field inspection services nationally; First American
Home Buyers Protection Corporation, a home warranty company; and First American
Capital Management, an investment advisory firm. The Corporation also operates
First American Trust Company and First Security Thrift Company in Southern
California. First American Financial has more than 10,000 employees in over 400
branch offices in the United States and abroad. Information about the Company's
subsidiaries and an archive of its press releases can be found at
http://www.firstam.com on the Internet.
# # #
<PAGE>
ANNEX G
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): NOVEMBER 30, 1997
THE FIRST AMERICAN FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Charter)
CALIFORNIA 0-3658 95-1068610
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
114 EAST FIFTH STREET, SANTA ANA, CALIFORNIA 92701-4642
(Address of Principal Executive Offices) (Zip Code)
(714) 558-3211
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former Name or Former Address, if Changed Since Last Report)
ITEM 5. OTHER EVENTS.
See the attached Exhibit.
ITEM 7. EXHIBITS.
99 Press Release of The First American Financial Corporation dated
December 2, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
THE FIRST AMERICAN FINANCIAL CORPORATION
(Registrant)
Date: January 27, 1998 By: /S/ THOMAS A. KLEMENS
Name: Thomas A. Klemens
Title: Executive Vice President and Chief
Financial Officer
<PAGE>
EXHIBIT 99
CONTACT: John Long
First American Real Estate Solutions
President
1-800-449-8732
Janis Lamar
Experian
Director, External Affairs
(714) 385-7814
FIRST AMERICAN FINANCIAL AND EXPERIAN
COMPLETE AGREEMENT TO FORM NEW COMPANY
FIRST AMERICAN REAL ESTATE SOLUTIONS WILL BE THE LEADER
IN MORTGAGE LENDING SERVICES WITH $450 MILLION IN REVENUES
SANTA ANA, CALIFORNIA, DECEMBER 2, 1997
The First American Financial Corporation (NYSE: FAF) and Experian Group
announced today that they have completed the previously announced merger of
their respective real estate information subsidiaries into a new company,
effective January 1, 1998. First American Real Estate Solutions, LLC, is 80
percent-owned by First American Financial and Experian owns the remaining 20
percent. Other businesses of the respective companies, including Experian's
credit division and First American's title insurance operations, were not part
of this transaction.
The combination of First American Real Estate Information Services, Inc.
(Information Services) and Experian's Real Estate Solutions (Experian RES)
results in the nation's largest and most diverse provider of information
technology and decision support solutions for the mortgage and real estate
industries. First American Real Estate Solutions will have annual revenues of
more than $450 million and a combined staff of 4,000. The venture combines RES's
property data and title information services with all of Information Service's
businesses, with the exception of Excelis, Inc., the mortgage loan servicing
software division. First American Financial and Experian management expect the
transaction to be accretive to the earnings of both companies.
The new company's headquarters are in St. Petersburg, Florida, the current
headquarters of Information Services, and John Long, President of Information
Services, has been named president.
The First American Financial Corporation, based in Santa Ana, California, is the
nation's leading provider of real estate-related financial and information
services. The corporation's subsidiaries include First American Title Insurance
Company, a national and international title insurer; First American Real Estate
Information Services, Inc., which offers tax reporting and certification, credit
reporting, flood certification, mortgage loan servicing systems, appraisal
services, mortgage document preparation and field inspection services
nationally; First American Home Buyers Protection Corporation, a home warranty
company; and First American Capital Management, an investment advisory firm. The
corporation also operates First American Trust Company and First Security Thrift
Company in Southern California. First American Financial has more than 10,000
employees in over 400 branch offices in the United States and abroad.
Information about the Company's subsidiaries and an archive of its press
releases can be found at http://www.firstam.com on the Internet.
Experian was formed in November 1996 from the combination of Experian and the
CCN Group. Experian employs about 7,000 people in more than 80 offices in the
United States, United Kingdom, Continental Europe, Africa and Asia Pacific. Pro
forma sales in fiscal year 1996/97 (April 1, 1996 - March 31, 1997) were $890
million. The merged companies are headquartered in Orange, Calif., and
Nottingham, U.K. Experian is the world's leading supplier of consumer credit
information and solutions. With its acquisition of Direct Marketing Technology
Inc. in April 1997, Experian became one of the largest companies in the direct
marketing industry worldwide. Direct Tech generated $65 million in sales in
fiscal 1996, which ended November 30. For business details, credit products and
practical information about managing credit, visit the company online at
www.experian.com.
# # #
<PAGE>
ANNEX H
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MARCH 18, 1998
THE FIRST AMERICAN FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Charter)
CALIFORNIA 0-3658 95-1068610
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
114 EAST FIFTH STREET, SANTA ANA, CALIFORNIA 92701-4642
(Address of Principal Executive Offices) (Zip Code)
(714) 558-3211
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former Name or Former Address, if Changed Since Last Report)
ITEM 5. OTHER EVENTS.
See the attached Exhibit.
ITEM 7. EXHIBITS.
99 Press Release of The First American Financial Corporation dated March
18, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
THE FIRST AMERICAN FINANCIAL CORPORATION
(Registrant)
Date: March 18, 1998 By: /S/ THOMAS A. KLEMENS
---------------------
Name: Thomas A. Klemens
Title: Executive Vice President
and Chief Financial Officer
<PAGE>
EXHIBIT 99
Contact: Thomas A. Klemens
Executive Vice President
800-854-3643, ext. 7442
FIRST AMERICAN FINANCIAL TO ACQUIRE CONTOUR SOFTWARE,
THE LARGEST MORTGAGE LOAN INDUSTRY SOFTWARE SUPPLIER
SANTA ANA, CALIFORNIA, MARCH 18, 1998 - The First American Financial Corporation
(NYSE:FAF) announced today a definitive agreement to acquire California-based
Contour Software, the largest supplier of mortgage origination software and
services to the mortgage loan industry.
Contour Software provides leading edge, technological solutions to the mortgage
lending industry. Contour's practical and efficient software makes the
origination process easier and faster for customers such as mortgage brokers,
mortgage lenders, credit unions, commercial banks and savings institutions.
Contour will become a wholly owned subsidiary of First American Real Estate
Information Services, Inc. Terms of the agreement were not disclosed.
"The acquisition of Contour will significantly benefit our customers and enhance
the electronic delivery of our products and services," said President Parker S.
Kennedy. "Mortgage brokers generate over 50 percent of first mortgages and
Contour provides products and services to over 30 percent of the broker market."
"We sought a platform for delivering our origination-related products, such as
appraisal, mortgage credit, flood certification and title insurance, to the
mortgage broker community," Kennedy continued. "Contour represents the very best
platform available. This acquisition is yet another step toward our goal of
becoming the only fully integrated, and the most efficient and innovative, real
estate information services provider."
First American Real Estate Information Services' President John Long said,
"Contour Software is the premier provider of Windows-based mortgage loan
origination technology. Contour will provide us with tremendous opportunities to
expand our services to the mortgage broker industry and to strengthen our
customer base while providing increased efficiency and a streamlined origination
process."
"With the backing of the mortgage industry's leading provider of information
services, Contour's customers will benefit from the integration and enhancement
of mortgage specific software and services," said Scott Cooley, Contour Software
president and CEO. "Our clients will now have direct access, right from their
lap or desk tops, to First American's complete array of products and services.
Lenders using Contour Software are the big winners."
Founded in 1982, Contour Software offers software products for the mortgage
lending industry. The company's flagship product, The Mortgage Banking Series,
is a complete line of software products for every facet of mortgage lending,
from qualification to servicing. With approximately 7,000 customers, Contour is
a technology leader with the most complete line of software products and the
most electronic commerce connections in the industry. Based in Campbell,
California, Contour is a privately held corporation with 100 employees and 25
sales representatives across the nation.
The First American Financial Corporation, based in Santa Ana, California, is the
nation's leading provider of real estate-related financial and information
services. The corporation's subsidiaries include First American Title Insurance
Company, a national and international title insurer; First American Real Estate
Information Services, Inc., which offers tax monitoring, credit reporting,
property data services, flood certification, field inspection services,
appraisal services, mortgage loan servicing systems and mortgage document
preparation; First American Home Buyers Protection Corporation, a home warranty
company; and First American Capital Management, an investment advisory firm. The
Corporation also operates First American Trust Company and First Security Thrift
Company in Southern California. First American Financial has more than 13,000
employees in over 400 branch offices in the United States and abroad.
Information about the company's subsidiaries and a press release archive are
available at http://www.firstam.com.
# # #
<PAGE>
ANNEX I
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MARCH 31, 1998
THE FIRST AMERICAN FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Charter)
CALIFORNIA 0-3658 95-1068610
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
114 EAST FIFTH STREET, SANTA ANA, CALIFORNIA 92701-4642
(Address of Principal Executive Offices) (Zip Code)
(714) 558-3211
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
ITEM 5. OTHER EVENTS.
See the attached Exhibit.
ITEM 7. EXHIBITS.
99 Press Release of The First American Financial Corporation dated
March 31, 1998.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
THE FIRST AMERICAN FINANCIAL CORPORATION
(Registrant)
Date: March 31, 1998 By: /S/ THOMAS A. KLEMENS
---------------------
Name: Thomas A. Klemens
Title: Executive Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT 99
Contact: Thomas A. Klemens
Executive Vice President
800-854-3643, ext. 7442
SANTA ANA, CALIFORNIA, MARCH 31, 1998 - The First American Financial Corporation
(NYSE: FAF) announced today that it has entered into an agreement to acquire by
merger Data Tree Corporation, a California company in the business of providing
database management and document imaging systems to county recorders,
governmental agencies and the title industry. Each share of Data Tree stock will
be converted into the right to receive First American stock. The merger must be
approved by the shareholders of Data Tree and is subject to customary closing
conditions, including governmental approvals. This transaction is expected to
close in the next two months, and the company believes it will be accretive to
the earnings of First American Financial. Data Tree will become a part of First
American Real Estate Solutions, LLC, the recently formed venture, owned 80
percent by First American and 20 percent by Experian.
Data Tree has two primary products. Titlescape is a subscription-based,
Windows-compliant software package that combines access to on-line historical
databases of imaged recorded title documents with integration software that
enables customers to combine their processing applications into one system. IDEA
(Indexing Document Extraction Application) is a turnkey imaging and document
management system designed for county recorders and other government agencies.
The system simplifies and expedites the maintenance of documents by allowing the
user to convert paper documents and other input media into electronic images and
then manage the storage, retrieval and routing of these images.
According to President Parker S. Kennedy, This acquisition provides the
assurance that electronic document imaging and retrieval capabilities will be
expanded geographically to meet the needs of our title operations and the title
industry at large.
Through processes that Data Tree has developed we will be able to greatly
accelerate the ability to search title and retrieve recorded documents
electronically from central locations, Kennedy continued. Efficiency gains
resulting from these procedures will work in the long term to assure the ability
of the title industry to keep pace with a rapidly changing marketplace. Harish
Chopra, president of Data Tree, stated: We are pleased to join forces with First
American. Titlescape's land record imaged database will create an important
fully integrated platform to benefit the title industry. This alliance will help
us expand at an accelerated pace to other key population centers around the
country.
Data Tree was founded in 1988 and is headquartered in San Diego,
California, with offices in Arizona, Nevada, Texas and Florida.
The First American Financial Corporation, based in Santa Ana, California,
is the nation's leading provider of real estate-related financial and
information services. The corporation's subsidiaries include First American
Title Insurance Company, a national and international title insurer; First
American Real Estate Information Services, Inc., which offers tax monitoring,
credit reporting, property data services, flood certification, field inspection
services, appraisal services, mortgage loan servicing systems, and mortgage
document preparation nationally; First American Home Buyers Protection
Corporation, a home warranty company; and First American Capital Management, an
investment advisory firm. The Corporation also operates First American Trust
Company and First Security Thrift Company in Southern California. First American
Financial has more than 13,000 employees in over 400 branch offices in the
United States and abroad. Information about the company's subsidiaries and an
archive of its press releases can be found at http://www.firstam.com on the
Internet.
<PAGE>
ANNEX J
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): APRIL 7, 1998
THE FIRST AMERICAN FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Charter)
CALIFORNIA 0-3658 95-1068610
- ---------- ------ ----------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
114 EAST FIFTH STREET, SANTA ANA, CALIFORNIA 92701-4642
-------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(714) 558-3211
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former Name or Former Address, if Changed Since Last Report)
ITEM 5. OTHER EVENTS.
See the attached Exhibit.
ITEM 7. EXHIBITS.
99 Press Release of The First American Financial Corporation dated April 7,
1998.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
THE FIRST AMERICAN FINANCIAL CORPORATION
(Registrant)
Date: April 7, 1998 By: /S/ THOMAS A. KLEMENS
---------------------------
Name: Thomas A. Klemens
Title: Executive Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT 99
Contact: Max 0. Valdes, Controller
714) 558-3211, ext. 7450
SANTA ANA, CALIFORNIA, APRIL 7, 1998-The First American Financial Corporation
(NYSE: FAF) announced today the issuance and sale of $100 million of 7.55
percent senior debentures, due April 1, 2028. Chase Securities Inc. and First
Chicago Capital Markets, Inc., underwrote the offering.
The 30-year bonds were issued at 99.456 percent of the principal amount.
Net proceeds will be used for general corporate purposes, including, without
limitation, repayment of certain debt and the financing of the construction of
new corporate facilities.
The First American Financial Corporation, based in Santa Ana, California,
is the nation's leading provider of real estate-related financial and
information services. The corporation's subsidiaries include First American
Title Insurance Company, a national and international title insurer; First
American Real Estate Information Services, Inc., which offers tax monitoring,
credit reporting, property data services, flood certification, field inspection
services, appraisal services, mortgage loan servicing systems, and mortgage
document preparation nationally; First American Home Buyers Protection
Corporation, a home warranty company; and First American Capital Management, an
investment advisory firm. The Corporation also operates First American Trust
Company and First Security Thrift Company in Southern California. First American
Financial has more than 13,000 employees in over 400 branch offices in the
United States and abroad. Information about the company's subsidiaries and an
archive of its press releases can be found at http://www.firstam.com on the
Internet.
<PAGE>
ANNEX K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-A
FOR REGISTRATION OF CERTAIN CLASSES OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF THE
SECURITIES EXCHANGE ACT OF 1934
THE FIRST AMERICAN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-1068610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
114 EAST FIFTH STREET
SANTA ANA, CALIFORNIA 92701-4642
(Address of principal executive offices) (Zip Code)
If this form relates to the If this form relates to the
registration of a class of securities registration of a class of securities
pursuant to Section 12(b) of the pursuant to Section 12(g) of the
Exchange Act and is effective Exchange Act and is effective
pursuant to General Instruction pursuant to General Instruction
A.(c), please check the following A.(d), please check the following
box. [X] box. [ ]
Securities Act registration statement file
number to which this form relates: ________________
(If Applicable)
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
Rights to Purchase Series A Junior New York Stock Exchange
Participating Preferred Shares
Securities to be registered pursuant to Section 12(g) of the Act:
None.
<PAGE>
ITEM 1 DESCRIPTION OF SECURITIES TO BE REGISTERED
On October 23, 1997, the Board of Directors of The First American Financial
Corporation, a California corporation (the "Company"), declared a dividend
distribution of one Right for each outstanding common share, $1.00 par value
(the "Common Shares") of the Company, to shareholders of record at the close of
business on November 15, 1997 (the "Record Date"). Each Right entitles the
record holder to purchase from the Company one one hundred-thousandth of a share
("Preferred Share Fraction") of the Company's Series A Junior Participating
Preferred Shares, $1.00 par value (the "Preferred Shares"), at a price of $265
(the "Purchase Price"), subject to adjustment in certain circumstances. Except
as otherwise provided in the Rights Agreement (as defined below), the Purchase
Price may be paid, at the election of the registered holder, in cash or by
certified bank check or money order payable to the order of the Company. The
description and terms of the Rights are set forth in a Rights Agreement, dated
as of October 23, 1997 (as it may be amended, modified or supplemented from time
to time, the "Rights Agreement"), between the Company and Wilmington Trust
Company, as Rights Agent.
Initially, the Rights will be attached to the certificates representing
outstanding Common Shares, and no Rights Certificates will be distributed. The
Rights will separate from the Common Shares and a "Distribution Date" will occur
upon the earlier of (i) the close of business on the tenth day after the date
(the "Share Acquisition Date") of a public announcement that a person or group
of affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 15% or more of the
outstanding Common Shares, or (ii) the close of business on the tenth Business
Day (or such later date as may be determined by the Company's Board of Directors
prior to such time as any person becomes an Acquiring Person) after the
commencement of a tender offer or exchange offer if, upon consummation thereof,
the person or group making such offer would be the beneficial owner of 15% or
more of the outstanding Common Shares. Until the Distribution Date, (i) the
Rights will be evidenced by the Common Share certificates and will be
transferred with and only with such Common Share certificates, (ii) new Common
Share certificates issued after the Record Date will bear a legend incorporating
the Rights Agreement by reference and (iii) the surrender for transfer of any
certificates for Common Shares outstanding will also constitute the transfer of
the Rights associated with the Common Shares represented by such certificate. As
soon as practicable following the Distribution Date, Rights Certificates will be
mailed to holders of record of the Common Shares as of the close of business on
the Distribution Date and, thereafter, such separate Rights Certificates alone
will evidence the Rights.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on October 23, 2007 unless earlier redeemed by the
Company as described below.
Except in the circumstances described below, after the Distribution Date
each Right will be exercisable into a Preferred Share Fraction. Each Preferred
Share Fraction carries voting and dividend rights that are intended to produce
the equivalent of one Common Share. The voting and dividend rights of the
Preferred Shares are subject to adjustment in the event of dividends,
subdivisions and combinations with respect to the Common Shares of the Company.
In lieu of issuing certificates for fractions of Preferred Shares (other than
fractions which are integral multiples of Preferred Share Fractions), the
Company may pay cash in accordance with the Rights Agreement.
In the event that, at any time following the Distribution Date, a Person
becomes an Acquiring Person (other than pursuant to an offer for all outstanding
Common Shares at a price and on terms which the majority of the independent
Directors determine to be fair to, and otherwise in the best interests of,
shareholders), the Rights Agreement provides that proper provision shall be made
so that each holder of a Right will thereafter have the right to receive, upon
the exercise thereof, Common Shares (or, in certain circumstances, cash,
property or other securities, including Preferred Share Fractions, of the
Company) having a value equal to two (2) times the exercise price of the Right.
In lieu of requiring payment of the Purchase Price upon exercise of the Rights
following any such event, the Company may provide that each Right be exchanged
for one Common Share (or cash, property or other securities, as the case may
be). The only right of a holder of Rights following the Company's election to
provide for such exchange shall be to receive the above described securities.
Notwithstanding any of the foregoing, following the occurrence of any of the
events set forth in this paragraph, any Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by an
Acquiring Person shall immediately become null and void.
For example, at an exercise price of $265 per Right, each Right not owned
by an Acquiring Person (or by certain related parties) following an event set
forth in the preceding paragraph would entitle its holder to purchase $530 worth
of Common Shares (or other equivalent securities, as noted above) for $265.
Assuming that the Common Shares had a per share value of $132.50 at such time,
the holder of each valid Right would be entitled to purchase four Common Shares
(or other equivalent securities, as noted above) for $265. Alternatively, the
Company could permit the holder to surrender each Right in exchange for one
Common Share (with a value of $132.50) without the payment of any consideration
other than the surrender of the Right.
