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Annual Report For Small Business Issuers Subject
to the 1934 Act Reporting Requirements
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Year Ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 Commission File No. 0-21417
CAPITAL TITLE GROUP, INC.
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(Name of Small Business Issuer in its charter)
Delaware 87-0399785
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
14555 North Scottsdale Road Suite 320, Scottsdale, Arizona 85254
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (602) 483-8868
Securities registered under Section 12(b) of the Act:
NONE
Securities registered under Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of class)
Check whether the issuer (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 [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will 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-KSB, or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $23,206,225.
On March 12, 1999, the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant was $39,981,550. This
figure was estimated based on March 12, 1999 closing price of the Company's
common stock. The number of shares of Common Stock outstanding on March 12, 1999
was 16,671,070.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders to be held on May 4, 1999 are incorporated by reference into Part
III.
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PART I
ITEM 1. BUSINESS
COMPANY HISTORY AND OVERVIEW
Capital Title Group, Inc. (the "Company") is a Delaware corporation
which acts as the parent holding company of the following subsidiaries:
Capital Title Agency, Inc. ("Capital Title") is an Arizona corporation
which has operated under the authority of the State Banking Commission
since November 1, 1981. Capital Title is an independent title agency
that provides escrow services and, as an agent for four title insurance
companies, issues title insurance policies to the real estate industry
in Maricopa, Yavapai and Mohave Counties in Arizona. As of March 12,
1999 Capital Title operated 28 offices located throughout Maricopa,
Yavapai and Mohave Counties in Arizona.
New Century Title Company ("New Century"), a California corporation,
purchased a dormant escrow and title agency in San Diego, California
and began operations as an independent title agency in July 1998. New
Century currently has two offices in San Diego County.
New Century Title Company of Northern California ("New Century of
Northern California") is a California corporation which acquired
Northwestern Consolidated Corporation ("Northwestern") and its
subsidiaries in November 1998. Northwestern had operated as an
independent title agency since 1959. New Century of Northern California
is an independent title agency that provides escrow services and, as an
agent for a title insurance company, issues title insurance policies to
the real estate industry in Sonoma, Contra Costa and Alameda Counties
in California. New Century of Northern California currently operates
nine offices in the San Francisco region.
New Century Insurance Services, Inc. ("NCIS"), an Arizona corporation,
was formed in January 1998 as an independent property and casualty
insurance agency. NCIS began operations in April 1998. Effective in
January 1999, the Company decided to exit the property and casualty
insurance market and accordingly, sold an 80% interest in NCIS to
NCIS's president.
The Company plans to aggressively continue its growth in Arizona and
California, and as conditions merit, to expand into other southern and
southwestern states. The Company intends to accomplish this planned expansion
both through acquisition transactions and through recruitment of escrow officers
with significant existing revenue production based upon their relationships with
real estate brokers, mortgage lenders and other industry participants. The
Company will attempt to attract these significant producers through employment
packages that include commissions based on revenue generated and stock options.
The principal executive offices of the Company are located at 14555 N.
Scottsdale Road, Suite 320, Scottsdale, Arizona 85254 and the Company's
telephone number is (602) 483-8868.
COMPANY OPERATIONS
The Company is an independent title agency providing escrow services
and, as an agent for First American Title Insurance Company ("First American"),
Chicago Title Corporation ("Chicago"), Stewart Information Services Corporation
("Stewart"), United General Insurance Company ("United General") and Old
Republic Insurance Company ("Old Republic"), issues title insurance policies to
service the real estate industry in seven counties in California and Arizona.
Capital Title's operations commenced in 1981 in Prescott, Arizona. During 1995
and 1996, Capital Title began an expansion program, opening additional offices
in the Yavapai County population centers of Prescott Valley, Cottonwood and
Sedona.
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During 1996 and 1997, Capital Title opened seven branch offices in
Maricopa County, Arizona. During 1998 the Company opened additional branch
offices in Maricopa County and expanded into Mohave County, Arizona along with
entering the California market.
The Company's 1998 operations were positively impacted by the
geographic locations in which it operates as Arizona and California rank among
the top states in the nation in the rate of new job creation, population growth
and gains in personal income. Additionally, these states are some of the highest
single family housing markets in the nation with Phoenix and San Diego currently
the 6th and 7th largest cities in the United States.
The December 1998 market share reports show Capital Title as the top
title insurer in Yavapai County. As of December 1998, Capital Title ranked
fourth in Maricopa County market share, having moved up from tenth in 1997 and
from twentieth the year before. The Company believes that its combination of
technology, management and employee stock options will play a significant role
in positively impacting its market share in the locations in which it is
currently operating and in the areas into which it expands.
INDUSTRY OVERVIEW
Title insurance has become 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. Virtually all real property lenders require
their borrowers to obtain title insurance policies at the time mortgage loans
are made.
The title insurance industry has undergone changes in the past few
years as a result of revenue fluctuation based on changes in interest rates.
Companies have focused on advancing technology in order to reduce costs, improve
accuracy and respond to the continuing pressures within the real estate industry
for faster and more cost effective processing of transactions. The major expense
of a title agency company is the search and examination function in preparing
preliminary title reports, commitments and title policies, and not from claim
losses associated with said policies. Technology has improved the accuracy and
consistency of information and allowed companies to maintain or increase their
number of closings with the same number of or fewer employees.
The Company possesses advanced title report generation and processing
technology that combines title information from multiple sources via electronic
data exchange. The Company has implemented this proprietary technology in its
Arizona operations and in its San Diego County, California operations. This
technology facilitates expansion of the Company's operations in existing
markets, and management believes it outperforms the technology of other major
title companies that possess greater resources than the Company.
In the past twenty years, several large, national companies have
captured a little over fifty percent of the market by securing the capital
required to meet the regulatory requirements of an insurance company combining
with the retention of independent agency operations. Larger companies, like
Chicago, First American, and Fidelity National Financial, Inc. began on the
local level, operating in a single city or county. From this small starting
point, these companies grew to regional leaders and finally into national
leaders in the industry.
TITLE POLICIES. Title insurance policies state the terms and conditions
upon which a title underwriter will insure title to real estate. The
beneficiaries of title insurance policies are generally buyers of real property
or secured lenders.
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Title insurance is different from other types of insurance because it
relates to past events that affect title to property at the time of closing and
not unforeseen future events. Prior to issuing policies underwriters can
eliminate future losses by accurately performing searches and examinations. The
major expense of a title company is the search and examination function in
preparing preliminary reports, commitments and policies and is not from claim
losses. The premium for title insurance is due in full on the closing date of
the real estate transaction and is based upon the purchase price of the property
insured or the amount of the secured loan. Coverage under the policy generally
terminates upon resale or refinance of the property. The terms of coverage have
become standardized in accordance with forms approved by trade associations such
as American Land Title Association, Land Title Association of Arizona and
California Land Title Association.
Title insurance policies are issued on the basis of a preliminary
report or commitment. These reports are prepared after a search of public
records, maps and other relevant documents to ascertain title ownership and the
existence of easements, restrictions, rights of way, conditions, encumbrances or
other matters affecting the title to, or use of, real property. A visual
inspection of the property may also be made prior to the issuance of certain
title insurance policies.
To facilitate the preparation of preliminary reports without the
necessity of manually searching public records, copies of public records, maps
and other relevant historical documents are compiled and indexed in a "title
plant." Each title plant relates to a particular county and is kept current on a
daily or other frequent basis by the addition of copies of recorded documents
that affect rights in real property in the particular county. Title companies
often subscribe to independent title information services to assist in the
updating of their title plants and the maintenance of title records.
DIRECT VS. AGENCY SALES. Preliminary reports and commitments to issue
policies are prepared by title underwriters (direct sales) or by independent
agents on behalf of the underwriters (agency sales). The terms and conditions
upon which the real property will be insured are determined in accordance with
the standard policies and procedures of the title underwriter. In direct sales,
the title underwriter issues the preliminary report and commitment and retains
the entire title premium paid in connection with the transaction. In agency
sales, the search and examination function is performed by the independent agent
and the majority of the premium collected is retained by the agent, with the
balance remitted to the title underwriter. Independent agents may select among
several title underwriters based upon the amount of the premium "split" offered,
the overall terms and conditions of the agency agreement, including
indemnification obligations of the agent and the scope of services offered to
the agent by the title underwriter. Agent commissions vary by geographic region.
THE TITLE POLICY PROCESS. A brief description of the process of issuing
a title insurance policy is as follows:
(i) The customer, typically a real estate salesperson or broker,
escrow agent or lender, places an order for a title policy.
(ii) Sales personnel note the specifics of the order and place a
request with the title department for a preliminary report.
(iii) After the relevant historical data on the property is compiled,
the title officer prepares a preliminary report that documents (a)
the current status of title to the property, (b) any exemptions,
exceptions and/or limitations that might be attached to the policy
and (c) specific issues that need to be addressed and resolved by
the parties to the transaction before the title policy will be
issued (such as removal of prior tax liens and payment of prior
loans on the property). The preliminary report is circulated to
all the parties for satisfaction of any specific issues.
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(iv) After all specific issues identified in the preliminary report are
satisfied, the escrow agent closes the transaction in accordance
with the instructions of the parties and the policy conditions.
(v) Once the transaction is closed and all monies have been released,
the policy is issued (a) to the owner and the lender on a resale
transaction or (b) to the lender only on a refinancing
transaction.
LOSSES AND RESERVES. The maximum amount of liability under a title
insurance policy is usually the face amount of the policy plus the cost of
defending the insurer's title against an adverse claim. The reserve for claim
losses is based upon known claims as well as losses the insurer expects to incur
based on historical experience and other factors, including industry averages,
claims loss history, current legal environment, geographic considerations and
type of policy written. Because the Company operates an independent agency, it
provides title insurance on behalf of third party underwriters. As such, the
Company's losses and reserves are less than those carried by a title insurance
underwriter (see Company Operations-Claims and Underwriting).
ECONOMIC FACTORS AFFECTING INDUSTRY. Title insurance revenue is closely
related to the level of activity in the real estate market and the average price
of real estate sales. Real estate sales are directly affected by the
availability of money to finance purchases. Other factors affecting real estate
activity include demand, mortgage interest rates, family income levels and
general economic conditions.
During 1998, there was a significant increase in the refinance market
as a result of the lowest mortgage interest rates in recent history. Low
mortgage rates coupled with a strong economy also had a positive impact on the
volume of residential home sales.
COMPANY STRATEGY
The Company's strategy is to pursue aggressive growth in the title
insurance industry in the Southwestern United States. Essential elements of the
Company's strategy are as follows:
COMMITMENT TO SERVICE. The Company is built on three basic
entrepreneurial premises: (1) every employee is a salesperson for the Company;
(2) the Company's services are a one-stop, computer-based contact point for
complete real estate transactions; and (3) success is achieved through focus on
an unequaled quality of customer service. Because title insurance policies and
escrow functions are generally standardized, the level of service provided is
the key differentiating factor among competitors in the title industry. One of
the Company's objectives is to issue written title reports on substantially all
its transactions within two working days from the opening of escrow. Through its
commitment to customer service, the Company seeks to build lasting relationships
with its real estate industry clients.
MARKET FOCUS. The Company's market focus is on real estate brokers and
mortgage lenders as this business has historically been more consistent and less
prone to fluctuation than commercial, new home sales or refinancing segments of
the market. To set itself apart as a service company, the Company has developed
industry specific information technology that it provides to its clients. The
Company is currently developing a product called "E*TitleGram" that will allow
real estate brokers access to the Company's services through the Internet.
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MANAGEMENT. The Company recognizes that its aggressive growth plan
calls for executive management with extensive industry operational and expansion
experience. The Company was co-founded by Donald R. Head, and he has served as
Chairman of the Board and Chief Executive Officer since inception. Mr. Head has
extensive experience as a developer and entrepreneur within the real estate
industry and has 18 years in the title insurance industry. Additionally, he
served as a board member on several U.S. and Canadian public companies and ran a
successful legal practice in Prescott, Arizona.
The Company appointed Andrew Johns as President effective April 16,
1996. Mr. Johns, the former President of Stewart Title for the State of
California, has nearly 30 years of industry experience, including the expansion
of United Title's Orange County operations throughout the Southern California
market. The Company believes that Mr. Johns has the leadership, experience and
industry contacts required to effect the Company's expansion into the California
Market.
In February, 1998, the Company appointed Milton Ferrantelli, Executive
Vice President of Capital Title Group and President of Capital Title Agency,
Inc.'s Arizona operations. Mr. Ferrantelli purchased United Title Insurance
Agency in 1986 with two active partners and served as its President and Chief
Executive Officer prior to its acquisition by Norwest Financial in 1994. United
Title held the number one market share for title and escrow services in Maricopa
County from 1984 through 1994. Mr. Ferrantelli has over 25 years of experience
in the title and escrow industry in the Arizona marketplace.
In addition, the Company employs eight managers to run the day-to-day
operations in the counties the Company operates in and to support the above
mentioned executives. These managers average over 20 years experience in the
title and escrow industry.
EQUITY PARTICIPATION BY ESCROW OFFICERS. Escrow officers are the major
revenue producers for title insurance companies. It is their business
relationships with real estate brokers, lenders and other industry participants
whom are primarily responsible for the direction of escrow and title business.
The Company will seek to attract the most successful escrow officers (and the
related revenue) through employment packages that include commissions based on
revenue produced and stock options as added motivational incentives. The Company
believes such programs will also promote Company loyalty, which will help to
insulate the Company's escrow officers from competitive recruiting efforts.
EXPANSION. The Company intends to accomplish its planned expansion
through acquisitions of existing title agencies and opening operations in
California and as conditions merit, other states throughout the South and
Southwest. These expanded operations are expected to be enhanced by utilizing
the Company's recruiting strategy that has proven extremely successful in
Arizona.
COMPANY OPERATIONS
The Company reported record revenues for each quarter in 1998 with
revenue up 178% for the year ended December 31, 1998 compared to the year ended
December 31, 1997. Revenue was $23.2 million for the year ended December 31,
1998 compared to $8.3 million for the year ended December 31, 1997. Although the
Company completed a significant acquisition in November 1998, most of the
increase in the Company's revenues in 1998 was attributable to internal growth.
Of the Company's $14.9 million revenue growth from 1997 to 1998, $1.8 million
was attributable to revenue from acquired companies, $1.8 million was
attributable to new start-up operations and $11.3 million was attributable to
increased revenue from expansion of existing operations.
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For the fiscal years ended December 31, 1998 and 1997, revenue from the
issuance of title insurance policies represented 63% and 64%, respectively, of
the Company's consolidated revenues. Escrow and related fees for the years ended
December 31, 1998 and 1997 represented 30% and 26%, respectively, of the
Company's consolidated revenue.
MARKETING. The Company believes that the primary source of its business
is from referrals from participants in the real estate industry such as real
estate brokers, mortgage lenders, developers and attorneys. In addition to the
referral market, the Company markets its services directly to larger brokerages
and real property lenders. Marketing activities are performed by the escrow
officers of the Company and marketing representatives whose sole function is the
solicitation of business from major real estate brokers, developers, owners and
lenders. Escrow officers, in addition to their escrow service duties, maintain
and further develop relationships established with current clients for on-going
business. The marketing representatives hold educational seminars for real
estate brokers, offer the use of "Dataquick" as a service that provides ease in
placing valuations on surrounding property and train brokers and their
assistants in the use of the Company's proprietary industry specific information
technology.
ESCROW SERVICE. The Company's escrow departments are responsible for
handling the consummation of real estate sales, exchanges and a variety of other
transactions involving the sale or encumbrance of real property, refinance of
real property, sales of assets of businesses and sales of promissory notes
secured by deeds of trust.
The escrow officer and assistant typically prepare escrow documents
pursuant to the real estate contract. The escrow instructions provide guidance
to all concerned parties as to the conditions required for the real estate
transaction. Furthermore, the instructions provide authorization for the escrow
agent to request information concerning matters appearing of record, the receipt
of all earnest monies and closing funds, the disbursement of seller proceeds,
payoff of underlying liens, judgments, real property taxes, insurance and any
other disbursement as set forth in the instructions or by the parties to the
transaction. The instructions also include authorization to prepare and obtain
documents necessary to complete the real estate transaction.
The escrow agent is held accountable by state governmental agencies for
strict compliance with its fiduciary responsibilities outlined by the escrow
instructions. The officer must possess a high degree of skill, professionalism
and confidentiality in the handling, preparation, collecting and recordation of
all escrow matters between the buyer, seller, real estate brokers and their
agents, developers, lenders and investors.
TITLE DEPARTMENT. The primary function of the title department is the
accumulation and analysis of various documents from the many sources that make
up the public record. From this analysis, a preliminary report is written
showing the present condition of title. This report is given to the escrow
officer who, in turn, distributes it to the parties involved in the purchase
agreement. After the preliminary report has been read and approved by all the
parties and the requirements of the report have been fulfilled, the escrow will
proceed to closing and a final title insurance policy will be issued.
The accumulation of title data from public records which provides the
history of each parcel of real estate in a particular county is referred to as a
"title plant." The Company has entered into a multi-year service agreements for
title plant access in the counties it operates. In certain counties, the Company
may be a partial owner in a title plant or own a title plant which contains data
prior to the time period covered by a third party title plant provider. The
Company can use the services of a third party title plant provider or acquire
additional title plants for purposes of conducting its title research as it
expands into additional geographic areas. The cost of obtaining title plants
varies with economic and market conditions in the geographic area to which the
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title plants relate. The Company believes it will be able to obtain title plants
on terms and conditions that are acceptable to it through the acquisition of
title companies as the Company expands into other markets; however, there can be
no assurance in this regard.
CLAIMS AND UNDERWRITING. The Company provides title insurance as an
agent of First American, United General, Chicago, Old Republic and Stewart.
These services are provided pursuant to Underwriting Agreements with each of
these underwriters which state the conditions on which the Company is authorized
to issue a title insurance policy on behalf of the underwriter and prescribe the
circumstances under which the Company may be liable to the underwriter if a
policy loss is attributable to errors made by the Company. The underwriting
agreements with First American, United General, Chicago, Old Republic and
Stewart provide that the Company: (1) must fully comply with all requirements
relating to the issuance of title insurance within each of the counties in which
the Company does business and must comply with generally accepted standards of
underwriting; (2) will be liable for any losses payable on a basis of erroneous
reports or in excess of the stated liability on the policy when an insured makes
a successful claim based on negligence; (3) may not write a policy in excess of
the stated contract amount without prior approval from the insurance company;
and (4) will be liable for the first $5,000 of each loss, unless specifically
waived by the insurance company. The Company is not an exclusive agent for First
American, United General, Chicago, Old Republic or Stewart.
Claims against title insurance policies normally arise out of human
error. During the process of accumulation and analysis of the public record,
certain inaccuracies and inconsistencies are encountered that sometimes result
in a situation in which interpretation of these documents could lead to a claim.
Such claims are reviewed by the Company's staff and, if warranted, sent to the
insurance carrier for final disposition.
Underwriting is the process of analyzing risk assumption. As each
individual situation arises, the local staff makes a risk analysis. If the local
underwriting staff decides that the risk assumption is outside its underwriting
authority, the insurance carrier is contacted for its underwriting approval.
The Company assumes the entire risk of losses incurred in errors made
during the escrow process; however, it has secured insurance coverage to limit
any significant losses.
ACCOUNT SERVICING. The account servicing department handles the receipt
and disbursement of monies for accounts with respect to which the Company acts
as servicing agent for a transaction. Its responsibility as trustee includes the
maintenance of all records reflecting receipts and disbursements, calculation of
total interest, principal and any other sums due as required under the
agreement/note between the buyer and the seller. This information is summarized
and reported to the Internal Revenue Service with the appropriate Form 1098
and/or 1099 supplied to the buyer and the seller. Following the payoff of
accounts, the servicing agent prepares and records the appropriate documents
necessary to substantiate accounts as paid in full in the applicable county
records. Typically, transactions serviced by the Company include promissory
notes secured by deeds of trust and agreements of sale.
FORECLOSURES. Both promissory notes secured by deeds of trust and
agreements of sale can be foreclosed non-judicially by the servicing agent. As
trustee of the documents being serviced by the Company, the seller and/or
beneficiary can direct the servicing agent, at the time of default, to proceed
with foreclosure of the lien.
The maintenance of accurate up-to-date accounting and control of all
original documents enable the trustee/servicing agent to expedite the
non-judicial trustee sale or foreclosure.
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ADMINISTRATION. The Company's administrative staff handles general
accounting and finance, human resources, purchasing, management information
systems and regulatory compliance.
CUSTOMERS
The Company is not dependent upon any single customer or single group
of customers. The loss of any one customer would not have a material adverse
effect on the Company.
SEASONALITY
The title insurance business is closely related to overall levels of
real estate activity. Historically, real estate activity slows down in the
winter months with volumes showing significant improvements in the spring and
summer months. In addition, the title insurance business is cyclical due to the
effect of interest rate fluctuations on the level of real estate activity.
Periods of high interest rates adversely effect real estate activity and
therefore premium and escrow revenues.
COMPETITION
The title insurance business is highly competitive. Companies with
significant market share in Arizona and California include First American,
Chicago, Old Republic, Security Title, ATI Title Agency, Fidelity Title, Lawyers
Title, and American Title. The number and size of competing companies varies in
different geographic areas. In those areas where the Company operates and
intends to operate the Company will face competition from major national
insurance underwriters and other independent agencies, many of which have
financial and other resources greater than those of the Company. The Company
believes that quality and timeliness of service are the key competitive factors
in the industry because parties to a real estate transaction are usually
concerned with time schedules and costs associated with delays in the closing of
transactions. In those states where prices are not established by regulation,
the price of title insurance is also an important competitive factor.
REGULATION
The Company conducts its business under licenses granted by the State
Banking and Insurance Departments of the State of Arizona and the Department of
Insurance in California. The title insurance and escrow businesses generally are
subject to extensive regulation under applicable state laws. These laws
establish supervisory agencies with broad administrative powers relating to
issuing and revoking licenses, regulating trade practices, licensing agents,
approving policy forms and approving rate schedules. Failure to comply with
these regulations or an inability to secure or maintain any required licenses
could materially adversely affect the Company's business. The Company believes
that it is in material compliance with applicable laws and regulations and that
it will maintain and obtain all licenses required for the conduct of its
business.
EMPLOYEES
As of December 31, 1998, the Company had a total of 477 employees, of
which 296 are located in Arizona and 181 are in California. The Company believes
that its relations with its employees are excellent.
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ITEM 2. PROPERTIES
The Company conducts its business operations primarily in leased office
space. The Company currently leases offices at 38 locations with remaining lease
periods ranging from one to sixty months. The Company's monthly rental payments
at the foregoing locations are approximately $172,000. In addition, the Company
owns three buildings in Northern California totaling approximately 38,000 square
feet. The Company is currently constructing, and will own, a 24,000 square foot
building in Phoenix, Arizona to house its corporate headquarters and its
Maricopa County operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain legal actions which arise in the
normal course of its title business. The Company believes that none of these
claims are material, either individually or in the aggregate.
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 ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been quoted on The Nasdaq SmallCap
Market under the symbol "CTGI" since September 21, 1998 and on the OTC
Electronic Bulletin Board market from May 15, 1997 to September 20, 1998.
The following table sets forth high and low bid prices of the Company's
Common Stock for the periods indicated. Bid quotations represent interdealer
prices, without retail mark-up, mark-down or commissions and may not represent
actual transactions.
Date High/Bid Low/Bid
---- -------- -------
1997
Second Quarter (beginning May 15) $3.00 $2.50
Third Quarter 2.38 1.50
Fourth Quarter 1.81 1.50
1998
First Quarter 2.56 1.56
Second Quarter 3.62 2.63
Third Quarter 4.50 3.25
Fourth Quarter 4.06 3.38
1999
First Quarter (through March 19) 3.69 3.00
As of December 31, 1998, the Company had issued and outstanding
16,926,791 shares of common stock. In addition, 2,400,000 shares are reserved
for issuance under the Company's 1996 Stock Option Plan and 370,000 shares are
reserved for issuance under the Company's Directors Non-Employee Plan. (See Item
11 "Security Ownership of Certain Beneficial Owners and Management.") At
December 31, 1998, there were 313 record holders of the Company's Common Stock.
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In March 1998, the Company issued 463,500 warrants in conjunction with
a private placement. Each warrant entitles the holder to purchase one share of
the Company's common stock at $2.50 until March 31, 2000. In April 1998, the
Company issued 308,642 warrants to an investment banking firm that acted as
placement agent in connection with private placement. Each warrant entitles the
holder to purchase one share of the Company's common stock at $1.62 until May 1,
2001.
In February 1998, the Company issued $125,000 in convertible notes for
the purpose of obtaining capital to open one additional branch in Maricopa
County, Arizona. The convertible notes require payment of interest only for
eighteen months at an interest rate equal to the prime rate plus 2 1/2%. At any
time within the eighteen months, the note holders will have the option of
converting the obligation into common stock of the Company at $2.00 per share.
The convertible notes are secured by furniture and equipment in the respective
branch.
The Company has never paid a dividend on its Common Stock. The Company
does not anticipate paying any dividends on its Common Stock in the foreseeable
future. Rather, the Company anticipates that its earnings, if any, will be
retained to fund the Company's working capital needs and the planned expansion
of its business. The payment of any dividends will be dependent upon the
discretion of the Board of Directors. Furthermore, under Delaware corporate law,
in the absence of current or retained earnings, the Company may be prohibited
from paying dividends (whether in cash or otherwise).
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the results of the operations and financial
condition of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
report. Historical results and percentage relationships among accounts are not
necessarily an indication of trends in operating results for any future period.
OVERVIEW
During 1998, the Company's primary business was providing title and
escrow services in Maricopa and Yavapai County, Arizona. The significant growth
the Company experienced in 1998 resulted from acquisitions in California,
startup operations in California and Mohave County, Arizona and further
expansion and market share increase in Maricopa and Yavapai County, Arizona.
Management believes the expansion in existing operations results in part from a
recruitment program which allows each employee of the Company to become an owner
of the Company through the Company's employee stock option plan, a management
philosophy which allows each branch manager to operate their branch as if it was
their own company and superior technology which allows for more efficient
processing of title and escrow services. The Company will continue to use this
philosophy and technology as it continues to expand its operations.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
components of the Company's revenue and expenses along with the percentage they
bear to total revenue:
<TABLE>
<CAPTION>
For The Years Ended,
----------------------------------------------------------
December 31, December 31, October 31,
------------------ ----------------- -----------------
1998 % 1997 % 1996 %
----------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Title insurance premiums $14,634,442 63.0% $5,359,001 64.2% $1,451,479 56.2%
Escrow and related fees 7,030,248 30.3 2,190,641 26.2 695,995 26.9
Account servicing 504,813 2.2 341,292 4.1 314,939 12.2
Other fees 248,727 1.1 186,151 2.2 16,947 .7
Interest income 787,995 3.4 271,419 3.3 103,295 4.0
----------- ----- ---------- ----- ---------- -----
$23,206,225 100.0% $8,348,504 100.0% $2,582,655 100.0%
=========== ===== ========== ===== ========== =====
Personnel cost $11,186,564 48.2% $4,650,618 55.7% $1,958,292 75.8%
Escrow commissions 2,249,468 9.7 519,670 6.2 24,768 1.0
Title remittance fees 1,459,452 6.3 494,776 5.9 170,933 6.6
Rent 1,254,010 5.4 692,732 8.3 296,058 11.5
Other operating expenses 5,121,998 22.1 2,206,402 26.4 1,162,762 45.0
Interest expense 99,257 .4 71,458 .9 17,835 .7
=========== ----- ========== ----- ========== -----
$21,370,749 92.1% $8,635,656 103.4% $3,630,648 140.6%
=========== ===== ========== ===== ========== =====
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
The Company's revenues increased by $14,857,721 or 178% for the year
ended December 31, 1998 as compared to the year ended December 31, 1997.
Approximately $3,626,000 of this increase resulted from acquisitions and startup
operations. The remaining increase is attributable to the Company's expansion
and increased market share in Maricopa and Yavapai counties, Arizona, a
favorable real estate market and favorable interest rates.
The Company's revenue from title insurance premiums and escrow fees is
primarily from three sources. The largest revenue source is from residential
resales. The current residential resale marketing projections for the counties
in which the Company operates predict that the resale market should continue to
be strong as new house prices continue to climb and mortgage interest rates
remain at their current low levels. The Company's marketing plan is to have the
vast majority of the Company's title and escrow revenue be derived from the
resale business. Historically, the resale business has been more consistent and
less subject to fluctuations than commercial, new homes sales, or refinancing
segments of the market. The commercial, new home sales and refinancing markets
tend to be more influenced by interest rates and other economic conditions.
Conventional real estate lending and refinancing make up the next
largest component of the Company's title and escrow revenue. There was an
increase in the refinance market during 1998 as a direct result of the lowest
mortgage interest rates in recent history. Included in this category is the
conventional real estate lending business, which, like residential resales, is
less affected by interest rate fluctuations. The Company was in an ideal
position, due to its technological and service reputation, to take advantage of
the strong refinance market in 1998.
12
<PAGE>
Commercial transactions made up less than 4% of the Company's title and
escrow revenue in 1998 compared to approximately 5% during 1997. The Company has
a separate commercial escrow unit in Maricopa County which accounts for a
majority of the Company's commercial business. The decrease in commercial
business as a percent of total title and escrow revenue is due to a higher mix
of residential resales and refinance business, as the overall volume of
commercial business increased in 1998 compared to 1997.
During the year ended December 31, 1998, there were approximately
$1,270,000 of operating expenses (net of revenue recognized) related to startup
costs for the Company's San Diego, California and Mohave County operations and
from costs associated with the Company's property and casualty insurance agency.
Excluding the startup costs (net of revenue recognized) of $1,270,000, income,
before income taxes, from existing operations would have been approximately
$3,105,000 for the year ended December 31, 1998.
Personnel costs, including commissions, are the most significant
component of the Company's operating expenses. Due to the growth the Company has
been experiencing since initiating its business plan, the number of people
employed by the Company increased from 175 on December 31, 1997 to 477 on
December 31, 1998. For the year ended December 31, 1998, personnel costs
including commissions were 57.9% of total revenue compared to 61.9% of total
revenue for the year ended December 31, 1997. This decrease was a result of
higher productivity and the somewhat fixed nature of those expenses in relation
to the increase in revenue.
Title remittance fees relate to the amounts paid pursuant to title
insurance underwriting agreements the Company has with five national title
companies. Title remittance fees as a percentage of revenue have remained
relatively unchanged when comparing 1998 results with fiscal year 1997.
Rent expense decreased as a percentage of revenue in the year ended
December 31 1998 to 5.4% from 8.3% in 1997. These decreases were the result to
the fixed nature of these costs in relation to the increase in revenue.
The significant components of other operating expenses include
supplies, utilities, insurance, depreciation, title plant maintenance and
access, postage and professional fees. Other operating expenses decreased as a
percentage of total revenue to 22.1% in 1998 from 26.4% in 1997. This decrease
was the result of the relatively fixed nature of most of these expenses in
relation to the increase in revenue.
An income tax provision of $159,449 was recorded for the year ended
December 31, 1998 based on the estimated annual effective tax rate after giving
consideration to the available net operating loss carryforward. As of December
31, 1998, the Company's net operating loss carryforward has been fully utilized.
FISCAL 1997 COMPARED TO FISCAL 1996
In December 1996, the Company elected to change its year end from
October to December. These discussions compare the fiscal year ended October 31,
1996 to the calendar year ended December 31, 1997.
The Company's revenues increased by $5,765,849 or 223% for the fiscal
year ended December 31, 1997 as compared to the fiscal year ended October 31,
1996. The revenue increase is attributable to the Company's expansion into and
increased market share in Maricopa County, Arizona, increased market share in
Yavapai County, Arizona, a favorable real estate market and favorable interest
rates.
13
<PAGE>
Personnel costs, including commissions, are the most significant
component of the Company's operating expenses. Due to the growth the Company has
been experiencing since initiating its growth plan, personnel costs increased
137% for the fiscal year ended December 31, 1997 compared to the fiscal year
ended October 31, 1996. The number of people employed by the Company increased
from 112 on December 31, 1996 to 175 on December 31, 1997. For the fiscal year
ended December 31, 1997, personnel costs including commissions were 61.9% of
total revenue compared to 76.8% of total revenue for the year ended October 31,
1996.
Title remittance fees relate to the amounts paid pursuant to title
insurance underwriting agreements the Company has. Title remittance fees as a
percentage of revenue decreased when comparing 1996 results with fiscal year
1997 due to more favorable terms in the underwriting agreements.
Rent expense decreased as a percentage of revenue in the year ended
December 31, 1997 to 8.3% from 11.5% in 1996. These decreases were the result of
the fixed nature of these costs in relation to the increase in revenue.
The significant components of other operating expenses include
supplies, utilities, insurance, depreciation, title plant maintenance and
access, postage and professional fees. Other operating expenses decreased as a
percentage of total revenue to 26.4% in 1997 from 45.0% in 1996. This decrease
was the result of the relatively fixed nature of most of these expenses in
relation to the increase in revenue.
LIQUIDITY AND CAPITAL RESOURCES
Capital Title Group requires capital to expand its geographical base,
make acquisitions, further implement its market penetration program, recruit and
train new personnel and purchase additional property and equipment to implement
its expansion program. During the year ended December 31, 1998, the Company
financed its operating and business development activities through operating
revenue, through the private placement of shares of common stock which resulted
in net proceeds to the Company of approximately $5,951,000 and through a private
placement and convertible debentures which resulted in net proceeds to the
Company of $125,000.
On March 31, 1998, the Company completed a private placement of 463,500
units at $3.00 per unit. Each unit consisted of two shares of common stock and a
warrant to purchase one share of common stock at a per share price of $2.50
within a two year period. The net proceeds from this private placement were
approximately $1,300,000.
On April 30, 1998 the Company completed a $5,000,000 private placement
of common stock in which 3,703,703 shares of common stock were issued at $1.35
per share. In addition, the Company issued three-year warrants to purchase an
additional 308,642 shares of common stock at $1.62 per share to the investment
banking firm that acted as placement agent in the transaction. The net proceeds
from this private placement of approximately $4,400,000 were used by the Company
to support expansion of its business in Arizona and California and for working
capital and general corporate purposes.
On October 29, 1998, the Company issued 86,712 shares of common stock
to developers in a transaction to acquire a build-to-suit building for its
corporate offices. In addition, the Company has obtained a loan commitment in
the amount of $3,650,000 to finance the building. This 10 year non-recourse loan
with a 25 year amortization will bear interest at approximately 7.4%.
14
<PAGE>
At December 31, 1998, the Company had current assets totaling
$6,180,454 compared to current liabilities which totaled $3,853,655. Management
believes that cash on hand and future cash flow from operations will be
sufficient to meet the Company's expansion plans and to pay all obligations as
they become due.
In February 1999, the Company secured a $5,000,000 credit facility from
a bank which will bear interest on any outstanding balance at the prime rate.
This credit facility is comprised of a $2,000,000 revolving line of credit and a
$3,000,000 term loan to be used for future acquisitions. No amounts have been
drawn against this credit facility.
YEAR 2000 ISSUE
Many older computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by the year 2000.
The Company has examined its operating systems and, with the exception
of nine offices recently acquired in Northern California, believes that its
operations are currently year 2000 compliant. The computer systems and programs
currently used by the nine offices the Company acquired from Northwestern
Consolidated Corporation are not year 2000 compliant; however, it was the
Company's intentions at the time of the acquisition to replace these systems
prior to December 1999 with technology and programs similar to those used in its
other operations. It is estimated that the costs associated with purchasing and
installing this technology will be approximately $620,000. These costs,
consisting primarily of hardware and software purchased and installed by third
party vendors, will be capitalized and will have a nominal impact on results of
operations.
The Company has initiated formal communications with all of its
significant suppliers, larger customers and other parties of which the Company
electronically interacts to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own year 2000 issues. The Company is not aware of any significant impact
on its operations that would result from third party year 2000 issues based on
presently available information. However, there can be no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted and would not have an adverse effect on the Company's systems.
The Company's business and financial transactions are processed on
local area networks comprised of relatively new personal computers and servers.
As a contingency plan, in the event of any unforseen problems related to
communications or third party interface, the Company could input, process and
store data on stand-alone networks until such problems could be remedied. This
contingency plan would, however, be negatively impacted in the event of a
catastrophic failure in banking systems and the failure of systems related to
county recorders.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB contains certain forward-looking
statements. The forward-looking statements contained herein are based on current
expectations that involve a number of risks and uncertainties. Among others,
these forward-looking statements are based on assumptions that (a) the volume of
real estate transactions in the Company's market areas will remain at sufficient
levels to support the company's business, (b) the Company will be able to
successfully integrate acquired businesses and the results of operations
therefrom will support the acquisition price, (c) that the Company will be able
to retain, and when needed, add key personnel, (d) that the Company's forecasts
will accurately anticipate market demand, (e) that there will be no material
adverse changes in the Company's existing operations, (f) the Company will be
able to obtain sufficient equity or debt funding to increase its capital
resources by the amount needed for new business acquisitions, if any and (g) the
Company will not suffer from problems related to Year 2000 issues. Assumptions
related to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions, and future business
decisions, all of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the results contemplated in forward-looking
statements will be realized. In addition, the business and operations of the
Company are subject to substantial risks, which increase the uncertainty
inherent in such forward-looking statements. In light of the significant
uncertainties inherent in the forward-looking information included herein, the
inclusion of such information should not be regarded as a representation by the
Company, or any other person, that the Company's plans or objectives will be
achieved.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Report of Independent Auditors
Shareholders and Board of Directors
Capital Title Group, Inc.
We have audited the accompanying consolidated balance sheets of Capital
Title Group, Inc. and Subsidiaries (the Company) as of December 31, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the two years in the period ended December
31, 1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company at December 31, 1998 and 1997, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Phoenix, Arizona
March 5, 1999
17
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1998 1997
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 4,833,826 $ 198,903
Accounts receivable, net 364,725 109,906
Notes and other receivables 406,028 36,287
Other current assets 575,875 16,554
----------- -----------
Total Current Assets 6,180,454 361,650
Property and Equipment, net 8,863,133 1,560,655
Other Assets:
Notes receivable 231,531 --
Investment in title plant 520,249 175,000
Deposits and other assets 312,693 90,823
Property held for investment 161,270 65,696
Goodwill 259,024 --
=========== ===========
Total Assets $16,528,354 $ 2,253,824
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 532,346 $ 553,119
Accounts payable 664,737 317,003
Accrued expenses 2,656,572 150,647
----------- -----------
Total Current Liabilities 3,853,655 1,020,769
Long-Term Debt 1,766,815 415,362
Other Liabilities 117,905 --
Stockholders' Equity:
Common stock, $.001 par value, 50,000,000
shares authorized,16,926,791 and 11,231,029
shares issued and outstanding in 1998
and 1997, respectively 16,927 11,231
Additional paid-in capital 10,944,294 2,653,731
Accumulated deficit (171,242) (1,847,269)
----------- -----------
Total Stockholders' Equity 10,789,979 817,693
----------- -----------
Total Liabilities and Stockholders' Equity $16,528,354 $ 2,253,824
=========== ===========
The accompanying notes are an integral part
of the consolidated financial statements
18
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1998 1997
----------- -----------
REVENUE:
Title insurance premiums $14,634,442 $ 5,359,001
Escrow and related fees 7,030,248 2,190,641
Account servicing 504,813 341,292
Other income 248,727 186,151
Interest income 787,995 271,419
----------- -----------
23,206,225 8,348,504
----------- -----------
EXPENSES:
Personnel costs 11,186,564 4,650,618
Escrow commissions 2,249,468 519,670
Title remittance fees 1,459,452 494,776
Rent 1,254,010 692,732
Other operating expenses 5,121,998 2,206,402
Interest expense 99,257 71,458
----------- -----------
21,370,749 8,635,656
----------- -----------
Income (loss) before income taxes 1,835,476 (287,152)
Income tax provision (benefit) 159,449 (42,434)
----------- -----------
Net income (loss) $ 1,676,027 $ (244,718)
=========== ===========
Net income (loss) per common share:
Basic $ .11 $ (0.02)
=========== ===========
Diluted $ .11 $ (0.02)
=========== ===========
Weighted average shares outstanding:
Basic 14,566,390 11,088,029
=========== ===========
Diluted 15,938,041 11,088,029
=========== ===========
The accompanying notes are an integral part
of the consolidated financial statements
19
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
-------------------- Paid-in Accumulated
Shares Par Value Capital Deficit
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 10,316,029 $10,316 $ 1,757,346 $(1,602,551)
Shares issued in private placement,
net of costs of $17,700 915,000 915 896,385 --
Net loss -- -- -- (244,718)
---------- ------- ----------- -----------
Balance at December 31, 1997 11,231,029 11,231 2,653,731 (1,847,269)
Shares issued in private placements,
net of costs of $754,000 4,727,415 4,728 5,946,886 --
Shares issued in connection with
options exercised 7,700 7 7,693 --
Shares issued in connection with
convertible debentures 250,000 250 249,750 --
Shares issued in connection with
acquisitions 710,647 711 2,086,234 --
Net income -- -- -- 1,676,027
---------- ------- ----------- -----------
Balance at December 31, 1998 16,926,791 $16,927 $10,944,294 $ (171,242)
========== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
20
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,676,027 $ (244,718)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 678,658 293,212
Changes in operating assets and liabilities, net
of effects from purchase of subsidiaries:
Accounts receivable (182,420) (91,197)
Income taxes receivable -- 25,796
Notes and other receivables (102,836) 36,287
Other current assets (492,979) (32,635)
Deposits and other assets (97,052) (32,124)
Accounts payable 198,767 (232,563)
Accrued expenses 753,728 79,437
Other liabilities 39,905 --
----------- ----------
Net Cash Flows - Operating Activities 2,471,798 (198,505)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,192,277) (746,922)
Property held for sale -- (21,500)
Purchase of subsidiaries, net cash 209,921 --
Purchase of title plant (97,447) --
----------- ----------
Net Cash Flows - Investing Activities (3,079,803) (768,422)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings 125,000 401,126
Debt service payments (581,254) (208,959)
Proceeds from the issuance of stock, net 5,699,182 897,300
----------- ----------
Net Cash Flows - Financing Activities 5,242,928 1,089,467
----------- ----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 4,634,923 122,540
CASH AT THE BEGINNING OF THE YEAR 198,903 76,363
----------- ----------
CASH AT THE END OF THE YEAR $ 4,833,826 $ 198,903
=========== ==========
The accompanying notes are an integral part
of the consolidated financial statements
21
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF CORPORATION:
Capital Title Group, Inc. (the "Company") is a Delaware corporation which acts
as the parent holding company of the following subsidiaries.
Capital Title Agency, Inc. ("Capital Title") is an Arizona corporation which has
operated under the authority of the State Banking Commission since November 1,
1981. Capital Title is an independent title agency providing escrow services
and, as an agent for four title insurance companies, issues title insurance
policies to the real estate industry in Maricopa, Yavapai and Mohave Counties in
Arizona. As of March 1, 1999 Capital Title operated 28 offices located
throughout Maricopa, Yavapai and Mohave Counties in Arizona.
New Century Title Company ("New Century"), a California corporation, purchased a
dormant escrow and title agency in San Diego, California and began operations as
an independent title agency in July 1998.
New Century Title Company of Northern California ("New Century of Northern
California") is a California corporation which acquired Northwestern
Consolidated Corporation and its subsidiaries in November 1998. New Century of
Northern California is an independent title agency providing escrow services
and, as an agent for a title insurance company, issues title insurance policies
to the real estate industry in Sonoma, Contra Costa and Alameda Counties in
California. New Century of Northern California currently operates nine offices
in the San Francisco region.
New Century Insurance Services, Inc. ("NCIS"), an Arizona corporation, was
formed in January 1998 as an independent property and casualty insurance agency.
NCIS began operations in April 1998. Effective in January 1999, the Company
decided to exit the property and casualty insurance market and accordingly, sold
an 80% interest in NCIS to NCIS's president.
BASIS OF PRESENTATION:
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All material inter-company accounts
and transactions have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and the accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include all highly liquid investments purchased with
an initial maturity of three months or less.
22
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACCOUNTS RECEIVABLE:
The Company uses the allowance method to account for non-collectible accounts
receivable. The allowance is established based upon a review of the individual
accounts and the Company's prior collection history. The allowance for
non-collectible accounts was $27,942 and $13,752 in 1998 and 1997, respectively.
INCOME RECOGNITION:
Title insurance premiums and escrow fees are recognized as revenue at the time
of closing of the related real estate transaction. Income from account servicing
and other fees is recognized when the service is performed. Income from
insurance recoveries is recognized when the dispute is settled and the money is
received.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and are being depreciated on a
straight-line basis over estimated useful lives and consist of the following:
Useful Lives 1998 1997
-------------- ----------- ----------
Land and construction in progress N/A $ 1,872,271 $ --
Buildings and leasehold improvements 10-40years 4,174,975 285,113
Office equipment 5years 4,533,085 1,683,472
Furniture and fixtures 7years 2,583,289 273,048
Vehicles 5years 270,098 61,418
----------- ----------
13,433,718 2,303,051
Less: accumulated depreciation and
amortization (4,570,585) (742,396)
----------- ----------
$ 8,863,133 $1,560,655
=========== ==========
CAPITAL LEASE OBLIGATION:
The Company is the lessee of office equipment under capital lease agreements
which expire throughout the year 2000. The asset and liability under the capital
lease are recorded at the lower of the present value of the minimum lease
payments or the fair market value of the asset. The asset is amortized over the
lower of its related lease term or its estimated productive life.
TITLE PLANT:
Title plants are recorded at the cost incurred to construct and organize
historical title information to the point it can be used to perform title
searches. Cost incurred to maintain, update and operate title plants are
expensed as incurred. Title plants are not amortized as they are considered to
have an indefinite life if maintained.
23
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
GOODWILL:
The Company recorded approximately $263,000 of goodwill related to cost in
excess of net assets acquired pursuant to its purchase of a title agency in San
Diego, California. Goodwill is being amortized over twenty years and accumulated
amortization at December 31, 1998 was approximately $4,000.
INCOME TAXES:
The Company and its subsidiaries file consolidated federal and state income tax
returns. The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards Statement No. 109 ACCOUNTING FOR INCOME TAXES.
Statement 109 provides that deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax basis, and the utilization of the net operating loss
("NOL") carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
EARNINGS PER SHARE:
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
EARNINGS PER SHARE. Statement 128 replaced the calculation of primary and fully
diluted earnings per share ("EPS") with basic and diluted EPS. Unlike primary
EPS, basic EPS excludes any dilutive effects of options, warrants and
convertible securities. Diluted EPS is very similar to the previously reported
fully diluted EPS.
The following table sets forth the computation of basic and diluted EPS:
<TABLE>
<CAPTION>
For the year ended December 31,
------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
Per share Per share
Net income Shares amount Net loss Shares amount
---------- ------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $1,676,027 14,566,390 $0.11 $(244,718) 11,088,029 $(0.02)
===== ======
Effect of Dilutive Securities:
Stock options -- 1,237,569 -- --
Warrants -- 134,082 -- --
---------- ---------- --------- ----------
Diluted EPS $1,676,027 15,938,041 $0.11 $(244,718) 11,088,029 $(0.02)
========== ========== ===== ========= ========== ======
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company discloses fair value information about financial instruments where
it is practicable to estimate their value in accordance with Statement No. 107,
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company estimates
that the carrying value of its financial instruments, consisting of cash, cash
equivalents, certificates of deposit, notes receivable and debt obligations
approximate their fair values at December 31, 1998 and 1997.
24
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
2. ACQUISITION:
In November 1998, the Company acquired Northwestern Consolidated Corporation for
a purchase price of approximately $3.5 million in cash and 665,647 restricted
shares of its common stock. The merger which is being accounted for as a
purchase was effective November 1, 1998.
The assets acquired and liabilities assumed in this acquisition were as follows:
Assets acquired at fair value $7,917,911
Liabilities assumed at fair value (2,454,351)
==========
Total purchase price $5,463,560
==========
The unaudited proforma results of operations, assuming this acquisition
occurred at the beginning of each period presented, are indicated in the
following table. These unaudited proforma results have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the combination been in effect
on the dates indicated.
Year ended December 31,
1998 1997
----------- -----------
Revenue $31,583,000 $17,972,000
Net income (loss) $ 2,335,000 $ (323,000)
Basic EPS $ 0.15 $ (0.03)
Diluted EPS $ 0.14 $ (0.03)
3. CASH IN ESCROW:
The Company is the custodian of cash deposited by customers with specific
instructions as to its disbursement from active escrow, trust and account
servicing. The balances in these accounts have not been included in these
financial statements. As of December 31, 1998, the accounts contain balances of
approximately $82,938,000.
4. CONCENTRATION OF CREDIT RISK:
The Company maintains cash and cash equivalents with various financial
institutions. Deposits not to exceed $100,000 at each institution are insured by
the Federal Deposit Insurance Corporation. At December 31, 1998, the Company had
uninsured cash and cash equivalents of approximately $1,297,000.
25
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. INCOME TAXES:
The income tax provision (benefit) consists of the following:
Year Ended December 31,
1998 1997
-------- --------
Current tax provision (benefit) $119,544 $(42,434)
Deferred tax provision 39,905 --
-------- --------
$159,449 $(42,434)
======== ========
The income tax benefit for the year ended December 31, 1997 related to income
tax refunds received from the IRS due to NOL carrybacks the Company utilized.
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. Significant components of
the Company's deferred tax assets as of December 31, 1998 and 1997 are as
follows:
1998 1997
--------- ---------
Accounts receivable $ 5,501 $ 3,160
Property and equipment (115,980) (32,183)
Alternative minimum credit 70,574 --
Loss carryforwards -- 312,140
--------- ---------
(39,905) 283,117
Less: valuation allowance -- (283,117)
========= =========
$ (39,905) $ --
========= =========
At December 31, 1998, the Company has fully utilized its net operating loss
carryforwards of approximately $1,750,000 for federal and state income tax
purposes.
The reconciliation of the provision (benefit) for income taxes with the expected
income taxes based on the statutory federal income tax rate is as follows:
Year Ended December 31,
1998 1997
--------- --------
Expected income tax provision (benefit)
at the federal statutory rate $ 642,106 $(97,632)
State income taxes net of federal benefit 16,154 --
Effect of rate schedule (5,334) --
Effect of net permanent differences 15,612 7,547
Effect of alternative minimum tax 70,574 --
Utilization of net operating loss carryover (579,663) --
Net operating loss unutilized -- 47,651
--------- --------
$ 159,449 $(42,434)
========= ========
26
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. LONG TERM DEBT:
Long term debt consists of the following:
1998 1997
---------- ---------
8.75% note payable to Imperial Bank of
California, with monthly principal
installments of $1,417 plus accrued interest,
due February 2000; secured by building. $1,523,969 $ --
8.2% note payable to Imperial Bank of
Arizona, with monthly installments of $11,000
including principal and interest, due
November 1999; secured by furniture and
equipment 105,978 223,980
8% note payable to an individual, with
monthly installments of $435, including
principal and interest, due October 2011;
secured by land. 41,173 42,972
8.5% credit line to Imperial Bank of Arizona,
with monthly installments of accrued
interest, credit line matures November 1999;
secured by furniture and equipment. The
maximum credit line limit is $250,000. -- 151,126
10% note payable to a related corporation,
with monthly installments of $3,187, due
January 2001, unsecured. -- 101,115
Note payable to Imperial Bank of California,
with monthly interest payments at prime plus
1%; principal due March 1999 36,000 --
Various notes payable with interest rates
ranging from 8.75% to 10.5%; secured by
automobiles -- 15,405
Convertible notes 125,000 250,000
Capital lease obligations, with varying rates
of 9% to 13% throughout the year 2000;
secured by equipment. 467,041 183,883
---------- --------
2,299,161 968,481
Less: current portion (532,346) (553,119)
---------- --------
$1,766,815 $415,362
========== ========
During the year ended December 31, 1997, the Company issued $250,000 in
convertible notes for the purpose of obtaining capital to open two new escrow
branches. The convertible notes require payment of interest only for eighteen
months at an interest rate equal to the prime rate (in effect) plus 2 1/2%. At
any time within the eighteen months, the note holders will have the option of
converting the obligation into common stock of the Company at $1.00 per share.