In the event that, at any time following the Share Acquisition Date, (i)
the Company engages in a merger or consolidation in which the Company is not the
surviving corporation, (ii) the Company engages in a merger or consolidation
with another person in which the Company is the surviving corporation, but in
which all or part of its Common Shares are changed or exchanged, or (iii) 50% or
more of the Company's assets or earning power is sold or transferred (except
with respect to clauses (i) and (ii), a merger or consolidation (a) which
follows an offer described in the second preceding paragraph and (b) in which
the amount and form of consideration is the same as was paid in such offer), the
Rights Agreement provides that proper provision shall be made so that each
holder of a Right (except Rights which previously have been voided as set forth
above) shall thereafter have the right to receive, upon the exercise thereof,
common stock of the acquiring company having a value equal to two (2) times the
exercise price of the Right. The events set forth in this paragraph and in the
second preceding paragraph are referred to as the "Triggering Events."
The Purchase Price payable, and the number of Preferred Share Fractions or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on the Preferred Shares or other capital shares, or a subdivision,
combination or reclassification of the Preferred Shares, (ii) upon the grant to
holders of the Preferred Shares of certain rights or warrants to subscribe for
Preferred Shares or securities convertible into Preferred Shares at less than
the current market price of the Preferred Shares, or (iii) upon the distribution
to holders of the Preferred Shares of evidences of indebtedness or assets
(excluding regular quarterly cash dividends or dividends payable in Preferred
Shares) or of subscription rights or warrants (other than those referred to
above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Preferred Shares (other than fractions which
are integral multiples of Preferred Share Fractions) will be issued upon
exercise of the Rights and, in lieu thereof, a cash payment will be made based
on the market price of the Preferred Shares on the last trading date prior to
the date of exercise.
At any time prior to the earlier of (i) the date on which a person becomes
an Acquiring Person and (ii) the Final Expiration Date, the Board of Directors
of the Company may redeem the Rights in whole, but not in part, at a price of
$.001 per Right, payable in cash or securities or both (the "Redemption Price").
Immediately upon the action of the Board of Directors of the Company ordering
redemption of the Rights, the Rights will terminate and the only right of the
holders of Rights will be to receive the Redemption Price.
Issuance of Common Shares upon exercise of Rights is subject to regulatory
approval. Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
be taxable to shareholders or to the Company, shareholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Shares (or other consideration) of the Company or for
common stock of the acquiring company as set forth above.
Any of the provisions of the Rights Agreement, other than certain
provisions relating to the principal economic terms of the Rights, may be
amended by the Board of Directors of the Company prior to the Distribution Date.
Thereafter, the provisions, other than certain provisions relating to the
principal economic terms of the Rights, of the Rights Agreement may be amended
by the Board in order: to cure any ambiguity, defect or inconsistency; to
shorten or lengthen any time period under the Rights Agreement; or in any other
respect that will not adversely affect the interests of holders of Rights
(excluding the interests of any Acquiring Person); provided that no amendment to
adjust the time period governing redemption shall be made at such time as the
Rights are not redeemable.
As of November 3, 1997 there were 11,773,833 Common Shares issued and
outstanding. Each outstanding Common Share on November 15, 1997 will receive one
Right. As long as the Rights are attached to the Common Shares and in certain
other limited circumstances, the Company will issue one Right with each new
Common Share so that all such shares will have attached Rights. 1,000 Preferred
Shares will initially be reserved for issuance upon exercise of the Rights.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on the Rights being redeemed or a substantial
number of Rights being acquired. The Rights should not interfere with any merger
or other business combination approved by the Board of Directors of the Company.
The form of Rights Agreement between the Company and the Rights Agent
specifying the terms of the Rights, which includes as Exhibits the Certificate
of Determination of Series A Junior Participating Preferred Shares, the form of
Rights Certificate and the form of Summary of Rights, is attached hereto as an
Exhibit and incorporated herein by reference. The foregoing description of the
Rights is qualified by reference to such Exhibit.
ITEM 2 EXHIBITS.
Exhibit 4 Form of Rights Agreement, dated as of October 23, 1997, between
The First American Financial Corporation and Wilmington Trust
Company, which includes as Exhibit A the Form of Certificate of
Determination of Series A Junior Participating Preferred Shares,
as Exhibit B the Form of Rights Certificate and as Exhibit C the
Summary of Rights.
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereto duly authorized.
THE FIRST AMERICAN FINANCIAL CORPORATION
(Registrant)
Date: November 7, 1997 By:/S/ MARK R ARNESEN
Name: Mark R Arnesen
Title: Vice President and Secretary
<PAGE>
EXHIBIT 4
THE FIRST AMERICAN FINANCIAL CORPORATION
and
WILMINGTON TRUST COMPANY,
as Rights Agent
------------
RIGHTS AGREEMENT
Dated as of October 23, 1997
<PAGE>
<TABLE>
TABLE OF CONTENTS
Page
<S> <C>
Section 1. Certain Definitions........................................................................... 1
Section 2. Appointment of Rights Agent................................................................... 4
Section 3. Issue of Rights Certificates.................................................................. 4
Section 4. Form of Rights Certificates................................................................... 6
Section 5. Countersignature and Registration............................................................. 7
Section 6. Transfer, Split Up, Combination and Exchange of
Rights Certificates; Mutilated, Destroyed, Lost or Stolen
Rights Certificates........................................................................... 8
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights................................. 9
Section 8. Cancellation and Destruction of Rights Certificates........................................... 11
Section 9. Reservation and Availability of Capital Shares; Registration of Securities.................... 11
Section 10. Capital Shares Record Date.................................................................... 12
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights................... 13
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.................................... 22
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power.......................... 23
Section 14. Fractional Rights and Fractional Shares....................................................... 27
Section 15. Rights of Action.............................................................................. 28
Section 16. Agreement of Rights Holders................................................................... 28
Section 17. Rights Certificate Holder Not Deemed a Shareholder............................................ 29
Section 18. Concerning the Rights Agent................................................................... 29
Section 19. Merger or Consolidation or Change of Name of Rights Agent..................................... 30
Section 20. Duties of Rights Agent........................................................................ 30
Section 21. Change of Rights Agent........................................................................ 32
Section 22. Issuance of New Rights Certificates........................................................... 33
Section 23. Redemption and Termination.................................................................... 34
Section 24. Notice of Certain Events...................................................................... 34
Section 25. Notices....................................................................................... 35
Section 26. Supplements and Amendments.................................................................... 36
Section 27. Successors.................................................................................... 36
Section 28. Determinations and Actions by the Board of Directors, etc..................................... 36
Section 29. Benefits of this Agreement.................................................................... 37
Section 30. Severability.................................................................................. 37
Section 31. Governing Law................................................................................. 37
Section 32. Counterparts.................................................................................. 37
Section 33. Descriptive Headings.......................................................................... 37
<PAGE>
Exhibit A - Form of Certificate of Determination of Series A Junior Participating Preferred Shares
Exhibit B - Form of Rights Certificate
Exhibit C - Form of Summary of Rights
</TABLE>
<PAGE>
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of October 23, 1997 (the "Agreement"), between
The First American Financial Corporation, a California corporation (the
"Company"), and Wilmington Trust Company (the "Rights Agent").
W I T N E S S E T H :
WHEREAS, on October 23, 1997 (the "Rights Dividend Declaration Date"), the
Board of Directors of the Company authorized and declared a dividend
distribution of one preferred share purchase right (individually a "Right" and
collectively the "Rights") for each Common Share (as hereinafter defined)
outstanding at the Close of Business on November 15, 1997 (the "Record Date"),
and has authorized the issuance of one Right (as such number may be hereinafter
adjusted pursuant to the provisions of Section 11(p) hereof) for each Common
Share issued or delivered between the Record Date and the earliest of the
Distribution Date, the date the Rights are redeemed or the Final Expiration Date
(as such terms are hereinafter defined) and as otherwise provided herein, each
Right initially representing the right to purchase one Preferred Share Fraction
(as hereinafter defined) upon the terms and subject to the conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person (as such term is hereinafter
defined) who or which, together with all Affiliates (as such term is hereinafter
defined) and Associates (as such term is hereinafter defined) of such Person,
shall be the Beneficial Owner (as such term is hereinafter defined) of 15% or
more of the Common Shares then outstanding, but shall not include (i) the
Company, (ii) any Subsidiary of the Company, (iii) any employee benefit plan or
employee stock plan of the Company or of any Subsidiary of the Company, (iv) any
dividend reinvestment plan of the Company or (v) any Person or entity organized,
appointed or established by the Company for or pursuant to the terms of any such
plan. Notwithstanding the foregoing, no Person shall become an "Acquiring
Person" (X) as the result of an acquisition of Common Shares by the Company
which, by reducing the number of shares outstanding, increases the proportionate
number of shares beneficially owned by such Person to 15% or more of the Common
Shares then outstanding; provided, however, that if a Person shall become the
Beneficial Owner of 15% or more of the Common Shares then outstanding by reason
of such an acquisition and shall, after such acquisition, become the Beneficial
Owner of any additional Common Shares (other than by means of any stock dividend
or stock split), then such Person shall be deemed to be an "Acquiring Person,"
or (Y) if within 5 days after such Person would otherwise have become an
Acquiring Person (but for the operation of this subclause Y), such Person
notifies the Board of Directors in writing that such Person became the
Beneficial Owner of 15% of more of the Common Shares then outstanding
inadvertently and within 2 days after such written notification, such Person is
the Beneficial Owner of less than 15% of the outstanding Common Shares.
(b) "Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under the
Exchange Act as in effect on the date of this Agreement.
(c) A Person shall be deemed the "Beneficial Owner" of, and shall be deemed
to beneficially own, any securities:
(i) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right or obligation to acquire
(whether such right is exercisable immediately or only after the passage of
time) pursuant to any agreement, arrangement or understanding (whether or
not in writing) or upon the exercise of conversion rights, exchange rights,
rights warrants or options, or otherwise; provided, however, that a person
shall not be deemed the "Beneficial Owner" of, or to "beneficially own,"
(A) securities tendered pursuant to a tender or exchange offer made by such
Person or any of such Person's Affiliates or Associates until such tendered
securities are accepted for purchase or exchange, or (B) at any time prior
to the occurrence of a Triggering Event, securities issuable upon exercise
of the Rights or (C) from and after the occurrence of a Triggering Event,
securities issuable upon exercise of Rights which were acquired by such
Person or any of such Person's Affiliates or Associates prior to the
Distribution Date or pursuant to Section 3(a) or Section 22 hereof (the
"Original Rights") or pursuant to Section 11(i) hereof in connection with
an adjustment made with respect to any Original Rights;
(ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or dispose of or
has "beneficial ownership" of (as determined pursuant to Rule 13d-3 of the
General Rules and Regulations under the Exchange Act and any successor
provision thereof), including pursuant to any agreement, arrangement or
understanding, whether or not in writing; provided, however, that a Person
shall not be deemed the "Beneficial Owner" of, or to "beneficially own,"
any security under this subparagraph (ii) as a result of an agreement,
arrangement or understanding to vote such security if such agreement,
arrangement or understanding: (A) arises solely from a revocable proxy
given in response to a public proxy or consent solicitation made pursuant
to, and in accordance with, the applicable provisions of the General Rules
and Regulations under the Exchange Act, and (B) is not also then reportable
by such Person on Schedule 13D under the Exchange Act (or any comparable or
successor report); or
(iii) which are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with which such Person
(or any of such Person's Affiliates or Associates) has any agreement,
arrangement or understanding (whether or not in writing), but excluding
customary agreements with and between underwriters and selling group
members with respect to a bona fide public offering of securities until the
expiration of forty days after the date of such acquisition, for the
purpose of acquiring, holding, voting (except pursuant to a revocable proxy
as described in the proviso to subparagraph (ii) of this paragraph (c) or
disposing of any voting securities of the Company.
(d) "Board of Directors" shall mean the board of directors of the Company.
(e) "Business Day" shall mean any day other than a Saturday, Sunday, U.S.
federal holiday or a day on which banking institutions in the States of
California, Delaware or New York are authorized or obligated by law or executive
order to close.
(f) "Close of Business" on any given date shall mean 5:00 P.M., New York
time, on such date; provided, however, that if such date is not a Business Day
it shall mean 5:00 P.M., New York time, on the next succeeding Business Day.
(g) "Common Shares" shall mean the common shares, $1.00 par value of the
Company, except that "Common Shares" when used with reference to any Person
other than the Company shall mean the capital shares of such Person with the
greatest voting power, or the equity securities or other equity interest having
power to control or direct the management, of such Person.
(h) "Distribution Date" shall have the meaning set forth in Section 3(a)
hereof.
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(i) "Expiration Date" shall have the meaning set forth in Section 7(a)
hereof.
(j) "Final Expiration Date" shall have the meaning set forth in Section
7(a) hereof.
(k) "Person" shall mean any individual, firm, corporation, limited
liability company, partnership or other entity, and shall include any successor
(by merger or otherwise) to any such entity.
(l) "Preferred Shares" shall mean Series A Junior Participating Preferred
Shares, $1.00 par value, of the Company having the rights and preferences set
forth in the form of Certificate of Determination of Series A Junior
Participating Preferred Shares attached to this Agreement as Exhibit A.
(m) "Preferred Share Fraction" shall mean one one hundred-thousandth of a
Preferred Share.
(n) "Purchase Price" shall have the meaning set forth in Section 4 hereof
as adjusted by the provisions of Section 11 hereof.
(o) "Record Date" shall have the meaning set forth in the first Whereas
clause.
(p) "Rights Dividend Declaration Date" shall have the meaning set forth in
the first Whereas clause.
(q) "Section 11(a)(ii) Event" shall mean the event described in Section
11(a)(ii) hereof.
(r) "Section 13 Event" shall mean any event described in clause (x), (y) or
(z) of Section 13(a) hereof.
(s) "Shares Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) under the Exchange Act) by
the Company or an Acquiring Person, that an Acquiring Person has become such.
(t) "Subsidiary" shall mean, with reference to any other Person, any
corporation or other entity of which securities or other ownership interests
having ordinary voting power, in the absence of contingencies, to elect at least
a majority of the directors or other persons performing similar functions is
beneficially owned, directly or indirectly, by such Person, or which is
otherwise controlled by such Person.
(u) "Trading Day" shall mean a day on which the principal national
securities exchange on which the Common Shares are listed or admitted to trading
is open for the transaction of business or, if the Common Shares are not listed
or admitted to trading on any national securities exchange, a Business Day.
(v) "Triggering Event" shall mean any Section 11(a)(ii) Event or any
Section 13 Event.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date also
be the holders of the Common Shares) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such Co-Rights Agents as it may deem necessary or
desirable.
Section 3. Issue of Rights Certificates.
(a) Until Close of Business on the earlier of (i) the tenth day after the
Shares Acquisition Date (or, if the tenth day after the Shares Acquisition Date
occurs before the Record Date, the Close of Business on the Record Date) or (ii)
the Close of Business on the tenth Business Day (or such later date as may be
determined by the Board of Directors prior to such time as any Person becomes an
Acquiring Person) after the date that a tender or exchange offer by any Person
(other than the Company, any Subsidiary of the Company, any employee benefit
plan or employee stock plan of the Company or of any Subsidiary of the Company,
or any Person or entity organized, appointed or established by the Company for
or pursuant to the terms of any such plan) is first published or sent or given
within the meaning of Rule 14d-2(a) of the General Rules and Regulations under
the Exchange Act, if upon consummation thereof, such Person would be the
Beneficial Owner of 15% or more of the Common Shares then outstanding (the
earlier of (i) and (ii) being herein referred to as the "Distribution Date"),
(x) the Rights will be evidenced (subject to the provisions of paragraph (b) of
this Section 3) by the certificates for Common Shares registered in the names of
the holders of the Common Shares (which certificates for Common Shares shall be
deemed also to be certificates for Rights) and not by separate certificates, and
(y) the Rights will be transferable only in connection with the transfer of the
underlying Common Shares (including a transfer to the Company). As soon as
practicable after its receipt from the Company of a written notice setting forth
the Distribution Date, the Rights Agent will send, at the Company's expense, by
first-class, postage prepaid mail, to each record holder of Common Shares as of
the Close of Business on the Distribution Date, at the address of such holder
shown on the records of the Company as provided to the Rights Agent, one or more
Rights Certificates, prepared by and at the expense of the Company, in
substantially the form of Exhibit B hereto (individually a "Rights Certificate"
and collectively the "Rights Certificates"), evidencing one Right for each
Common Share so held, subject to adjustment as provided herein. In the event
that an adjustment in the number of Rights per Common Share has been made
pursuant to Section 11(p) hereof, prior to the time of distribution of the
Rights Certificates, the Company shall make the necessary and appropriate
rounding adjustments (in accordance with Section 14(a) hereof) and advise the
Rights Agent thereof in writing, so that Rights Certificates representing only
whole numbers of Rights are distributed and cash is paid in lieu of any
fractional Rights. As of and after the Distribution Date, the Rights will be
evidenced solely by Rights Certificates.
(b) As promptly as practicable following the Record Date, the Company will
send a copy of a Summary of Rights to Purchase Preferred Shares, in
substantially the form attached hereto as Exhibit C (the "Summary of Rights"),
by first-class, postage prepaid mail, to each record holder of Common Shares as
of the Close of Business on the Record Date, at the address of such holder shown
on the records of the Company. With respect to certificates for Common Shares
outstanding on or after the Record Date, until the Distribution Date, the Rights
will be evidenced by such certificates for Common Shares with or without a copy
of the Summary of Rights attached thereto and the registered holders of the
Common Shares shall also be the registered holders of the associated Rights.
Until the earlier of the Distribution Date or the Expiration Date, the transfer
of any certificates representing Common Shares with or without a copy of the
Summary of Rights attached thereto in respect of which Rights have been issued
shall also constitute the transfer of the Rights associated with such Common
Shares.
(c) Rights shall be issued in respect of all Common Shares which are issued
after the Record Date but prior to the earlier of the Distribution Date or the
Expiration Date. Common Share certificates issued after the Record Date, but
prior to the earlier of the Distribution Date or the Expiration Date, shall also
be deemed to be Certificates for Rights and shall bear the following legend:
"This certificate also evidences and entitles the holder hereof to certain
Rights as set forth in the Rights Agreement between The First American
Financial Corporation and Wilmington Trust Company, dated October 23, 1997
(as it may be amended, modified or supplemented from time to time, the
"Rights Agreement"), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal offices of The
First American Financial Corporation. Under certain circumstances, as set
forth in the Rights Agreement, such Rights will be evidenced by separate
certificates and will no longer be evidenced by this certificate. The
Rights will expire on the Close of Business on October 23, 2007 unless
redeemed prior thereto. The First American Financial Corporation will mail
to the holder of this certificate a copy of the Rights Agreement, as in
effect on the date of mailing, without charge promptly after receipt of a
written request therefor. Under certain circumstances set forth in the
Rights Agreement, Rights issued to, or held by, any person who is, was or
becomes an Acquiring Person or any Affiliate or Associate thereof (as such
terms are defined in the Rights Agreement), whether currently held by or on
behalf of such person or by any subsequent holder, may become null and
void."
With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights
associated with the Common Shares represented by such certificates shall be
evidenced by such certificates alone and registered holders of Common Shares
shall also be the registered holders of the associated Rights, and the transfer
of any of such Certificates shall also constitute the transfer of the Rights
associated with the Common Shares represented by such Certificates. In the event
that the Company purchases or acquires any Common Shares after the Record Date
but before the Distribution date, any Rights associated with such shares shall
be deemed cancelled and retired so that the Company shall not be entitled to
exercise any Rights associated with the Common Shares which are no longer
outstanding.