On October 16, 1998, holders of the Company's convertible notes elected to
convert $250,000 of the notes into 250,000 shares of the Company's common stock.
27
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On February 2, 1998, the Company issued $125,000 in convertible notes for the
purpose of obtaining capital to open a new branch in Maricopa County, Arizona.
The convertible notes have the same terms as those described above with the
exception that they are convertible into common stock of the Company at $2.00
per share. The convertible notes are secured by furniture and equipment in the
respective branch.
As of December 31, 1998 no amounts were drawn on the Company's $250,000 credit
line; however $150,000 was committed for a standby letter of credit required
pursuant to an office lease.
In February 1999, the Company secured a $5,000,000 credit facility from a bank
which will bear interest on any outstanding balance at the prime rate. This
credit facility is comprised of a $2,000,000 revolving line of credit and a
$3,000,000 term loan to be used for future acquisitions. No amounts have been
drawn against this credit facility
The maturities of long-term Debt as of December 31, 1998 were as follows:
1999 $ 532,346
2000 1,654,694
2001 60,777
2002 15,131
2003 6,156
Thereafter 30,057
----------
$2,299,161
==========
7. OPERATING LEASE COMMITMENTS:
The Company leases offices at 38 locations. The remaining lease periods range
from one month to sixty months with renewal options up to ten years. For the
years ended December 31, 1998 and 1997 rental expense was $1,254,010 and
$692,732 respectively.
The Company's future minimum lease commitments as of December 31, 1998 were as
follows:
1999 $1,626,620
2000 1,132,984
2001 912,671
2002 698,790
2003 415,391
Thereafter 119,925
----------
$4,906,381
==========
28
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. RELATED PARTY TRANSACTIONS:
During the years ended December 31, 1998 and 1997 the Company paid $55,866 and
$41,260 respectively, to Dale A. Head for legal services. Dale A. Head is Donald
R. Head's brother. In October 1998, the Company hired Dale A. Head as Executive
Vice President and General Counsel.
9. CONTINGENCIES AND UNCERTAINTIES:
The Company is a defendant in various lawsuits and claims, which it is
vigorously defending. It is management's contention that such matters arise out
of the normal course of business, primarily related to title and escrow
disputes. While the results of litigation cannot be predicted with certainty,
management believes, based on the advice of legal counsel, that the final
outcome of such lawsuits and claims will not have a material adverse effect on
the Company's financial position, results of operations, or liquidity. As of
December 31, 1998 and 1997, the Company had accrued $173,000 and $37,200,
respectively, for possible title and escrow losses.
10. SUPPLEMENTARY CASH FLOW INFORMATION:
The following supplemental cash flow information is provided with respect to
interest and tax payments, as well as certain non-cash investing and financing
activities.
Year Ended December 31,
1998 1997
---------- ------------
Cash paid (refunded) during the year:
Interest $ 99,257 $ 71,458
Income taxes -- (68,230)
Non-cash investing and financing activities:
Equipment purchased under capital leases 372,270 141,612
Conversion of convertible debt 250,000 --
Shares issued in connection with a building purchase 260,136 --
Acquisition of New Century Title Company 95,000 --
Acquisition of Northwestern Consolidated Corporation 806,556 --
11. EMPLOYEE BENEFIT PLAN:
PROFIT SHARING PLAN:
The Company maintains a profit sharing plan under Section 401(k) of the Internal
Revenue Code. Under this plan, substantially all full-time employees may elect
to defer up to 15% of their salary. The Company contributes $.25 for every $1.00
the employee contributes, up to a maximum of four percent of the employee's
earnings. Vesting of matching contributions is based on certain service
requirements. Employees are fully vested after six years of service.
Employer contributions for the years ended December 31, 1998 and 1997 were
approximately $33,600 and $6,200, respectively.
29
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CAFETERIA PLAN:
The Company maintains an Internal Revenue Code Section 125 Cafeteria Plan as a
benefit to its employees. The plan provides for employee and dependent coverage
to be paid from before tax compensation. As such, there is no effect on the
financial statements.
12. PRIVATE PLACEMENTS OF COMMON STOCK:
On March 31, 1998, the Company completed a private placement of 463,500 units at
$3.00 per unit. Each unit consisted of two shares of common stock and a warrant
to purchase one share of common stock at a per share price of $2.50 within a two
year period. The net proceeds from this private placement were approximately
$1.3 million.
On April 30, 1998 the Company completed a $5.0 million private placement of
common stock in which 3,703,703 shares of common stock were issued at $1.35 per
share. In addition, the Company issued three-year warrants to purchase an
additional 308,642 shares of common stock at $1.62 per share to an investment
banking firm that acted as placement agent in the transaction. The net proceeds
from this private placement of approximately $4.4 million were used by the
Company to support expansion of its business in Arizona and California and for
working capital and general corporate purposes.
On October 29, 1998, the Company issued 86,712 shares of common stock to
developers in a transaction to acquire a build-to-suit building for its
corporate offices. In addition, the Company has obtained a loan commitment in
the amount of $3.6 million to finance the building. This 10 year non-recourse
loan with a 25 year amortization will bear interest at approximately 7.4%.
13. STOCK OPTION PLANS:
The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related Interpretations
in accounting for its 1996 Stock Option Plan and the Company's Non-Employee
Directors Stock Option Plan because, as discussed below, the alternative fair
value accounting provided for under FASB Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION (Statement 123) requires use of options valuation
models that were not developed for use in valuing stock options. Under APB 25,
because the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
The Company's 1996 Stock Option Plan ("The Plan") has authorized the grant of
common stock options to all the Company's employees. As of December 31, 1998,
2,372,150 shares have been granted under the Plan. All options granted have 5
year terms. Fifty percent of the options can be exercised after two years, the
remaining shares can be exercised after three years provided the optionee
remains employed with the Company at such vesting date. Options granted under
the Plan are not transferable and the per share exercise price of an incentive
stock option granted under the Plan may not be less than the fair market value
of the common stock on the date of grant. At the Company's 1998 annual meeting,
the stockholders approved the reservation of 2,400,000 shares of Common Stock
for issuance pursuant to the Plan. The Company intends to seek stockholder
approval at its 1999 annual meeting to increase the number of shares reserved
for issuance pursuant to the Plan to 3,900,000 shares.
30
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company's Non-Employee Directors Stock Option Plan ("Directors Plan") has
authorized the grant of options to non-employee members of the Board of
Directors and advisory boards. As of December 31, 1998, 406,000 shares have been
granted under the Directors Plan. At the Company's 1998 annual meeting, the
stockholders approved the reservation of 370,000 shares of Common Stock for
issuance pursuant to the Directors Plan. The Company intends to seek stockholder
approval at its 1999 annual meeting to increase the number of shares reserved
for issuance pursuant to the Directors Plan to 600,000 shares. All options
granted have 5 year terms. Fifty percent of the options can be exercised after
two years, the remaining shares can be exercised after three years provided the
optionee remains an eligible director at such vesting date. Upon election to the
Board of Directors each board member is granted the option to purchase 15,000
shares of common stock. In addition to the foregoing option grants, each year
every non-employee director automatically receives an option to acquire 10,000
shares of the Company's common stock on the third business day following the
date the Company publicly announces its annual financial results; provided that
such director has attended at least 75% of the meetings of the Board of
Directors and the Board Committees of which such non-employee director is a
member in the preceding fiscal year.
A summary of the Company's stock option activity pursuant to its stock option
plans, and related information for the years ended December 31, 1998 and 1997 is
as follows:
1998 1997
------------------- -------------------
Weighted Weighted
Average Average
Options Price Options Price
------- ----- ------- -----
Outstanding - beginning of year 1,760,150 $1.10 1,215,100 $1.00
Granted 1,104,600 2.25 617,850 1.30
Exercised (7,700) 1.00 -- --
Forfeited (78,900) 1.74 (72,800) 1.35
--------- ---------
Outstanding - end of year 2,778,150 1.53 1,760,150 1.09
========= =========
Exercisable at end of year 569,500 1.00 -- --
========= =========
Weighted - average fair value of
options granted during the year $1.01 $0.35
========= =========
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions: risk-free
interest rate for 1998 and 1997 of 4.5% and 5.25%, respectively; dividend yields
of 0%; volatility factors of the expected market price of the Company's common
stock for 1998 and 1997 of .44 and .30, respectively; and a weighted-average
expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.
31
<PAGE>
CAPITAL TITLE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. If the Company had
accounted for its stock-based compensation plans using a fair value based method
of accounting the pro forma information would have been reported as follows:
Year ended December 31,
1998 1997
---------- ---------
Pro forma net income (loss) $1,294,066 $(457,335)
Pro forma net income (loss) per share-basic $ 0.09 $ (0.04)
Pro forma net income (loss) per share-diluted $ 0.08 $ (0.04)
14. SEGMENT INFORMATION:
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in the fiscal year ended December 31, 1998. SFAS 131 establishes standards
for reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS 131 also establishes
standards for related disclosures about products and services and geographic
areas. To date, the Company has viewed its operations as principally one
segment; services and one geographic region; the Southwestern United States.
32
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement for its 1999 Annual Meeting of Stockholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement for its 1999 Annual Meeting of Stockholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement for its 1999 Annual Meeting of Stockholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the years ended December 31, 1998 and 1997 the Company paid $55,866
and $41,260 respectively, to Dale A. Head for legal services. Dale A. Head is
Donald R. Head's brother. Mr. Head has discontinued his private law practice and
has served as the Company's Executive Vice President, Corporate General Counsel
and Secretary since October 1998.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
Exhibit Method of
No. Description Filing
- ------- ----------- ------
2 Share Exchange Agreement between Capital Title Agency,
Inc. and Norvex, Inc. dated May 23, 1996 (1)
3.1 Certificate of Incorporation (1)
3.2 Amended and Restated Bylaws (1)
10.1 Underwriting Agreement between Capital Title Agency, Inc.
and Old Republic National Title Insurance Company dated
March 1, 1996 (1)
10.2 Underwriting Agreement between Capital Title Agency, Inc.
and First American Title Insurance Company dated August
16, 1996 (1)
10.3 Image Service Agreement between Capital Title Agency, Inc.
and Security Union Title Insurance Company dated June 5,
1996 (1)
10.4 Title Plant Service Agreement between Capital Title
Agency, Inc. and Diversified Information Services
Corporation dated March 1, 1996 (1)
10.5 Office Lease between Capital Title Agency, Inc. and 4808
Corporation dated June 7, 1996 (1)
10.6 Promissory Note between PWCC, Inc. and BankOne Arizona, NA
dated January 5, 1996 (1)
10.7 Assumption Agreement between Capital Title Agency, Inc.
and PWCC, Inc. dated January 5, 1996 (1)
10.8 Employment Agreement between Registrant and Donald R. Head
dated June 1, 1996 (1)
10.9 Employment Agreement between Registrant and Andrew A.
Johns dated June 1, 1996 (1)
10.10 Promissory Note between Capital Title Group, Inc. and
Imperial Bank, dated November 15, 1996 (2)
10.11 Financial Advisor Agreement between Registrant and Miller
Capital Corporation dated June 17, 1997 (2)
10.12 Employment Agreement between Capital Title Agency, Inc.
and Milt Ferrantelli dated June 17, 1997 (2)
33
<PAGE>
Exhibit Method of
No. Description Filing
- ------- ----------- ------
10.13 Underwriting Agreement between Capital Title Agency, Inc.
and United General Insurance Company dated January 21,
1998. (2)
10.14 Credit Line Agreement between Registrant and Imperial
Bank, dated November 17, 1997 (2)
10.15 Acquisition Consulting Agreement between Registrant and
Miller Capital Corporation, dated January 28, 1998. (2)
10.16 Issuing Underwriting Agreement between Capital Title
Agency, Inc. and Chicago Title Insurance Company dated
April 1, 1998. *
10.17 Placement Agent Agreement between Registrant and Sanders
Morris Mundy Inc. dated April 13, 1998. *
10.18 Title Plant Agreement between Registrant and Security
Union Title Insurance Company dated April 29, 1998 *
10.19 Amendment to Acquisition Consulting Agreement between
Registrant and Miller Capital Corporation dated June 12,
1998. *
10.20 Financial Advisor Agreement between Registrant and Miller
Capital Corporation dated June 16, 1998. *
10.21 Purchase and Sale Agreement between Registrant and KDC-AZ,
LLC dated July 1, 1998 *
10.22 Merger Agreement among Registrant, Northwestern
Consolidated Corporation and related subsidiaries dated
September 1, 1998. (3)
10.23 Credit Agreement between Registrant and Imperial Bank
dated February 1, 1999. *
21 Subsidiaries *
23 Consent of Ernst & Young LLP *
27 Financial Data Schedule *
- ----------
* Filed herewith
(1) Incorporated by reference to the Registrant's Form 10-QSB filed with the
Securities and Exchange Commission on September 20, 1996.
(2) Incorporated by reference to the Registrant's Form 10-KSB for the year
ended December 31, 1997, filed with the Securities and Exchange Commission
on March 25, 1998.
(3) Incorporated by reference to the Registrant's Form 8-K filed with the
Securities and Exchange Commission on December 10, 1998.
(b) Reports on Form 8-K
During the quarter ended December 31, 1998, the Company filed the
following Current Reports on Form 8-K:
Current Report of Form 8-K dated November 25, 1998-Pursuant to Item 2,
the Company reported the consummation of transactions under a Merger
Agreement dated September 1, 1998 among the Company, New Century Title
Company of Northern California, Northwestern Consolidated Corporation and
certain of its subsidiaries. Pursuant to Item 7(a)(4) of Form 8-K, all
required historical financial statements and all required pro forma
financial statements were filed pursuant to an amendment to this Current
Report within 60 days following the date on which this Current Report was
required to have been filed.
34
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CAPITAL TITLE GROUP, INC.
By /s/ Donald R. Head
-------------------------------
Donald R. Head
Chief Executive Officer
Date: March 22, 1999
In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Donald R. Head Chairman of the Board /s/ Donald R. Head March 22, 1999
and -------------------------
Chief Executive Officer
Andrew A. Johns President, Director /s/ Andrew A. Johns March 22, 1999
-------------------------
Mark C. Walker Officer and Treasurer /s/ Mark C. Walker March 22, 1999
Vice President, Chief Financial -------------------------
Richard A. Alexander Director /s/ Richard A. Alexander March 22, 1999
-------------------------
Jeffrey P. Anderson Director /s/ Jeffrey P. Anderson March 22, 1999
-------------------------
David Dewar Director /s/ David Dewar March 22, 1999
-------------------------
Theo F. Lamb Director /s/ Theo F. Lamb March 22, 1999
-------------------------
Robert B. Liverant Director /s/ Robert B. Liverant March 22, 1999
-------------------------
Stephen A McConnell Director /s/ Stephen A McConnell March 22, 1999
-------------------------
Ben T. Morris Director /s/ Ben T. Morris March 22, 1999
-------------------------
</TABLE>
ISSUING UNDERWRITING AGREEMENT
This Issuing Underwriting Agreement ("Agreement") is made and entered into this
1st day of April, 1998 by and between CHICAGO TITLE INSURANCE COMPANY hereafter
referred to as "Principal" and CAPITAL TITLE AGENCY, hereafter referred to as
"Title Company".
In consideration of the promises and the mutual covenants herein and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Principal and Title Company agree as follows:
1. APPOINTMENT OF TITLE COMPANY. Principal hereby appoints Title Company as a
policy issuing Title Company of Principal for the sole purpose of issuing
title insurance commitments, policies, endorsements and other title
assurances approved by Principal and by all required regulatory agencies,
now in existence or hereafter developed, relating to real property located
in the county of San Diego, in the state of California in accordance with
the terms of this Agreement. During the term of this Agreement, Title
Company shall have the right to issue title insurance commitments, policies
and endorsements of any title insurance company in the referenced
geographic area.
Notwithstanding the foregoing, pertaining to the referenced geographic
area, Principal and its affiliates shall have, and do retain, the right to
service directly any customer, and Principal or its affiliates may, without
limitation, do any of the following:
(i) issue directly, from any of its offices, or from any location
nationwide, commitments, policies, endorsements, or any other title
assurance or evidence, search or real estate information product, or
any other product whatsoever, now in existence or hereafter developed
(all of the foregoing are hereafter collectively referred to as
"Information");
(ii) purchase or otherwise obtain from any source any search data or
Information.
2. AGREEMENT TERM. The term of this Agreement shall be three (3) years,
commencing on 4/1/98. Unless either party gives written notice to the other
of its election to terminate this Agreement at least sixty (60) days prior
to the expiration of the then current term, this Agreement shall be
automatically extended for additional terms of three (3) years each.
3. DUTIES OF PRINCIPAL. Principal shall:
A. Furnish Title Company forms of commitments, policies, endorsements and
other forms required for transacting Title Company's title insurance
business.
B. Furnish Title Company guidelines and instructions for transacting
Title Company's title insurance business.
C. Determine all risk assumption questions submitted by Title Company.
D. Arrange for reinsurance where required, to the extent such reinsurance
is available.
<PAGE>
4. DUTIES OF TITLE COMPANY. Title Company shall:
A. Receive and process applications for title insurance in a timely,
prudent and ethical manner with due regard to recognized title
insurance underwriting practices and in accordance with Principal's
bulletins, manuals and other instructions of Principal.
B. Base each policy issued on behalf of Principal upon a determination of
insurability of title which includes
(i) a search from earliest public records or in accordance with
Principal's written instructions; and (ii) an examination of all
documents affecting title to the subject property.
C. Supply, at Title Company's expense, office space and qualified
personnel for conducting business.
D. Prepare, preserve and maintain in Title Company's possession a
separate file for each application for title insurance containing all
documents upon which Title Company relied to make its determination of
insurability, including, but not limited to: affidavits, maps, plats,
lien waivers, surveys, title reports, searches, examinations, and work
sheets, together with a copy of each commitment, policy, endorsement
and other title assurance issued as well as closing statements,
disbursement worksheets, copies of all checks disbursed and receipted,
deposit slips, escrow agreements and any other instruments or
documents executed or created at Closing.
Upon termination of this Agreement, Title Company shall deliver such
files to Principal, which files may not be copied by Title Company
without the written consent of Principal. Title Company hereby grants
to Principal the right to enter upon the premises of Title Company or
other locations where such files are maintained, during business
hours, for purposes of recovering possession thereof.
In the event Title Company ceases to engage in the title insurance
business, title to such files shall vest in Principal, and Title
Company shall deliver said files to Principal immediately upon
termination of this Contact. Title Company hereby grants to Principal
the right to enter upon the premises of Title Company or other
locations where such said files are maintained, during business hours,
for purposes of recovering possession thereof.
In the event Title Company sells, transfer or conveys its title
insurance operations or any interest therein to a third party,
Principal shall have the right to copy such files, and the right to
copy shall survive any sale, transfer or encumbrance of Title
Company's title insurance operations or an interest therein. Title
Company hereby grants to Principal the right to enter upon the
premises of Title Company or other locations where said title files
are maintained, during business hours, for purposes of making a
reproduction thereof.
E. Send to Principal a voucher containing information regarding each
policy, endorsement and other title assurance issued by Title Company,
as instructed by Principal. Or send to Principal information regarding
each policy, endorsement and other title assurance issued by Title
Company, in magnetic or electronic format, as instructed by Principal.
<PAGE>
F. Maintain a policy register in a form approved by Principal showing the
disposition of all policies and other pre-numbered forms furnished by
Principal. Upon request by Principal, Title Company shall furnish a
statement accounting for all such forms and shall return all spoiled,
obsolete or canceled policies and forms to Principal. Title Company
shall safely maintain and store all forms furnished by Principal and
hereby assumes liability for loss or damage suffered by Principal by
reason of Title Company's wrongful or negligent use or storage of such
forms.
G. Provide Principal quarterly, copies of quarterly financial statements
of the Title Company and an updated Information Affidavit, such
financial statements to be kept confidential by Principal.
H. Perform such services and render such assistance as Principal may
reasonably request in connection with any claim or litigation arising
from a commitment, policy, endorsement or other title assurance issued
by Title Company or by Principal on behalf of Title Company or on
account of any conduct of Title Company, whether such claim or
litigation is instituted during the term of this Agreement or
following termination thereof. In addition, Title Company shall
promptly forward to Principal:
(i) all documents received by Title Company in which Principal is a
party to judicial proceedings;
(ii) all written complaints or inquiries made to any regulatory Title
Company regarding transactions involving title insurance
policies, endorsements, commitments or other title assurances of
Principal;
(iii)any information alleging a claim involving a policy, commitment,
endorsement or other title assurance of Principal or a
transaction for which Principal may be liable; and
(iv) all original documentation and work papers associated with the
transaction or conduct giving rise to any claim or complaint.
I. In those instances where Title Company closes real estate
transactions and receives and disburses funds of others, Title
Company shall:
(i) maintain said funds safely in accounts fully insured by an
agency of the Federal Government and in accordance with
applicable state laws;
(ii) maintain separate from Title Company's personal or operating
accounts all funds received by Title Company from any source
in connection with transaction(s) in which Principal's title
insurance is involved;
(iii)disburse such funds only for the purposes for which they
were entrusted;
(iv) maintain an escrow ledger for each title insurance order
involving fiduciary funds, which ledger shall separately
reflect the escrow activity for each order;
(v) maintain a control account showing total fiduciary liability
for each escrow bank account; and
(vi) reconcile monthly the control account and ledger records to
the monthly bank statement.
<PAGE>
Principal shall have the right to examine, audit and approve
Title Company's accounting procedures to assure compliance
with Principal's Escrow Accounting Manual, a copy of which
is being delivered to Title Company simultaneously with the
execution of this Agreement.
J. Comply with all applicable laws and regulations relating to the
conduct of Title Company's business. Said violation, may, by the sole
discretion of Principal, be considered a breach of this Agreement.
K. Comply with all bulletins, manuals and other instructions furnished to
Title Company in writing, by facsimile or other electronic
transmission by Principal. If any reasonable doubt exists with regard
to the insurability or marketability of title or as to whether a
particular risk is extra-ordinary or extra-hazardous, Title Company
shall contact Principal or Principal's designated underwriting counsel
for guidance and approval.
L. The parties hereto acknowledge that Title Company is not a Title
Company of Principal for purposes of conducting a Closing, as defined
in Paragraph 7H hereof; however, because Principal may be subject to
allegations of liability for acts of Title Company with regard to
Title Company's settlement or escrow business, Title Company shall
cooperate with Principal in the performance of audits of Title
Company's escrow records, accounts and procedures. In addition, Title
Company agrees to provide to Principal, within thirty (30) days
following receipt, a copy of any audit conducted by any accounting
firm with respect to Title Company's escrow records, accounts or
procedures.
M. Timely furnish the insured with a title insurance policy and other
title assurances Title Company is obligated to issue.
N. Maintain in confidence the terms and conditions of this Agreement.
5. RATES AND REMITTANCES. Attached hereto and made a part hereof is a Schedule
of Rates and Remittances. Title Company shall quote, charge and collect the
Rates set forth therein and shall report and remit to Principal premiums as
set forth therein.
6. INSURANCE. Title Company shall immediately obtain and keep in full force,
at Title Company's expense, during the term of this Agreement
(i) Title Insurance, Errors and Omissions Policy with opinion of title
coverage, with an insurance company acceptable to Principal in a sum
of not less than $1,000,000 . (ii) Fidelity Insurance. Title Company
is responsible to meet the requirement of the California Department of
Insurance Section Code 12340.8. Title Company accepts option below:
a.) Title Company shall obtain and maintain a fidelity bond or
insurance policy, satisfactory to Principal in accordance with
and agreeing to the option provided for in Section 12389.6 (1) of
the Insurance Code of the State of California that covers losses
caused by misappropriation, disappearance, or other wrongful use
of escrow funds deposited with Title Company. The face amount of
the fidelity bond or insurance policy shall be at least 10 times
<PAGE>
the Title Company's required minimum net worth under subdivision
(a) of Section 12389 of the Code. The bond or insurance policy
shall name Principal as an additional insured, co-insured, or
joint-loss payee. The bond or insurance policy may not exclude
coverage due to act omissions of any officer, director, employee,
or principal of Title Company. In the event of cancellation or
nonrenewal of the bond or insurance policy, Principal shall be
given advance written notice by the underwriter of the bond or
insurance policy. Title Company shall submit a copy of the bond
or the insurance policy to Principal within 14 days of the
effective date of the Agreement.
Accept: _____________________________ Date: ____________________
b) Title Company agrees to adopt as internal operating policy
account review processes and oversight, and internal control
guidelines, in electronic or other medium, drafted by the
California Land Title Association's Account Review Processes
and Oversight and Internal Control Guidelines, the American
Land Title Association Insurance Companies, Agencies and
Approved Attorneys, and Employee Affidavit, as defined in
Section 12340.8, and approved by the commissioner. The Title
Company further agrees to pay an annual audit fee of
$4,000.00 due December 31 of each year this underwriting
agreement is in effect.
Accept: _____________________________ Date: ____________________
Title Company agrees to furnish Principal annually with a
copy of such policies and any renewals thereof and any other
evidence that Principal may deem necessary to demonstrate
compliance with this provision. Title Company hereby assigns
to Principal, Principal's legal representatives and assigns,
all sums claims, demands and causes of action of whatsoever
kind, that Title Company may have against Title Company's
Errors and Omissions insurance company and against Title
Company's Fidelity insurance company, in connection with all
claims arising out of the actions of Title Company, its
employees, independent contractors, and subcontractors which
fall within the scope of Paragraph 6 hereof.
7. LIMITATIONS ON TITLE COMPANY'S AUTHORITY. Title Company shall not, without
prior written approval of Principal:
A. Commit Principal to a risk in excess of $1,000,000.00. This limit
shall include commitment, policy, endorsement and/or other title
assurance immediately being issued.
B. Commit Principal to insure a title involving a risk in excess of
$500,000.00 determined to be extra-ordinary or extra-hazardous,
including Mechanics Liens.
C. Alter the printed language of any commitment, policy, endorsement or
other form furnished by Principal, or commit Principal to any
particular interpretation of the terms or provisions thereof or issue
any policy, endorsement or other title assurance which has not been
approved for use by all required state regulatory agencies and by
Principal.
<PAGE>
D. Adjust or otherwise settle or attempt to settle any claim for loss for
which Principal may become liable or engage counsel to represent
Principal or the insured.
E. Accept service of process on Principal. Title Company shall
immediately notify Principal of any attempted service of process upon
Title Company for Principal. Title Company shall also immediately
notify Principal of any matter that is or may become a claim against
Principal of which Title Company has knowledge.
F. Incur bills or debts chargeable to Principal.
G. Commit Principal to a risk with respect to a transaction in which
Title Company, or an employee of Title Company, a member of Title
Company's or employee's immediate family, has or will have a legal or
an equitable interest, without Principals written approval.
H. Handle escrow funds or conduct a Closing, as hereafter defined, of a
transaction in which Title Company, a member of Title Company's
immediate family, Title Company's employee, or a member of Title
Company's employee's immediate family has or will have a legal or an
equitable interest, without Principals written approval. The term
"Closing" as used in this Agreement shall mean: the handling and
disbursement of settlement funds or the providing of settlement
services.
I. Insure or commit to insure any property for an amount other than the
fair market value of the estate or interest to be insured or the
amount of the mortgage or portion thereof and other indebtedness
secured thereby to be insured.
J. Neither Title Company nor any Affiliated Attorney of Title Company
will represent any insured as against the interests of Principal. The
term "Affiliated Attorney" as used herein shall mean any attorney who
is an employee, associate, member, shareholder, or partner of Title
Company or any law firm that owns any legal or beneficial interest in
Title Company.
K. State or imply in advertising, business promotion material or
otherwise, the existence of any relationship or affiliation between
Principal and Title Company other than that Title Company is an
underwritten Title Company authorized to issue policies of Principal.
8. LIABILITY OF TITLE COMPANY. Principal and Title Company shall be
responsible for and promptly pay losses as follows:
A. Principal shall be responsible for all losses, including costs and
attorneys' fees caused by claims arising out of assurances of the
Principal issued by Title Company except for losses described in
paragraph 8.B. which is the responsibility of the Title Company;
B. Title Company shall be responsible for all loss, cost or damage,
including attorneys' fees caused by:
i. Deliberate failure of Title Company to comply with the terms of
this Agreement or with the rules, regulations or instructions
given to Title Company by Principal.
ii. The escrow or closing operations of Title Company.
iii. Fraud, dishonesty or defalcation of an employee, officer,
director or Title Company of Title Company.
iv. Any act or failure to act of an employee, officer or attorney of
Title Company which results in Principal being liable for bad
faith, unfair claim practices or punitive damages.
<PAGE>
C. Title Company shall be liable to Principal for the first five thousand
dollars ($5,000.00) on each claim for losses, costs, or damages,
including attorneys' fees, caused by:
i. Errors or omissions in Title Company's abstracting or examining
of title or failure of any title assurance to accurately reflect
the correct description of real property involved or record title
thereto.
ii. Errors or omissions which are disclosed by the application, the
examiner's report or which were known to Title Company or in the
exercise of due diligence should have been known to Title
Company.
iii. Issuance of a policy where the chain of title included an
uninsured, unescrowed, or gift deed which is subsequently
asserted to be a forgery unless submitted and approved in writing
by Principal.
Any violation of the terms contained above will be considered a breach
of this Agreement.
9. TERMINATION OF ISSUING AGREEMENT. Notwithstanding anything the contrary
herein, this Agreement may be terminated in the event any one of the
following events of default should occur:
A. Title Company fails to report policies or remit premiums in accordance
with the provisions hereof said default continues for the applicable
cure period;
B. Title Company materially deviates from the guidelines, instructions or
escrow accounting standards of Principal furnished to Title Company;
C. Either party hereto fails to perform any of the other material
provisions, covenants or conditions of this Agreement on its part to
be performed; D. A petition under the United States Bankruptcy Code is
filed by or against either party hereto;
E. A supervisor, conservator or receiver is appointed for either party
hereto or for substantially all of the assets of said party;
F. Title Company ceases to engage in the abstract and title insurance
Title Company business or Title Company's license to engage in the
abstract and title insurance business is revoked or suspended;
G. There is a change in the senior management of Title Company, and Title
Company fails to secure prior written approval of Principal;
H. There is a change of more than 10% of the ownership of the Title
Company, and Title Company fails to secure prior written approval of
Principal;
I. The loss ratio during any calendar year, as herein defined, arising
from policies issued by Title Company, equals or exceeds seventy
percent (70%);
J. Title Company defaults in any of the terms of that certain Agreement
between Title Company and Principal dated 4/1/98;
<PAGE>
Upon the occurrence of an event of default, the non-defaulting party
may terminate this Agreement, upon the expiration of thirty (30) days
from the date of written notice of default to the defaulting party and
the defaulting party's failure to cure. Notwithstanding the foregoing,
upon the occurrence of an event of default as described in Paragraph
9D or 9E, this Agreement shall automatically terminate without notice;
upon the occurrence of an event of default as described in Paragraph
9B, 9F or 11, this Agreement may be terminated by Principal
immediately upon delivery of written notice to Title Company.
Upon expiration or termination of this Agreement, Title Company shall
immediately furnish to Principal a true, correct and complete
accounting of all remittances due hereunder, all orders involving
Principal's title assurances which have not closed, all orders
involving Principal's title assurances which have closed but for which
no policy has been issued and all commitments, policies, endorsements
and other title assurances of Principal which have been issued but not
reported to Principal. Title Company shall also provide Principal
access to all forms and all files relating to commitments, policies
and other title assurances of Principal. Title Company shall promptly
make and accounting of and deliver to Principal all unused title
insurance forms, manuals, advertising, promotional materials, other
supplies exhibiting Principal's name or any variation thereof and all
other supplies furnished by Principal to Title Company, except those
which Principal authorizes Title Company to retain for purposes of
completing pending transactions.
10. EXAMINATION OF RECORDS. Title Company agrees to provide to Principal access
for examination purposes at any reasonable time or times to all files,
books and accounts and other records of Title Company relating to the
business carried on hereunder and relating to the Closing of transactions
involving a commitment to issue Principal's title assurances. Such right of
examination may also be exercised after termination of this Agreement.
11. SHORTAGE OF FUNDS. In the event a shortage is revealed or discovered in
Title Company's accounts of funds entrusted to Title Company by others or
in the remittances due Principal hereunder, then Principal may declare
immediately due and payable any debts owed by Title Company, including any
funds for which Principal may be responsible or have a liability therefor
and Title Company grants to Principal a lien on all property of Title
Company as security for the repayment thereof. On demand by Principal,
Title Company shall immediately make good the shortage or convey and
deliver possession of such property to Principal. A conveyance of such
property shall not of itself relieve Title Company of further liability for
such shortage, but may be utilized to mitigate the liability of Title
Company therefor.
12. ADVERTISING. Title Company agrees that it will not use the trade name,
trade mark or any variation thereof of Principal or any of its subsidiaries
or affiliated entities on any of its advertising without the prior written
approval of Principal.
13. CLAIMS. If a policy claim is made to Title Company, if Title Company
receives notice of a potential claim, or if Title Company receives notice
of litigation which may result in a claim, Title Company shall,
immediately, by facsimile transmission or overnight mail, give notice of
same to Principal and shall lend all reasonable assistance, without charge
to Principal, in investigating, adjusting or contesting said claim. Title
<PAGE>
Company is not authorized to act as or to provide counsel in connection
with said claim; however, Principal may seek Title Company's assistance in
the selection of counsel.
14. NOTICES. Except as otherwise specifically set forth in this Agreement, all
notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given when delivered by hand
or when mailed first class postage prepaid, certified or registered mail,
return receipt requested:
If to Principal, to: Chicago Title Insurance Company
3750 Convoy, Suite 118
San Diego, California 92111
If to Title Company, to: Capital Title Agency
4808 North 22nd Street
Phoenix, Arizona 85016
or to such other address or addresses as each of the parties may communicate in
writing to the other.
15. NON-WAIVER BY PRINCIPAL. The failure of Principal to enforce strictly the
performance by Title Company of any provision of this Agreement or to
exercise any right or remedy following from Title Company's breach of any
condition herein or the acceptance by Principal of any payment, remittance
or other performance during Title Company's failure to perform or during
Title Company's breach shall not be deemed a waiver by Principal of its
rights under this Agreement as written and shall not be construed to be an
amendment or modification of this Agreement as written.
16. ENTIRE AGREEMENT; PRIOR AGREEMENTS. This Agreement sets forth the entire
understanding and agreement between the parties hereto with respect to the
subject matter hereof. No terms, conditions, or warranties, other than
those contained herein, and no amendments or modifications hereto shall be
valid unless made in writing and signed by the parties hereto. This
Agreement supersedes all prior understandings of any kind, whether written
or oral, with respect to the Agreement and the subject matter hereof.
17. ASSIGNMENT; BINDING EFFECT. This Agreement is not assignable by Title
Company except upon written consent of Principal. This Agreement is,
however, binding on and inures to the benefit of any corporate successor,
parent corporation, affiliate or wholly owned subsidiary of Principal. The
duties and obligations of Title Company and any signatory or guarantor
hereunder shall survive any merger, consolidation, dissolution or change in
ownership or structure of Title Company.
18. INVALID PROVISIONS. If any provision of this Agreement or the other
documents contemplated hereby is held to be illegal, invalid, or
unenforceable under present or future laws, such provisions shall be fully
severable; the appropriate documents shall be construed and enforced as if
such illegal, invalid or unenforceable provision had never comprised a part
hereof or thereto; and the remaining provisions hereof or thereof shall
remain in full force and effect and shall not be affected by the illegal,
invalid, or unenforceable provision. There shall be added automatically as
a part hereof or thereto a provision as similar in terms to such illegal,
invalid or unenforceable provision as may be possible and still be legal,
valid and binding.
<PAGE>
19. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
20. ATTORNEY'S FEES. COSTS. VENUE. If a legal action or other proceedings are
brought for the enforcement of this Agreement, or because of any alleged
dispute, breach, default or misrepresentation in connection with any of the
provisions of this Agreement, the prevailing party shall be entitled to
recover reasonable attorneys' fees, administrative costs and other costs
incurred in that action or proceeding in addition to any other relief to
which it may be entitled. in addition, in the event of a material breach by
Title Company, Principal shall be entitled to recover all costs and loss
associated with resolving the matter giving rise to said material breach.
Venue for any such proceeding shall be a location of Principal's choice.
21. OTHER AGREEMENTS VOID. It is expressly understood and agreed by and between
the parties hereto that this Agreement sets forth all the promises,
agreements, conditions and understandings between Principal and Title
Company with respect to this Agreement and the subject matter hereof.
Pertaining to such Agreement, there are no promises, agreements, conditions
or understandings, either oral or written, between them other than as are
herein set forth.
22. AGREEMENT. The terms and conditions of this Agreement shall apply only to
Principal named herein and shall not apply to any company now or hereafter
affiliated with Principal or with Principal's parent Chicago Title and
Trust Company.
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed this ____ day of ________, 199__.
CAPITAL TITLE AGENCY:
By:
--------------------------------------------
Its:
--------------------------------------------
CHICAGO TITLE INSURANCE COMPANY
By:
--------------------------------------------
Its:
--------------------------------------------
- -------------------------------------------------
, INDIVIDUALLY
- -------------------------------------------------
, INDIVIDUALLY
<PAGE>
RATES AND REMITTANCES SCHEDULE
THIS RATES AND REMITTANCES SCHEDULE attached to that Issuing Underwriting
Agreement ("Agreement") dated __________________ by and between Capital Title
Agency and Chicago Title Insurance Company.
1. RATES. Title Company shall quote, charge and collect the rates set forth in
the schedule provided to Title Company for the territory covered by this
Agreement. Principal reserves the right to revise said rates from time to
time upon written notice to Title Company.
2. TITLE COMPANY'S COMPENSATION AND PRINCIPAL'S REMITTANCES. Title Company
shall be entitled to compensation on all premium-generating polices,
commitments, endorsements and other title assurances which Title Company
issues on behalf of Principal. Title Company's compensation shall be the
rates and charges required herein to be collected, less the amounts
required herein to be remitted to Principal. Principal's compensation shall
be the amount herein required to be remitted by Title Company. Title
Company shall assume full responsibility for the collection of all premiums
due to Principal. Title Company agrees that Principal's share of premiums
collected shall be held in a separate account in trust for the benefit of
Principal.
All payments of Principal's share of the premium shall be mailed or
delivered to Principal at the following address: P.O. BOX 95594, CHICAGO,
IL 60694 no later than sixty (60) days following the Effective Date, as
hereinafter defined, of the policy, commitment or endorsement. The
Effective Date of the policy or endorsement shall be the policy date set
forth in Schedule A of the title insurance policy.
Where Principal purchases reinsurance or excess coinsurance, a decision
which rests solely with Principal, the division of the rates as herein
provided shall be computed on the net amount remaining after deducting the
cost thereof. Title Company shall remit to Principal the cost of such
reinsurance or coinsurance.
For each policy and endorsement of Principal issued by Title Company
pursuant to this Agreement, Title Company agrees to report and remit nine
percent (9%) of the premiums collected pursuant to the Rate Provision
herein beginning _____________. Commencing ________ through
_______________, Title Company shall pay Principal ten percent (10%) of the
premiums collected pursuant to the Rate Provision herein.
Notwithstanding the foregoing, where orders for title insurance are
directed to Title Company by Principal or by any company affiliated with
Principal's parent, Chicago Title and Trust Company, the amount of the
premium to be reported and remitted to Principal shall be negotiated by
Principal and Title Company. Remittances to the Principal shall include a
referral fee of 30% of the negotiated premium in addition to the remittance
agreed upon in this agreement by Principal and Title Company.
<PAGE>
This Rates and Remittances Schedule is executed to be effective
_____________________.
CAPITAL TITLE AGENCY:
By:
--------------------------------------------
Its:
--------------------------------------------
CHICAGO TITLE INSURANCE COMPANY
By:
--------------------------------------------
Its:
--------------------------------------------
- -------------------------------------------------
, INDIVIDUALLY
- -------------------------------------------------
, INDIVIDUALLY
PLACEMENT AGENT AGREEMENT
April 13, 1998
Sanders Morris Mundy Inc.
3100 Chase Tower
Houston, Texas 77002
Dear Sirs:
1. Introductory. Capital Title Group, Inc., a Delaware corporation (the
"Company"), proposes to sell 3,703,703 shares (the "Shares") of its Common
Stock, $.001 par value (the "Common Stock") at a purchase price of $1.35 per
share.
2. Representations and Warranties of the Company. The Company
represents, warrants, and agrees that:
(i) A Private Placement Memorandum dated April 13, 1998 (the
"Memorandum"), with respect to the Common Stock, copies of which have
heretofore been delivered to you, has been prepared by the Company.
(ii) At the date of the Memorandum, the Memorandum did not
include any untrue statement of a material fact or omit 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; at all times subsequent thereto up to and
including the Closing Date (as hereinafter defined) neither the
Memorandum, nor any amendment or supplement thereto, will include any
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein in light of the circumstances
under which they were made not misleading; and neither the Memorandum
nor any supplemental written sales material supplied or approved in
writing by the Company (when read in conjunction with the Memorandum,
whether designated only for broker-dealer use or otherwise) will
include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein in the light of
the circumstances under which they were made not misleading; provided,
however, that the foregoing representations, warranties, and
agreements shall not apply to information contained in or omitted from
the Memorandum, any such amendment or supplement or supplemental sales
material in reliance upon, and in conformity with, information
furnished to the Company by you specifically for use in the
preparation thereof.
(iii) Subsequent to the respective dates as of which information
is given in the Memorandum, and except as set forth or contemplated in
the Memorandum, including the financial statements and the notes
thereto,(a) neither the Company nor any subsidiary of
- 1 -
<PAGE>
the Company (individually, a "Subsidiary") and, collectively, the
"Subsidiaries") has incurred any material liabilities or obligations,
direct or contingent, which are required to be reflected or reserved
in a balance sheet or the notes thereto under generally accepted
accounting principles, but which are not reflected in the Exchange Act
Documents, nor entered into any material transactions, except in
either case in the ordinary course of business, (b) there has not been
any material adverse change, or to the knowledge of the Company, any
development involving a prospective material adverse change (so far as
the Company may now foresee), in the condition (financial or
otherwise), business, prospects, or results of operations of the
Company and the Subsidiaries or any change in the capital or increase
in the long-term debt of the Company, (c) neither the Company nor any
Subsidiary has sustained any material loss, including, but not limited
to any loss on account of theft, fire, flood, explosion, accident or
other calamity, whether or not insured, which has materially and
adversely interfered, or may materially and adversely interfere, with
the operation of the Company's or any Subsidiary's business, (d) to
the best knowledge of the Company, no event, condition or state of
facts, including, without limitation, the enactment, adoption or
promulgation of any law, rule or regulation, has occurred, which
materially and adversely does or would affect the results of
operations or the business or financial condition of the Company or
any Subsidiary, (e) the Company has not declared, paid, or made any
dividend or distribution of any kind on its capital stock, and (f) to
the Company's knowledge there has not been any material change in the
ownership of the capital stock of the Company. As of the date hereof,
the Company has no dividends declared but not paid or in arrears.
(iv) The financial statements, together with the related notes,
set forth in the Memorandum and the Exchange Act Documents (as defined
below) fairly present, on the basis stated therein and on the date of
the Memorandum or the date of the respective Exchange Document, the
financial position of the Company and its consolidated Subsidiaries at
the respective dates therein specified and their consolidated results
of operations and cash flows for the periods then ended, subject to,
in the case of financial statements respecting interim periods, normal
year-end adjustments. To the best knowledge of the Company, such
statements and related notes have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
except as may be set forth in the Memorandum.
(v) Ernst & Young LLP, which has expressed its opinion on the
audited financial statements of the Company included in the
Memorandum, are, with respect to the Company, independent public
accountants within the meaning of the Securities Act of 1933, as
amended (the "1933 Act") and the rules and regulations promulgated
thereunder (the "Rules and Regulations").
(vi) All action required to be taken by the Company as a
condition to the due and proper authorization, issuance, sale, and
delivery of the Common Stock of the Company to subscribers therefor in
accordance with the terms of this Agreement, and the
- 2 -
<PAGE>
Memorandum has been, or prior to the Closing Date (as herein defined),
will have been, taken; and upon the payment of the consideration for
the Common Stock specified in the Memorandum, the Common Stock will be
duly and validly issued, fully paid and non- assessable.
(vii) The Company has been duly organized and is validly existing
and in good standing as a corporation under the laws of the State of
Delaware, with power and author ity (corporate and other) to own or
lease its properties and to conduct its business as described in the
Exchange Act Documents; each of the Subsidiaries has been duly
organized and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, with
corporate power and authority to own or lease its properties and to
conduct its business as described in the Exchange Act Documents; the
Company and each of the Subsidiaries are duly qualified to do business
and in good standing as foreign corporations in all other
jurisdictions in which their ownership or leasing of properties, or
the conduct of their business requires or may require such
qualification where the failure to be so qualified would have a
material adverse effect on the Company; the Company and the
Subsidiaries are in possession of and operating in compliance in all
material respects with all franchises, grants, authorizations,
licenses, permits, easements, consents, certificates, and orders
required for the conduct of their business as described in the
Exchange Act Documents, where the failure to possess or comply
therewith would have a material adverse effect upon the Company's
consolidated condition (financial or otherwise), business, or results
of operations of the Company and the Subsidiaries taken as a whole
(viii) At April 1, 1998, the authorized, issued, and outstanding
shares of capital stock of the Company are as follows:
Par Shares Shares
Title Value Authorized Outstanding
----- ----- ---------- -----------
Common Stock $0.001 50,000,000 12,168,029
The outstanding shares of Common Stock of the Company are duly
authorized, validly issued, fully paid, and non-assessable, with no
personal liability attaching to the ownership thereof, except for
personal liability that may attach to shareholders pursuant to Section
164 of the Delaware General Corporation Law (the "DGCL"). Except as
set forth on Schedule 2(viii) attached hereto or in the Memorandum,
the Company has not granted or issued, or agreed to grant or issue,
any options, warrants or similar rights to acquire or receive any of
the authorized but unissued shares of its capital stock or any
securities convertible into shares of its capital stock. No person
holds of record or, to the best of the Company's knowledge,
beneficially, 5% or more of the outstanding shares of the capital
stock of the Company except as set forth in the Memorandum. Except as
set forth above or in the Memorandum, there are no outstanding
agreements or understandings
- 3 -
<PAGE>
to which the Company is a party with respect to the sale of any shares
of the Common Stock of the Company. The capital stock of the Company
conforms in all material respects to the description thereof contained
in the Memorandum.
(ix) Except as disclosed in the Memorandum, there are no legal or
governmental proceedings pending to which the Company or a Subsidiary
is a party or of which any of its properties are the subject, which,
if determined adversely to the Company or a Subsidiary, would
individually or in the aggregate result in a material adverse change
in the condition (financial or otherwise), business or results of
operations of the Company and its Subsidiaries taken as a whole; and,
to the best knowledge of the Company after due inquiry, no such
proceedings are threatened, except as set forth in the Memorandum.
(x) Neither the Company nor any Subsidiary is in violation of its
certificate of incorporation or bylaws, and is not in default, or with
the giving of notice or lapse of time or both, would not be in
default, in the performance of any material obligation, agreement, or
condition contained in any lease, license, material contract,
indenture, or loan agreement or in any bond, debenture, note, or any
other evidence of indebtedness, except for such defaults as would not
have a material adverse effect on the Company and the Subsidiaries
taken as a whole. The execution, delivery and performance of this
Agreement, the incurrence of the obligations herein and the
consummation of the transactions contemplated herein will not conflict
with or result in a breach of, or default under, the certificate of
incorporation or bylaws of the Company, or any material loan
agreement, mortgage, deed of trust, indenture, or other agreement or
instrument to which the Company or any Subsidiary is a party or by
which it is bound, except to the extent that the same have been, or
prior to the Closing Date will be, waived or cured, or, to the best
knowledge of the Company, any material law, statute, order, rule,
administrative regulation, or decree of any court, or governmental
agency or body having jurisdiction over the Company or any Subsidiary
or their properties or result in the creation or imposition of any
material lien, charge, claim, or encumbrance upon any property or
asset of the Company or any Subsidiary.
(xi) There are no pre-emptive rights or other rights to subscribe
for or to purchase, or any restriction upon the voting or transfer of,
any such shares of Common Stock pursuant to the Company's certificate
of incorporation, by-laws, or any agreement or other instrument to
which the Company is a party, except as set forth in the Memorandum.
The offering or sale of the Common Stock as contemplated in this
Agreement will not give rise to any rights for or relating to the
registration of any such shares of Common Stock other than the
registration rights of the holders of Common Stock and the Warrant (as
hereinafter defined) to be issued to you as provided in Section 4(h)
hereof.
(xii) This Agreement has been duly and validly authorized,
executed and delivered by or on behalf of the Company and constitutes
a legal, valid, and binding
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obligation of the Company enforceable against the Company in
accordance with its terms, except as such enforceability may be
limited by bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium, rearrangement, liquidation,
conservatorship, receivership, or similar laws relating to or
affecting creditors' rights generally and except as enforceability of
the indemnity and contribution provisions contained in Section 6 may
be limited by applicable law or principles of public policy.
(xiii) Except as otherwise stated in the Memorandum (including
the financial statements and notes thereto included therein), the
Company and each of its Subsidiaries has good title, free and clear of
all liens and encumbrances, to all of the personal property referred
to in the Memorandum as being owned by it except liens and
encumbrances that are not material in the aggregate and do not
materially interfere with the conduct of the business of the Company
and the Subsidiaries, and, except as otherwise stated in the
Memorandum, has valid and binding leases to the real and/or personal
property described in the Memorandum as under lease to it with such
exceptions as do not materially interfere with the conduct of the
business of, or the use of such property by, the Company or any
Subsidiary.
(xiv) Neither the Company nor any Subsidiary is in violation of
any law, ordinance, governmental rule, regulation, or permit, or court
decree to which it may be subject and has not failed to obtain any
license, permit, franchise, or other governmental authorization
necessary to the ownership of its property or to the conduct of its
business, which violation or failure to obtain would have any material
adverse effect on the condition (financial or other), properties or
results of operations of the Company and its Subsidiaries taken as a
whole.
(xv) No consent, approval, authorization or order of any court or
governmental authority or agency is required for the consummation by
the Company of the transactions contemplated by this Agreement, except
such as may be required by the National Association of Securities
Dealers, Inc., the 1933 Act or the Rules and Regulations or state
securities or Blue Sky laws.