Section 4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of election to purchase and of
assignment to be printed on the reverse thereof) shall each be substantially in
the form set forth in Exhibit B hereto and may have such marks of identification
or designation and such legends, summaries or endorsements printed thereon as
the Company may deem appropriate and as are not inconsistent with the provisions
of this Agreement, or as may be required to comply with any applicable law or
with any rule or regulation made pursuant thereto or with any rule or regulation
of any stock exchange on which the Rights may from time to time be listed, or to
conform to usage. Subject to the provisions of Section 11 and Section 22 hereof,
the Rights Certificates, whenever distributed, shall be dated as of the Record
Date (or, in the case of Rights issued with respect to Common Shares issued by
the Company after the Record Date, as of the date of issuance of such Common
Shares), shall note the date of issuance and on their face shall entitle the
holders thereof to purchase such number of Preferred Share Fractions as shall be
set forth therein at the price set forth therein (such exercise price per
Preferred Share Fraction, the "Purchase Price"), but the amount and type of
securities purchasable upon the exercise of each Right and the Purchase Price
thereof shall be subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or Section 22
hereof that represents Rights beneficially owned by: (i) an Acquiring Person or
any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person becomes such, or (iii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such and
receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests in such
Acquiring Person or to any Person with whom such Acquiring Person has any
continuing plan, agreement, arrangement or understanding regarding the
transferred Rights or (B) a transfer which the Board of Directors has determined
is part of a plan, agreement, arrangement or understanding which has as a
primary purpose or effect the avoidance of Section 7(e) hereof, and any Rights
Certificate issued pursuant to Section 6 or Section 11 hereof upon transfer,
exchange, replacement or adjustment of any other Rights Certificate referred to
in this sentence, shall contain (to the extent feasible) the following legend:
"The Rights represented by this Rights Certificate are or were beneficially
owned by a Person who was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person (as such terms are defined in the Rights
Agreement). Accordingly, this Rights Certificate and the Rights represented
hereby may become null and void in the circumstances specified in Section
7(e) of the Rights Agreement."
The provisions of Section 7(e) of this Agreement shall be operative whether or
not the foregoing legend is contained on any such Rights Certificates.
Section 5. Countersignature and Registration.
(a) The Rights Certificates shall be executed on behalf of the Company by
its Chairman of the Board, its President or its Secretary, either manually or by
facsimile signature, and shall have affixed thereto the Company's seal or a
facsimile thereof. The Rights Certificates shall be countersigned manually by
the Rights Agent upon the written direction of the Company, and shall not be
valid for any purpose unless so countersigned. In case any officer of the
Company who shall have signed any of the Rights Certificates shall cease to be
such officer of the Company before countersignature by the Rights Agent and
issuance and delivery by the Company, such Rights Certificates, nevertheless,
may be countersigned by the Rights Agent and issued and delivered by the Company
with the same force and effect as though the person who signed such Rights
Certificates had not ceased to be such officer of the Company; and any Rights
Certificate may be signed on behalf of the Company by any person who, at the
actual date of the execution of such Rights Certificate, shall be a proper
officer of the Company to sign such Rights Certificate, although at the date of
the execution of this Rights Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or cause to
be kept, at its principal office or offices designated as the appropriate place
for such purpose, books for registration and transfer of the Rights Certificates
issued hereunder. Such books shall show the names and addresses of the
respective holders of the Rights Certificates, the certificate number of each of
the Rights Certificates, the number of Rights evidenced on its face by each of
the Rights Certificates and the date of each of the Rights Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
(a) Subject to the provisions of Section 4(b), Section 7(e) and Section 14
hereof, at any time after the Close of Business on the Distribution Date, and
prior to the Close of Business on the Expiration Date, any Rights Certificate or
Certificates may be transferred, split up, combined or exchanged for another
Rights Certificate or certificates, entitling the registered holder to purchase
(or receive) a like number of Preferred Share Fractions (or, following a
Triggering Event, Common Shares, other securities, cash or other assets, as the
case may be) as the Rights Certificate, or Certificates surrendered then
entitled such holder or holders in the case of a transfer to purchase. Any
registered holder desiring to transfer, split up, combine or exchange any Rights
Certificate or Certificates shall make such request in writing delivered to the
Rights Agent, and shall surrender the Rights Certificate or Certificates to be
transferred, split up, combined or exchanged at the principal office or offices
of the Rights Agent designated for such purpose. Neither the Rights Agent nor
the Company shall be obligated to take any action whatsoever with respect to the
transfer of any such surrendered Rights Certificate until the registered holder
shall have completed and signed the certificate contained in the form of
assignment set forth on the reverse side of each such Rights Certificate and
shall have provided such additional evidence of the identity of the Beneficial
Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the
Company shall reasonably request. Thereupon the Rights Agent shall, subject to
Section 4(b), Section 7(e) and Section 14 hereof, upon the written direction of
the Company, countersign and deliver to the Person entitled thereto a Rights
Certificate or Rights Certificates, as the case may be, as so requested. The
Company may require payment from the holder of the Right of a sum sufficient to
cover any tax or governmental charge that may be imposed in connection with any
transfer, split up, combination or exchange of Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Rights
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and reimbursement to the Company and
the Rights Agent of all reasonable expenses incidental thereto, and upon
surrender to the Rights Agent and cancellation of the Rights Certificate if
mutilated, the Company will execute and deliver a new Rights Certificate of like
tenor to the Rights Agent for countersignature and delivery, upon the written
direction of the Company, to the registered owner in lieu of the Rights
Certificate so lost, stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.
(a) Subject to Section 7(e) hereof, the registered holder of any Rights
Certificate may exercise the Rights evidenced thereby (except as otherwise
provided herein including, without limitation, the restrictions on
exercisability set forth in Section 9(c), Section 11(a)(iii) and Section 23(a)
hereof) in whole or in part at any time after the Distribution Date upon
surrender of the Rights Certificate, with the form of election to purchase set
forth on the reverse side thereof and the certificate contained therein duly
executed, to the Rights Agent at the principal office or offices of the Rights
Agent designated for such purpose, together with payment of the aggregate
Purchase Price (except as provided in Section 11(q)) with respect to the
surrendered Rights for the total number of the Preferred Share Fractions (or
Common Shares, other securities or property, as the case may be) as to which
such surrendered Rights are exercisable, prior to the earlier of (i) the Close
of Business on October 23, 2007 (the "Final Expiration Date"), (ii) the time at
which the Rights are redeemed as provided in Section 23 hereof or (iii) the time
at which the Rights are exchanged as provided in Section 11(q) hereof (the
earlier of (i), (ii) or (iii) being herein referred to as the "Expiration
Date").
(b) The Purchase Price for each Preferred Share Fraction pursuant to the
exercise of a Right shall initially be $265, and shall be subject to adjustment
from time to time as provided in Section 11 and Section 13(a) hereof and shall
be payable in accordance with paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing exercisable Rights,
with the form of election to purchase set forth on the reverse side thereof and
the certificate contained therein duly executed, accompanied by payment (except
as provided in Section 11(q)), with respect to each Right so exercised, of the
Purchase Price per Preferred Share Fraction (or Common Shares, other securities
or property, as the case may be) to be purchased as set forth below and an
amount equal to any applicable transfer tax, the Rights Agent shall, subject to
Section 20(k) and Section 14(b) hereof, thereupon promptly (i) (A) requisition
from any transfer agent of the Preferred Shares (or make available, if the
Rights Agent is the transfer agent for the Preferred Shares) certificates for
the total number of Preferred Share Fractions to be purchased and the Company
hereby irrevocably authorizes its transfer agent to comply with all such
requests subject to applicable law, or (B) if the Company shall have elected to
deposit the total number of Preferred Shares issuable upon exercise of the
Rights hereunder with a depositary agent, requisition from the depositary agent
depositary receipts representing such number of Preferred Share Fractions as are
to be purchased (in which case certificates for the Preferred Shares represented
by such receipts shall be deposited by the transfer agent with the depositary
agent) and the Company will direct the depositary agent to comply with such
request, (ii) requisition from the Company the amount of cash, if any, to be
paid in lieu of fractional shares in accordance with Section 14 hereof, (iii)
after receipt of such certificates or depositary receipts, cause the same to be
delivered to or upon the order of the registered holder of such Rights
Certificate, registered in such name or names as may be designated by such
holder and (iv) after receipt thereof, deliver such cash, if any, to or upon the
order of the registered holder of such Rights Certificate. The payment of the
Purchase Price (as such amount may be reduced pursuant to Section 11(a)(iii)
hereof) shall be made (x) in cash or by certified bank check or money order
payable to the order of the Company, or (y) by delivery of a certificate or
certificates (with appropriate stock powers executed in blank attached thereto)
evidencing a number of Common Shares equal to the then Purchase Price divided by
the current market price (as determined pursuant to Section 11(d) hereof) per
Common Share on the date of such exercise. In the event that the Company is
obligated to issue other securities (including Common Shares) of the Company,
pay cash and/or distribute other property pursuant to Section 11(a) hereof, the
Company will make all arrangements necessary so that such other securities, cash
and/or other property are available for distribution by the Rights Agent, if and
when appropriate.
(d) In case the registered holder of any Rights Certificate shall exercise
less than all the Rights evidenced thereby, a new Rights Certificate evidencing
Rights equivalent to the Rights remaining unexercised shall be executed by the
Company and delivered to the Rights Agent together with a written instruction
instructing the Rights Agent to countersign such Rights Certificate and to
deliver the same to, or upon the order of, the registered holder of such Rights
Certificate, registered in such name or names as may be designated by such
holder, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from and
after the first occurrence of a Section 11(a)(ii) Event, any Rights beneficially
owned by (i) an Acquiring Person or any Associate or Affiliate of an Acquiring
Person, (ii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee after the Acquiring Person becomes such or
(iii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee prior to or concurrently with the Acquiring
Person becoming such and receives such Rights pursuant to either (A) a transfer
(whether or not for consideration) from the Acquiring Person to holders of
equity interests in such Acquiring Person or to any Person with whom the
Acquiring Person has any continuing plan, agreement, arrangement or
understanding regarding the transferred Rights or (B) a transfer which the Board
of Directors has determined is part of a plan, agreement, arrangement or
understanding which has as a primary purpose or effect the avoidance of this
Section 7(e), shall become null and void without any further action and no
holder of such Rights shall have any rights whatsoever with respect to such
Rights, whether under any provision of this Agreement or otherwise. The Company
shall use all reasonable efforts to insure that the provisions of this Section
7(e) and Section 4(b) hereof are complied with, but neither the Company nor the
Rights Agent shall have any liability to any holder of Rights Certificates or
other Person as a result of its failure to make, or error in making, any
determinations with respect to an Acquiring Person or its Affiliates, Associates
or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary, neither the
Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder upon the occurrence of any purported exercise as
set forth in this Section 7 unless such registered holder shall have (i)
completed and signed the certificate contained in the form of election to
purchase set forth on the reverse side of the Rights Certificate surrendered for
such exercise and (ii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates. All Rights
Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the Rights
Agent for cancellation and retirement, and the Rights Agent shall so cancel and
retire, any other Rights Certificate purchased or acquired by the Company,
otherwise than upon the exercise thereof. The Rights Agent shall deliver all
cancelled Rights Certificates to the Company, or shall, at the written request
of the Company, destroy such cancelled Rights Certificates, and in such case
shall deliver a certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Capital Shares; Registration of
Securities.
(a) The Company covenants and agrees that at all times it will cause to be
reserved and kept available out of its authorized and unissued Preferred Shares,
the number of Preferred Shares that will be sufficient to permit the exercise in
full of all outstanding Rights and, after the occurrence of a Section 11(a)(ii)
Event, shall, to the extent reasonably practicable, so reserve and keep
available a sufficient number of Common Shares (and/or other securities) which
may be required to permit the exercise of the Rights pursuant to this Agreement.
(b) So long as the Preferred Shares (and following the occurrence of a
Triggering Event, Common Shares and/or other securities) issuable and
deliverable upon the exercise of the Rights may be listed on any national
securities exchange, the Company shall use its best efforts to cause, from and
after such time as the Rights become exercisable (and the Company reasonably
anticipates that a Right may be exercised), all shares (or other securities)
reserved for such issuance to be listed on such exchange upon official notice of
issuance upon such exercise.
(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the first occurrence of a Section
11(a)(ii) Event on which the consideration to be delivered by the Company upon
exercise of the Rights has been determined pursuant to this Agreement (including
in accordance with Section 11(a)(iii) hereof), or as soon as is required by law
or regulation following the Distribution Date, as the case may be, a
registration statement or statements under the Securities Act of 1933 (the
"Securities Act"), with respect to the securities purchasable upon exercise of
the Rights on an appropriate form or forms, (ii) cause such registration
statement or statements to become effective as soon as practicable after such
filing and (iii) cause such registration statement or statements to remain
effective (with a prospectus at all times meeting the requirements of the
Securities Act) until the earlier of (A) the date as of which the Rights are no
longer exercisable for such securities, and (B) the date of the expiration of
the Rights. The Company will also take such action as may be appropriate under,
or to ensure compliance with, the securities or blue sky laws of the various
states in connection with the exercisability of the Rights. The Company may
temporarily suspend, for a period of time not to exceed ninety (90) days after
the date set forth in clause (i) of the first sentence of this Section 9(c), the
exercisability of the Rights in order to prepare and file such registration
statement and permit it to become effective. Upon any such suspension, the
Company shall issue a public announcement and deliver to the Rights Agent a
written notice stating that the exercisability of the Rights has been
temporarily suspended, as well as a public announcement and written notice to
the Rights Agent at such time as the suspension is no longer in effect.
Notwithstanding any provision of this Agreement to the contrary, the Rights
shall not be exercisable in any jurisdiction if the requisite qualification in
such jurisdiction shall not have been obtained or the exercise thereof would be
in violation of applicable law.
(d) The Company covenants and agrees that it will take all such action as
may be necessary to ensure that all Preferred Share Fractions (and following the
occurrence of a Triggering Event, Common Shares and/or other securities)
delivered upon exercise of Rights shall, at the time of delivery of the
certificates for such shares (subject to payment of the Purchase Price), be duly
and validly authorized and issued and fully paid and nonassessable.
(e) The Company further covenants and agrees that it will pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Rights Certificates and of
any certificates for a number of Preferred Share Fractions (or Common Shares
and/or other securities, as the case may be) upon the exercise of Rights. The
Company shall not, however, be required to pay any transfer tax which may be
payable in respect of any transfer or delivery of Rights Certificates to a
person other than, or the issuance or delivery of a number of Preferred Share
Fractions (or Common Shares and/or other securities, as the case may be) in
respect of a name other than that of, the registered holder of the Rights
Certificates evidencing Rights surrendered for exercise or to issue or deliver
any certificates for a number of Preferred Share Fractions (or Common Shares
and/or other securities, as the case may be) in a name other than that of the
registered holder upon the exercise of any Rights until such tax shall have been
paid (any such tax being payable by the holder of such Rights Certificates at
the time of surrender) or until it has been established to the Company's
satisfaction that no such tax is due.
Section 10. Capital Shares Record Date. Each person in whose name any
certificate for a number of Preferred Share Fractions (or Common Shares and/or
other securities, as the case may be) is issued upon the exercise of Rights
shall for all purposes be deemed to have become the holder of record of such
Preferred Share Fractions (or Common Shares and/or other securities, as the case
may be) represented thereby on, and such certificate shall be dated, the date
upon which the Rights Certificate evidencing such Rights was duly surrendered
and payment of the Purchase Price (and all applicable transfer taxes) was made;
provided, however, that if the date of such surrender and payment is a date upon
which the Preferred Share Fraction (or Common Shares and/or other securities, as
the case may be) transfer books of the Company are closed, such Person shall be
deemed to have become the record holder of such shares (fractional or otherwise)
on, and such certificate shall be dated, the next succeeding Business Day on
which the Preferred Share Fraction (or Common Shares and/or other securities, as
the case may be) transfer books of the Company are open. Prior to the exercise
of the Rights evidenced thereby, the holder of a Rights Certificate shall not be
entitled to any rights of a shareholder of the Company with respect to shares
(fractional or otherwise) for which the Rights shall be exercisable, including,
without limitation, the right to vote, to receive dividends or other
distributions or to exercise any preemptive rights, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights. The Purchase Price, the number and kind of shares covered by
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
(a)(i) In the event the Company shall at any time after the date of this
Agreement (A) declare a dividend on the Preferred Shares payable in Preferred
Shares or other capital shares, (B) subdivide the outstanding Preferred Shares,
(C) combine the outstanding Preferred Shares into a smaller number of shares, or
(D) issue any share of its capital shares in a reclassification of the Preferred
Shares (including any such reclassification in connection with a consolidation
or merger in which the Company is the continuing or surviving corporation),
except as otherwise provided in Section 11(a)(ii) and Section 7(e) hereof, the
Purchase Price in effect at the time of the record date for such dividend or of
the effective date of such subdivision, combination or reclassification, and the
number and kind of Preferred Shares or capital shares, as the case may be,
issuable on such date, shall be proportionately adjusted so that the holder of
any Right exercised after such time shall be entitled to receive, upon payment
of the Purchase Price then in effect, the aggregate number and kind of Preferred
Shares or capital shares, as the case may be, which, if such Right had been
exercised immediately prior to such date and at a time when the Preferred Shares
(or other capital shares, as the case may be) transfer books of the Company were
open, the holder would have owned upon such exercise and been entitled to
receive by virtue of such dividend, subdivision, combination or
reclassification. If an event occurs which would require an adjustment under
both this Section 11(a)(i) and Section 11(a)(ii) hereof, the adjustment provided
for in this Section 11(a)(i) shall be in addition to, and shall be made prior to
any adjustment required pursuant to Section 11(a)(ii) hereof.
(ii) In the event any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan or employee stock plan of the Company or of
any Subsidiary of the Company, any dividend reinvestment plan of the Company, or
any Person or entity organized, appointed or established by the Company for or
pursuant to the terms of any such plan) alone or together with its Affiliates
and Associates, shall, at any time after the date hereof, become an Acquiring
Person, unless the event causing such threshold to be crossed is a transaction
set forth in Section 13(a) hereof, or is an acquisition of Common Shares
pursuant to a tender offer or exchange offer for all outstanding Common Shares
at a price and on terms determined by at least a majority of the members of the
Board of Directors who are not officers of the Company and who are not
representatives, nominees, Affiliates or Associates of an Acquiring Person,
after receiving advice from one or more investment banking firms, to be (a) at a
price which is fair to shareholders (taking into account all factors which such
members of the Board deem relevant including, without limitation, the long-term
prospects and value of the Company and the prices which could reasonably be
achieved if the Company or its assets were sold on an orderly basis designed to
realize maximum value) and (b) otherwise in the best interests of (1) the
Company and its shareholders (including the possibility that these interests may
best be served by the continued independence of the Company), (2) the Company's
employees, suppliers, creditors, customers and (3) the community in which the
Company operates, then, promptly following the first occurrence of the event
described in Section 11(a)(ii) hereof, proper provision shall be made so that
each holder of a Right (except as provided in Section 11(a)(iii), and in Section
7(e) hereof) shall thereafter have the right to receive, upon exercise thereof
at the then current Purchase Price in accordance with the terms of this
Agreement, in lieu of a number of Preferred Share Fractions, such number of
Common Shares of the Company as shall equal the result obtained by (x)
multiplying the then current Purchase Price by the then number of Preferred
Share Fractions for which a Right was exercisable by such holder immediately
prior to the first occurrence of a Section 11(a)(ii) Event, and (y) dividing
that product (such product, following such first occurrence, shall thereafter be
referred to as the Purchase Price for each Right and for all purposes of this
Agreement) by 50% of the current market price (determined pursuant to Section
11(d) hereof) per Common Share on the date of such first occurrence (such number
of Common Shares are herein called the "Adjustment Shares").