(xvi) Except as described in Schedule 2(xvi) hereto or in the
Memorandum, the Company has not made during the past six months, and
will not make throughout the Offering Period (as herein defined) or
during the six-month period commencing on the Closing Date, any offer
to sell any security to be issued by it or any security issued or to
be issued by any other corporation, partnership, or similar entity
formed or to be formed by it, which security is of the same or a
similar class as the Common Stock or the Common Stock of the Company,
other than offers of securities under an employee benefit plan as
defined in Rule 405 under the 1933 Act, securities issued in
connection with the Warrant, securities issued in connection with
acquisitions, or other securities that will not invalidate the
exemption from registration relied on to offer and sell the Common
Stock.
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(xvii) All reports and statements required to be filed by the
Company under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations thereunder, due at or
prior to the date of this Agreement have been made. Such filings,
together with all documents incorporated by reference therein, are
referred to as "Exchange Act Documents." Each Exchange Act Document
conformed in all material respects at the time of its filing to the
requirements of the Exchange Act and the rules and regulations
thereunder, and no Exchange Act Document includes any untrue statement
of a material fact or omits to state any 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.
(xviii) Except as indicated in Schedule 2(xviii) attached hereto,
each of the Company and the Subsidiaries has filed all United States
federal, state, county, local and foreign national, provincial and
local returns and reports which were required to be filed on or prior
to the date herein in respect of all income, withholding, franchise,
payroll, excise, property, sales, use, value-added or other taxes or
levies, imposts, duties, license and registration fees, charges,
assessments or withholdings of any nature whatsoever (together,
"Taxes"), and has paid all Taxes (and any related penalties, fines and
interest) which have become due pursuant to such returns or reports or
pursuant to any assessment which has become payable, or, to the extent
its liability for any Taxes (and any related penalties, fines and
interest) has not been fully discharged, adequate reserves therefor
have been established. All such returns and reports filed on or prior
to the date hereof have been properly prepared and are true, correct
(and to the extent such returns reflect judgments made by the Company
or a Subsidiary, as the case may be, such judgments were reasonable
under the circumstances) and complete in all material respects.
(xix) Except as set forth in Schedule 2(xix) attached hereto,
since December 31, 1997, each of the Company and the Subsidiaries has
conducted its business, maintained its real property and equipment and
kept its books of account, records and files, substantially in the
same manner as previously conducted, maintained or kept and solely in
the ordinary course.
3. Representations and Warranties of Sanders Morris Mundy. You
represent and warrant to, and agree with, the Company that:
(i) You have been duly organized and are validly existing and in
good standing as a corporation under the laws of the State of Texas,
with power and authority (corporate and other) to perform your
obligations under this Agreement; you are a broker-dealer registered
and in good standing under the Securities Exchange Act of 1934, as
amended, and under the securities or Blue Sky laws of each state in
which the Shares are being offered or sold by you, and you are a
member in good standing of the National Association of Securities
Dealers, Inc.; you are in possession of and operating in compliance
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with all authorizations, licenses, permits, consents, certificates and
orders required for the performance of your duties under this
Agreement.
(ii) There are no legal or governmental proceedings pending to
which you are a party or of which any of your properties is the
subject, which, if determined adversely to you, would individually or
in the aggregate materially and adversely affect your ability to
perform your obligations under this Agreement.
(iii) There are no facts or circumstances relating to your
directors or officers which would give rise to a prohibition or
restriction under the terms of Rule 502(b)(2)(iii) adopted under the
1933 Act.
(iv) This Agreement has been duly and validly authorized,
executed and delivered by you or on your behalf and constitutes your
legal, valid, and binding obligation enforceable against you
accordance with its terms, except as such enforceability may be
limited by bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium, rearrangement, liquidation,
conservatorship, receivership, or similar laws relating to or
affecting creditors' rights generally and except as enforceability of
the indemnity and contribution provisions contained in Section 6 may
be limited by applicable law or principles of public policy.
(v) No consent, approval, authorization or order of any court or
governmental authority or agency is required for the performance by
you of your obligations under this Agreement, except such as may be
required by the National Association of Securities Dealers, Inc. or
under Regulation D or state securities or Blue Sky laws.
4. Offering and Sale of Common Stock. (a) On the basis of the
representations, warranties, and covenants herein contained, but subject to the
terms and upon the conditions herein set forth, you are hereby appointed the
exclusive selling agent of the Company during the term herein specified (the
"Offering Period") for the purpose of finding subscribers for the Shares, on a
best-efforts all-or-none basis for the account of the Company through a private
offering (the "Offering") to an unlimited number of "accredited investors" (as
such term is defined in the Rules and Regulations) and up to 35 investors who
are not accredited investors. Subject to the perfor mance by the Company of all
its obligations to be performed hereunder, and to the completeness and accuracy
of all the representations and warranties contained herein, you hereby accept
such agency and agree on the terms and conditions herein set forth to use your
best efforts during the Offering Period to find subscribers for the Common Stock
at a price of $1.35 per share. Your agency hereunder, which is terminable as
provided in Section 10 hereof, shall continue until not later than May 4, 1998;
provided that such termination date (the "Termination Date") may be extended up
to and including until May 19, 1998, by mutual agreement of the parties.
(b) In connection with the performance of your obligations under this
Agreement, you may engage, for the account of the Company, the services of one
or more broker-dealers ("Addi tional Agents") who are members of the National
Association of Securities Dealers, Inc. and who are acceptable to the Company,
and, as compensation for their services, shall pay to such Addi tional Agents an
amount to be negotiated between you and such Additional Agents. Such amount will
be paid to the Additional Agents by you only out of the commissions received by
you in respect of sales of Common Stock as described in paragraph (f) of this
Section 4, and the Company shall have no obligation to any Additional Agent
respecting any such payment. The arrangements, if any, between the Company, you,
and any Additional Agent shall be set forth in an Additional Agent Agreement
("Additional Agent Agreement"), which shall provide, among other things, that
such Additional Agent shall be deemed to have agreed to the matters set forth
herein as if the Additional Agent were a signatory hereof. Nothing contained in
this Agreement or in the Additional Agent Agreement shall be deemed to
constitute the Additional Agents, if any, as your agents, and you shall not be
liable to the Company in respect of the performance by the Additional Agents, if
any, of any representations, warranties or covenants of such Additional Agents
contained herein or in the Additional Agent Agreement.
(c) Each subscriber must complete and execute a copy of the
Subscription Agreement. Upon receipt, you shall hold the Subscription Agreements
for safekeeping and deposit all funds delivered to you into a segregated
subscription escrow account as described in the Memorandum.
(d) In the event that subscriptions for a minimum of 3,703,703 shares
of Common Stock shall not have been received and accepted by the Company by the
Termination Date, all funds received from subscribers (if any) shall be returned
in full, and your agency and this Agreement shall terminate without obligation
on your part or on the part of the Company, except as provided in Sections 6 and
7 hereof.
(e) If, by the Termination Date or such earlier time as may be agreed
upon by you and the Company, you have received subscriptions for all of the
Shares, you shall notify the Company of the aggregate amount of Common Stock for
which you have received subscriptions. Payment of the purchase price for the
Common Stock for which you have found subscribers, and delivery, with respect to
each subscriber for Common Stock, of a copy of a Subscription Agreement signed
by such subscriber, shall then be made at the offices of Sanders Morris Mundy,
3100 Chase Tower, Houston, Texas 77002 or such other place as shall be agreed
upon between you and the Company, at 10:00 A.M., Houston Time, on the fifth full
business day after the day on which you so notify the Company of the amount of
Common Stock subscribed for, or such other day and time (not later than ten
business days thereafter) as shall be agreed upon between you and the Company
(the "Closing Date"), in accordance with the terms and provisions of the Escrow
Agreement dated as of April 13, 1998, among you, the Company, and Sterling Bank.
(f) As compensation for your services, a cash commission will be paid
to you with respect to subscriptions received by you as to which the payments
and deliveries provided for in this Section 4 are made at the Closing Date equal
to 6.0% of the purchase price of each share of Common Stock. In addition, the
Company agrees to pay you $50,000 as a non-accountable expense allowance and, in
addition, to reimburse you for your reasonable expenses in accordance with
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<PAGE>
Section 6 hereof. Such commissions and non-accountable expense allowance shall
be paid to you on the Closing Date by bank wire transfer payable in Federal
Funds (same day funds).
(g) Neither you, the Company, nor any Additional Agent shall, directly
or indirectly, pay or award any finder's fees, commissions or other compensation
to any person engaged by a potential investor for investment advice as an
inducement to such advisor to advise the purchase of Common Stock; provided,
however, that, subject to Section 4(b), normal sales commissions payable to a
registered broker-dealer or other properly licensed person for selling Common
Stock shall not be prohibited hereby.
(h) If the Offering closes, as further consideration for your services
hereunder, the Company will issue to you on the Closing Date a stock purchase
warrant (the "Warrant") in the form attached hereto as Exhibit II granting you
the right to purchase from the Company for a period of three years 308,642
shares of Common Stock for a cash consideration per share equal to $1.62 subject
to standard antidilution adjustments. The Warrant shall be deemed fully earned
upon its issuance.
(i) You will prepare and file such statements and reports as are or may
be required to enable the Common Stock to be qualified for sale under the
securities laws of such jurisdictions as you may designate.
(j) You will advise the Company if you become aware of any material
change in the facts and circumstances subsequent to the date of the Memorandum
relating to the offer and sale of the Common Stock, as described in the
Memorandum.
(k) You will not make a general solicitation with respect to the
Offering.
5. Covenants and Agreements of the Company. The Company covenants and
agrees with you that:
(a) Neither the Company nor any of its Subsidiaries will, prior to the
Closing Date incur any material liability or obligation, direct or contingent,
or enter into any material transaction, other than in the ordinary course of
business, except as contemplated by the Memorandum. The Company will not declare
or pay any dividend or make any distribution on the Common Stock payable to
shareholders of record on a date prior to the Closing Date.
(b) The Company will use the net proceeds received by it from the sale
of the Common Stock in the manner specified in the Memorandum under the caption
"Use of Proceeds."
(c) If at any time after the date of the Memorandum and prior to the
Termination Date, any event relating to or affecting the Company occurs as a
result of which the Memorandum would include an untrue statement of a material
fact, or omit to state any material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading,
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<PAGE>
the Company will promptly notify you thereof and will prepare an amended or
supplemented offering memorandum which will correct such statement or omission.
For purposes of this para graph (a), the Company will furnish such information
with respect to itself as you may from time to time reasonably request.
(d) It will deliver to you, at or before the date hereof, an original
of the Memorandum suitable for duplication by you, including such financial
statements. It will deliver to you, from time to time until the Termination
Date, an original of such amendments or supplements to the Memorandum that may
be prepared by the Company suitable for duplication by you.
(e) It will cooperate with you to enable the Common Stock to be
qualified for sale under the securities laws of such jurisdictions as you may
designate, subject to approval by the Company, and at your request will make
such applications and furnish such information as may be required of it for that
purpose; provided, however, that it shall not be required to qualify to do
business or to file a general consent to service of process in any such
jurisdiction. It will, from time to time, prepare and file such statements and
reports as are or may be required to continue such qualifications in effect for
so long a period as you may reasonably request for the distribution of the
Common Stock.
(f) It will file all reports required by Regulation D with regard to
sales of the Common Stock and use of the proceeds therefrom; provided that you
provide all information as to purchasers of the Common Stock required for such
filings.
(g) For a period of three years from the Closing Date, the Company will
deliver to you (i) copies of the financial statements furnished by the Company
to stockholders and each other report furnished by the Company to stockholders,
(ii) as soon as they are available, copies of any other reports (financial or
other) which the Company shall publish or otherwise make generally available to
the Company's security holders as such and (iii) as soon as they are available,
copies of any reports and financial statements furnished to or filed with the
Commission.
(h) The Company agrees to nominate for election as a director of the
Company one individual designated by you for so long as purchasers of the Common
Stock offered and sold pursuant to Section 4(a) of this Agreement retain, in the
aggregate, at least 50% of the aggregate number of shares of Common Stock
offered and sold pursuant to Section 4(a).
(i) The Company will not offer or sell any securities of the Company
that are of the same or a similar class as the Common Stock offered and sold
pursuant to this Agreement for a period of six months after the Closing Date,
other than those offers or sales of securities under an employee benefit plan as
defined in Rule 405 under the 1933 Act, unless the Company provides you with an
opinion of counsel acceptable to you that any such offer or sale will not be
integrated with the offering of the Common Stock pursuant to this Agreement for
purposes of the exemptions under Regulation D and the condition contained in
Rule 502(a) of Regulation D.
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<PAGE>
(j) The Company will cause each of Donald R. Head, Andrew A. Johns,
Theo F. Lamb, and Rudy R. Miller to deliver to you on or before the Closing Date
an agreement satisfactory in form and substance to you, whereby each agrees, for
a period of one year after the Closing Date, not to sell, offer or otherwise
dispose of any shares of Common Stock without your prior written consent
("Lock-Up Letters"); provided, however, that Messrs Head, Johns, and Lamb may
sell up to five percent of the shares of Common Stock that they currently own
and Mr. Miller may sell up to 25% of the shares that he currently owns without
your consent. In addition, during the lock-up period, Messrs. Head, Johns, Lamb,
and Miller may sell their shares on a pro rata basis with other selling
shareholders, if any, in any underwritten public offering, subject to the
discretion of the underwriters in any such offering to limit the shares of
selling shareholders that may be sold in such offering.
(k) The Company agrees that, until the Company has successfully
completed an underwritten public offering of Common Stock pursuant to which the
Company realizes proceeds of at least $12,000,000 and the price to the public is
at least $5.00 per share (a "Qualified Offering"), the number of shares of the
Common Stock collectively issued or issuable by the Company as incentive
compensation, directly or pursuant to the grant and exercise of options or
warrants, to its employees (both full and part-time), directors, consultants,
agents (excluding you), or any others persons under any plan, agreement, or
otherwise will not, in the aggregate, exceed 2,770,000 without your written
consent. In addition, the issuance of such shares, options, or warrants will be
subject to the following limitations: (i) no more than 30,000 shares shall be
issued to employees of each new branch office opened in Arizona subsequent to
the Closing Date, (ii) no more than 150,000 shares shall be issued to employees
located in each new county in California in which the Company opens an office
subsequent to the Closing Date (provided that the relocation of an existing
office shall not be considered the opening of a new office), and (iii) no more
than 50,000 shares shall be issued for any other purpose. The Company agrees
that no shares issued pursuant to this paragraph (k) will be issued or issuable
at a per share price less than the greater of $2.50 or Current Market Value
except for up to 150,000 shares to be issued in connection with the Company's
proposed expansion into San Diego County, California which may be issued at a
price of not less than $2.00.
(l) The Company hereby grants you a right of first refusal to act as,
at least, co-manager on the next succeeding offering by the Company of its
securities commenced within the 24 months following the Closing Date. The
foregoing right of first refusal shall not apply if, in the reasonable judgment
of counsel for the lead underwriter selected by the Company, your inclusion as
an underwriter would cause the offering to violate applicable rules and
regulations of federal or state governmental agencies, including the Corporate
Financing Rules of the National Association of Securities Dealers, Inc.
Notwithstanding the foregoing, the Company shall not be required to employ any
specific underwriter that you suggest that is not acceptable to the Company nor
shall you be required to co-manage any offering with an underwriter suggested by
the Company that is not acceptable to you.
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<PAGE>
(m) The Company hereby also grants to the purchasers of the Common
Stock offered pursuant to Section 4(a) hereof (individually a "Purchaser" and ,
collectively, the "Purchasers") a pre-emptive right to purchase any and all
additional shares of Common Stock, or securities convertible into or containing
an option or warrant to purchase Common Stock ("Derivative Securities"), as may
hereafter be issued from time to time by the Company (including shares of Common
Stock or Derivative Securities offered, sold, or granted to officers and
employees of the Company) if such shares are offered and/or sold for a purchase
price or such Derivative Securities have a conversion or exercise price that is
less than the lesser of (i) $1.35 per share or (ii) the Current Market Price of
the Common Stock. Such pre-emptive rights shall exist with respect to shares of
Common Stock originally authorized, shares hereafter authorized, or treasury
shares, but shall not exist with respect to: (a) shares of Common Stock issued
by the Company in a firm commitment underwritten offering, (b) shares of Common
Stock issued by the Company upon the exercise or conversion of currently
outstanding Derivative Securities, or (c) shares of Common Stock issued by the
Company upon the exercise of stock options permitted under paragraph (k) above.
Each Purchaser shall be entitled to purchase the number of shares of
Common Stock equal to the number of shares of Common Stock offered by the
Company multiplied by a fraction the numerator of which is the number of shares
of Common Stock owned by the Purchaser and the denominator of which is
3,703,703. The Board of Directors of the Company shall establish the price,
terms, and conditions on which such pre-emptive rights may be exercised on an
equitable basis. Adjustments may be made in the number of shares offered to each
holder in order to eliminate fractional shares. The time of expiration of
pre-emptive rights may be established by the Board of Directors but each holder
shall have a minimum of 45 days in which to consider exercising his or her
pre-emptive right.
The foregoing pre-emptive right shall terminate on the date that the
Company successfully completes a Qualified Offering.
(n) The "Current Market Price" as used in this Agreement shall mean, as
of any date, 5% of the sum of the average, for each of the 20 consecutive
Trading Days immediately prior to such date, of either: (i) the high and low
sales prices of the Common Stock on such Trading Day as reported on the
composite tape for the principal national securities exchange on which the
Common Stock may then be listed, or (ii) if the Common Stock shall not be so
listed on any such Trading Day, the high and low sales prices of Common Stock in
the over-the-counter market as reported by the Nasdaq National Market, or (iii)
if the Common Shares shall not be included in the Nasdaq National Market on any
such Trading Day, the representative bid and asked prices at the end of such
Trading Day in such market as reported by the Nasdaq Stock Market or (iv) if
there be no such representative prices reported by the Nasdaq Stock Market, the
lowest bid and highest asked prices at the end of such Trading Day in the
over-the-counter market as reported on the OTC Electronic Bulletin Board or by
the National Quotation Bureau, Inc., or any successor organization. For purposes
of determining Current Market Price, the term "Trading Day" shall mean a day on
which an amount greater than zero can be calculated with respect to the Common
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Stock under any one or more of the foregoing categories (i), (ii), (iii) and
(iv), and the "end" thereof, for the purposes of categories (iii) and (iv),
shall mean the exact time at which trading shall end on the New York Stock
Exchange. If the Current Market Price cannot be determined under any of the
foregoing methods, Current Market Price shall mean the fair value per share of
Common Stock on such date determined by the Board of Directors in good faith,
irrespective of any accounting treatment.
6. Payment of Expenses. If this Agreement becomes effective and the
transactions contemplated by this Agreement are consummated or this Agreement
terminates or is terminated, the Company will pay all reasonable expenses
incident to the performance of the obligations of the Company under this
Agreement, including (but not limited to) all expenses and taxes incident to the
sale and delivery of the Common Stock, all expenses incident to the printing of
copies of the Memorandum, any supplemental sales material supplied or approved
in writing by the Company, any amendments or supplements thereto, any "Blue Sky"
memorandum, and this Agreement and furnishing the same to you, all filing and
printing fees and expenses (including legal fees and disbursements of your
counsel) incurred in connection with qualification of the Common Stock for sale
under the laws of such jurisdictions as you may designate, the fees and
disbursements of counsel and accountants for the Company, and all your
out-of-pocket expenses (including fees and disbursements of your counsel
incurred in connection with this Agreement and the Offering) incurred in
connection with this Agreement, preparing to market, and marketing the Common
Stock, up to a maximum of $75,000 (the non-accountable expense allowance
provided in Section 4(f) shall not count against such expense limitation).
7. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless you, each Additional Agent and each person, if any,
who controls you or such Additional Agent within the meaning of the 1933 Act,
against any losses, claims, damages, liabilities, or expenses (including, unless
the Company elects to assume the defense as hereinafter provided, the reasonable
cost of investigating and defending against any claims therefor and counsel fees
incurred in connection therewith), joint or several, which (i) are based on the
ground or alleged ground that the Memorandum (as from time to time amended or
supplemented) or any written supplemental sales material supplied or approved in
writing by the Company provided that such supplemental sales material is
accompanied with or preceded by the Memorandum, includes or allegedly includes
an untrue statement of material fact or omits to state a material fact necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, unless such statement or omission (i) was
made in reliance upon, and in conformity with, information furnished to the
Company by you or any Additional Agent specifically for use in the preparation
thereof, (ii) arise out of the acts or omissions of broker-dealers retained by
the Company in connection with the Offering other than you or Additional Agents
retained by you, or (iii) arise out of the Company's breach of a representation
or warranty or covenant or agreement contained in this Agreement; provided that
in no case is the Company to be liable with respect to any claims made against
you, such Additional Agent or any such controlling person unless you, such
Additional Agent or such controlling person shall have notified the Company in
writing within a reasonable time after the summons or other first legal process
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<PAGE>
giving information of the nature of the claim shall have been served upon you,
such Additional Agent, or such controlling person, but failure to notify the
Company of any such claim shall not relieve it from any liability that it may
have to you, such Additional Agent, or such controlling person otherwise than on
account of the indemnity agreement contained in this paragraph. The Company will
be entitled to participate at its own expense in the defense, or if it so
elects, to assume the defense of any suit brought to enforce any such liability,
but, if the Company elects to assume the defense, such defense shall be
conducted by counsel chosen by it. In the event the Company elects to assume the
defense of any such suit and retain such counsel, you, such Additional Agent, or
such controlling person or persons, defendant or defendants in the suit, may
retain additional counsel but shall bear the fees and expenses of such counsel
unless (i) the Company shall have specifically authorized the retaining of such
counsel or (ii) the parties to such suit include you, such Additional Agent, or
such controlling person or persons, and the Company and you, such Additional
Agent, or such controlling person or persons have been advised by counsel that
one or more material legal defenses may be available to you or them that may not
be available to the Company in which case the Company shall not be entitled to
assume the defense of such suit notwithstanding its obligation to bear the
reasonable fees and expenses of such counsel. In no event shall the Company be
liable for the fees and expenses of more than one counsel for all indemnified
parties in connection with any one action or separate but similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances. The Company shall not be liable to indemnify any person for any
settlement of any such claim effected without its consent which shall not be
unreasonably withheld. This indemnity agreement will be in addition to any
liability which the Company might otherwise have.
(b) You and each Additional Agent agree to indemnify and hold harmless
the Company, each of the Company's officers, directors, and each other person,
if any, who controls the Company within the meaning of the 1933 Act, against any
losses, claims, damages, liabilities, or expenses (including, unless you or such
Additional Agent elects to assume the defense, the reasonable cost of
investigating and defending against any claims therefor and counsel fees
incurred in connection therewith), joint or several, which (1) may be based on
the ground or alleged ground that the Memorandum (as from time to time amended
and supplemented) or any supplemental sales material used by you or such
Additional Agent, includes or allegedly includes an untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which it was made, not
misleading, but only insofar as such statement or omission (i) was made in
reliance upon, and in conformity with, written information furnished to the
Company by you or an Additional Agent specifically for use in the preparation
thereof or (ii) relates to any such supplemental sales material not supplied by
the Company or approved by it in writing, (2) arise out of any acts or omissions
by you that cause the Offering to involve a public offering under Section 4(2)
of the 1933 Act or your failure to be properly licensed to sell the Shares, or
(3) arise out of your breach of a representation or warranty or covenant or
agreement contained in this Agreement; provided, however, that in no case are
you or any Additional Agent to be liable with respect to any claims made against
the Company or any such person against whom the action is brought unless the
Company or such person shall have notified you or such Additional Agent, as the
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<PAGE>
case may be, in writing within a reasonable time after the summons or other
first legal process giving information of the nature of the claim shall have
been served upon the Company or such person, but failure to notify you or such
Additional Agent of such claim shall not relieve you or such Additional Agent
from any liability that you or such Additional Agent may have to the Company or
such person otherwise than on account of the indemnity agreement contained in
this paragraph. You or such Additional Agent shall be entitled to participate at
your or its expense in the defense, or if you or such Additional Agent so
elects, to assume the defense of any suit brought to enforce any such liability,
but, if you or such Additional Agent elects to assume the defense, such defense
shall be conducted by counsel chosen by you or such Additional Agent, as the
case may be. In the event that you or such Additional Agent elects to assume the
defense of any such suit and retain such counsel, the Company, said officers and
directors and any person or persons, defendant or defendants in the suit, may
retain additional counsel but shall bear the fees and expenses of such counsel
unless (i) you shall have specifically authorized the retaining of such counsel
or (ii) the parties to such suit include you, such Additional Agent or such
controlling person or persons, and the Company and you, such Additional Agent,
or such controlling person or persons have been advised by counsel that one or
more material legal defenses may be available to the Company that may not be
available to you or them in which case you shall not be entitled to assume the
defense of such suit notwithstanding your obligation to bear the reasonable fees
and expenses of such counsel. You or such Additional Agent shall not be liable
to indemnify any person for any settlement of any such claim effected without
your or its consent which consent shall not be unreasonably withheld. This
indemnity agreement will be in addition to any liability which you or any
Additional Agent might otherwise have.
(c) If the indemnification provided for in this Section 7 is
unavailable, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) in such proportion as is
appropriate to reflect not only the relative benefits received by the Company on
one hand and you and the Additional Agents, if any, on the other from the
Offering, but also the relative fault of the Company on the one hand and you and
the Additional Agents, if any, on the other in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities, or
expenses (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and you and the Additional Agents, if any, on the other, shall be
deemed to be in the same proportion as the total maximum net proceeds from the
Offering (before deducting expenses) received by the Company, bear to the total
selling commissions and the value of the Warrant received by you and the
Additional Agents, if any. The relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, you or an Additional Agent, the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission, and whether a party breached a
representation or warranty or covenant or agreement contained in this Agreement.
The Company and you agree that it would not be just and equitable if
contribution were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
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<PAGE>
to above. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities or expenses (or actions in respect thereof)
referred to above shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such claim. Notwithstanding the provisions of this paragraph
(c), you shall not be required to contribute any amount in excess $350,000 less
the amount of any damages which you have otherwise been required to pay by
reason of an untrue or alleged untrue statement or omission or alleged omission
by the Company. Notwithstanding the provisions of this paragraph (c), the
Company shall not be required to contribute any amount in excess of $5,000,000
less the amount of any damages which the Company has otherwise been required to
pay by reason of an untrue or alleged untrue statement or omission or alleged
omission by you. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
8. Survival of Indemnities, Representations, Warranties, etc. The
respective indemnities, covenants, agreements, representations, warranties, and
other statements of you and the Company as set forth in this Agreement or made
by them respectively, pursuant to this Agreement, shall remain in full force and
effect, regardless of any investigation made by or on behalf of you, the Company
or any of the officers or directors of the Company or any controlling person,
and shall survive delivery of and payment for the Common Stock.
9. Conditions of Your Obligations. Your obligations hereunder are
subject to the accuracy in all material respects at and (except as otherwise
stated herein) as of the date hereof and at and as of the Closing Date, of the
representations and warranties made herein by the Company, to the compliance in
all material respects at and as of the Closing Date by the Company with its
covenants and agreements herein contained and other provisions hereof to be
satisfied at or prior to the Closing Date and to the following additional
conditions:
(a) You shall not have stated in writing prior to the Closing Date to
the Company that the Memorandum, or any amendment or supplement thereto contains
an untrue statement of fact which, in your opinion, is material, or omits to
state a fact which, in your opinion, is necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(b) You shall have received from Squire, Sanders & Dempsey L.L.P.,
counsel for the Company, an opinion, dated the Closing Date, substantially to
the effect set forth in Exhibit II hereto.
(c) You shall have received from Snell & Smith, P.C., your counsel, an
opinion or opinions dated the Closing Date with respect to such matters as you
may reasonably request, and the Company shall have furnished to such counsel
such documents as they may reasonably request for the purpose of enabling them
to pass upon such matters.
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<PAGE>
(d) You shall have received a certificate, dated the Closing Date, of
the Chief Executive Officer or the President and the chief financial or
accounting officer of the Company to the effect that:
(i) No injunction preventing or suspending the use of the
Memorandum has been issued, and, to the best of the knowledge of the
signers, no proceedings for that purpose have been instituted or are
pending or contemplated under the 1933 Act or any
State securities laws;
(ii) The representations and warranties of the Company in this
Agreement are true and correct in all material respects at and as of
the Closing Date, and the Company has complied in all material respects
with all the agreements and satisfied in all material respects all the
conditions on its part to be performed or satisfied at or prior to the
Closing Date;
(iii) No litigation has been instituted or threatened against
the Company of a character required to be disclosed in the Memorandum
that is not so disclosed; and
(iv) Between the date of this Agreement and the Closing Date,
there has not been any material adverse change, or to the knowledge of
the Company, any development involving a prospective material adverse
change (so far as the Company may now foresee), in the condition
(financial or otherwise), business, prospects, or results of operations
of the Company.
(e) The Company shall have furnished to you such additional
certificates as you may have reasonably requested as to the accuracy, at and as
of the Closing Date, of the representations and warranties made herein by it, as
to compliance at and as of the Closing Date by it with its covenants and
agreements herein contained and other provisions hereof to be satisfied at or
prior to the Closing Date and as to other conditions to your obligations
hereunder.
(f) There shall not have been any material adverse change in any legal
proceedings or regulatory actions pending or the commencement of similar actions
which, if determined adversely to the Company, would have a material adverse
effect on the condition (financial or otherwise), business, property, or results
of operations of the Company.
(g) You shall have received a Lock-Up Letter from each executive
officer and director of the Company.
If any of the conditions provided for in this Section 8 shall not have
been satisfied when and as required by this Agreement, this Agreement may be
terminated by you by notifying the Company of such termination in writing at or
prior to the Closing Date, but you shall be entitled to waive any of such
conditions.
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<PAGE>
10. Effective Date. This Agreement shall become effective at 11:00
A.M., Houston Time, on the date hereof.
11. Termination. In the event of any termination of this Agreement
under this or any other provision of this Agreement, there shall be no liability
of any party to this Agreement to any other party, other than as provided in
Sections 6, 7, and 8.
This Agreement may be terminated after it becomes effective by (A) the
Company for any reason by notice to you and (B) you by notice to the Company (i)
if at or prior to the Closing Date trading in securities on the New York,
American Stock Exchange, or Nasdaq Stock Market shall have been suspended or
minimum or maximum prices shall have been established on either such exchange or
stock market, or a banking moratorium shall have been declared by Texas or
United States authorities (unless such suspension is made pending completion of
the sale of the Shares, at which time, such suspension will be lifted); (ii) if
at or prior to the Closing Date there shall have been an outbreak of hostilities
between the United States and any foreign power, or of any other insurrection or
armed conflict involving the United States which, in your reasonable judgment,
makes it impracticable or inadvisable to offer or sell the Common Stock; (iii)
if there shall have been any development or prospective development involving
particularly the business or properties or securities of the Company or the
transactions contemplated by this Agreement, which, in your reasonable judgment,
makes it impracticable or inadvisable to offer or deliver the Common Stock on
the terms contemplated by the Memorandum, or (iv) if there shall be any
litigation or regulatory action, pending or threatened against or involving the
Company, which, in your reasonable judgment, makes it impracticable or
inadvisable to offer or deliver the Common Stock on the terms contemplated by
the Memorandum.
If, and only if, the Company terminates this Agreement after it becomes
effective for any reason or the Offering fails to close because of the Company's
breach of any representations or warranties contained in this Agreement or the
Company's failure to fulfill its covenants and agreements contained in this
Agreement, the Company shall pay you a fee of $100,000, plus actual expenses
incurred as provided in Section 6 hereof, less the amounts previously paid to
you by the Company pursuant to Section 6, which shall be in addition to all
amounts previously paid to you and any amounts payable to you pursuant to
Section 7 or 8 hereof.
12. Notices. All communications hereunder shall be in writing and, if
sent to you or any Additional Agent shall be mailed, delivered or telegraphed
and confirmed to you, at 3100 Chase Tower, Houston, Texas 77002, or if sent to
the Company shall be mailed, delivered or telegraphed and confirmed to the
Company, to 14555 North Scottsdale Road, Suite 320, Scottsdale, Arizona 85254.
13. Successors. This Agreement shall inure to the benefit of and be
binding upon you, any Additional Agents, the Company and their respective
successors and legal representatives. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person other than the
persons mentioned in the preceding sentence any legal or equitable right,
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<PAGE>
remedy or claim under or in respect of this Agreement, or any provisions herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person; except that the representations, warranties,
covenants, agreements and indemnities of the Company contained in this Agreement
shall also be for the benefit of the person or persons, if any, who control you
or any Additional Agent within the meaning of Section 15 of the 1933 Act, and
your and any Additional Agent's indemnities shall also be for the benefit of
each officer and director of the Company and the person or persons, if any, who
control the Company within the meaning of Section 15 of the 1933 Act.
14. Applicable Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas.
If the foregoing correctly sets forth our understanding please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter and your acceptance shall constitute a binding agreement between us.
Very truly yours,
CAPITAL TITLE GROUP, INC.
By: /s/ Donald R. Head
-----------------------------------
Name: Donald R. Head
Title: President
Accepted and delivered in Houston,
Texas as of the date first
above written
SANDERS MORRIS MUNDY INC.
By: /s/ Charles L. Davis
------------------------------
Charles L. Davis, Vice President
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<PAGE>
EXHIBIT I
OPINION OF COUNSEL TO THE COMPANY
(i) The Company has been duly organized and is validly existing and in
good standing as a corporation under the laws of the State of Delaware and is
qualified to do business as a foreign corporation in the State of Arizona, with
corporate power and authority to own or lease its properties and to conduct its
business as described in the Memorandum.
(ii) All action required to be taken by the Company as a condition to
the due and proper authorization, issuance, sale, and delivery of the Common
Stock of the Company to subscribers therefor in accordance with the terms of the
Placement Agent Agreement and the Memorandum has been taken; and, assuming the
due and valid execution and delivery by subscribers of Subscription Agreements,
and the payment of the consideration for the Common Stock of the Company
specified in the Memorandum, the Common Stock of the Company issued to
subscribers will be duly and validly issued, fully paid, and non-assessable.
(iii) The authorized and, to our knowledge, issued and outstanding
shares of capital stock of the Company as of April 13, 1998, are as follows:
Par Shares Shares
Title Value Authorized Outstanding
----- ----- ---------- -----------
Common Stock $0.001 50,000,000 12,168,029
The outstanding shares of Common Stock of the Company are duly authorized,
validly issued, fully paid, and nonassessable, with no personal liability
attaching to the ownership thereof, except for personal liability that may
attach to shareholders pursuant to Section 164 of the Delaware General
Corporation Law (the "DGCL"). Except as described in the Memorandum and the
Placement Agent Agreement, to our knowledge, the Company has not granted or
issued, or agreed to grant or issue, any options, warrants, or similar rights to
acquire any of the authorized but unissued shares of its capital stock. Except
as set forth above and in the Memorandum and the Placement Agent Agreement, to
our knowledge, there are no outstanding agreements or understandings to which
the Company is a party with respect to the sale of any shares of the capital
stock of the Company.
(iv) To our knowledge, the capital stock of the Company conforms in all
material respects to the description thereof contained in the Memorandum.
(v) The execution, delivery and performance of the Placement Agent
Agreement, the incurrence of the obligations therein set forth and the
consummation of the transactions contemplated therein and in the Memorandum
(assuming approval of the Offering by the
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<PAGE>
Company's shareholders) will not conflict with or result in a breach of, or
default under, the cer tificate of incorporation or bylaws of the Company, or to
our knowledge result in a breach of, or default under any material loan
agreement, mortgage, deed of trust, indenture or other agreement or instrument
relating to borrowed money known to us to which the Company is a party or by
which it is bound, except to the extent that the same have been waived or cured,
or any material law, statute, rule or administrative regulation applicable to
the Company or its properties.
(vi) There are no pre-emptive rights or other rights to subscribe for
or to purchase, or any restriction upon the voting or transfer of, any shares of
Common Stock pursuant to the Company's certificate of incorporation, by-laws or,
to such counsels's knowledge, any agreement or other instrument to which the
Company is a party, except as set forth in the Memorandum.
(vii) The Placement Agent Agreement has been duly and validly
authorized, executed and delivered by or on behalf of the Company and
constitutes a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms except as such enforceability
may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization,
moratorium, rearrangement, liquidation, conservatorship, receivership, or
similar laws relating to or affecting creditors' rights generally and except as
enforceability of the indemnity and contribution provisions contained in Section
7 of the Placement Agent Agreement may be limited by applicable law or
principles of public policy.
(viii) If the Placement Agent and the Company offer the Common Stock
only to "accredited investors" (as such term is defined in the Rules and
Regulations) and up to 35 investors who are not accredited investors, and do not
generally solicit purchasers of the Common Stock, the offering and sale of the
Common Stock in accordance with the Purchase Agreement will be exempt from the
registration provisions of the 1933 Act under Section 4(2) thereof and
Regulation D promulgated thereunder.
(ix) To such counsel's knowledge, no consent, approval, authorization
or order of any court or governmental authority or agency is required for the
consummation by the Company of the transactions contemplated by the Placement
Agent Agreement, except such as may be required by the National Association of
Securities Dealers, Inc., the 1933 Act, the Rules and Regulations, or state
securities or Blue Sky laws.
(x) To such counsel's knowledge, except as set forth in the Memorandum,
there are no legal or governmental proceedings pending to which the Company is a
party or to which any of its properties are subject, which, if determined
adversely to the Company would individually or in the aggregate result in a
material adverse change in the condition (financial or otherwise), business,
properties, or results of operation of the Company, and, to such counsel's
knowledge, no such proceedings have been threatened by governmental authorities
or others.
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<PAGE>
In addition, such counsel shall state that such counsel has
participated in telephone conferences with officers and other representatives of
the Company, and representatives of the Placement Agent at which the contents of
the Memorandum were discussed and, although such counsel is not passing upon and
does not assume responsibility for the accuracy, completeness or fairness of the
statements contained in the Memorandum, on the basis of the foregoing nothing
has come to the attention of such counsel that causes them to believe that the
Memorandum (as amended and supplemented) as of its date and at the Closing Date
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not, in light of the circumstances under which they were made, not misleading
(it being understood that such counsel need express no opinion with respect to
the financial statements and schedules and other financial and statistical data
included in or omitted from the Memorandum or any supplement or amendment
thereto).
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TITLE PLANT AGREEMENT
THIS AGREEMENT is being executed on the 29TH day of APRIL, 1998. The parties to
this Agreement are SECURITY UNION TITLE INSURANCE COMPANY, a California
corporation ("Security Union"), and CAPITAL TITLE GROUP, INC., an Arizona
corporation ("Customer").
RECITALS
A. Security Union and Customer wish to enter into this Agreement for the
purpose of providing Customer with access to the Title Plant owned
exclusively by Security Union, pertaining to real property in San Diego
County, California (the "County"), as more particularly described in
Paragraph 3(a) of this Agreement.
B. Security Union currently maintains its title plant for the County at its
facility located at 3750 Convoy Street, San Diego, California, hereinafter
referred to as "Title Plant Facility".
TERMS OF THE AGREEMENT
In consideration of the facts recited above and the mutual
promises set out below, the parties agree as follows:
1. ACCESS
Security Union grants Customer nonexclusive access during normal working
hours (as set by Security Union) to all of the records and materials, as
described in Paragraph 3(a) below, in Security Union's Title Plant for the
County.
2. TERM
The effective date of this Agreement shall be the 1ST day of JUNE, 1998.
The effective date shall begin the initial term of this Agreement, which is
made for five (5) years. The Agreement shall be automatically extended for
additional five (5) year terms unless either party gives written notice to
the other party of its election not to extend at least six (6) months prior
to the end of the initial term or of any additional term.
<PAGE>
3. TITLE PLANT SERVICES
(a) TITLE PLANT DESCRIPTION. During the term of this Agreement, Security
Union agrees to make available to Customer for Customer's use in
searching titles, all of the records and materials located at Security
Union's title plant facility for the County including, but not limited
to, lot books (or microfilm copies of lot books or geographic
folders), on-line property index and general index (also known as an
"individual/corporation index"), as well as all microfilm, maps,
starters (i.e., copies of previously issued policies of title
insurance, preliminary reports, guarantees and binders, hereinafter
referred to as "Starters"), and copies of documents recorded in the
Official Records of the County. These records and materials shall also
include any additions made through Security Union's customary daily
input procedures, and shall be subject to any deletions resulting from
Security Union's customary purging procedures. These records and
materials, sometimes referenced in this Agreement collectively as a
Title Plant, will be used by Customer and others during the term,
subject to all the other provisions of this Agreement. Both parties
recognize that Security Union may in the future acquire records
through purchase, lease assignment or other method of transfer and
that Security Union may restrict, or may be restricted from allowing,
Customer from using such records. Any records so acquired and
restricted are not included in this Agreement.
(b) USE OF STARTERS. Starters furnished to Customer under this Agreement
are to be used by Customer solely for the purpose of searching and
examining specific parcels of real property. Customer agrees that no
other use of any Starter is permitted and further agrees that Security
Union will have no responsibility for errors or omissions of any kind
in these starters.
(c) AVAILABILITY OF STARTERS. The availability of particular Starters
under this Agreement shall be determined by Security Union and will
not include any
<PAGE>
Starters of any other company which Security Union may have in its
possession by reason of an agreement with that company if the
agreement with that company contains a provision restricting the use
of their Starters to Security Union. STARTERS IN THE POSSESSION OF
SECURITY UNION THAT WERE ISSUED BY TICOR TITLE INSURANCE COMPANY OF
CALIFORNIA OR ITS PREDECESSORS (THE "TICOR STARTERS") ARE NOT A PART
OF THIS AGREEMENT. Other than restrictions regarding the use of other
companies' Starters and the exclusion of the Ticor Starters, nothing
in this paragraph is intended to restrict Customer from access to all
of the Title Plant described in Paragraph 3(a) of this Agreement.
(d) CUSTOMER INVESTIGATION AND SATISFACTION. Customer has made its own
independent investigation of the operation of the Title Plant and of
the method of input, storage and retrieval of the information
contained in the Title Plant, as well as the quality of the
information in the Title Plant and the type of documents indexed,
including the criteria in effect for including or excluding specific
types of documents in daily plant input procedures, and the criteria
in effect for deleting, by purging procedures, specific types of
documents. Customer is satisfied that input, storage and retrieval
methods, and the quality of the information and the criteria for input
and purging, are satisfactory for the purposes intended in this
Agreement.
4. WARRANTIES, LIABILITIES AND INDEMNITIES
(a) WARRANTY EXCLUSION AND LIMITATION OF DAMAGE. SECURITY UNION MAKES NO
WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, INCLUDING THE
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, CONCERNING THE ACCURACY OR COMPLETENESS OF THE TITLE PLANT OR
THE INFORMATION CONTAINED IN THE TITLE PLANT. Customer agrees that in
no event shall Security Union be liable for any
<PAGE>
lost profits or for any special, consequential or exemplary damages
even if Security Union has been advised of the possibility of such
damages.
(b) DISCLAIMER OF LIABILITIES. Security Union and Customer agree that no
other person, firm or corporation not a party to this Agreement
acquires any rights under this agreement. Security Union and Customer
also agree that Security Union assumes no liability and will not be
held liable to Customer, or to Customer's customers or insureds, or to
any other person to whom Customer may furnish any title policy,
binder, guarantee, endorsement or other title assurance, or any report
or title information, by reason of any error or assertion of error in
the Title Plant or in any services or Starter furnished to Customer by
Security Union.
(c) INDEMNITY. If any customer or person claims or asserts that Security
Union has any liability by reason of an error in the Title Plant or in
any Starter furnished to Customer by Security Union, Customer agrees
to indemnify and hold Security Union harmless from and against the
claim or demand, including all costs, expenses, attorneys' fees and
actual loss or losses incurred or sustained by reason of the claim or
assertion. When a claim or assertion is made, Security Union agrees to
promptly give notice to Customer. Customer shall have the right, if it
so elects, to provide for the defense of Security Union, in any action
or litigation based upon or involving the claim or assertion, by
counsel of Customer's own choosing and at Customer's own cost, and to
pursue litigation to final determination. Customer shall also have the
right, whether or not any action or litigation results, to compromise
or settle the claim on behalf of Security Union but at the sole cost
of Customer.
5. TITLE PLANT ACCESS CHARGE
As set forth at Appendix A, attached.
6. SPACE USE CHARGE
Security Union shall provide and bill Customer on a monthly basis, and
Customer shall pay Security Union monthly for the space occupied by
<PAGE>
Customer's personnel, equipment and furniture at Security Union's Title
Plant facility.
(a) SQUARE FOOTAGE RATE. The initial space use charge shall be $1.75 per
square foot. Adjustments shall be made to the space use charge
effective the first day of January each year of the term of the
Agreement. The adjustment in the charge shall be an increase or a
decrease as necessary to adjust the space use charge to an amount
equal to the actual average square foot building expense of the prior
twelve month period and the rent rate to be paid by Security Union
during the succeeding twelve month period. The building expenses to be
included are: utilities, building maintenance and supplies (security,
landscaping, refuse, rest room and coffee room supplies), janitorial,
air conditioning maintenance, music/paging system, a ten percent
administrative charge and rent. Security Union will submit an itemized
statement to Customer during the month of June each year setting forth
Security Union's building costs for the prior twelve month period and
rent rate for the succeeding twelve month period, all which will be
used as a basis for any increase or decrease in the space use charge.
Any annual increase shall not exceed ten percent (10%), except that
the item of rent shall be adjusted to the actual amount specified in
any lease with a third party landlord. Customer shall have the right
to review the building cost records of Security Union at Security
Union's office.
(b) MINIMUM SPACE USE CHARGE. Customer has designated an area of
*______square feet as an initial space requirement. Customer shall pay
Security Union a minimum office space use charge based upon this
initial space requirement. Customer's space use may be increased, if
available, and Customer shall pay for increased space at the same
square footage rate as for the minimum space. The space use minimum
may be decreased only if Security Union has a substitute use or other
need for
* To be determined by separate letter agreement.
<PAGE>
such decreased amount of space. Any increase or decrease of the square
footage (space) must be agreed to in writing by both parties.
7. PAYMENT DUE DATE; AUDIT
(a) DUE DATE. All monies due from Customer are due and payable to Security
Union on the tenth (10th) work day of each month of the term of this
Agreement. Payment shall be sent to:
SECURITY UNION TITLE INSURANCE COMPANY
1007 East Cooley Drive
Colton, California 92324
Attn: Accounting Department
Payment shall continue to be sent to this address until notified in
writing as set forth at Paragraph 28 of this Agreement.
(b) PRORATION OF CHARGES. The charges, set forth at Paragraphs 5 and 6
above, for any partial month of Customer's use of the Title Plant at
the beginning or end of any term of this Agreement shall be prorated
according to the total number of days of use as that number of days
relates to the total number of days in the affected month.
(c) DEFAULT DUE TO NON-PAYMENT. A state of default exists under this
Agreement whenever Customer fails to pay, when due and payable, any
sum payable to Security Union for a period of fifteen (15) days after
the sum has become due and payable. To cure that default, the sum then
due, plus a late payment charge equal to ten percent (10%) of the sum
then due, must be paid to Security Union. In the event of default,
Security Union may discontinue the right of Customer to any service
provided for in this Agreement. If any state of default is not cured
within thirty (30) days after the sum first becomes due and payable,
and after written notice to Customer, Security Union may terminate all
rights of Customer under this Agreement.
(d) WRITTEN REPORT. Simultaneously with the payment of the monthly title
plant charges, Customer must furnish a written report to Security
Union, signed by an officer of Customer, showing the total orders
opened for all
<PAGE>
title assurances issued by Customer during the preceding month, and
any other information necessary to enable Security Union to determine
that the amount is correct. This information will be confidential to
and used by Security Union's auditors and accounting personnel and
will not be used for other purposes by Security Union. The report form
will be designed and furnished by Security Union.
(e) AUDIT. Security Union shall have the right to audit the accounts of
Customer, at the expense of Security Union, in order to verify the
correctness of the sums of money being paid to Security Union by
Customer. These audits shall be conducted so as not to unreasonably
interfere with the normal business routine of Customer. Customer shall
supply the following to Security Union at the end of each fiscal year:
+ A complete, signed copy of Customer's audited Annual Report to
the Insurance Commissioner of the State of California;
+ Audited financial statements for the County.
No information need be given to Security Union regarding any of the
business affairs of Customer other than information necessary to
determine the correctness of the amounts of sums paid to Security
Union under this Agreement.
8. COPIES OF TITLE DOCUMENTS FURNISHED BY CUSTOMER
During the term of this Agreement, on a monthly basis, Customer agrees to
furnish Security Union full and complete copies of all title policies,
binders, guarantees, endorsements or other title assurances, as well as
title reports for canceled orders issued by Customer on real property in
the County during the prior month. These copies of title assurances and
reports are to be forwarded to Security Union's Title Plant Manager of the
title plant facility for the County on or before the fifth(5th) work day of
every month. Security Union shall have the right
<PAGE>
to place these copies in Security Union's Title Plant for use by
Security Union or other customers. These copies become the property of
Security Union, free of any restrictions as to use or otherwise, but
without warranty as to correctness on the part of Customer.
9. DESK SPACE, EQUIPMENT AND SUPPLIES
(a) DESK AND EQUIPMENT SPACE. Security Union agrees to make available, at
Security Union's title plant facility, desk and equipment space as may
be reasonably necessary to be used by employees of Customer to
"search" title to specific property involved in Customer's title
orders. Security Union shall bill Customer on a monthly basis and
Customer shall pay Security Union monthly for use of space in the
title plant facility, in accordance with the provisions of Paragraph 6
of this Agreement.
(b) DEFINITION OF "SEARCH". For the purpose of definition, both parties
agree that the word "search", as used in this Agreement, refers to the
functions of identifying, locating and copying the proper accounts,
documents, Starters and maps necessary for examining, reporting on and
otherwise issuing title evidences on specific parcels of real
property. It does not include any functions of a title company or a
title insurance company beyond the identifying, collecting and initial
copying process described above and specifically does not include the
actual examination of the title and the process of "writing up" the
findings of the examination. Normal customer service activities are
intended to be included.
(c) EQUIPMENT AND SUPPLIES. All microfilm viewer-printers and copying
equipment used by Customer's employees are to be installed and paid
for by Customer, and all supplies and materials used by Customer's
employees are to be paid for by Customer. However, Customer may use
Security Union's micro film viewer-printers and copying equipment if
available and if Customer pays for the cost of its prorated share of
that use. Security Union shall provide personnel and equipment
necessary for the refiling of all film cassettes or reels pulled for
use by Customer and for printing, upon request, one initial copy for
Customer of any plant item
<PAGE>
which Security Union now or in the future deems necessary to restrict
from general access. These same services may be provided by Security
Union to all plant users. Security Union shall bill and Customer shall
pay its monthly pro rata share of the cost of providing these
services.
10. SERVICES NOT FURNISHED
Security Union will not be obligated to furnish tax, bond or assessment
information nor to furnish any title engineer or other help for the purpose
of verifying or creating a legal description of land involved in Customer's
orders nor any other service, except that which is specifically stated in
this Agreement.
11. PARKING NOT FURNISHED
Security Union will not be obligated to furnish parking for Customer's
employees.
12. TITLE PLANT BUILT BY CUSTOMER
Customer agrees that if at any time during the term of this Agreement it
elects to build or participate in the building of a title plant, it will do
so without the use of the Title Plant owned by Security Union. An election
by Customer to build or participate in the building of a title plant will
not discharge or relieve Customer of any of its obligations under this
Agreement.
13. OWNERSHIP AND USE OF THE TITLE PLANT
(a) PROPERTY OF SECURITY UNION. The Title Plant shall at all times remain
the property of Security Union.