(iii) In the event that the number of Common Shares which are authorized
but not outstanding or reserved for issuance for purposes other than upon
exercise of the Rights is not sufficient, or there shall not have been received
regulatory approvals necessary, in each case to permit the exercise in full of
the Rights in accordance with the foregoing subparagraph (ii) of this Section
11(a), the Company shall: (A) determine the excess of (1) the value of the
Adjustment Shares issuable upon the exercise of a Right (the "Current Value")
over (2) the Purchase Price (such excess, the "Spread"), and (B) with respect to
each Right, make adequate provision to substitute for the Adjustment Shares,
upon payment of the applicable Purchase Price, (1) cash, (2) a reduction in the
Purchase Price, (3) Common Shares or other equity securities of the Company
(including, without limitation, preferred shares, or Preferred Share Fractions),
which the Board of Directors has deemed to have the same value as Common Shares
(such shares, "common share equivalents")), (4) debt securities of the Company,
(5) other assets or (6) any combination of the foregoing, having an aggregate
value equal to the Current Value, where such aggregate value has been determined
by the Board of Directors based upon the advice of a nationally recognized
investment banking firm selected by the Board of Directors; provided, however,
if the Company shall not have made adequate provision to deliver value pursuant
to clause (B) above within thirty (30) days following the first occurrence of
(x) a Section 11(a)(ii) Event or (y) the date on which the Company's right of
redemption pursuant to Section 23(a) expires (the later of (x) and (y) being
referred to herein as the "Section 11(a)(ii) Trigger Date"), then the Company
shall be obligated to deliver, upon the surrender for exercise of a Right and
without requiring payment of the Purchase Price, Common Shares (to the extent
available) and then, if necessary, cash, which shares and/or cash have an
aggregate value equal to the Spread. If the Board of Directors shall determine
in good faith that it is likely that sufficient additional Common Shares could
be authorized for issuance upon exercise in full of the Rights, the thirty (30)
day period set forth above may be extended by resolution of the Board of
Directors to the extent necessary, but not more than ninety (90) days following
the first occurrence of a Section 11(a)(ii) Trigger Date, in order that the
Company may seek shareholder approval for the authorization of such additional
shares (such period, as it may be extended, the "Substitution Period"). To the
extent that the Company determines that some action need be taken pursuant to
the first and/or second sentences of this Section 11(a)(iii), the Company (x)
shall provide, subject to Section 7(e) hereof, that such action shall apply
uniformly to all outstanding Rights and (y) may suspend the exercisability of
the Rights until the expiration of the Substitution Period in order to seek any
authorization of additional shares, to take any action to obtain any required
regulatory approval and/or to decide the appropriate form of distribution to be
made pursuant to such first sentence and to determine the value thereof. In the
event of any such suspension, the Company shall issue a public announcement and
deliver to the Rights Agent a written notice stating that the exercisability of
the Rights has been temporarily suspended, as well as a public announcement and
written notice to the Rights Agent at such time as the suspension is no longer
in effect. For purposes of this Section 11(a)(iii), the value of the Common
Shares shall be the current market price (as determined pursuant to Section
11(d) hereof) per Common Share on the Section 11(a)(ii) Trigger Date and the
value of any common share equivalents shall be deemed to have the same value as
the Common Shares on such date.
(iv) If the rules of the national securities exchange, registered as such
pursuant to Section 6 of the Exchange Act, or of the national securities
association, registered as such pursuant to Section 15A of the Exchange Act, on
which the Common Shares are principally traded would prohibit such exchange or
association from listing or continuing to list, or from authorizing for or
continuing quotation and/or transaction reporting through an inter-dealer
quotation system, the Common Shares or other equity securities of the Company if
the Rights were to be exercised for Common Shares in accordance with
subparagraph (ii) of this Section 11(a) because such issuance would nullify,
restrict or disparately reduce the per share voting rights of holders of Common
Shares or for any other reason, the Company shall: (A) determine the Spread and
(B) with respect to each Right, make adequate provision to substitute for the
Adjustment Shares, upon payment of the applicable Purchase Price, (1) cash, (2)
equity securities of the Company, including, without limitation, "common share
equivalents," other than securities which would have the effect of nullifying,
restricting or disparately reducing the per share voting rights of holders of
Common Shares or otherwise cause the prohibition described above, (3) debt
securities of the Company, (4) other assets, or (5) any combination of the
foregoing, having an aggregate value equal to the Current Value, where such
aggregate value has been determined by the Board of Directors based upon the
advice of a nationally recognized investment banking firm selected by the Board
of Directors; provided, however, if the Company shall not have made adequate
provision to deliver value pursuant to clause (B) above within thirty (30) days
following the Section 11(a)(ii) Trigger Date, then the Company shall be
obligated to deliver, upon the surrender for exercise of a Right and without
requiring payment of the Purchase Price, cash having an aggregate value equal to
the Spread. To the extent that the Company determines that an action needs to be
taken pursuant to the first sentence of this Section 11(a)(iv), the Company (x)
shall provide, subject to Section 7(e), that such action shall apply uniformly
to all outstanding Rights and (y) may suspend the exercisability of the Rights,
but not longer than ninety (90) days after the Section 11(a)(ii) Trigger Date,
in order to decide the appropriate form of distribution to be made pursuant to
such first sentence and to determine the value thereof. In the event of any such
suspension, the Company shall issue a public announcement and deliver to the
Rights Agent a written notice stating that the exercisability of the Rights has
been temporarily suspended, as well as a public announcement and written notice
to the Rights Agent at such time as the suspension is no longer in effect. For
purposes of this Section 11(a)(iv), the value of the Common Shares shall be the
current market price (as determined pursuant to Section 11(d) hereof) per Common
Share on the Section 11(a)(ii) Trigger Date and the value of any "common share
equivalent" shall be deemed to have the same value as the Common Shares on such
date.
(b) In case the Company shall fix a record date for the issuance of rights
(other than the Rights), options or warrants to all holders of Preferred Shares
entitling them to subscribe for or purchase (for a period expiring within
forty-five (45) calendar days after such record date) Preferred Shares (or
shares having the same rights, privileges and preferences as the Preferred
Shares ("Equivalent Preferred Shares")), or securities convertible into
Preferred Shares or Equivalent Preferred Shares at a price per share of
Preferred Shares or Equivalent Preferred Shares (or having a conversion price
per share, if a security convertible into Preferred Shares or Equivalent
Preferred Shares) less than the current market price (as determined pursuant to
Section 11(d) hereof) per share of Preferred Shares on such record date, the
Purchase Price to be in effect after such record date shall be determined by
multiplying the Purchase Price in effect immediately prior to such record date
by a fraction, the numerator of which shall be the number of Preferred Shares
outstanding on such record date, plus the number of Preferred Shares which the
aggregate offering price of the total number of Preferred Shares and/or
Equivalent Preferred Shares so to be offered (and/or the aggregate initial
conversion price of the convertible securities so to be offered) would purchase
at such current market price and the denominator of which shall be the number of
Preferred Shares outstanding on such record date, plus the number of additional
Preferred Shares and/or Equivalent Preferred Shares to be offered for
subscription or purchase (or onto which the convertible securities to be offered
are initially convertible). In case such subscription price may be paid by
delivery of consideration part or all of which may be in a form other than cash,
the value of such consideration shall be as determined in good faith by the
Board of Directors, whose determination shall be described in a statement filed
with the Rights Agent and shall be binding on the Rights Agent and the holders
of the Rights. Preferred Shares owned by or held for the account of the Company
shall not be deemed outstanding for the purpose of any such computation. Such
adjustment shall be made successively whenever such a record date is fixed; and
in the event that such rights or warrants are not so issued, the Purchase Price
shall be adjusted to be the Purchase Price which would then be in effect if such
record date had not been fixed.
(c) In case the Company shall fix a record date for a distribution to all
holders of Preferred Shares (including any such distribution made in connection
with a consolidation or merger in which the Company is the continuing
corporation) of evidences of indebtedness, cash (other than a regular quarterly
cash dividend paid out of the earnings or retained earnings of the Company),
assets (other than a dividend payable in Preferred Shares, but including any
dividend payable in capital shares other than Preferred Shares) or subscription
rights or warrants (excluding those referred to in Section 11(b) hereof), the
Purchase Price to be in effect after such record date shall be determined by
multiplying the Purchase Price in effect immediately prior to such record date
by a fraction, the numerator of which shall be the current market price (as
determined pursuant to Section 11(d) hereof) per share of Preferred Shares on
such record date, less the fair market value (as determined in good faith by the
Board of Directors, whose determination shall be described in a statement filed
with the Rights Agent) of the portion of the cash, assets or evidences of
indebtedness to be distributed or of such subscription rights or warrants
applicable to a share of Preferred Shares and the denominator of which shall be
such current market price (as determined pursuant to Section 11(d) hereof) per
share of Preferred Shares. Such adjustments shall be made successively whenever
such a record date is fixed, and in the event that such distribution is not
made, the Purchase Price shall be adjusted to be the Purchase Price which would
have been in effect if such record date had not been fixed.
(d)(i) For the purpose of any computation hereunder, other than
computations made pursuant to Section 11(a)(iii) hereof, the "current market
price" per Common Share on any date shall be deemed to be the average of the
daily closing price per Common Share for the thirty (30) consecutive Trading
Days immediately prior to such date, and for purposes of computations made
pursuant to Section 11(a)(iii) hereof, the current market price per Common Share
on any date shall be deemed to be the average of the daily closing price per
Common Share for the ten (10) consecutive Trading Days immediately following
such date; provided, however, that in the event that the then current market
price per Common Share is determined during a period following the announcement
by the issuer of such Common Shares of (i) any dividend or distribution on such
Common Shares payable in such Common Shares or securities convertible into
Common Shares (other than the Rights), (ii) any subdivision, combination or
reclassification of such Common Shares, and prior to the expiration of the
requisite thirty (30) Trading Day or ten (10) Trading Day period, as set forth
above, after the exdividend date for such dividend or distribution, or the
record date for such subdivision, combination or reclassification, then, in each
such case, the current market price shall be properly adjusted to take into
account ex-dividend trading. The closing price for each day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Common Shares are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Common Shares are listed or admitted to trading or, if the Common
Shares are not listed or admitted to trading on any national securities
exchange, the last quoted sale price or, if not so quoted, the average of the
high bid and low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ") or such other system then in use, or, if on any such date the Common
Shares are not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a market in
the Common Shares selected by the Board of Directors. If on any such date no
market maker is making a market in the Common Shares, the fair value of such
shares on such date as determined in good faith by the Board of Directors shall
be used and shall be conclusive for all purposes. If the Common Shares are not
publicly held or not so listed or traded, current market price per share shall
mean the fair value per share as determined in good faith by the Board of
Directors, whose determination shall be described in a statement filed with the
Rights Agent and shall be conclusive for all purposes.
(ii) For the purpose of any computation hereunder, the "current market
price" per Preferred Share shall be determined in the same manner as set forth
above for the Common Shares in Section 11(d)(i) (other than the last sentence
thereof). If the current market price per Preferred Share cannot be determined
in the manner provided above or if the Preferred Shares are not publicly held or
listed or traded in a manner described in Section 11(d)(i), the "current market
price" per Preferred Share shall be conclusively deemed to be an amount equal to
$100,000 (as such number may be appropriately adjusted for such events as stock
splits, stock dividends and recapitalizations with respect to the Common Shares
occurring after the date of this Agreement) multiplied by the current market
price per Common Share. If neither the Common Shares nor the Preferred Shares
are publicly held or so listed or traded, "current market price" per Preferred
Share shall mean the fair value per share as determined in good faith by the
Board of Directors, whose determination shall be described in a statement filed
with the Rights Agent and shall be conclusive for all purposes.
(e) Anything herein to the contrary notwithstanding, no adjustment in the
Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) to the Purchase Price;
provided, however, that any adjustments which by reason of this Section 11(e)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this Section 11 shall be made
to the nearest cent or to the nearest one ten-thousandth of a Common Share or
other share or one one-billionth of a Preferred Share, as the case may be.
Notwithstanding the first sentence of this Section 11(e), any adjustment
required by this Section 11 shall be made no later than the earlier of (i) three
(3) years from the date of the transaction which mandates such adjustment or
(ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 11(a) or
Section 13(a) hereof, the holder of any Right thereafter exercised shall become
entitled to receive any capital shares other than Preferred Shares, thereafter
the number of such other shares receivable upon exercise of any Right and the
Purchase Price thereof shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Preferred Shares contained in Sections 11(a), (b), (c), (e), (g),
(h), (i), (j), (k), (m) and (q) hereof, and the provisions of Sections 7, 9, 10,
13 and 14 hereof with respect to the Preferred Shares shall apply on like terms
to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of Preferred Share
Fractions (or other consideration, as the case may be) purchasable from time to
time hereunder upon exercise of the Rights, all subject to further adjustment as
provided herein.
(h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of Preferred Share
Fractions (calculated to the nearest one ten-thousandth) obtained by (i)
multiplying (x) the number of Preferred Share Fractions covered by a Right
immediately prior to this adjustment, by (y) the Purchase Price in effect
immediately prior to such adjustment of the Purchase Price and (ii) dividing the
product so obtained by the Purchase Price in effect immediately after such
adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of Preferred Share Fractions purchasable upon the
exercise of a Right. Each of the Rights outstanding after the adjustment in the
number of Rights shall be exercisable for the number of Preferred Share
Fractions for which a Right was exercisable immediately prior to such
adjustment. Each Right held of record prior to such adjustment of the number of
Rights shall become that number of Rights (calculated to the nearest one
ten-thousandth) obtained by dividing the Purchase Price in effect immediately
prior to adjustment of the Purchase Price by the Purchase Price in effect
immediately after adjustment of the Purchase Price. The Company shall make a
public announcement and deliver to the Rights Agent a written notice of its
election to adjust the number of Rights, indicating the record date for the
adjustment, and, if known at the time, the amount of the adjustment to be made.
This record date may be the date on which the Purchase Price is adjusted or any
day thereafter, but, if the Rights Certificates have been issued, shall be at
least ten (10) days later than the date of the public announcement. If Rights
Certificates have been issued, upon each adjustment of the number of Rights
pursuant to this Section 11(i), the Company shall, as promptly as practicable,
cause to be distributed to holders of record of Rights Certificates on such
record date Rights Certificates evidencing, subject to Section 14 hereof, the
additional Rights to which such holders shall be entitled as a result of such
adjustment, or, at the option of the Company, shall cause to be distributed to
such holders of record in substitution and replacement for the Rights
Certificates held by such holders prior to the date of adjustment, and upon
surrender thereof, if required by the Company, new Rights Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Rights Certificates so to be distributed shall be issued, executed
and countersigned in the manner provided for herein (and may bear, at the option
of the Company, the adjusted Purchase Price) and shall be registered in the
names of the holders of record of Rights Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or the
number of Preferred Share Fractions issuable upon the exercise of the Rights,
the Rights Certificates theretofore and thereafter issued may continue to
express the Purchase Price per Preferred Share Fraction and the number of
Preferred Share Fractions which were expressed in the initial Rights
Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment reducing the
Purchase Price below the then stated value, if any, of the number of Preferred
Share Fractions issuable upon exercise of the Rights, the Company shall take any
corporate action which may, in the opinion of its counsel, be necessary in order
that the Company may validly and legally issue fully paid and nonassessable
Preferred Share Fractions at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an adjustment
in the Purchase Price be made effective as of a record date for a specified
event, the Company may elect to defer, until the occurrence of such event, the
issuance to the holder of any Right exercised after such record date the number
of Preferred Share Fractions and other capital shares or securities of the
Company, if any, issuable upon such exercise over and above the number of
Preferred Share Fractions and other capital shares and securities of the
Company, if any, issuable upon such exercise on the basis of the Purchase Price
in effect prior to such adjustment; provided, however, that the Company shall
deliver to such holder a due bill or other appropriate instrument evidencing
such holder's right to receive such additional shares (fractional or otherwise)
of Common Shares and other capital shares or securities upon the occurrence of
the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the Board
of Directors shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that in their good faith judgment the Board of Directors shall
determine to be advisable in order that any (i) consolidation or subdivision of
the Preferred Shares, (ii) issuance wholly for cash of Preferred Shares at less
than the current market price, (iii) issuance wholly for cash of Preferred
Shares or securities which by their terms are convertible into or exchangeable
for Preferred Shares, (iv) stock dividends or (v) issuance of rights, options or
warrants referred to in this Section 11, hereafter made by the Company to holder
of its Preferred Shares shall not be taxable to such shareholders.
(n) The Company covenants and agrees that it shall not, at any time after
the Distribution Date, (i) consolidate with any other Person (other than a
Subsidiary of the Company in a transaction which complies with Section 11(o)
hereof), (ii) merge with or into any other Person (other than a Subsidiary of
the Company in a transaction which complies with Section 11(o) hereof) or (iii)
sell or transfer (or permit any Subsidiary to sell or transfer), in one
transaction or a series of related transactions, assets or earning power
aggregating more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to, any other Person or Persons (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which
complies with Section 11(o) hereof), if (x) at the time of or immediately after
such consolidation, merger or sale there are any rights, warrants or other
instruments or securities outstanding or agreements in effect which would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights or (y) prior to, simultaneously with or immediately after
such consolidation, merger or sale, the shareholders of the Person who
constitutes, or would constitute, the "Principal Party" for purposes of Section
13(a) hereof shall have received a distribution of Rights previously owned by
such Person or any of its Affiliates and Associates.
(o) The Company covenants and agrees that, after the Distribution Date, it
will not, except as permitted by Section 23 or Section 26 hereof, take (or
permit any Subsidiary to take) any action if at the time such action is taken it
is reasonably foreseeable that such action will diminish substantially or
otherwise eliminate the benefits intended to be afforded by the Rights.
(p) Anything in this Agreement to the contrary notwithstanding, in the
event that the Company shall at any time after the date of this Agreement and
prior to the Distribution Date (i) declare a dividend on the outstanding Common
Shares payable in Common Shares, (ii) subdivide the outstanding Common Shares or
(iii) combine the outstanding Common Shares into a smaller number of shares, the
number of Rights associated with each Common Share then outstanding, or issued
or delivered thereafter but prior to the Distribution Date, shall be
proportionately adjusted so that the number of Rights thereafter associated with
each Common Share following any such event shall equal the result obtained by
multiplying the number of Rights associated with each Common Share immediately
prior to such event by a fraction the numerator which shall be the total number
of Common Shares outstanding immediately prior to the occurrence of the event
and the denominator of which shall be the total number of Common Shares
outstanding immediately following the occurrence of such event.
(q)(i) The Board of Directors may, at its option, at any time after any
Person becomes an Acquiring Person, exchange all or part of the then outstanding
and exercisable Rights (which shall not include Rights that have become void
pursuant to the provisions of Section 11(a)(ii) hereof) for Common Shares of the
Company at an exchange ratio of one Common Share per Right, appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such exchange ratio being hereinafter referred
to as the "Exchange Ratio"). Notwithstanding the foregoing, the Board of
Directors shall not be empowered to effect such exchange at any time after any
Person (other than the Company, any wholly owned Subsidiary of the Company, any
employee benefit plan of the Company or any such Subsidiary, or any entity
holding Common Shares for or pursuant to the terms of any such plan), together
with all Affiliates and Associates of such Person, becomes the Beneficial Owner
of 50% or more of the Common Shares then outstanding.
(ii) Immediately upon the action of the Board of Directors ordering the
exchange of any Rights pursuant to subsection (i) of this Section 11(q) and
without any further action and without any notice, the right to exercise such
Rights shall terminate and the only right thereafter of a holder of such Rights
shall be to receive that number of Common Shares equal to the number of such
Rights held by such holder multiplied by the Exchange Ratio. The Company shall
promptly give public notice and written notice to the Rights Agent of any such
exchange; provided, however, that the failure to give, or any defect in, such
notice shall not affect the validity of such exchange. The Company shall
promptly mail a notice of any such exchange to all of the holders of such Rights
at their last addresses as they appear upon the registry books of the Rights
Agent. Any notice which is mailed in the manner herein provided shall be deemed
given, whether or not the holder receives the notice. Each such notice of
exchange will state the method by which the exchange of the Common Shares for
Rights will be effected and, in the event of any partial exchange, the number of
Rights which will be exchanged. Any partial exchange shall be effected pro rata
based on the number of Rights (other that Rights which have become void pursuant
to the provisions of Section 11(a)(ii) hereof) held be each holder of Rights.
(iii) In any exchange pursuant to this Section 11(q), the Company, at its
option, may substitute Preferred Shares (or Equivalent Preferred Shares as such
term is defined in Section 11(b) hereof) for some or all of the Common Shares
exchangeable for Rights, at the initial rate of one one-hundred thousandth of a
Preferred Share (or such a fraction of an Equivalent Preferred Share) for each
Common Share, as appropriately adjusted to reflect adjustments in the voting
rights of the Preferred Shares pursuant to the terms thereof, so that the
fraction of a Preferred Share delivered in lieu of each Common Share shall have
the same voting rights as one Common Share.
(iv) In the event that there shall not be sufficient Common Shares or
Preferred Shares issued but not outstanding or authorized but unissued to permit
any exchange of Rights as contemplated in accordance with this Section 11(q),
the Company shall take all such action as may be necessary to authorize
additional Common Shares or Preferred Shares for issuance upon exchange of the
Rights.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 or Section 13 hereof,
the Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent, and with each transfer agent for the
Preferred Shares and the Common Shares, a copy of such certificate and (c) mail
a brief summary thereof to each holder of a Rights Certificate (or, if prior to
the Distribution Date, to each holder of a certificate representing Common
Shares) in accordance with Section 25 hereof. Whenever any determination or
calculation is made by the Company as provided in Section 11 or Section 13
hereof or any action that is subject to condition(s) or left to the discretion
of the Company as provided in Section 11 or Section 13 hereof is taken by the
Company, the Company shall promptly provide written notice thereof to the Rights
Agent in accordance with Section 25 hereof. The Rights Agent shall be fully
protected in relying on any such certificate or notice and on any adjustment,
determination, calculation or action therein contained and shall not be deemed
to have knowledge of any such adjustment, determination, calculation or action
unless it shall have received such certificate or notice.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power.
(a) In the event that, following the Share Acquisition Date, directly or
indirectly, (x) the Company shall consolidate with, or merge with and into, any
other Person (other than a Subsidiary of the Company in a transaction which
complies with Section 11(o) hereof), and the Company shall not be the continuing
or surviving corporation of such consolidation or merger, (y) any Person (other
than a Subsidiary of the Company in a transaction which complies with Section
11(o) hereof) shall consolidate with, or merge with or into, the Company, and
the Company shall be the continuing or surviving corporation of such
consolidation or merger and, in connection with such consolidation or merger,
all or part of the outstanding Common Shares shall be changed into or exchanged
for shares or other securities of any other Person or cash or any other
property, or (z) the Company shall sell or otherwise transfer (or one or more of
its Subsidiaries shall sell or otherwise transfer), in one transaction or a
series of related transactions, assets or earning power aggregating more than
50% of the assets or earning power of the Company and its Subsidiaries (taken as
a whole) to any Person or Persons (other than the Company or any Subsidiary of
the Company in one or more transactions each of which complies with Section
11(o) hereof), then, and in each such case and except as set forth in Section
13(f) hereof, proper provision shall be made so that:
(i) each holder of a Right, except as provided in Section 7(e) hereof,
shall thereafter have the right to receive, upon the exercise thereof at
the then current Purchase Price in accordance with the terms of this
Agreement, such number of validly authorized and issued, fully paid,
nonassessable and freely tradeable Common Shares of the Principal Party (as
such term is hereinafter defined), not subject to any liens, encumbrances,
rights of first refusal or other adverse claims, as shall be equal to the
result obtained by (1) multiplying the then current Purchase Price by the
number of Preferred Share Fractions for which a Right is exercisable by
such holder immediately prior to the first occurrence of a Section 13 Event
(or, if a Section 11(a)(ii) Event has occurred prior to the Section 13
Event, multiplying the Purchase Price in effect immediately prior to the
first occurrence of such Section 11(a)(ii) Event by the number of Preferred
Share Fractions for which a Right was exercisable immediately prior to such
first occurrence) and dividing that product (such product, following the
first occurrence of a Section 13 Event, shall be referred to as the
"Purchase Price" for each Right and for all purposes of this Agreement) by
(2) 50% of the current market price (determined pursuant to Section
11(d)(i) hereof with respect to the Common Shares) per Common Share of such
Principal Party on the date of consummation of such Section 13 Event;
provided, however, that the Purchase Price (as theretofore adjusted in
accordance with Section 11(a)(ii) hereof) and the number of Common Shares
of such Principal Party so receivable upon exercise of a Right shall be
subject to further adjustment as appropriate in accordance with Section
11(f) hereof to reflect any events occurring in respect of the Common
Shares of such Principal Party after the occurrence of such consolidation,
merger, sale or transfer;
(ii) such Principal Party shall thereafter be liable for, and shall
assume, by virtue of such Section 13 Event, all the obligations and duties
of the Company pursuant to this Agreement;
(iii) the term "Company" shall thereafter be deemed to refer to such
Principal Party, it being specifically intended that the provisions of
Section 11 hereof shall apply only to such Principal Party following the
first occurrence of a Section 13 Event;
(iv) such Principal Party shall take such steps (including, but not
limited to, the reservation of a sufficient number of shares of its Common
Shares) in connection with the consummation of any such transaction as may
be necessary to insure that the provisions hereof shall thereafter be
applicable, as nearly as reasonably may be, in relation to its Common
Shares thereafter deliverable upon the exercise of the Rights; provided,
however, that, upon the subsequent occurrence of any Section 13 Event in
respect of such Principal Party, each holder of a Right shall thereupon be
entitled to receive, upon exercise of a Right and payment of the Purchase
Price as provided in this Section 13(a), such cash, shares, rights,
warrants and other property which such holder would have been entitled to
receive had such holder, at the time of such transaction, owned the Common
Shares of the Principal Party receivable upon the exercise of a Right
pursuant to this Section 13(a), and such Principal Party shall take such
steps (including, but not limited to, reservation of shares of stock) as
may be necessary to permit the subsequent exercise of the Rights in
accordance with the terms hereof for such cash, shares, rights, warrants
and other property; and
(v) the provisions of Section 11(a)(ii) hereof shall be of no effect
following the first occurrence of any Section 13 Event.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in clause (x) or (y) of
the first sentence of Section 13(a), the Person that is the issuer of any
securities into which Common Shares of the Company are converted in such
merger or consolidation, and if no securities are so issued, the Person
that is the other party to such merger or consolidation; and
(ii) in the case of any transaction described in clause (z) of the
first sentence of Section 13(a), the Person that is the party receiving the
greatest portion of the assets or earning power transferred pursuant to
such transaction or transactions, or, if each Person that is a party to
such transaction or transactions receives the same portion of the assets or
earning power so transferred or if the Person receiving the greatest
portion of the assets or earning power cannot be determined, whichever of
such Persons as is the issuer of Common Shares having the greatest
aggregate market value of shares outstanding;
provided, however, that in any such case, (1) if the Common Shares of such
Person is not at such time and has not been continuously over the preceding
twelve (12) month period registered under Section 12 of the Exchange Act, and
such Person is a direct or indirect Subsidiary of another Person the Common
Shares of which is and has been so registered, "Principal Party" shall refer to
such other Person; (2) in case such Person is a Subsidiary, directly or
indirectly, of more than one Person, the Common Shares of two or more of which
are and have been so registered, "Principal Party" shall refer to whichever of
such Persons is the issuer of the Common Shares having the greatest aggregate
market value; and (3) in case such Person is owned, directly or indirectly, by a
joint venture formed by two or more Persons that are not owned, directly or
indirectly, by the same Person, the rules set forth in (1) and (2) above shall
apply to each of the chains of ownership having an interest in such joint
venture as if such party were a "Subsidiary" of both or all of such joint
ventures and the Principal Parties in each such chain shall bear the obligations
set forth in this Section 13 in the same ratio as their direct or indirect
interests in such Person bear to the total of such interests.
(c) The Company shall not consummate any such consolidation, merger, sale
or transfer unless the Principal Party shall have a sufficient number of
authorized Common Shares which have not been issued or reserved for issuance to
permit the exercise in full of the Rights in accordance with this Section 13 and
unless prior thereto the Company and such Principal Party shall have executed
and delivered to the Rights Agent a supplemental agreement providing for the
terms set forth in paragraphs (a) and (b) of this Section 13 and further
providing that, as soon as practicable after the date of any consolidation,
merger or sale of assets mentioned in paragraph (a) of this Section 13, the
Principal Party at its own expense will:
(i) prepare and file a registration statement under the Securities
Act, with respect to the Rights and the securities purchasable upon
exercise of the Rights on an appropriate form, and will use its best
efforts to cause such registration statement to (A) become effective as
soon as practicable after such filing and (B) remain effective (with a
prospectus at all times meeting the requirements of the Securities Act)
until the Expiration Date;
(ii) use its best efforts to qualify or register the Rights and the
securities purchasable upon exercise of the Rights under the Blue Sky laws
of such jurisdictions as may be necessary or appropriate;
(iii) deliver to holders of the Rights historical financial statements
for the Principal Party and each of its Affiliates which comply in all
respects with the requirements for registration on Form 10 under the
Exchange Act;
(iv) use its best efforts, if the Common Shares of the Principal Party
shall be listed or admitted to trading on the New York Stock Exchange or on
another national securities exchange, to list or admit to trading (or
continue the listing of) the Rights and the securities purchasable upon
exercise of the Rights on the New York Stock Exchange or such other
national securities exchange, or, if the Common Shares of the Principal
Party shall not be listed or admitted to trading on the New York Stock
Exchange or a national securities exchange, to cause the Rights and the
securities receivable upon exercise of the Rights to be authorized for
quotation on NASDAQ or on such other quotation system then in use; and
(v) obtain waivers of any rights of first refusal or preemptive rights
in respect of the Common Shares of the Principal Party subject to purchase
upon exercise of outstanding Rights.
In the event that a Section 13 Event shall occur at any time after the
occurrence of a Section 11(a)(ii) Event, the Rights which have not theretofore
been exercised shall thereafter become exercisable in the manner described in
Section 13(a).
(d) In case the Principal Party has provision in any of its authorized
securities or in its certificate of incorporation or by-laws or other instrument
governing its corporate affairs, which provision would have the effect of (i)
causing such Principal Party to issue (other than to holders of Rights pursuant
to this Section 13), in connection with or as a consequence of, the consummation
of a transaction referred to in this Section 13 Common Shares of such Principal
Party at less than the then current market price per share thereof (determined
pursuant to Section 11(d) hereof) or securities exercisable for, or convertible
into, Common Shares of such Principal Party at less than such then current
market price, or (ii) providing for any special payment, tax of similar
provision in connection with the issuance of the Common Shares of such Principal
Party pursuant to the provisions of Section 13, then, in such event, the Company
hereby agrees with and for the benefit of each holder of Rights that it shall
not consummate any such transaction unless prior thereto the Company and such
Principal Party shall have executed and delivered to the Rights Agent a
supplemental agreement providing that the provision in question of such
Principal party shall have been cancelled, waived or amended, or that the
authorized securities shall be redeemed, so that the applicable provision will
have no effect in connection with, or as a consequence of, the consummation of
the proposed transaction.
(e) The Company covenants and agrees that it shall not, and proper
provision shall be made so that the Principal Party shall not, at any time after
the Section 13 Event, enter into any transaction of the type described in
subparagraphs (x) and (y) of Section 13(a) hereof if (i) at the time of or
immediately after such Section 13 Event there are any rights, warrants or other
instruments or securities outstanding or agreements in effect which would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights, (ii) prior to, simultaneously with or immediately after
such Section 13 Event, the stockholders of the Person who constitutes, or would
constitute, the Principal Party for purposes of Section 13(a) hereof shall have
received a distribution of Rights previously owned by such Person or any of its
Affiliates or Associates of (iii) the form or nature of organization of the
Principal Party would preclude or limit the exercisability of the Rights.
(f) Notwithstanding anything in this Agreement to the contrary, Section 13
shall not be applicable to a transaction described in subparagraphs (x) and (y)
of Section 13(a) if (i) such transaction is consummated with a Person or Persons
who acquired Common Shares pursuant to a tender offer or exchange offer for all
outstanding Common Shares that complies with the provisions of Section 11(a)(ii)
hereof (or a wholly-owned Subsidiary of any such Person or Persons), (ii) the
price per Common Share offered in such transaction is not less than the price
per Common Share paid to all holders of Common Shares whose shares were
purchased pursuant to such tender offer or exchange and (iii) the form of
consideration being offered to the remaining holders of Common Shares pursuant
to such transaction is the same as the form of consideration paid pursuant to
such tender offer or exchange offer. Upon consummation of any such transaction
contemplated by this Section 13(f), all Rights hereunder shall expire.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights, except
prior to the Distribution Date as provided in Section 11(p) hereof, or to
distribute Rights Certificates which evidence fractional Rights. In lieu of such
fractional Rights, there shall be paid to the registered holders of the Rights
Certificates with regard to which such fractional Rights would otherwise be
issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For purposes of this Section 14(a), the "current market
value" of a whole Right shall be the closing price of the Rights for the Trading
Day immediately prior to the date on which such fractional Rights would have
been otherwise issuable. The closing price of the Rights for any day shall be
the last sale price, regular way, or, in case no such sale takes place on such
day, the average of the closing bid and asked prices, regular way, in either
case as reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange or, if the Rights are not listed or admitted to trading on the New York
Stock Exchange, as reported in the principal consolidated transaction reporting
system with respect to securities listed on the principal national securities
exchange on which the Rights are listed or admitted to trading, or if the Rights
are not listed or admitted to trading on any national securities exchange, the
last quoted price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by NASDAQ or such other
system then in use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Rights selected by the Board of
Directors. If on any such date no such market maker is making a market in the
Rights the fair value of the Rights on such date as determined in good faith by
the Board of Directors shall be used and shall be conclusive for all purposes.
(b) The Company shall not be required to issue fractions of Preferred
Shares (other than integral multiples of Preferred Share Fractions) upon
exercise of the Rights or to distribute certificates which evidence fractional
Preferred Shares (other than integral multiples of Preferred Share Fractions).
In lieu of fractional Preferred Shares that are not Preferred Share Fractions or
integral multiples thereof, the Company may pay to the registered holders of
Rights Certificates at the time such Rights are exercised as herein provided an
amount in cash equal to the same fraction of the current market value of a
Preferred Share. For purposes of this Section 14(b), the "current market value"
of one share of Preferred Share shall be the closing price of a Preferred Share
(as determined pursuant to Section 11(d)(ii) hereof) for the Trading Day
immediately prior to the date of such exercise.
(c) Following the occurrence of a Triggering Event, the Company shall not
be required to issue fractions of Common Shares upon exercise of the Rights or
to distribute certificates which evidence fractional Common Shares. In lieu of
fractional Common Shares, the Company may pay to the registered holders of
Rights Certificates at the time such Rights are exercised as herein provided an
amount in cash equal to the same fraction of the "current market value" of one
Common Share. For purposes of this Section 14(c), the current market value of
one Common Share shall be the closing price of a Common Share (as determined
pursuant to Section 11(d)(i) hereof) for the Trading Day immediately prior to
the date of such exercise.
(d) The holder of a Right by the acceptance of the Rights expressly waives
his right to receive any fractional Rights or any fractional shares upon
exercise of a Right, except as permitted by this Section 14.
Section 15. Rights of Action. All rights of action in respect of this
Agreement, except those rights of action vested in the Rights Agent pursuant to
Sections 18 through 20 inclusive, are vested in the respective registered
holders of the Rights Certificates (and, prior to the Distribution Date, the
registered holders of the Common Shares); and any registered holder of any
Rights Certificate (or, prior to the Distribution Date, of the Common Shares),
without the consent of the Rights Agent or of the holder of any other Rights
Certificate (or, prior to the Distribution Date, of the Common Shares), may, in
his own behalf and for his own benefit, enforce, and may institute and maintain
any suit, action or proceeding against the Company to enforce, or otherwise act
in respect of, his right to exercise the Rights evidenced by such Rights
Certificate in the manner provided in such Rights Certificate and in this
Agreement. Without limiting the foregoing or any remedies available to the
holders of Rights, it is specifically acknowledged that the holders of Rights
would not have an adequate remedy at law for any breach of this Agreement and
shall be entitled to specific performance of the obligations hereunder and
injunctive relief against actual or threatened violations of the obligations
hereunder of any Person subject to this Agreement. Holders of Rights shall be
entitled to recover the reasonable costs and expenses, including attorneys'
fees, incurred by them in any action to enforce the provisions of this
Agreement.
Section 16. Agreement of Rights Holders. Every holder of a Right by
accepting the same consents and agrees with the Company and the Rights Agent and
with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable only in
connection with the transfer of Common Shares;
(b) after the Distribution Date, the Rights Certificates are transferable
only on the registry books of the Rights Agent if surrendered at the principal
office or offices of the Rights Agent designated for such purposes, duly
endorsed or accompanied by a proper instrument of transfer and with the
appropriate forms and certificates fully executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the Company and the
Rights Agent may deem and treat the person in whose name a Rights Certificate
(or, prior to the Distribution Date, the associated Common Share certificate) is
registered as the absolute owner thereof and of the Rights evidenced thereby
(notwithstanding any notations of ownership or writing on the Rights
Certificates or the associated Common Share certificate made by anyone other
than the Company or the Rights Agent) for all purposes whatsoever, and neither
the Company nor the Rights Agent shall, subject to the last sentence of Section
7(e) hereof, be required to be affected by any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the contrary, neither the
Company nor the Rights Agent shall have any liability to any holder of a Right
or other Person as a result of its inability to perform any of its obligations
under this Agreement by reason of any preliminary or permanent injunction or
other order, decree or ruling issued by a court of competent jurisdiction or by
a governmental, regulatory or administrative agency or commission, or any
statute, rule, regulation or executive order promulgated or enacted by any
governmental authority, prohibiting or otherwise restraining performance of such
obligation; provided, however, the Company must use its best efforts to have any
such order, decree or ruling lifted or otherwise overturned as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a Shareholder. No holder,
as such, of any Rights Certificate shall be entitled to vote, receive dividends
or be deemed for any purpose the holder of the number of Preferred Share
Fractions or any other securities of the Company which may at any time be
issuable on the exercise of the Rights represented thereby, nor shall anything
contained herein or in any Rights Certificate be construed to confer upon the
holder of any Rights Certificate, as such, any of the rights of a shareholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to shareholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive notice of meetings or other
actions affecting shareholders (except as provided in Section 24 hereof), or to
receive dividends or subscription rights, or otherwise, until the Right or
Rights evidenced by such Rights Certificate shall have been exercised in
accordance with the provisions hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable compensation
for all services rendered by it hereunder and, from time to time, on demand of
the Rights Agent, its reasonable expenses and counsel fees and disbursements and
other disbursements incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder. The Company
also agrees to indemnify the Rights Agent for, and to defend and hold it
harmless against, any loss, liability, or expense, incurred without gross
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and performance of this Agreement, including the costs and expenses of defending
against any claim of liability in the premises.