(b) SUPERVISION BY SECURITY UNION. Customer agrees that the use of the
Title plant shall at all times be in the custody and under the
supervision of an employee of Security Union.
(c) NO UNAUTHORIZED USE. Customer agrees to make no reproductions of the
Title Plant or use or permit use of the information obtained from it
except to conduct its own title business as to specific orders and as
to specific parcels of real property, and to provide usual customer
service.
(d) COPIES OF DOCUMENTS. No part of the Title Plant shall be removed from
the premises of Security Union. However, subject to the other
provisions
<PAGE>
of this Agreement, Customer shall have the right to make copies of
documents and other information contained in the Title Plant.
(e) CONDUCT OF EMPLOYEES. The use of the Title Plant by Customer and the
conduct and physical appearance of employees of Customer while on the
premises of Security Union shall all be subject to the same directives
and instructions by Security Union now or in the future directed to
employees of Security Union. Security Union shall have the right to
refuse entrance and access to any employee of Customer not complying
with directives and instructions of Security Union.
(f) HOURS OF ACCESS. The use of the Title Plant shall be limited to the
normal business hours of Security Union, except that Security Union
will cooperate with Customer in emergency situations in endeavoring to
provide for the opening of the building and supervision of Customer's
use of the Title Plant by an employee of Security Union in order to
satisfy reasonable plant access requirements of customer, at the
expense of the Customer.
(g) ACCESS LIMITED. Access to the title plant facility and the use of the
Title Plant will be limited to the employees of Customer required to
search title, as defined in Paragraph 9(b) above, to specific property
involved in its title orders and to provide usual customer service.
Customer agrees that access to the Title Plant shall not be utilized
by Customer or any of its employees for the purpose of furnishing any
information to any other title insurance company, title company, or
any person, firm or corporation except Customer and Customer's
customers in the ordinary course of its business.
(h) NO PLANT TOURS. Customer is not allowed to conduct any organized
"plant tours" of the premises where the Title Plant is located.
(i) NO EXTRAORDINARY TITLE PLANT AGREEMENTS. Customer shall not be allowed
to provide for extraordinary Title Plant service agreements to its
customers. Use of the Title Plant is limited to specific bona fide
orders
<PAGE>
for title insurance policies, binders, guarantees, endorsements and
reports covering specific parcels of real property. However, Customer
shall have the right to utilize the Title Plant to furnish the usual
customer service as to inquiry by customers of Customer as regards
specific parcels of land or specific documents in the Title Plant.
(j) DUE CARE USE. Customer agrees to exercise due care in the use of the
Title Plant and of the space provided in the title plant facility so
as to prevent loss or damage. Customer also agrees that it will be
liable to Security Union for any loss or damage to the Title Plant or
building or any other property of Security Union arising out of a
failure to exercise due care or arising out of an intentional,
dishonest or fraudulent act of an employee of Customer.
(k) OTHER PLANT USES BY SECURITY UNION. Security Union shall have the
right, during the term of this Agreement, to enter into other
contracts with any title insurer, title company or any other person,
firm or corporation, covering all or any part of the Title Plant or
Security Union's facilities. Those contracts may include, but will not
be limited to, title plant leases, title plant service agreements,
underwriting contracts or any combination of the above.
(l) NONEXCLUSIVE USE. It is recognized by the parties that Security Union
shall continue to use the Title Plant owned by it in the usual and
ordinary course of its business of reporting upon and insuring land
titles, while at the same time furnishing plant services to Customer
as well as others.
(m) ADVERTISEMENT OF USE OR OWNERSHIP. During the term of this Agreement,
Customer shall not publicize to the public that Customer owns the
Title Plant or has any interest in the Title Plant except such rights
as are specifically granted to Customer by this Agreement. Likewise,
during the term of this Agreement, Security Union shall not in any
advertisement or publicity state that Customer is dependent upon
Security Union for use of its Title Plant.
<PAGE>
Security Union may, however, publicize to whatever extent it may
desire, its ownership of the Title Plant.
14. DISASTER OR OTHER INTERRUPTION OF SERVICE
(a) FORCE MAJEURE. If at any time either party to the Agreement is
prevented from performance when due (other than performance consisting
of payment of money) by a disaster such as or resulting from flood,
hurricane, cyclone, earthquake, fire or other event commonly referred
to as an "Act of God", causing extensive destruction or damage; or by
acts of war, riot, unlawful assembly, strikes, explosions, "peaceful
protest" gatherings or other similar events causing or accompanied by
extensive destruction; so that it is impossible or unreasonably
difficult for that party to perform, then its failure to perform when
performance is due will be deemed excused. However, that party must
take all reasonable steps to remedy its non-performance or delay in
performance with the least possible delay, and by doing whatever may
reasonably be done to mitigate the adverse effect of its
non-performance upon the other party to this Agreement.
(b) TEMPORARY INTERRUPTIONS. The parties recognize that the input and
retrieval of the information contained in Security Union's computer
system is subject to the hazards of temporary interruptions by reason
of equipment failure arising out of numerous possible causes and that
Security Union is not a guarantor of the constant and continual
availability of the computer system installed on the premises of
Security Union. Security Union does, however, agree that it will
maintain a reasonable capability to provide timely, workmanlike repair
and maintenance service whenever the computer system becomes
inoperable.
(c) SECURITY COPY. Security Union further covenants and agrees that will
at all times maintain a security copy of that portion of the Data Base
which is contained in Security Union's computer system. The security
copy shall be in the form of magnetic tape, stored away from the
location
<PAGE>
of Security Union's computer center. The magnetic tape security copy
shall be updated monthly.
15. COMPUTER SYSTEM LIABILITY DISCLAIMER
Notwithstanding any provision of this Agreement to the contrary, Customer
agrees that Security Union shall incur no liability to Customer in the
event of damage or destruction to the computer system installed on the
premises of Security Union or any part of that computer system from any
cause whatsoever. Security Union shall not be required to reinstitute or
reconstruct the then existing computer system if it is damaged or destroyed
from any cause whatsoever. Security Union does, however, covenant and agree
that it will use its best efforts to devise and implement reasonably
adequate security measures to prevent damage or destruction of the computer
system and interruptions of the use of the computer system, all in
accordance with reasonable prudent business practice.
16. OTHER PLANT CONTRACTS
Security Union shall have the right, during the term of this Agreement, to
enter into other contracts with any title insurer or underwritten title
company, or any other person, firm or corporation, covering its title plant
facilities or any portion of those facilities, including, but not limited
to, title plant leases or title plant service agreements.
17. SYSTEMS CHANGES
It is anticipated that Security Union may, during the existence of this
Agreement, but without obligation to do so, make certain systems additions
or changes in the title plant or in the method of input, storage and
retrieval, it is agreed by Customer that Security Union shall have the
right to make such changes or additions so long as the use of the Title
Plant by Customer is comparable to the use by others.
18. CHANGE OF LOCATION
Three (3) months after serving upon Customer written notice of its
intention to move the Title Plant, Security Union shall have the right to
move the physical location of
<PAGE>
its Title Plant, and the space and the access furnished under this
Agreement from the present location to any other location. Security Union
may move its computerized records for the Title Plant, any appurtenant
equipment and software to any location at any time without notice
19. NONLIABILITY FOR INJURY OR DAMAGE AND INDEMNIFICATION
(a) NONLIABILITY. Security Union shall not be liable for injuries to any
employees, guests or invitees of Customer nor for damage to property
of Customer caused by the conditions of the premises where the Title
Plant is located.
(b) INJURY OR DAMAGE. Customer agrees to neither hold nor attempt to hold
Security Union, its agents or employees liable for any injury or
damage, either proximate or remote, occurring through or caused by any
repairs, alterations, injury or accidents in or to the premises, to
adjacent premises or other parts of the building, whether by reason of
the negligence or fault of Security Union, another Customer or any
other person; nor liable for any injury of damage occasioned by gas,
smoke, rain, snow, wind, ice, hail, water, lightning, earthquakes,
war, civil disorder, strike, defective electric wiring or the breaking
or stoppage of the plumbing or sewage upon or in the building or
adjacent premises, whether the breakdown or stoppage results from
freezing or otherwise and no matter how often injury or damage occurs.
All personal property stored in the premises will be at the sole risk
of the Customer. Security Union shall not be liable for any misuse or
unauthorized use of Customer's equipment or property, including
telephone equipment and lines.
(c) INDEMNIFICATION. Customer accepts the premises and agrees to defend,
indemnify and hold Security Union harmless from any and all claims,
damages, liabilities, losses or actions, including costs, expenses and
attorneys' fees, arising out of actions or claims by employees, guests
or invitees of Customer, by reason of death, injuries to person or
damage
<PAGE>
to property arising out of or relating to use of the premises or use
of any office equipment located on the premises where the Title Plant
is located.
20. INSURANCE
Customer agrees to maintain and pay the premium for the following insurance
coverage during the entire term of this Agreement, together with any
special endorsements as specified:
(a) WORKERS' COMPENSATION INSURANCE. Workers' Compensation Insurance to
meet statutory State requirements (or approval by the State of
California to be permissibly self-insured) and Employers' Liability
coverage with minimum limits of One Hundred Thousand Dollars
($100,000.00) for all persons employed by Customer who may come on to
or occupy the premises and Customer will have its carrier waive any
right of subrogation thereunder with respect to Security Union.
(b) COMPREHENSIVE GENERAL LIABILITY INSURANCE. Comprehensive General
Liability Insurance covering all injuries to persons or damages to
property that occur in or about the premises. This policy will provide
at least the following coverages and limits:
i. The policy will name Security Union as an Additional Insured.
ii. The policy will carry a minimum combined single liability limit
of One Million Dollars ($1,000,000.00), or such higher amount as
Security Union may from time to time reasonably require.
iii. The policy shall be endorsed with a cross-liability endorsement
stating that in the event that a claim is brought by one insured
against another insured under the policy, or by an employee of
one insured against another insured under the policy, each
insured shall be considered a separate insured for the purpose of
the insurance.
iv. The policy shall be written on a "caused by any occurrence"
rather than written on the "caused by accident" basis for bodily
injury and property damage liability coverage.
<PAGE>
v. The policy shall be written with a blanket contractual liability
endorsement providing automatic coverage for bodily injury or
property damage, assumed under any type of written contract in
addition to types of contracts defined in the policy form, except
any contract under which the insured assumes liability for the
sole negligence of an indemnitee.
vi. The policy shall be written using a "personal injury" endorsement
providing coverage for claims arising out of false arrest, false
imprisonment, defamation of character, libel and slander,
wrongful eviction, and invasion of privacy, and such endorsement
shall not contain an exclusion of coverage for claims for
"personal injury" brought by employees of an insured.
(c) PROPERTY DAMAGE INSURANCE. Customer will obtain and maintain
during the entire term All-Risk Property Damage coverage for its
personal property, trade fixtures, any interior improvements
constructed within the premises and any alterations to the premises
made by Customer pursuant to this Agreement, all on a replacement cost
basis. Customer will have its carrier waive any right of subrogation
on behalf of Security Union.
(d) OTHER INSURANCE MATTERS.
i. All insurance required of Customer under this Agreement will be
primary coverage and will not be contributing with any other
insurance maintained by Security Union. The insurance must be
written by insurance companies reasonably satisfactory to
Security Union. Customer must provide Security Union prior to
occupancy, and annually thereafter, satisfactory Certificates of
Insurance by Customer to Security Union must specify that thirty
(30) days written notice of cancellation or non-renewal will be
provided to Security Union.
<PAGE>
ii. The insurance policies must insure performance by the Customer of
the indemnity provisions of this Agreement related to the use of
the premises.
iii. If Customer fails to obtain any of the insurance required in this
Agreement, Security Union may obtain the insurance on behalf of
Customer and the cost of obtaining the insurance must be paid by
Customer as additional charges with the first payment of charges
which are due subsequent to Security Union incurring any costs.
21. COMPETITION
This Agreement shall not operate to deny either party the right and
opportunity to compete with each other, or to compete on an equal basis on
the open market. Nothing contained in this Agreement is to be deemed to
constitute an association, partnership or joint liability between the
parties. The parties have no intention or thought to agree between
themselves, or even to confer together, as to underwriting methods, as to
fees or premiums to be charged by them to their customers, or as to any
other processes or practices of either party except as otherwise stated or
prescribed by the Issuing Agency Agreement entered into between the
parties.
22. DEFAULT
(a) TERMINATION ON DEFAULT. If either party does not faithfully perform
all of the terms and provisions of this Agreement or in any manner
fails, refuses or neglects to perform its obligations under this
Agreement and does not cure that default within ten (10) days after
receipt of written notice specifying the default, then this Agreement
may be terminated by the party not in default.
(b) NONEXCLUSIVE REMEDIES. Any right of termination is in addition to any
other remedy provided by law or equity.
(c) NONWAIVER. Failure by either party to declare a termination of this
Agreement for the breach of any one or more of the provisions
contained in this Agreement or a failure of either party to take
action under the provisions of
<PAGE>
this Agreement for a breach will never be construed as a waiver of the
breach or any subsequent breach of the same or other provisions of
this Agreement. But, on the contrary, either party may at any time
take advantage of and act upon the breach in accordance with
applicable provisions of this Agreement.
23. CONSTRUCTION AND PERFORMANCE
This Agreement shall not be construed against the party preparing it, but
shall be construed as if all parties prepared this Agreement and in
accordance with the laws of the State of California. The headings of each
numbered paragraph are to assist in reference only and are not to be used
in the interpretation of the paragraphs.
24. ARBITRATION
If either party institutes an action against the other party for breach of
this Agreement, at Security Union's option, arbitration shall be conducted
in accordance with the Rules of Commercial Arbitration of the American
Arbitration Association ("AAA"). The arbitration shall be conducted in Los
Angeles by a single arbitrator. If the parties have not agreed to a
mutually acceptable arbitrator within thirty (30) days of the date of the
notice to arbitrate, the arbitrator shall be selected by the AAA from its
regularly maintained list of commercial arbitrators. The arbitrator shall
conduct a single hearing for the purpose of receiving evidence and shall
render a decision within thirty (30) days of the conclusion of the hearing.
The parties shall be entitled to require production of documents prior to
the hearing in accordance with the procedures set forth in the Federal
Rules of Civil Procedure, and shall exchange a list of witnesses and be
entitled to conduct up to five (5) depositions in accordance with the
procedures of the Federal Rules of Civil Procedure. The decision of the
arbitrator shall be binding and final.
25. GOVERNING LAW
This Agreement is to be construed under the laws of the State of
California.
<PAGE>
26. SAVINGS CLAUSE
In any one or more of the terms, provisions, promises, covenants or
conditions of this Agreement, or their application to any person,
corporation, other business entity, or circumstance is to any extent
adjudged invalid, unenforceable, void or voidable for any reason whatsoever
by a court of competent jurisdiction, each and all of the remaining terms,
provisions, promises, covenants and conditions of this Agreement and their
application to other persons, corporations, business entities or
circumstances will not be affected and shall be valid and enforceable to
the fullest extent permitted by law.
27. ASSIGNMENT OR TRANSFER
(a) INVOLUNTARY TRANSFER. If Customer's rights and benefits in this
Agreement are transferred in whole or in part by involuntary method,
or by operation of law, or by merger, Security Union shall have the
right to terminate this Agreement if the result is not satisfactory to
Security Union.
(b) NONASSIGNABLE. This Agreement cannot be assigned, in whole or in part,
by Customer without the prior written consent of Security Union, which
consent shall not be unreasonably withheld.
(c) BANKRUPTCY OF CUSTOMER. Notwithstanding the definite term of this
Agreement, it will be automatically terminated upon the filing of a
petition in bankruptcy by Customer, or the appointment of a receiver
for Customer, or the adjudication in bankruptcy on an involuntary
partition against Customer, or if any general assignment for the
benefit of creditors by Customer of its assets is made.
(d) SALE OF CUSTOMER'S ASSETS. If Customer sells all or substantially all
of its assets, then Security Union, at its option, shall have the
right to terminate this Agreement.
(e) ASSIGNMENT BY SECURITY UNION. Security Union shall have the right,
without Customer's consent, to assign this Agreement to a corporation
with which it may merge or consolidate, to any parent or subsidiary of
Security Union or
<PAGE>
subsidiary of Security Union's parent, or to a purchaser or
substantially all of Security Union's assets.
28. NOTICES
(a) METHODS AND ADDRESSES. All written notices permitted or required to be
given under this Agreement may be personally delivered to the office
of each of the parties, or mailed to the office of each party by
Registered or Certified United States Mail when addressed as follows:
To Security SECURITY UNION TITLE INSURANCE COMPANY
Union: 1007 East Cooley Drive
Colton, California 92324
Attention: Vice President,
Plant and Title Support Operations
-and -
SECURITY UNION TITLE INSURANCE COMPANY
245 South Los Robles Avenue, Ste. 105
Pasadena, California 91109
Attention: Division Counsel
To Customer: CAPITAL TITLE GROUP, INC.
14555 N. Scottsdale Road
Suite 320
Scottsdale, Arizona 85254
Attention: Chief Executive Officer
(b) CHANGE OF ADDRESS. Either party may, by written notice to the other,
change the address to which notices are to be sent.
29. COMPLIANCE WITH LAWS AND REGULATIONS
Customer agrees to use information received from Security Union in
compliance with all applicable State and Federal laws and regulations,
including the Federal Credit Reporting Act (U.S.C.A. Title 15, Chapter 41,
Subchapter III).
<PAGE>
30. SURVIVAL
Following the expiration or termination of this Agreement, whether by its
terms, operation of law or otherwise, all terms, provisions or conditions
required for the interpretation of this Agreement or necessary for the full
observation and performance by each party hereto of all rights and
obligations arising prior to the date of expiration or termination, shall
survive such expiration or termination.
31. PROPRIETARY INFORMATION
Customer agrees that all Security Union supplied information, software,
manuals and documentation provided as part of this service are proprietary
and confidential information of Security Union or its suppliers. Customer
will permit only its employees or authorized representatives to have access
to such material. Customer further agrees to not make copies of such
manuals, documentation or Agreements, Attachments and Exhibits. Customer
will return all Security Union property upon termination or expiration of
this Agreement.
32. SUPPLIER ARRANGEMENTS.
Certain of the material and information provided or made available to
Customer under this Agreement is obtained by Security Union from third
party suppliers. In the event that any such supplier fails to deliver (or
delays the delivery of) such material or information (through no fault of
Security Union) or in the event that any such supplier materially and
adversely modifies the conditions or cost to Security Union of obtaining
such material or information, then Security Union, at its option, may (1)
use reasonable efforts to seek alternative sources of supply on
commercially reasonable term; or (2) suspend or terminate its obligations
to Customer under this Agreement either with respect to the portion of such
Agreement which relates thereto or with respect to the entire Agreement
upon sixty (60) days written notice; or (3) notwithstanding any other
provision of this Agreement to the contrary, increase the applicable fees
or charges upon thirty (30) days written notice; or (4) any combination of
the foregoing. Security Union will incur no liability to Customer with
respect to any action or omission under this Paragraph.
<PAGE>
33. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the parties
pertaining to the subject contained in it and supersedes all prior and
contemporaneous agreements, both oral and written, representations and
understandings of the parties. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by the parties.
No waiver of any of the provisions of this Agreement is to be considered a
waiver to constitute a continuing waiver. No waiver shall be binding unless
executed by the party making the waiver.
34. COUNTERPART EXECUTION
This Agreement may be executed simultaneously in two counterparts, each of
which shall be deemed an original but which together shall constitute one
and the same instrument.
The parties have executed this Agreement effective as of the date written
at Paragraph 2 of this Agreement.
SECURITY UNION TITLE INSURANCE CAPITAL TITLE GROUP, INC.
COMPANY ("Security Union") ("Customer")
By: /s/ Kevin J. Beach By: /s/ Donald R. Head
-------------------------- --------------------------
Print Name: Kevin J. Beach Print Name: Donald R. Head
----------------- ------------------
Title: Vice President Title: CEO
---------------------- -----------------------
Date: 5-12-98 Date: 4-29-98
---------------------- -----------------------
<PAGE>
APPENDIX "A"
SCHEDULE OF FEES
1. INITIAL BACK PLANT CHARGE.
The initial charge to Customer for access to the Back Title Plant shall
be Ten Thousand Dollars ($10,000.00).
2. MONTHLY BASE CHARGE.
The monthly charge to Customer for access to the Title Plant shall be a
base fee of Eight Thousand Dollars ($8,000.00) each month, for the
County. This base fee shall allow three hundred title orders for the
month. This base fee shall be due and payable whether or not Customer
finds it necessary to access the Title Plant.
3. FEE FOR TITLE ORDERS EXCEEDING BASE AMOUNT.
Security Union shall bill and Customer shall pay Twelve Dollars and
Fifty Cents ($12.50) for each title order in excess of three hundred a
month.
4. ADDITIONAL FEES.
An additional fee of $.10 shall be made each month for each of
Customer's open order items remaining open in the system over 180 days.
5. IMAGE CHARGES.
Customer shall pay Security Union each month for Customer's image
access in the prior month according to the following:
Type of Image Charge
------------- ------
Document $ .42 per Document
Map $ .25 per Map page
Starter $1.25 per Starter
6. NETWORK ACCESS.
Security Union shall bill and Customer shall pay a Network Access
charge of Four Hundred Dollars ($400.00) each month, per site.
Page 1 of 2
<PAGE>
APPENDIX "A"
7. ANNUAL INCREASE.
The additional fees charge as stated above, shall be increased annually
on July 1 (first adjustment year 1999) by the percentage amount
indicated by the annual change in the Consumer Price Index for urban
wage earners and clerical workers for the Los Angeles/Riverside/Anaheim
Area of the State of California, as compiled by the U.S. Department of
Labor, Bureau of Labor Statistics ("Index") for the twelve (12) months
immediately preceding the adjustment date.
The charges shown above do not include the necessary equipment, data
line and/or communications equipment necessary to access the title
plant. These monthly charges shall be determined at the time of
installation and invoiced separately.
Page 2 of 2
June 12, 1998
Mr. Donald R. Head
Chairman of the Board and
Chief Executive Officer
CAPITAL TITLE GROUP, INC.
14555 North Scottsdale Road, Suite 320
Scottsdale, Arizona 85254
RE: Amendment to Acquisition Consulting Agreement between Capital Title Group,
Inc. and Miller Capital Corporation Dated January 28, 1998
Dear Don:
Per our recent discussions, Miller Capital Corporation ("MCC") has agreed to
amend our Acquisition Consulting Agreement (the "Agreement") specifically
Section II, Compensation, relating to fees to be paid to MCC in the event the
Company effectuates a corporate restructuring, merger, joint venture or
acquisition during the term of the Agreement in accordance with the fee schedule
as detailed in Section II.
The Agreement is hereby amended to state that MCC will not be entitled to a fee
for transactions, as contemplated under the Agreement, that are arranged
directly by the Company and where each transaction is in an amount of $5,000,000
or less. In the event the Company requests MCC's services on transactions of
$5,000,000 or less, then MCC and the Company will negotiate an acceptable fee
for services in advance of MCC's acceptance of such assignment.
Further, MCC and Capital Title Group are presently negotiating on the potential
acquisition of Northwestern Title Company, which if completed MCC agrees to
accept a reduced minimum fee for the transaction in the amount of $125,000 as a
cash payment and $25,000 in value of the Company's common stock (the "Common
Stock"). The Company reserves the right to bonus MCC for additional compensation
at the close of the transaction. The Common Stock will be priced at the average
Bid price for 30 days prior to the closing date of the transaction and will
include registration and piggyback rights.
<PAGE>
Mr. Donald R. Head
Capital Title Group, Inc.
Amendment to Acquisition Consulting Agreement between
Capital Title Group, Inc. and Miller Capital Corporation Dated January 28, 1998
June 12, 1998
SIGNATURE PAGE ONLY
AGREED AND ACCEPTED:
Please confirm that the foregoing correctly sets forth our mutual
understanding by signing and returning the copy of this Agreement provided for
that purpose.
Capital Title Agency Inc. Miller Capital Corporation
Donald R. Head Rudy R. Miller
By: By:
------------------------------------ -------------------------------
Title: Chairman and CEO Title: Chairman and CEO
Date: Date:
----------------------------------- -----------------------------
LETTER OF AGREEMENT
This letter will confirm and constitute the agreement ("Agreement") as
of the 16th day of June, 1998 between Capital Title Group, Inc. (hereinafter
"Capital Title" or the "Company") and Miller Capital Corporation ("MCC")
pursuant to which MCC will furnish to the Company certain management consulting,
financial advisory and investor relations services.
1. MCC SERVICES.
MCC will perform the following services for the Company: (i) financial
consultation with respect to the Company's funding requirements and projected
associated costs to include preparation of reports and valuation meaningful to a
private placement or public equity funding; (ii) advice and consultation with
respect to financial structure, markets and placement of any equity offering;
and (iii) investor relations services.
It is expressly acknowledged and agreed by the parties hereto that
MCC's obligations do not insure the successful negotiation of or obtaining of
any type of Financing for the Company and any efforts by MCC for obtaining
Funding for the Company shall be done on a "BEST EFFORTS" basis only. MCC is not
a NASD registered broker/dealer.
It is expressly acknowledged and agreed by the parties hereto that MCC
and employees of MCC are independent contractors and are not employees or
officers of the Company.
2. PROVISION OF INFORMATION BY THE COMPANY.
The Company acknowledges that MCC, in order to perform its services
effectively under this Agreement and to satisfy such obligations, requires
prompt receipt of all material information with respect to the Company, its
operations and prospects. Accordingly, the Company will furnish to MCC copies of
all financial statements, tax returns, reports and agreements executed in
relation to the Company's business. The Company recognizes the necessity of
promptly notifying, and will promptly notify, MCC of all material developments
concerning the Company, its business and prospects and will supply MCC with
information sufficient to enable MCC to make a determination as to its
compliance with its own procedures as well as any legal requirements.
MCC will have access to the Company's legal and accounting
professionals and with prior approval from the Company access to outside legal
counsel and accounting professionals at the Company's expense.