(b) The Rights Agent shall be protected and shall incur no liability to
anyone for or in respect of any action taken, suffered or omitted by it in
connection with its performance of this Agreement in reliance upon any Rights
Certificate or certificate for Common Shares or for other securities of the
Company, instrument of assignment or transfer, power of attorney, endorsement,
affidavit, letter, notice, direction, consent, certificate, statement, or other
paper or document believed by it to be genuine and to be signed, executed and,
where necessary, verified or acknowledged, by the proper Person or Persons, or
otherwise upon advice of counsel as set forth in Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
(a) Any corporation or association into which the Rights Agent or any
successor Rights Agent may be merged or with which it may be consolidated, or
any corporation or association resulting from any merger or consolidation to
which the Rights Agent or any successor Rights Agent shall be a party or any
corporation or association succeeding to the corporate trust or stock transfer
business of the Rights Agent or any successor Rights Agent, shall be the
successor to the Rights Agent under this Agreement without the execution or
filing of any paper or any further act on the part of any of the parties hereto;
provided, however, that such corporation or association would be eligible for
appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Rights Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of a predecessor Rights Agent and deliver such Rights
Certificates so countersigned; and in case at that time any of the Rights
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates either in the name of the predecessor or in
the name of the successor Rights Agent; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
(b) In case at any time the name of the Rights Agent shall be changed and
at such time any of the Rights Certificates shall have been countersigned but
not delivered, the Rights Agent may adopt the countersignature under its prior
name and deliver Rights Certificates so countersigned; and in case at that time
any of the Rights Certificates shall not have been countersigned, the Rights
Agent may countersign such Rights Certificates either in its prior name or in
its changed name; and in all such cases such Rights Certificates shall have the
full force provided in the Rights Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties
and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action
taken, suffered or omitted by it in good faith and in accordance with such
opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any Acquiring Person and the
determination of current market prices) be proved or established by the Company
prior to taking, omitting to take or suffering any action hereunder, such fact
or matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
certificate signed by the Chairman of the Board, the President, any Vice
President, the Treasurer or the Secretary of the Company and delivered to the
Rights Agent; and such certificate shall be full authorization and protection to
the Rights Agent for any action taken, omitted or suffered in good faith by it
under the provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall not be liable to anyone hereunder or in
connection herewith, except for its own gross negligence, bad faith or willful
misconduct, and, without limiting the generality of the foregoing, shall not be
liable for any error of judgment made by it.
(d) The Rights Agent shall not be liable to anyone for or by reason of any
of the statements of fact or recitals contained in this Agreement or in the
Rights Certificates or be required to verify the same (except as to its
countersignature on such Rights Certificates), but all such statements and
recitals are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect of
the Rights or the validity or sufficiency of this Agreement or the execution and
delivery hereof (except the due execution and delivery hereof by the Rights
Agent) or in respect of the validity or execution of any Rights Certificate
(except its countersignature thereof); nor shall it be responsible for any
breach by the Company of any covenant or condition contained in this Agreement
or in any Rights Certificate; nor shall it be responsible for any adjustment
required under the provisions of Section 11 or Section 13 hereof or responsible
for the manner, method or amount of any such adjustment or the ascertaining of
the existence of facts that would require any such adjustment (except with
respect to the exercise of Rights evidenced by Rights Certificates after actual
written notice of any such adjustment has been received by the Rights Agent);
nor shall it by any act hereunder be deemed to make any representation or
warranty as to the authorization or reservation of any Common Shares or
Preferred Shares to be issued pursuant to this Agreement or any Rights
Certificate or as to whether any Common Shares or Preferred Shares will, when so
issued, be validly authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept and follow
instructions with respect to the performance of its duties hereunder from any of
the Chairman of the Board, the President, any Vice President, the Treasurer and
the Secretary of the Company, and is hereby authorized to apply to any of such
officers for written advice or instructions in connection with its rights and
duties, and it shall be fully protected in relying on any such advice or
instructions and shall not be liable to anyone for any action taken, omitted or
suffered to be taken by it in good faith in accordance with instructions of any
such officer, or for any delay in acting while waiting for those instructions.
Any application by the Rights Agent for written instructions from the Company
may, at the option of the Rights Agent, set forth in writing any action proposed
to be taken, suffered, or omitted by the Rights Agent under this Agreement and
the date on and/or after which such action shall be taken or suffered or such
omission shall be effective. The Rights Agent shall not be liable to anyone for
any action taken, or suffered by, or omission of, the Rights Agent in accordance
with the proposal included in any such application on or after the date
specified in such application (which date shall not be less than five (5)
Business Days after the date of such application unless any such officer shall
have consented in writing to an earlier date) unless, prior to taking or
suffering any such action (or the effective date in the case of an omission),
the Rights Agent shall have received written instructions in response to such
application specifying the action to be taken or suffered or omitted. The Rights
Agent shall have no duty to take or refrain from taking any action under or in
connection with this Agreement, except as expressly provided herein, and no
implied duties or obligations (including fiduciary duties) shall be read into
this Agreement against the Rights Agent.
(h) The Rights Agent and any shareholder, director, officer or employee of
the Rights Agent may buy, sell or deal in any of the Rights or other securities
of the Company or become pecuniarily interested in any transaction in which the
Company may be interested, or contract with or lend money to the Company or
otherwise act as fully and freely as though it were not Rights Agent under this
Agreement. Nothing herein shall preclude the Rights Agent from acting in any
other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct; provided, however, reasonable care was exercised in the
selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to expend
or risk its own funds or otherwise incur or risk any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Rights Certificate surrendered to the Rights
Agent for exercise or transfer, the certificate contained in the form of
assignment or the form of election to purchase set forth on the reverse thereof,
as the case may be, has either not been completed or indicates an affirmative
response to clause 1 and/or 2 thereof, the Rights Agent shall not take any
further action with respect to such requested exercise of transfer without
written instructions from the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty (30) days' notice in writing to the Company. The Company may remove
the Rights Agent or any successor Rights Agent upon thirty (30) days' notice in
writing, mailed to the Rights Agent or successor Rights Agent, as the case may
be, and to each transfer agent of the Common Shares and Preferred Shares, by
registered or certified mail, and to the holders of the Rights Certificates by
first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of thirty (30) days after giving notice of such removal or after it has
been notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by any registered holder of a Rights Certificate
(who shall, with such notice, submit his Rights Certificate for inspection by
the Company), then any registered holder of any Rights Certificate may apply to
any court of competent jurisdiction for the appointment of a new Rights Agent.
Any successor Rights Agent, whether appointed by the Company or by such a court,
shall be (a) a corporation organized, doing business and in good standing under
the laws of the United States or any State thereof, in good standing, which is
authorized under such laws to exercise corporate trust or stock transfer powers
and is subject to supervision or examination by federal or state authority and
which has at the time of its appointment as Rights Agent a combined capital and
surplus of at least $100,000,000 or (b) an affiliate of any such corporation
described in clause (a) above. After appointment, the successor Rights Agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named as Rights Agent without further act or deed; but
upon payment of all compensation, expenses and other amounts owing to it the
predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment, the Company shall file notice
thereof in writing with the predecessor Rights Agent and each transfer agent of
the Common Shares and Preferred Shares, and mail a notice thereof in writing to
the registered holders of the Rights Certificates or, prior to the Distribution
Date, the registered holders of Common Shares. Failure to give any notice
provided for in this Section 21, however, or any defect therein, shall not
affect the legality or validity of the resignation or removal of the Rights
Agent or the appointment of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Rights Certificates. Notwithstanding any of the
provisions of this Agreement or of the Rights to the contrary, the Company may,
at its option, issue new Rights Certificates evidencing Rights in such form as
may be approved by its Board of Directors to reflect any adjustment or change in
the Purchase Price and the number or kind or class of shares or other securities
or property purchasable under the Rights Certificates made in accordance with
the provisions of this Agreement. In addition, in connection with the issuance
or sale of Common Shares following the Distribution Date and prior to the
Expiration Date, the Company (a) shall, with respect to Common Shares so issued
or sold pursuant to the exercise of stock options or under any employee plan or
arrangement, or upon the exercise, conversion or exchange of securities
hereinafter issued by the Company, and (b) may, in any other case, if deemed
necessary or appropriate by the Board of Directors, issue Rights Certificates
representing the appropriate number of Rights in connection with such issuance
or sale; provided, however, that (i) no such Rights Certificate shall be issued
if, and to the extent that, the Company shall be advised by counsel that such
issuance would create a significant risk of material adverse tax consequences to
the Company or the Person to whom such Rights Certificate would be issued, and
(ii) no such Rights Certificate shall be issued if, and to the extent that,
appropriate adjustment shall otherwise have been made in lieu of the issuance
thereof.
Section 23. Redemption and Termination.
(a) The Board of Directors may, at its option, at any time prior to the
earlier of (i) the date on which a Section 11(a)(ii) Event occurs or (ii) the
Final Expiration Date, redeem all but not less than all the then outstanding
Rights at a redemption price of $.001 per Right, as such amount may be
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such redemption price being
hereinafter referred to as the "Redemption Price"). The Company may, at its
option, pay the Redemption Price either in Company securities (the value of
which shall be based (i) if such securities are Common Shares, on the "current
market value" determined in accordance with Section 11(d) hereof or (ii) if such
securities are not Common Shares, on a good faith determination by the Board of
Directors of the fair value thereof, whose determination shall be described in a
statement filed with the Rights Agent and shall be conclusive for all purposes)
or cash or both; provided that if the Company elects to pay all or part of the
Redemption Price in Common Shares, the Company shall not be required to issue
any fractional Common Shares and the number of Common Shares issuable to each
holder of Rights shall be rounded down to the next whole share.
(b) Immediately upon the redemption of the Rights by the Board of Directors
in accordance with Section 23(a) hereof, evidence of which shall have been filed
with the Rights Agent and without any further action and without any notice, the
right to exercise the Rights will terminate and the only right thereafter of the
holders of the Rights shall be to receive the Redemption Price for each Right so
held. Promptly after the action of the Board of Directors ordering the
redemption of the Rights, the Company shall give written notice of such
redemption to the Rights Agent and the holders of the outstanding Rights by
mailing such notice to the Rights Agent and to all such holders at each holder's
last address as it appears upon the registry books of the Rights Agent or, prior
to the Distribution Date, on the registry books of the transfer agent for the
Common Shares. Any notice which is mailed in the manner herein provided shall be
deemed given, whether or not the holder receives the notice. Each such notice of
redemption will state the method by which the payment of the Redemption Price
will be made.
Section 24. Notice of Certain Events.
(a) In case the Company shall propose, at any time after the Distribution
Date, (i) to pay any dividend payable in shares of any class of capital shares
to the holders of Preferred Shares or to make any other distribution to the
holders of Preferred Shares (other than a regular quarterly cash dividend paid
out of earnings or retained earnings of the Company), or (ii) to offer to the
holders of Preferred Shares rights or warrants to subscribe for or to purchase
any additional Preferred Shares or shares of any class or any other securities,
rights or options, or (iii) to effect any reclassification of its Preferred
Shares (other than a reclassification involving only the subdivision of
outstanding Preferred Shares), or (iv) to effect any consolidation or merger
into or with any other Person (other than a Subsidiary of the Company in a
transaction which complies with Section 11(o) hereof) or to effect any sale or
other transfer (or to permit one or more of its Subsidiaries to effect any sale
or other transfer), in one transaction or series of related transactions, of
more than 50% of the assets or earning power of the Company and its Subsidiaries
(taken as a whole) to any other Person (other than the Company and/or any of its
Subsidiaries in one or more transactions each of which complies with Section
11(o) hereof), or (v) to effect the liquidation, dissolution or winding up of
the Company, then, in each such case, the Company shall give to the Rights Agent
and each holder of a Rights Certificate, to the extent feasible, and in
accordance with Section 25 hereof, a written notice of such proposed action,
which shall specify the record date for the purposes of such share dividend,
distribution of rights or warrants, or the date on which such reclassification,
consolidation, merger, sale, transfer, liquidation, dissolution, or winding up
is to take place and the date of participation therein by the holders of
Preferred Shares, if any such date is to be fixed, and such notice shall be so
given in the case of any action covered by clause (i) or (ii) above at least
twenty (20) days prior to the record date for determining holders of the
Preferred Shares for purposes of such action, and in the case of any such other
action, at least twenty (20) days prior to the date of the taking of such
proposed action or the date of participation therein by the holders of the
Preferred Shares, whichever shall be the earlier.
(b) Upon the occurrence of a Section 11(a)(ii) Event, (i) the Company shall
as soon as practicable thereafter give to the Rights Agent and each holder of a
Rights Certificate, to the extent feasible, in accordance with Section 25
hereof, a written notice of the occurrence of such event and the consequences of
the event to holders of Rights under Section 11(a)(ii) hereof and (ii) all
references in the preceding paragraph to Preferred Shares shall be deemed
thereafter to refer to Common Shares and/or, if appropriate, other securities.
Section 25. Notices. Notices or demands authorized by this Agreement to be
given or made by the Rights Agent or by the holder of any Rights Certificate to
or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
The First American Financial Corporation
114 East Fifth Street
Santa Ana, California 92701
Attention: Secretary
Subject to the provisions of Section 21, any notice or demand authorized by this
Agreement to be given or made by the Company or by the holder of any Rights
Certificate to or on the Rights Agent shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address is
filed in writing with the Company) as follows:
Wilmington Trust Company
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
Attention: Corporate Trust Administration
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate (or if prior
to the Distribution Date, to the holder of certificates representing Common
Shares) shall be sufficiently given or made if sent by first-class mail, postage
prepaid, addressed to such holder at the address of such holder as shown on the
registry books of the Company.
Section 26. Supplements and Amendments. Prior to the Distribution Date and
except as provided for in this Section 26, the Company may, by resolution of its
Board of Directors and the Rights Agent shall, if the Company so directs,
supplement or amend any provision of this Agreement without the approval of any
holders of certificates representing Common Shares. From and after the
Distribution Date and except as provided for in this Section 26, the Company and
the Rights Agent shall, if the Company so directs, supplement or amend this
Agreement without the approval of any holders of Rights Certificates in order
(i) to cure any ambiguity, (ii) to correct or supplement any provision contained
herein which may be defective or inconsistent with any other provisions herein,
(iii) to change or supplement the provisions hereunder in any manner which the
Company may deem necessary or desirable and which shall not adversely affect the
interests of the holders of Rights Certificates (other than an Acquiring Person
or an Affiliate or Associate of an Acquiring Person), or (iv) to shorten or
lengthen any time period hereunder; provided, this Agreement may not be
supplemented or amended to lengthen, pursuant to clause (iv) of this sentence,
(A) a time period relative to when the Rights may be redeemed at such time as
the Rights are not then redeemable, or (B) any other time period unless such
lengthening is for the purpose of protecting, enhancing or clarifying the rights
of, and/or the benefits to, the holders of Rights. Upon the delivery of a
certificate from an appropriate officer of the Company which states that the
proposed supplement or amendment is in compliance with the terms of this Section
26, the Rights Agent shall execute such supplement or amendment, provided that
such supplement or amendment does not adversely affect the rights or obligations
of the Rights Agent under this Agreement. Notwithstanding anything contained in
this Agreement to the contrary, no supplement or amendment shall be made which
changes the Redemption Price, the Final Expiration Date, the Purchase Price, or
the number of Preferred Share Fractions for which a Right is exercisable. Prior
to the Distribution Date, the interests of the holders of Rights shall be deemed
coincident with the interests of the holders of Common Shares.
Section 27. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Rights Agent shall bind and inure to
the benefit of their respective successors and assigns hereunder.
Section 28. Determinations and Actions by the Board of Directors, etc. For
all purposes of this Agreement, any calculation of the number of Common Shares
outstanding at any particular time, including for purposes of determining the
particular percentage of such outstanding Common Shares of which any Person is
the Beneficial Owner, shall be made in accordance with the last sentence of Rule
13d(1)(i) of the General Rules and Regulations under the Exchange Act as in
effect as of the date hereof. The Board of Directors shall have the exclusive
power and authority to administer this Agreement and to exercise all rights and
powers specifically granted to the Board or the Company, or as may be necessary
or advisable in the administration of this Agreement, including, without
limitation, the right and power to (i) interpret the provisions of this
Agreement, and (ii) make all determinations deemed necessary or advisable for
the administration of this Agreement (including a determination to redeem or not
redeem the Rights or to amend the Agreement). All such actions, calculations,
interpretations and determinations (including, for purposes of Clause (y) below,
all omissions with respect to the foregoing) which are done or made by the Board
in good faith, shall (x) be final, conclusive and binding on the Company, the
Rights Agent, the holders of the Rights and all other parties, and (y) not
subject the Board of Directors to any liability to the holders of the Rights.
Section 29. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any Person other than the Company, the Rights Agent and the
registered holders of the Rights Certificates (and, prior to the Distribution
Date, registered holders of the Common Shares) any legal or equitable right,
remedy or claim under this Agreement; but this Agreement shall be for the sole
and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Rights Certificates (and, prior to the Distribution Date,
registered holders of the Common Shares).
Section 30. Severability. If any term, provision, 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, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated.
Section 31. Governing Law. This Agreement, each Right and each Rights
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of California and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts made
and to be performed entirely within such State.
Section 32. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the several
sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
* * *
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its officer thereunto duly authorized, all as of the day and year
first above written.
THE FIRST AMERICAN FINANCIAL CORPORATION
By______________________________________
President
WILMINGTON TRUST COMPANY,
as Rights Agent
By______________________________________
Authorized Signatory
<PAGE>
EXHIBIT A
FORM OF CERTIFICATE OF DETERMINATION OF
SERIES A JUNIOR PARTICIPATING PREFERRED SHARES
of
THE FIRST AMERICAN FINANCIAL CORPORATION
Pursuant to Section 401 of the California General Corporations Law
We, President, and Secretary, of The First American Financial Corporation,
a corporation organized and existing under the General Corporation Law of the
State of California, in accordance with the provisions of Section 401 thereof,
DO HEREBY CERTIFY:
(i) That pursuant to the authority conferred upon the Board of
Directors by the Articles of Incorporation of the said Corporation, the
said Board of Directors on October 23, 1997 adopted the resolution set
forth below creating a series of preferred shares designated as Series A
Junior Participating Preferred Shares; and
(ii) That none of said shares has yet been issued.
RESOLVED, that pursuant to the authority vested in the Board of Directors
of this Corporation in accordance with the provisions of Article Sixth of its
Articles of Incorporation, the Board of Directors hereby creates a series of
preferred shares of the Corporation, the amount, designation, rights,
preferences and privileges of which are as follows:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series A Junior Participating Preferred Shares" and the number of
shares constituting such series shall initially be one thousand (1,000), $1.00
par value, such number of shares to be subject to increase or decrease by action
of the Board of Directors as evidenced by a certificate of determination.
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of any shares
of any series of preferred shares ranking prior and superior to the shares of
Series A Junior Participating Preferred Shares with respect to dividends, the
holders of Series A Junior Participating Preferred Shares shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds legally
available for the purpose, quarterly dividends payable in cash on the last day
of March, June, September and December in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"), commencing on the
first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Junior Participating Preferred Shares, in an
amount per share (rounded to the nearest cent) equal to the greater of (a)
$10.00 or (b) subject to the provision for adjustment hereinafter set forth,
100,000 times the aggregate per share amount of all cash dividends, and 100,000
times the aggregate per share amount (payable in kind) of all non-cash dividends
or other distributions other than a dividend payable in Common Shares or a
subdivision of the outstanding Common Shares (by reclassification or otherwise),
declared on the common shares, $1.00 par value, of the Corporation (the "Common
Shares") since the immediately preceding Quarterly Dividend Payment Date, or,
with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series A Junior Participating
Preferred Shares. In the event the Corporation shall at any time after October
23, 1997 (the "Rights Declaration Date") (i) declare any dividend on Common
Shares payable in Common Shares, (ii) subdivide the outstanding Common Shares,
or (iii) combine the outstanding Common Shares into a smaller number of shares,
then in each such case the amount to which holders of Series A Junior
Participating Preferred Shares were entitled immediately prior to such event
under clause (b) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of Common Shares
outstanding immediately after such event and the denominator of which is the
number of Common Shares that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the Series
A Junior Participating Preferred Shares as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the Common Shares
(other than a dividend payable in Common Shares); provided that, in the event no
dividend or distribution shall have been declared on the Common Shares during
the period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $10.00 per share on the Series A
Junior Participating Preferred Shares shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding Series
A Junior Participating Preferred Shares from the Quarterly Dividend Payment Date
next preceding the date of issue of such Series A Junior Participating Preferred
Shares, unless the date of issue of such share is prior to the record date for
the first Quarterly Dividend Payment Date, in which case dividends on such
shares shall begin to accrue from the date of issue of such shares, or unless
the date of issue is a Quarterly Dividend Payment Date or is a date after the
record date for the determination of holders of Series A Junior Participating
Preferred Shares entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends shall
begin to accrue and be cumulative from such Quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest. Dividends paid on the
Series A Junior Participating Preferred Shares in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of Series A Junior Participating Preferred Shares entitled to receive
payment of a dividend or distribution declared thereon, which record date shall
be no more than 30 days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of Series A Junior Participating
Preferred Shares shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
Series A Junior Participating Preferred Share shall entitle the holder thereof
to 100,000 votes on all matters submitted to a vote of the shareholders of the
Corporation. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Shares payable in Common
Shares, (ii) subdivide the outstanding Common Shares, or (iii) combine the
outstanding Common Shares into a smaller number of shares, then in each such
case the number of votes per share to which holders of Series A Junior
Participating Preferred Shares were entitled immediately prior to such event
shall be adjusted by multiplying such number by a fraction the numerator of
which is the number of Common Shares outstanding immediately after such event
and the denominator of which is the number of Common Shares that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of Series A
Junior Participating Preferred Shares and the holders of Common Shares shall
vote together as one class on all matters submitted to a vote of shareholders of
the Corporation.
(C)(i) If at any time dividends on any Series A Junior Participating
Preferred Shares shall be in arrears in an amount equal to six (6) quarterly
dividends thereon, the occurrence of such contingency shall mark the beginning
of a period (herein called a "default period") which shall extend until such
time when all accrued and unpaid dividends for all previous quarterly dividend
periods and for the current quarterly dividend period on all Series A Junior
Participating Preferred Shares then outstanding shall have been declared and
paid or set apart for payment. During each default period, all holders of
preferred shares (including holders of the Series A Junior Participating
Preferred Shares) (collectively, the "Preferred Shares") with dividends in
arrears in an amount equal to (6) quarterly dividends thereon, voting as a
class, irrespective of series, shall have the right to elect two (2) directors.
(ii) During any default period, such voting right of the holders of Series
A Junior Participating Preferred Shares may be exercised initially at a special
meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any
annual meeting of shareholders, and thereafter at annual meetings of
shareholders, provided that neither such voting right nor the right of the
holders of any other series of Preferred Shares, if any, to increase, in certain
cases, the authorized number of Directors shall be exercised unless the holders
of ten percent in number of Preferred Shares outstanding shall be present in
person or by proxy. The absence of a quorum of the holders of Common Shares
shall not affect the exercise by the holders of Preferred Shares of such voting
right. At any meeting at which the holders of Preferred Shares shall exercise
such voting right initially during an existing default period, they shall have
the right, voting as a class, to fill such vacancies, if any, in the Board of
Directors as may then exist up to two (2) Directors or, if such right is
exercised at an annual meeting, to elect two (2) Directors. If the number which
may be so elected at any special meeting does not amount to the required number,
the holders of the Preferred Shares shall have the right to make such increase
in the number of Directors as shall be necessary to permit the election by them
of the required number. After the holders of the Preferred Shares shall have
exercised their right to elect Directors in any default period and during the
continuance of such period, the number of Directors shall not be increased or
decreased except by vote of the holders of Preferred Shares as herein provided
or pursuant to the rights of any equity securities ranking senior to or pari
passu with the Series A Junior Participating Preferred Shares.
(iii) Unless the holders of Preferred Shares shall, during an existing
default period, have previously exercised their right to elect Directors, the
Board of Directors may order, or any shareholder or shareholders owning in the
aggregate not less than ten percent (10)% of the total number of Preferred
Shares outstanding, irrespective of series, may request, the calling of a
special meeting of the holders of Preferred Shares, which meeting shall
thereupon be called by the Chairman of the Board, the President or the Secretary
of the Corporation. Notice of such meeting and of any annual meeting at which
holders of Preferred Shares are entitled to vote pursuant to this paragraph
(C)(iii) shall be given to each holder of record of Preferred Shares by mailing
a copy of such notice to him at his last address as the same appears on the
books of the Corporation. Such meeting shall be called for a time not earlier
than 10 days and not later than 60 days after such order or request, such
meeting may be called on similar notice by any shareholder or shareholders
owning in the aggregate not less than ten percent (10)% of the total number of
Preferred Shares outstanding. Notwithstanding the provisions of this paragraph
(C)(iii), no such special meeting shall be called during the period within 60
days immediately preceding the date fixed for the next annual meeting of the
shareholders.
(iv) In any default period, the holders of Common Shares, and other classes
of stock of the Corporation if applicable, shall continue to be entitled to
elect the whole number of Directors until the holders of Preferred Shares shall
have exercised their right to elect two (2) Directors voting as a class, after
the exercise of which right (x) the Directors so elected by the holders of
Preferred Shares shall continue in office until their successors shall have been
elected by such holders or until the expiration of the default period, and (y)
any vacancy in the Board of Directors may (except as provided in paragraph
(C)(ii) of this Section 3) be filled by vote of a majority of the remaining
Directors theretofore elected by the holders of the class of stock which elected
the Director whose office shall have become vacant. References in this paragraph
(C) to Directors elected by the holders of a particular class of stock shall
include Directors elected by such Directors to fill vacancies as provided in
clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the right of
the holders of Preferred Shares as a class to elect Directors shall cease, (y)
the term of any Directors elected by the holders of Preferred Shares as a class
shall terminate, and (z) the number of Directors shall be such number as may be
provided for in the Articles of Incorporation or by-laws irrespective of any
increase made pursuant to the provisions of paragraph (C)(ii) of this Section 3
(such number being subject, however, to change thereafter in any manner provided
by law or in the Articles of Incorporation or by-laws). Any vacancies in the
Board of Directors effected by the provisions of clauses (y) and (z) in the
preceding sentence may be filled by a majority of the remaining Directors.
(D) Except as set forth herein, holders of Series A Junior Participating
Preferred Shares shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Shares as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Participating Preferred Shares as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on Series A Junior Participating
Preferred Shares outstanding shall have been paid in full, the Corporation shall
not:
(i) declare or pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Junior Participating Preferred
Shares;
(ii) declare or pay dividends on or make any other distributions on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior
Participating Preferred Shares, except dividends paid ratably on the Series
A Junior Participating Preferred Shares and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares
of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior
Participating Preferred Shares, provided that the Corporation may at any
time redeem, purchase or otherwise acquire shares of any such parity stock
in exchange for shares of any stock of the Corporation ranking junior
(either as to dividends or upon dissolution, liquidation or winding up) to
the Series A Junior Participating Preferred Shares; or
(iv) redeem or purchase or otherwise acquire for consideration any
Series A Junior Participating Preferred Shares, or any shares of stock
ranking on a parity with the Series A Junior Participating Preferred
Shares, except in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all holders of
such shares upon such terms as the Board of Directors, after consideration
of the respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective
series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any Series A Junior Participating Preferred
Shares purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares upon their cancellation become authorized but unissued
Preferred Shares and may be reissued as part of a new series of Preferred Shares
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution or winding
up of the Corporation, no distribution shall be made to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Participating-Preferred Shares unless, prior
thereto, the holders of Series A Junior Participating Preferred Shares shall
have received $100,000 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment (the "Series A Liquidation Preference"). Following the payment of
the full amount of the Series A Liquidation Preference, no additional
distributions shall be made to the holders of Series A Junior Participating
Preferred Shares unless, prior thereto, the holders of Common Shares shall have
received an amount per share (the "Common Adjustment") equal to the quotient
obtained by dividing (i) the Series A Liquidation Preference by (ii) 100,000 (as
appropriately adjusted as set forth in subparagraph C below to reflect such
events as stock splits, stock dividends and recapitalizations with respect to
the Common Shares) (such number in clause (ii), the "Adjustment Number").
Following the payment of the full amount of the Series A Liquidation Preference
and the Common Adjustment in respect of all outstanding Series A Junior
Participating Preferred Shares and Common Shares, respectively, holders of
Series A Junior Participating Preferred Shares and holders of Common Shares
shall receive their ratable and proportionate share of the remaining assets to
be distributed in the ratio of the Adjustment Number to 1 with respect to such
Preferred Shares and Common Shares, on a per share basis, respectively.
(B) In the event, however, that there are not sufficient assets available
to permit payment in full of the Series A Liquidation Preference and the
liquidation preferences of all other series of preferred stock, if any, which
rank on a parity with the Series A Junior Participating Preferred Shares, then
such remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences. In the event,
however, that there are not sufficient assets available to permit payment in
full of the Common Adjustment, then such remaining assets shall be distributed
ratably to the holders of Common Shares.
(C) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Shares payable in Common
Shares, (ii) subdivide the outstanding Common Shares, or (iii) combine the
outstanding Common Shares into a smaller number of shares, then in each such
case the Adjustment Number in effect immediately prior to such event shall be
adjusted by multiplying such Adjustment Number by a fraction the numerator of
which is the number of Common Shares outstanding immediately after such event
and the denominator of which is the number of Common Shares that were
outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
Common Shares are exchanged for or changed into other stock or securities, cash
and/or any other property, then in any such case the Series A Junior
Participating Preferred Shares shall at the same time be similarly exchanged or
changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 100,000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each Common Share is changed or exchanged. In the
event the Corporation shall at any time after the Rights Declaration Date (i)
declare any dividend on Common Shares payable in Common Shares, (ii) subdivide
the outstanding Common Shares, or (iii) combine the outstanding Common Shares
into a smaller number of shares, then in each such case the amount set forth in
the preceding sentence with respect to the exchange or change of Series A Junior
Participating Preferred Shares shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of Common Shares outstanding
immediately after such event and the denominator of which is the number of
Common Shares that were outstanding immediately prior to such event.
Section 8. No Redemption. The Series A Junior Participating Preferred
Shares shall not be redeemable.
Section 9. Ranking. The Series A Junior Participating Preferred Shares
shall rank junior to all other series of the Corporation's Preferred Shares as
to the payment of dividends and the distribution of assets, unless the terms of
any such series shall provide otherwise.
Section 10. Amendment. The Articles of Incorporation of the Corporation
shall not be further amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Junior
Participating Preferred Shares so as to affect them adversely without the
affirmative vote of the holders of two-thirds (2/3) or more of the outstanding
Series A Junior Participating Preferred Shares, voting separately as a class.
Section 11. Fractional Shares. Series A Junior Participating Preferred
Shares may be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Junior Participating Preferred Shares.
<PAGE>
IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do
affirm the foregoing as true under the penalties of perjury this 23rd day of
October, 1997.
----------------------------
Parker S. Kennedy
President
Attest:
Mark R Arnesen
Secretary
<PAGE>
EXHIBIT B
[Form of Rights Certificate]
Certificate No. R- Rights
NOT EXERCISABLE AFTER THE EXPIRATION DATE (AS SUCH TERM IS DEFINED IN THE RIGHTS
AGREEMENT REFERRED TO BELOW). THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE
OPTION OF THE COMPANY, AT $.001 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS
AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN
ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH
TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH
RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS
CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN
ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH
TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE
AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES
SPECIFIED IN SECTION 7(e) OF THE RIGHTS AGREEMENT.](F1)
(F1) The portion of the legend in brackets shall be inserted only if applicable
and shall replace the preceding sentence.
Rights Certificate
THE FIRST AMERICAN FINANCIAL CORPORATION
This certifies that , or registered assigns, is the registered holder of
the number of Rights set forth above, each of which entitles the owner thereof,
subject to the terms, provisions and conditions of the Rights Agreement, dated
as of October 23, 1997 (as it may be amended, modified or supplemented from time
to time, the "Rights Agreement"), between The First American Financial
Corporation, a California corporation (the "Company"), and Wilmington Trust
Company, a Delaware banking corporation (the "Rights Agent"), to purchase from
the Company at any time prior to 5:00 P.M. (New York time) on the Expiration
Date (as defined in the Rights Agreement), which shall not be later than October
23, 2007 at the office or offices of the Rights Agent designated for such
purpose, or its successors as Rights Agent, one one hundred-thousandth of a
share of the Company's Series A Junior Participating Preferred Shares, $1.00 par
value (the "Preferred Shares"), at a purchase price of $265 (the "Purchase
Price") per one one hundred-thousandth of a Preferred Share (such fraction, a
"Preferred Share Fraction"), upon presentation and surrender of this Rights
Certificate with the Form of Election to Purchase set forth on the reverse
hereof and the Certificate contained therein duly executed. Except as otherwise
provided in Section 11(q) of the Rights Agreement, the Purchase Price shall be
paid at the election of the holder in cash or by certified bank check or money
order payable to the order of the Company. The number of Rights evidenced by
this Rights Certificate and the number of Preferred Share Fractions which may be
purchased upon exercise thereof and the Purchase Price per Preferred Share
Fraction, set forth above, are the number of Rights, number of Preferred Share
Fractions and Purchase Price as of _____________, 19__(F2)
(F2) Insert the Distribution Date., based on the Preferred Shares as constituted
at such date.
Except as otherwise provided in the Rights Agreement, upon the occurrence
of a Section 11(a)(ii) Event (as such term is defined in the Rights Agreement),
if the Rights evidenced by this Rights Certificate are beneficially owned by (i)
an Acquiring Person or any Affiliate or Associate of an Acquiring Person (as
such terms are defined in the Rights Agreement), (ii) a transferee of any such
Acquiring Person, Associate or Affiliate, or (iii) under certain circumstances
specified in the Rights Agreement, a transferee of a person who, concurrently
with or after such transfer, became an Acquiring Person, or an Affiliate or
Associate of an Acquiring Person, such Rights shall become null and void and no
holder hereof shall have any rights with respect to such Rights from and after
the occurrence of such Section 11(a)(ii) Event.
As provided in the Rights Agreement, the Purchase Price and the number and
kind of Preferred Shares or other securities, which may be purchased upon the
exercise of the Rights evidenced by this Rights Certificate are subject to
modification and adjustment upon the happening of certain events, including
Triggering Events (as such term is defined in the Rights Agreement).
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holder of the Rights Certificate, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the office of the Company as set
forth in the Rights Agreement and are also available upon written request to the
Company.
This Rights Certificate, with or without other Rights Certificates, upon
surrender at the principal office or offices of the Rights Agent designated for
such purpose, may be exchanged for another Rights Certificate or Rights
Certificates of like tenor and date evidencing Rights entitling the holder to
purchase a like aggregate number of Preferred Share Fractions as the Rights
evidenced by the Rights Certificate or Rights Certificates surrendered shall
have entitled such holder to purchase. If this Rights Certificate shall be
exercised in part, the holder shall be entitled to receive upon surrender hereof
another Rights Certificate or Rights Certificates for the number of whole Rights
not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Certificate may be redeemed by the Board of Directors of the Company at its
option at a redemption price of $.001 per Right at any time prior to the earlier
of (i) the date on which a Section 11(a)(ii) Event occurs and (ii) the Final
Expiration Date.
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one hundred-thousandth of a Preferred Share, which may, at the
election of the Company, be evidenced by depositary receipts), but in lieu
thereof a cash payment will be made, as provided in the Rights Agreement.
No holder of this Rights Certificate shall be entitled to vote or receive
dividends or be deemed for any purpose the holder of the Preferred Shares or of
any other securities of the Company which may at any time be issuable on the
exercise hereof, nor shall anything contained in the Rights Agreement or herein
be construed to confer upon the holder hereof, as such, any of the rights of a
shareholder of the Company or any right to vote for the election of directors or
upon any matter submitted to shareholders at any meeting thereof, or to give or
withhold consent to any corporate action, or to receive notice of meetings or
other actions affecting shareholders (except as provided in the Rights
Agreement), or to receive dividends or subscription rights, or otherwise, until
the Right or Rights evidenced by this Rights Certificate shall have been
exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
<PAGE>
WITNESS the facsimile signature of the proper officers of the Company and
its corporate seal.
Dated as of __________, ____
ATTEST: THE FIRST AMERICAN FINANCIAL
CORPORATION
By:______________________ By:____________________________
Secretary President
WILMINGTON TRUST COMPANY,
as Rights Agent
By:____________________________
Authorized Signatory
<PAGE>
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
Rights Certificate.)
FOR VALUE RECEIVED _______ hereby sells, assigns and transfers unto
_______________ (Please print name and address of transferee) this Rights
Certificate, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint ________________, Attorney, to
transfer the within Rights Certificate on the books of the within-named Company
with full power of substitution.
Dated:________________ ________________________
Signature
Signature Guaranteed:______________________________________
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes that:
(1) this Rights Certificate [ ] is [ ] is not being sold, assigned and
transferred by or on behalf of a Person who is or was an Acquiring Person or an
Affiliate or Associate of an Acquiring Person (as such terms are defined in the
Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it [ ]
did [ ] did not acquire the Rights evidenced by this Rights Certificate from any
Person who is, was or subsequently became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person.
Dated:_________________ _______________________
Signature Guaranteed:______________________________________
NOTICE
The signatures to the foregoing Assignment and Certificate must correspond
to the name as written upon the face of this Rights Certificate in every
particular, without alteration or enlargement or any change whatsoever.
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if the registered holder desires to exercise Rights represented
by the Rights Certificate.)
To: THE FIRST AMERICAN FINANCIAL CORPORATION
The undersigned hereby irrevocably elects to exercise ______ Rights
represented by this Rights Certificate to purchase the Preferred Shares issuable
upon the exercise of the Rights (or such other securities of the Company or of
any other person which may be issuable upon the exercise of the Rights) and
requests that certificates for such shares be issued in the name of and
delivered to:
________________________________________________________________________________
(Please print name and address)
Please insert social security or other identifying number:______________________
If such number of Rights shall not be all the Rights evidenced by this
Rights Certificate, a new Rights Certificate for the balance of such Rights
shall be registered in the name of and delivered to:
________________________________________________________________________________
(Please print name and address)
Please insert social security or other identifying number:______________________
Dated:______________________
________________________________________________
Signature
Signature Guaranteed:
________________________________________________
<PAGE>
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not
being exercised by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of an Acquiring Person (as such terms are defined in
the Rights Agreement); and
(2) after due inquiry and to the best knowledge of the undersigned, it [ ]
did [ ] did not acquire the Rights evidenced by this Rights Certificate from any
Person who is, was or subsequently became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person.
Dated:______________________
________________________________________________
Signature
Signature Guaranteed:
________________________________________________
NOTICE
The signatures to the foregoing Election to Purchase and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
<PAGE>
EXHIBIT C
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED SHARES
On October 23, 1997, the Board of Directors of The First American Financial
Corporation, a California corporation (the "Company"), declared a dividend
distribution of one Right for each outstanding share of common stock, $1.00 par
value (the "Common Shares") of the Company, to shareholders of record at the
close of business on November 15, 1997 (the "Record Date"). Each Right entitles
the record holder to purchase from the Company one one hundred-thousandth of a
share ("Preferred Share Fraction") of the Company's Series A Junior
Participating Preferred Shares, $1.00 par value (the "Preferred Shares") at a
price of $265 (the "Purchase Price"), subject to adjustment in certain
circumstances. Except as otherwise provided in the Rights Agreement, the
Purchase Price may be paid, at the election of the registered holder, in cash or
by certified bank check or money order payable to the order of the Company. The
description and terms of the Rights are set forth in a Rights Agreement, dated
as of October 23, 1997 (as it may be amended, modified or supplemented from time
to time, the "Rights Agreement"), between the Company and Wilmington Trust
Company, as Rights Agent.
Initially, the Rights will be attached to the certificates representing
outstanding Common Shares, and no Rights Certificates will be distributed. The
Rights will separate from the Common Shares and a "Distribution Date" will occur
upon the earlier of (i) the close of business on the tenth day after the date
(the "Share Acquisition Date") of a public announcement that a person or group
of affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 15% or more of the
outstanding Common Shares, or (ii) the close of business on the tenth Business
Day (or such later date as may be determined by the Company's Board of Directors
prior to such time as any person becomes an Acquiring Person) after the
commencement of a tender offer or exchange offer if, upon consummation thereof,
the person or group making such offer would be the beneficial owner of 15% or
more of the outstanding Common Shares. Until the Distribution Date, (i) the
Rights will be evidenced by the Common Share certificates and will be
transferred with and only with such Common Share certificates, (ii) new Common
Share certificates issued after the Record Date will contain a notation
incorporating the Rights Agreement by reference and (iii) the surrender for
transfer of any certificates for Common Shares outstanding will also constitute
the transfer of the Rights associated with the Common Shares represented by such
certificate. As soon as practicable following the Distribution Date, Rights
Certificates will be mailed to holders of record of the Common Shares as of the
close of business on the Distribution Date and, thereafter, such separate Rights
Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on October 23, 2007 unless earlier redeemed by the
Company as described below.
Except in the circumstances described below, after the Distribution Date
each Right will be exercisable into a Preferred Share Fraction. Each Preferred
Share Fraction carries voting and dividend rights that are intended to produce
the equivalent of one Common Share. The voting and dividend rights of the
Preferred Shares are subject to adjustment in the event of dividends,
subdivisions and combinations with respect to the Common Shares of the Company.
In lieu of issuing certificates for fractions of Preferred Shares (other than
fractions which are integral multiples of Preferred Share Fractions), the
Company may pay cash in accordance with the Rights Agreement.
In the event that, at any time following the Distribution Date, a Person
becomes an Acquiring Person (other than pursuant to an offer for all outstanding
Common Shares at a price and on terms which the majority of the independent
Directors determine to be fair to, and otherwise in the best interests of,
shareholders), the Rights Agreement provides that proper provision shall be made
so that each holder of a Right will thereafter have the right to receive, upon
the exercise thereof, Common Shares (or, in certain circumstances, cash,
property or other securities, including Preferred Share Fractions, of the
Company) having a value equal to two (2) times the exercise price of the Right.
In lieu of requiring payment of the Purchase Price upon exercise of the Rights
following any such event, the Company may provide that each Right be exchanged
for one Common Share (or cash, property or other securities, as the case may
be). The only right of a holder of Rights following the Company's election to
provide for such exchange shall be to receive the above described securities.
Notwithstanding any of the foregoing, following the occurrence of any of the
events set forth in this paragraph, any Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by an
Acquiring Person shall immediately become null and void.
For example, at an exercise price of $265 per Right, each Right not owned
by an Acquiring Person (or by certain related parties) following an event set
forth in the preceding paragraph would entitle its holder to purchase $530 worth
of Common Shares (or other equivalent securities, as noted above) for $265.
Assuming that the Common Shares had a per share value of $132.50 at such time,
the holder of each valid Right would be entitled to purchase four Common Shares
(or other equivalent securities, as noted above) for $265. Alternatively, the
Company could permit the holder to surrender each Right in exchange for one
Common Share (with a value of $132.50) without the payment of any consideration
other than the surrender of the Right.
In the event that, at any time following the Share Acquisition Date, (i)
the Company engages in a merger or consolidation in which the Company is not the
surviving corporation, (ii) the Company engages in a merger or consolidation
with another person in which the Company is the surviving corporation, but in
which all or part of its Common Shares are changed or exchanged, or (iii) 50% or
more of the Company's assets or earning power is sold or transferred (except
with respect to clauses (i) and (ii), a merger or consolidation (a) which
follows an offer described in the second preceding paragraph and (b) in which
the amount and form of consideration is the same as was paid in such offer), the
Rights Agreement provides that proper provision shall be made so that each
holder of a Right (except Rights which previously have been voided as set forth
above) shall thereafter have the right to receive, upon the exercise thereof,
common stock of the acquiring company having a value equal to two (2) times the
exercise price of the Right. The events set forth in this paragraph and in the
second preceding paragraph are referred to as the "Triggering Events."
The Purchase Price payable, and the number of Preferred Share Fractions or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on the Preferred Shares or other capital shares, or a subdivision,
combination or reclassification of the Preferred Shares, (ii) upon the grant to
holders of the Preferred Shares of certain rights or warrants to subscribe for
Preferred Shares or securities convertible into Preferred Shares at less than
the current market price of the Preferred Shares, or (iii) upon the distribution
to holders of the Preferred Shares of evidences of indebtedness or assets
(excluding regular quarterly cash dividends or dividends payable in Preferred
Shares) or of subscription rights or warrants (other than those referred to
above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Preferred Shares (other than fractions which
are integral multiples of Preferred Share Fractions) will be issued upon
exercise of the Rights and, in lieu thereof, a cash payment will be made based
on the market price of the Preferred Shares on the last trading date prior to
the date of exercise.
At any time prior to the earlier of (i) the date on which a person becomes
an Acquiring Person and (ii) the Final Expiration Date, the Board of Directors
of the Company may redeem the Rights in whole, but not in part, at a price of
$.001 per Right, payable in cash or securities or both (the "Redemption Price").
Immediately upon the action of the Board of Directors of the Company ordering
redemption of the Rights, the Rights will terminate and the only right of the
holders of Rights will be to receive the Redemption Price.
Issuance of Common Shares upon exercise of Rights is subject to regulatory
approval. Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
be taxable to shareholders or to the Company, shareholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Shares (or other consideration) of the Company or for
common stock of the acquiring company as set forth above.
Any of the provisions of the Rights Agreement, other than certain
provisions relating to the principal economic terms of the Rights, may be
amended by the Board of Directors of the Company prior to the Distribution Date.
Thereafter, the provisions, other than certain provisions relating to the
principal economic terms of the Rights, of the Rights Agreement may be amended
by the Board in order: to cure any ambiguity, defect or inconsistency; to
shorten or lengthen any time period under the Rights Agreement; or in any other
respect that will not adversely affect the interests of holders of Rights
(excluding the interests of any Acquiring Person); provided that no amendment to
adjust the time period governing redemption shall be made at such time as the
Rights are not redeemable.
A copy of the Rights Agreement will be filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement of the Company on
Form 8-A. A copy of the Rights Agreement is available free of charge from the
Company upon written request therefor. This summary description of the Rights
does not purport to be complete and is qualified in its entirety by reference to
the Rights Agreement, which is incorporated herein by reference.
<PAGE>
PART II
Information Not Required in Prospectus/Proxy Statement
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subject to certain limitations, Section 317 of the California Corporations
Code provides in part that a corporation shall have the power to indemnify any
person who was or is a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of the corporation to
procure a judgment in its favor) by reason of the fact that the person is or was
an agent (which term includes officers and directors) of the corporation,
against expenses, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with the proceeding if that person acted in
good faith and in a manner the person reasonably believed to be in the best
interests of the corporation and, in the case of a criminal proceeding, had no
reasonable cause to believe the conduct of the person was unlawful.
The California indemnification statute, as provided in Section 317 of the
California Corporations Code (noted above), is nonexclusive and allows a
corporation to expand the scope of indemnification provided, whether by
provisions in its Bylaws or by agreement, to the extent authorized in the
corporation's articles.
The Articles of Incorporation of the Registrant provide that: "The
liability of the directors of the Corporation for monetary damages shall be
eliminated to the fullest extent permissible under California law." The effect
of this provision is to exculpate directors from any liability to the
Registrant, or anyone claiming on the Registrant's behalf, for breaches of the
directors' duty of care. However, the provision does not eliminate or limit the
liability of a director for actions taken in his capacity as an officer. In
addition, the provision applies only to monetary damages and is not intended to
impair the rights of parties suing on behalf of the Registrant to seek equitable
remedies (such as actions to enjoin or rescind a transaction involving a breach
of the directors' duty of care or loyalty).
The Bylaws of the Registrant provide that, subject to certain
qualifications, "(i) the corporation shall indemnify its Officers and Directors
to the fullest extent permitted by law, including those circumstances in which
indemnification would otherwise be discretionary; (ii) the corporation is
required to advance expenses to its Officers and Directors as incurred,
including expenses relating to obtaining a determination that such Officers and
Directors are entitled to indemnification, provided that they undertake to repay
the amount advanced if it is ultimately determined that they are not entitled to
indemnification; (iii) an Officer or Director may bring suit against the
corporation if a claim for indemnification is not timely paid; (iv) the
corporation may not retroactively amend this Section 1 in a way which is adverse
to its Officers and Directors; (v) the provisions of subsections (i) through
(iv) above apply to all past and present Officers and Directors of the
corporation." "Officer" includes the following officers of the Registrant:
Chairman of the Board, President, Vice President, Secretary, Assistant
Secretary, Treasurer, Assistant Treasurer and such other officers as the board
shall designate from time to time. "Director" of the Registrant means any person
appointed to serve on the Registrant's board of directors either by its
shareholders or by the remaining board members.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the registrant
pursuant to the foregoing provisions, the registrant has been informed that, in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Each of the Registrant's 1996 Stock Option Plan and its 1997 Directors'
Stock Plan (each individually, the "Plan") provides that, subject to certain
conditions, "The Company shall, through the purchase of insurance or otherwise,
indemnify each member of the Board (or board of directors of any affiliate),
each member of the [Compensation] Committee, and any [other] employees to whom
any responsibility with respect to the Plan is allocated or delegated, from and
against any and all claims, losses, damages, and expenses, including attorneys'
fees, and any liability, including any amounts paid in settlement with the
Company's approval, arising from the individual's action or failure to act,
except when the same is judicially determined to be attributable to the gross
negligence or willful misconduct of such person."
The Registrant's Deferred Compensation Plan provides that, "To the extent
permitted by applicable state law, the Company shall indemnify and save harmless
the Committee and each member thereof, the Board of Directors and any delegate
of the Committee who is an employee of the Company against any and all expenses,
liabilities and claims, including legal fees to defend against such liabilities
and claims arising out of their discharge in good faith of responsibilities
under or incident to the Plan, other than expenses and liabilities arising out
of willful misconduct. This indemnity shall not preclude such further
indemnities as may be available under insurance purchased by the Company or
provided by the Company under any bylaw, agreement or otherwise, as such
indemnities are permitted under state law."
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Agreement and Plan of Merger, dated as of March 27, 1998 by and among
the Registrant, Image Acquisition Corp., Data Tree Corporation and
Harish Chopra. (1)
3.1 Restated Articles of Incorporation of The First American Financial
Corporation dated January 1, 1998. (2)
3.2 Bylaws of The First American Financial Corporation.(*)
4.1 Description of the Registrant's capital stock in Article Sixth of the
Restated Articles of Incorporation of The First American Financial
Corporation (contained in Exhibit 3.1).(*)
4.2 Rights Agreement, dated as of October 23, 1997 by and among the
Registrant and Wilmington Trust company, as Rights Agent. (3)
5.1 Opinion of White & Case LLP.(*)
21.1 Subsidiaries of the Registrant. (4)
23.1 Consent of White & Case LLP (contained in Exhibit 5.1).
23.2 Consent of Price Waterhouse LLP.
23.3 Consent of Ernst & Young LLP, independent auditors.
24.1 Power of Attorney.(*)
99.1 Form of Proxy of Data Tree.(*)
99.2 Form of Notice and Letter of Transmittal.(*)
- --------------
(*) Previously filed.
(1) Incorporated by reference to Annex A hereto.
(2) Incorporated by reference to Exhibit 3(a) of the Company's Form 10-K
for the year ended December 31, 1997, attached as Annex D hereto.
(3) Incorporated by reference to Exhibit 4 of the Registrant's
Registration Statement on Form 8-A dated November 7, 1997, attached as
Annex K hereto.
(4) Incorporated by reference from Company Form 10-K for the year ended
December 31, 1997, attached as Annex D hereto.
ITEM 23. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(2) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(3) That every prospectus: (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Securities Act of 1933 and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(4) To respond to requests for information that is incorporated by
reference into this prospectus pursuant to Item 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.
(5) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration.
(6) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(7) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(8) That every prospectus: (i) that is filed pursuant to paragraph (7)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Act and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be the new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim of
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by its is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
Pursuant to Item 601(b)(2) of Regulation S-K, the schedules to the
Agreement and Plan of Merger attached as Annex A to the Prospectus/Proxy
Statement have been omitted. These schedules describe exceptions to the
representations and warranties contained in the Agreement and Plan of Merger.
The Registrant hereby undertakes to furnish supplementally a copy of any such
omitted schedule to the Commission upon request.
* * *
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Pre-Effective Amendment No. 1 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Santa Ana, state of California, on May 19, 1998.
THE FIRST AMERICAN FINANCIAL
CORPORATION
By:/s/ Parker S. Kennedy
-----------------------------
Parker S. Kennedy, President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
Date: May 19, 1998 By:/s/ D.P. Kennedy
--------------------------------------------
D.P. Kennedy, Chairman and Director
Date: May 19, 1998 By:/s/ Parker S. Kennedy
--------------------------------------------
Parker S. Kennedy, President and Director
Date: May 19, 1998 By:/s/ Thomas A. Klemens
--------------------------------------------
Thomas A. Klemens, Executive Vice
President, Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
Date: May 19, 1998 By:/s/George L. Argyros*
--------------------------------------------
George L. Argyros, Director
Date: May 19, 1998 By:/s/ Gary J. Beban*
--------------------------------------------
Gary J. Beban, Director
Date: May 19, 1998 By:/s/ J. David Chatham*
--------------------------------------------
J. David Chatham, Director
Date: May 19, 1998 By:/s/ William G. Davis*
--------------------------------------------
William G. Davis, Director
Date: May 19, 1998 By:/s/ James L. Doti*
--------------------------------------------
James L. Doti, Director
Date: May 19, 1998 By:/s/ Lewis W. Douglas, Jr.*
--------------------------------------------
Lewis W. Douglas, Jr., Director
Date: May 19, 1998 By:/s/ Paul B. Fay, Jr.*
--------------------------------------------
Paul B. Fay, Jr., Director
Date: May 19, 1998 By:/s/ Dale F. Frey*
--------------------------------------------
Dale F. Frey, Director
Date: May 19, 1998 By:/s/ Anthony R. Moiso*
--------------------------------------------
Anthony R. Moiso, Director
Date: May 19, 1998 By:/s/ Rudolph J. Munzer*
--------------------------------------------
Rudolph J. Munzer, Director
Date: May 19, 1998 By:/s/ Frank O'Bryan*
--------------------------------------------
Frank O'Bryan, Director
Date: May 19, 1998 By:/s/ Roslyn B. Payne*
--------------------------------------------
Roslyn B. Payne, Director
Date: May 19, 1998 By:/s/ D. Van Skilling*
--------------------------------------------
D. Van Skilling, Director
Date: May 19, 1998 By:/s/ Virginia Ueberroth*
--------------------------------------------
Virginia Ueberroth, Director
*By:/s/ Mark R Arnesen
- ------------------------------------
Mark R Arnesen
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Agreement and Plan of Merger, dated as of March 27, 1998 by and among
the Registrant, Image Acquisition Corp., Data Tree Corporation and
Harish Chopra. (1)
3.1 Restated Articles of Incorporation of The First American Financial
Corporation dated January 1, 1998. (2)
3.2 Bylaws of The First American Financial Corporation.(*)
4.1 Description of the Registrant's capital stock in Article Sixth of the
Restated Articles of Incorporation of The First American Financial
Corporation (contained in Exhibit 3.1).(*)
4.2 Rights Agreement, dated as of October 23, 1997 by and among the
Registrant and Wilmington Trust company, as Rights Agent. (3)
5.1 Opinion of White & Case LLP.(*)
21.1 Subsidiaries of the Registrant. (4)
23.1 Consent of White & Case LLP (contained in Exhibit 5.1).
23.3 Consent of Price Waterhouse LLP.
23.4 Consent of Ernst & Young LLP, independent auditors.
24.1 Power of Attorney.(*)
99.1 Form of Proxy of Data Tree.(*)
99.2 Form of Notice and Letter of Transmittal.(*)
- --------------
(*) Previously filed.
(1) Incorporated by reference to Annex A hereto.
(2) Incorporated by reference to Exhibit 3(a) of the Company's Form 10-K
for the year ended December 31, 1997, attached as Annex D hereto.
(3) Incorporated by reference to Exhibit 4 of the Registrant's
Registration Statement on Form 8-A dated November 7, 1997, attached as
Annex K hereto.
(4) Incorporated by reference from Company Form 10-K for the year ended
December 31, 1997, attached as Annex D hereto.
EXHIBIT 23.3
CONSENT OF PRICE WATERHOUSE LLP
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of The First American Financial Corporation
of our report dated February 9, 1998 relating to the financial statements of The
First American Financial Corporation, which appears in such Prospectus. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Costa Mesa, California
May 18, 1998
EXHIBIT 23.4
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated December 3, 1997, with respect to the financial
statements of Data Tree Corporation, included in the Proxy Statement that is
made a part of Pre-Effective Amendment No. 1 to the Registration Statement (Form
S-4) and Prospectus of The First American Financial Corporation for the
registration of 838,095 shares of its common stock.
/s/ Ernst & Young LLP
Ernst & Young LLP
San Diego, California
May 18, 1998