<PAGE>
Capital Title Group, Inc.
June 16, 1998
Page 2
MCC will accept and hold such Information in complete confidence for
their use as contemplated hereby. The confidentiality obligations assumed by MCC
hereunder will not apply to any Information which is presently in or
subsequently becomes part of the public domain or is otherwise generally known
or is obtained from any third party which is in possession of such Information
through no fault of MCC.
3. COMPENSATION , TERM AND FEE WAIVER.
For services rendered under this Agreement, MCC shall receive the following
compensation:
A. The Company will pay to MCC a monthly fee of $6,500 as compensation
for Investor Relations Services starting with the renewal date of this
Agreement and continuing thereafter on a monthly basis for a period of
twenty-four (24) consecutive months;
B. Out-of-pocket expenses incurred by MCC in connection with the services
to be performed by it hereunder will be payable by the Company upon
submission by MCC of monthly invoices delineating such expense. Any
expense over $1,000 must be approved by the Company in advance;
C. MCC will receive a success fee ("Success Fee") in the form of a cash
payment of the gross proceeds of any private financing ("Financing")
including any form of equity, convertible debt, debt with warrants,
debt with equity incentives to the lender. Success Fee percentages are
based on the type of Financing transaction completed on behalf of
Capital Title with private placement fees being five (5%) percent of
the gross proceeds for any Private Placement Funding payable upon
receipt of the net proceeds by the Company. MCC does not receive fees
for traditional bank debt arranged directly by the Company;
D. MCC will receive a Success Fee in the form of a cash payment on the
gross proceeds of a public stock offering, payable upon the receipt of
the net proceeds by the Company. The Success Fee will be based on the
following fee schedule applicable to the gross proceeds received by
the Company:
<PAGE>
Capital Title Group, Inc.
June 16, 1998
Page 3
MAXIMUM
GROSS PROCEEDS FEE PERCENT FEE AMOUNT
-------------- ----------- ----------
$1 up to 10,000,000 million 2.75 percent $275,000
$1 up to 20,000,000 million 2.25 percent $450,000
$1 up to 30,000,000 million 1.75 percent $525,000
$1 to in excess of 30,000,000 1.25 percent
E. Capital Title shall have sole discretion in determining what
constitutes an acceptable Financing as contemplated by this Agreement.
MCC shall earn the Success Fee only upon the closing or receipt of
funds from a Financing as described in 3.C. or 3.D., above, and not
merely for presenting a financing option or prospective investor which
in Capital Title sole discretion is unacceptable;
F. MCC will receive compensation, the amount to be mutually agreed upon
by the Company and MCC, for issuance of an update to the Due Diligence
Report dated January 30, 1998, in the event such update is requested
by the Company or any third party; and
G. MCC agrees to waive any fees due from the Koll, Cohen Construction and
Lee & Associates equity private placement of common stock associated
with the Company's corporate headquarters real estate transaction.
4. EXCLUSIVITY.
A. The Company acknowledges that the Company is a party to that certain
agreement dated April 13, 1998, between the Company and Sanders Morris
Mundy ("SMM") whereby SMM has been engaged by the Company as its
co-exclusive financial advisor and investment banker (the "SMM
Agreement"). The Company further acknowledges that its officers will
not engage any other person or entity to serve as its agent or
representative to provide services similar to those to be provided by
MCC and SMM through the term of this Agreement without the prior
written consent of MCC.
B. If for a period of twenty four (24) months following the successfully
closing a Financing, as contemplated under this Agreement, Capital
Title desires to commence any Transaction (other than traditional bank
debt), Miller Capital Corporation and Sanders Morris Mundy as
co-financial advisors to the Company shall have the right of first
refusal to act as Capital Title's co-financial advisors, to arrange
for placement agents or underwriters, as the case may be, with respect
to any such Transaction or Transactions. If Capital Title decides to
pursue any such Transaction, and MCC and SMM exercise their right of
first refusal provided hereunder, Capital Title, MCC and SMM will
enter into an agreement appropriate to the circumstances.
<PAGE>
Capital Title Group, Inc.
June 16, 1998
Page 4
5. COMPANY COVENANT RE MCC EMPLOYEES.
The Company recognizes that client service officers and other employees
of MCC are necessary for the continued servicing by MCC of its several clients.
Accordingly, the Company will not, during the term of this Agreement, and for a
period of two years after its termination, employ any client service officer,
account executive or other employee of MCC in any capacity.
6. ASSIGNMENT.
MCC recognizes the personal nature of the services to be performed by
it and shall not transfer or assign to any other person, firm or corporation its
responsibilities and obligations under this Agreement without prior approval of
the Company. In the event that a merger, sale of assets or change of control of
the Company or MCC shall occur, this Agreement shall be binding upon the
successor and assigns of such party.
7. INTEGRATION.
This writing constitutes the full and complete agreement of the
parties, which Agreement may not be modified by any method other than another
writing signed by the parties.
8. HEADINGS.
The paragraph headings have been inserted for convenience and shall not
be construed in a manner contrary to the text of this Agreement.
9. ATTORNEY FEES.
In the event of any action or proceeding to enforce the provisions of
this Agreement, the prevailing party shall be entitled to its reasonable
attorney fees, such fees to be set by a judge and not by a jury and to be
included in any judgment entered in such action or proceeding.
<PAGE>
Capital Title Group, Inc.
June 16, 1998
Page 5
10. INDEMNIFICATION.
Both MCC and the Company agree to indemnify the other company's
respective directors, officers and employees against all losses and claims as is
customary in advisory engagements. The provisions of this section shall survive
any termination of the engagement that is the subject of this letter.
11. PUBLICITY.
Capital Title approves the use by MCC of the Company's name or logo in
publicity that includes tombstones and advertising related materials used
exclusively by MCC. MCC agrees to obtain prior approval, which approval will not
be unreasonably withheld, for the use of the Company's name or logo in any other
circumstance.
12. EFFECTIVE DATE.
This Agreement shall be effective as of the date and year first set
forth above.
AGREED AND ACCEPTED:
Please confirm that the foregoing correctly sets forth our mutual
understanding by signing and returning the copy of this Agreement provided for
that purpose.
Capital Title Agency Inc. Miller Capital Corporation
Donald R. Head Rudy R. Miller
By: /s/ Donald R. Head By: /s/ Rudy R. Miller
------------------------------ -----------------------
Title: Chairman and CEO Title: Chairman and CEO
--------------------------- --------------------
Date: Date:
--------------------------- --------------------
PURCHASE AND SALE AGREEMENT
AND
SUPPLEMENTAL ESCROW INSTRUCTIONS
SELLER:
KDC-AZ, LLC,
A DELAWARE LIMITED LIABILITY COMPANY
2425 EAST CAMELBACK ROAD, SUITE 1175
PHOENIX, ARIZONA 85016
BUYER:
CAPITAL TITLE GROUP, INC.,
AN ARIZONA CORPORATION
14555 N. SCOTTSDALE ROAD, SUITE 320
SCOTTSDALE, ARIZONA 85254
<PAGE>
TABLE OF CONTENTS
PAGE
----
1. Agreement............................................................ 1
2. The Property......................................................... 1
3. Purchase Price and Terms of Payment.................................. 2
4. Opening Date......................................................... 2
5. Close of Escrow...................................................... 3
6. Earnest Money........................................................ 3
7. INTENTIONALLY OMITTED................................................ 3
8. Title Insurance...................................................... 4
9. INTENTIONALLY OMITTED................................................ 4
10. Conveyance of Property............................................... 6
11. Maintenance of Property Prior to Closing............................. 6
12. Possession........................................................... 6
13. Seller's Representations and Warranties and
Condition of Property.............................................. 6
14. Closing Deliveries................................................... 8
(a) Seller's Deliveries............................................. 8
(b) Buyer's Deliveries.............................................. 9
(c) Post-Closing Deliveries......................................... 9
15. Prorations and Closing Costs......................................... 9
16. Defaults and Remedies................................................ 9
(a) Seller's Remedies............................................... 9
(b) Buyer's Remedies................................................ 10
17. Condemnation......................................................... 10
18. Commissions.......................................................... 10
19. Risk of Loss......................................................... 11
20. Assignment........................................................... 11
21. Notices.............................................................. 11
22. Merger............................................................... 12
<PAGE>
TABLE OF CONTENTS (CONT'D)
PAGE
----
23. Time of the Essence.................................................. 12
24. Further Documentation................................................ 12
25. Governing Law........................................................ 13
26. Severability......................................................... 13
27. Waivers.............................................................. 13
28. Attorneys' Fees...................................................... 13
29. Counterparts; Duplicate Originals.................................... 13
30. Time for Performance................................................. 13
31. Construction and Completion of Improvements . . . . . . 13
32. Construction Contract ............................................... 14
33. Letter of Credit .................................................... 14
34. Subsidiary .......................................................... 14
<PAGE>
LIST OF EXHIBITS
Exhibit A - Legal Description
Exhibit B - Plans and Specifications
Exhibit C - Contracts and Agreements
Exhibit D - Tangible Personal Property
Exhibit E - Promissory Note
Exhibit F - Assignment of Tenant's Interest in Ground Lease
Exhibit G - Bill of Sale
Exhibit H - Assignment and Assumption of Contracts
Exhibit I - Stock Subscription Contracts
Exhibit J - Contractor's Warranty
<PAGE>
PURCHASE AND SALE AGREEMENT
AND
SUPPLEMENTAL ESCROW INSTRUCTIONS
PARTIES:
SELLER: KDC-AZ, LLC, an Arizona
limited partnership
2425 E. Camelback Road, Suite 1175
Phoenix, Arizona 85016
Attn: President
Phone: 602/955-4433
BUYER: CAPITAL TITLE GROUP, INC.,
an Arizona corporation
14555 N. Scottsdale Road, Suite 320
Scottsdale, Arizona 85254
Attn: Donald R. Head, C.E.O.
Phone: 602/483-8868
ESCROW CAPITAL TITLE INSURANCE COMPANY
AGENT: 2929 East Camelback Road, Suite 115
Phoenix, Arizona 85016
Phone: 602/956-3305
Escrow Officer: Patty Marino
Escrow No.:
1. AGREEMENT. Seller agrees to sell, and Buyer agrees to buy, the Property
(as defined below) on the terms and conditions set forth in the printed form
Escrow Instructions attached hereto and these Supplemental Escrow Instructions.
The printed form Escrow Instructions and these Supplemental Escrow Instructions
together constitute a binding and enforceable agreement (the "Agreement"). In
the event of a conflict between the provisions of the printed form Escrow
Instructions and these Supplemental Escrow Instructions, the provisions of these
Supplemental Escrow Instructions shall control. Paragraphs 12 and 13 of the
printed form Escrow Instructions are hereby deleted.
2. THE PROPERTY. The term "the Property" shall include the following:
(a) the Seller's interest in the ground lease (the "Ground Lease")
executed by and between Olive Stanford as Landlord, and Seller as Tenant, and
dated January 30, 1998, for the approximately thirty-two thousand six hundred
forty (32,640) square feet of unimproved real property located at 29th Street
and Camelback in Phoenix, Arizona (the "Property"), as legally described on
Exhibit A attached hereto, including all right, title and interest of the Seller
in and to any easements, covenants and other rights appurtenant to the Property,
and all right, title and interest of the Seller in and to any land lying in the
bed of any street, road, avenue or alley, open or closed, in front of or
adjoining the Property;
<PAGE>
(b) a two (2) story office building containing approximately
twenty-four thousand 24,000 square feet of office space with two (2) floors of
underground parking to be constructed on the Property (the "Improvements"). The
Improvements will be constructed in accordance with plans and specifications to
be mutually agreed upon by Buyer and Seller and in compliance with the terms of
Exhibit B attached hereto;
(c) all right, title and interest of the Seller in and to the contracts
and agreements listed in Exhibit C attached hereto and made a part hereof;
(d) all personal property, furniture, furnishings, fixtures, equipment
and other tangible personal property owned by the Seller as listed in Exhibit D
attached hereto and made a part hereof;
(e) all warranties, licenses and other tangible property used in the
operation of the Improvements and the Land.
3. PURCHASE PRICE AND TERMS OF PAYMENT.
The purchase price of the Property shall be the sum of Four Million
Three Hundred Eight Thousand Eight Hundred Forty-Six Dollars ($4,308,846),
subject to adjustments to the budget for the cost of the Improvements as agreed
upon by Buyer and Seller and shall be paid as follows:
(a) An earnest money deposit of Six Hundred Fifty-Eight Thousand Six
Hundred Forty-Six Dollars ($658,646) represented by Buyer's execution of a
promissory note ("Note") in the form attached as Exhibit E to Seller shall be
deposited with Escrow Agent upon execution of this Agreement by both Seller and
Buyer. Upon (A) Buyer's approval of (1) the Guaranteed Maximum Price
Construction Contract for the Improvements, (2) the Permanent Financing
Commitment, (3) a Construction Budget, and (4) the Interior Drawings and (B) the
funding of the Stock Subscription Contracts being executed contemporaneously
herewith and attached hereto as Exhibit I, the Note will be replaced by Buyer
with a like amount of cash that will be nonrefundable (except in the event of
Seller's default) and will be released from escrow to Seller to be used by
Seller as owner's funds for the construction loan. Buyer agrees to deliver to
Seller its approval or disapproval of (1) the Guaranteed Maximum Price
Construction Contract, (2) the Permanent Financing Commitment, (3) a
Construction Budget, and (4) the Interior Drawings, within ten (10) days after
its receipt of all such final documents. Buyer agrees that it shall not
unreasonably withhold its approval of such documents, and further agrees that if
such documents do not substantially differ in form from (1) the Guaranteed
Maximum Price Construction Contract, (2) the Permanent Financing Commitment, (3)
a Construction Budget, and (4) the Interior Drawings (the Loan Application for
the Permanent Financing Commitment and the Construction Budget have been
<PAGE>
reviewed by Buyer), Buyer will not withhold its approval of such documents. If
Buyer disapproves of any of such items, then Seller shall have twenty (20) days
from the date of such written disapproval to cure such objections to Buyer's
satisfaction. If Seller is unable to cure such objections, then Buyer shall not
be obligated to replace the Promissory Note with cash, and this Agreement shall
terminate and be of no further force or effect.
(b) The balance of the purchase price shall be paid at Close of Escrow,
via cash, certified check or wired funds.
(c) In addition to the Purchase Price, Buyer will deliver to Seller, at
the Closing, twenty-five thousand (25,000) shares of the common stock of Buyer.
4. OPENING DATE. Escrow shall be deemed opened on the date (the "Opening
Date") when at least one (1) fully executed original of this Agreement has been
delivered to the Escrow Agent along with the "Note" representing the earnest
money deposit of Six Hundred Fifty-Eight Thousand, Eight Hundred Forty-Six
($658,846). Escrow Agent shall advise Buyer and Seller in writing of the Opening
Date.
5. CLOSE OF ESCROW. Close of Escrow shall occur immediately upon the
occurrence of both (a) the substantial completion of the Improvements, in
accordance with the final plans and specifications which have been approved by
both Buyer and Seller and (b) the funding of the Permanent Loan. At Close of
Escrow, conveyancing documents shall be recorded as provided in this Agreement.
Close of Escrow shall be held at the offices of Escrow Agent, unless a different
location is otherwise mutually agreed upon.
6. EARNEST MONEY. The timely deposit of the Note representing the earnest
money and the replacement thereof referred to in this Agreement is an express
condition precedent to Seller's obligations under this Agreement. If Buyer fails
to timely replace the Note with a like amount of cash (unless Buyer is not so
obligated to do), then Buyer shall be deemed to be in default hereunder, the
Escrow Agent is hereby instructed to deliver the Note to Seller, and the Buyer
shall be fully liable to the Seller for full payment under the Note.
7. INTENTIONALLY DELETED.
8. TITLE INSURANCE.
(a) At Close of Escrow, Seller shall provide Buyer with an extended
coverage lessee's policy of title insurance issued by Escrow Agent or its
underwriters in the full amount of the sales price, effective as of the Close of
Escrow. The policy shall contain such endorsements as are reasonably required by
<PAGE>
Buyer, but the incremental cost of the endorsements shall be the responsibility
of Buyer. Seller shall pay the premium which would have been charged for a
standard coverage lessee's policy, and the additional premium charge for the
extended coverage lessee's title insurance policy shall be borne by Buyer.
(b) The obligations of Seller to provide the title insurance called for
in this Paragraph shall be satisfied if, at the Close of Escrow, Escrow Agent
has given a binding commitment to issue the title insurance in the form required
by this Paragraph and if the actual policy is delivered within a reasonable time
following the Close of Escrow.
9. INTENTIONALLY DELETED.
10. CONVEYANCE OF PROPERTY.
(a) At Close of Escrow, Seller shall convey its leasehold interest to
the Property to Buyer by an Assignment of Tenant's interest in the Ground Lease,
in the form attached as Exhibit F, subject to the Ground Lease, current taxes
and assessments, reservations in patents, all easements, rights of way,
encumbrances, liens, covenants, conditions, restrictions, obligations,
liabilities and all other matters of record.
(b) At Close of Escrow, Seller shall transfer and assign to Buyer title
to the personal property owned by Seller and included within the definition of
"Property" by bill of sale, in the form attached as Exhibit G, without
representation or warranty as to title or the condition thereof.
(c) At Close of Escrow, Seller shall execute and deliver to Buyer an
Assignment and Assumption (without recourse or warranty) of the Service
Contracts, in the form attached as Exhibit H and Buyer shall, subject to the
limitations of the next sentence, expressly assume the Seller's obligations
under the Service Contracts. To the extent any Service Contract may be canceled
on or before Close of Escrow without liability to Seller, and Buyer gives notice
to Seller prior to the end of Buyer's Contingency Period that Buyer does not
wish to assume it (or them), Seller not assign any such Service Contract to
Buyer.
11. MAINTENANCE OF PROPERTY PRIOR TO CLOSING. Until the Close of Escrow,
Seller or Seller's agent shall keep the Property insured against fire and other
hazards covered by extended coverage endorsement and comprehensive public
liability insurance against claims for bodily injury, death and property damage
occurring in, on or about the Property.
12. POSSESSION. Possession of the Property shall be delivered to Buyer upon
the Close of Escrow.
<PAGE>
13. SELLER'S REPRESENTATIONS AND WARRANTIES AND CONDITION OF PROPERTY.
(a) Seller is a Delaware limited liability company, duly organized,
validly existing and in good standing under the laws of the State of Arizona.
(b) Seller is authorized to perform its obligations under this
Agreement, and the execution of this Agreement will not violate any material
terms of Seller's Limited Partnership Agreement.
(c) There are no pending lawsuits or administrative proceedings
affecting the property or any portion thereof, nor does Seller have actual
knowledge of any such action as presently contemplated.
(d) There are no tenant leases or contracts or agreements, other than
those listed in Exhibit C which will remain in effect after the closing.
(e) No consent, approval, order or authorization of any person not a
party to this Agreement, and no consent, approval, declaration or filing of any
governmental authority on the part of Seller is required in connection with the
execution and delivery of this Agreement or the performance of the transactions
contemplated herein, except the consent of the Landlord under the Ground Lease.
(f) Seller has paid, or by the Closing Date will pay, all real property
taxes of every kind and nature imposed on the Property, except such property
taxes as shall be prorated between Buyer and Seller as of the Closing Date.
(g) Seller has no actual knowledge of any material defect or error in
any of the Property Documents delivered to Buyer nor of any other information
with respect to the Property which would materially and adversely affect the
development thereof.
(h) Seller represents and warrants that the Property is in compliance
with state, local and federal laws respecting accessibility or nondiscrimination
as to people with disabilities, including, but not limited to, the Americans
With Disabilities Act.
(i) Seller represents and warrants that the Property will be zoned to
allow construction and use of the Improvements.
(j) Buyer acknowledges that Buyer has fully investigated the Property
and all records and documents relating thereto to Buyer's satisfaction. Seller
is therefore released from all responsibility and liability regarding the
condition, valuation or utility of the Property. Buyer expressly acknowledges
<PAGE>
that Buyer is buying the Property in an "as is" condition, and that Buyer has
not relied on any warranties, promises, understandings or representations,
express or implied, of Seller or any agent of Seller relating to the Property
which are not expressly contained in this Agreement. Buyer acknowledges that any
and all leasing information, feasibility or marketing reports, or other
information of any type which Buyer has received or may receive from Seller or
Seller's agents is or has been furnished on the express condition that Buyer
shall or would make an independent verification of the accuracy of any and all
such information, all such information being furnished without any warranty
whatsoever. Buyer agrees that Buyer will not attempt to assert any liability
against Seller for furnishing such information, and Buyer agrees to indemnify
and hold Seller free and harmless from any and all such claims of liability.
This indemnity shall survive the Close of Escrow or the termination of this
Agreement.
(k) EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, SELLER HEREBY
DISCLAIMS ALL WARRANTIES OF ANY KIND OR NATURE WHATSOEVER (INCLUDING WARRANTIES
OF HABITABILITY, MERCHANTABILITY AND FITNESS FOR PARTICULAR PURPOSE), WHETHER
EXPRESSED OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES WITH RESPECT TO
THE PROPERTY, THE ZONING OF THE LAND, THE SOIL CONDITIONS OF THE LAND, OR THE
SUITABILITY OF THE PROPERTY FOR BUYER'S INTENDED USE THEREOF. BUYER ACKNOWLEDGES
THAT BUYER WILL CONDUCT A DILIGENT INVESTIGATION OF THE PROPERTY WITH REGARD TO
ITS CONDITION, PROFITABILITY, PERMITTED USE, AND SUITABILITY FOR BUYER'S
INTENDED USE THEREOF, AS WELL AS ALL OTHER FACTORS DEEMED MATERIAL TO BUYER AND
WILL EMPLOY SUCH INDEPENDENT PROFESSIONALS IN CONNECTION THEREWITH AS DEEMED
NECESSARY BY BUYER. BUYER FURTHER ACKNOWLEDGES THAT BUYER IS PURCHASING THE
PROPERTY "AS IS" AND IN ITS PRESENT CONDITION AND THAT BUYER IS NOT RELYING UPON
ANY REPRESENTATION OF ANY KIND OR NATURE MADE BY SELLER, OR ANY OF ITS EMPLOYEES
OR AGENTS, WITH RESPECT TO THE PROPERTY, AND THAT, IN FACT, NO SUCH
REPRESENTATIONS WERE MADE.
(l) FURTHER, AND WITHOUT IN ANY WAY LIMITING ANY OTHER PROVISION OF
THIS AGREEMENT, SELLER MAKES NO WARRANTY WITH RESPECT TO THE PRESENCE ON OR
BENEATH THE PROPERTY (OR ANY PARCEL IN PROXIMITY THERETO) OF HAZARDOUS
SUBSTANCES OR MATERIALS WHICH ARE CATEGORIZED AS HAZARDOUS OR TOXIC UNDER ANY
LOCAL, STATE OR FEDERAL LAW, STATUTE, ORDINANCE, RULE, OR REGULATION PERTAINING
TO ENVIRONMENTAL OR SUBSTANCE REGULATION, CONTAMINATION, CLEANUP OR DISCLOSURE,
AND SHALL HAVE NO LIABILITY TO BUYER THEREFOR. BY ACCEPTANCE OF THIS AGREEMENT
AND THE DEED, BUYER ACKNOWLEDGES THAT BUYER'S OPPORTUNITY FOR INSPECTION AND
INVESTIGATION OF SUCH PROPERTY (AND OTHER PARCELS IN PROXIMITY THERETO) WILL BE
<PAGE>
ADEQUATE TO ENABLE BUYER TO MAKE BUYER'S OWN DETERMINATION WITH RESPECT TO THE
PRESENCE ON OR BENEATH THE PROPERTY (AND OTHER PARCELS IN PROXIMITY THERETO) OF
SUCH HAZARDOUS SUBSTANCES OR MATERIALS.
(m) Notwithstanding the foregoing, Seller represents to Buyer that
Seller has disclosed to Buyer all material information it has concerning the
Property. Seller knows of no condition or event which is not disclosed to Buyer
which would have a material, adverse impact on the Property. Seller has not
failed to disclose any information to Buyer necessary to ensure that any
representation made herein is not in any way misleading.
14. CLOSING DELIVERIES.
(a) SELLER'S DELIVERIES. Seller shall deliver, at or before the
Closing, the following documents:
(1) An Assignment of Tenant's interest in the Ground Lease, in the
form attached hereto as Exhibit F.
(2) A Bill of Sale to the personal property in the form attached
hereto as Exhibit G.
(3) The contracts described in Exhibit C.
(4) An assignment of contracts described on Exhibit C by way of an
Assignment and Assumption of Contracts in the form attached as Exhibit H.
(5) An Affidavit pursuant to the Foreign Investment in Real
Property Tax Act in the Escrow Agent's standard form.
(6) A partnership resolution authorizing Seller's consummation of
this transaction.
(7) Seller's certificate representing and warranting to Buyer that
the Improvements have been completed in accordance with the Construction Plans
set forth on Exhibit B.
(b) BUYER'S DELIVERIES. Buyer shall deliver, at or before the Closing,
the following:
(1) The purchase price.
(2) The Assignment and Assumption of Contracts.
(c) POST-CLOSING DELIVERIES. Subsequent to Closing, Seller shall
provide to Buyer copies of form letters to contractors, utility companies and
others serving the Property, advising them of the sale of the Property to Buyer
and directing to Buyer all bills for the services provided to the Property on
and after the Closing Date. Seller shall be entitled to the return of any
deposits posted by it with any such company.
<PAGE>
15. PRORATIONS AND CLOSING COSTS.
(a) Seller and Buyer shall each pay one-half (1/2) of the escrow
charges. Real estate taxes, rents (i.e., tenant leases), contract payments,
irrigation assessments, improvement liens and utilities shall be prorated in the
escrow as of Close of Escrow, based on the latest information available to
Escrow Agent. On or before Close of Escrow, and as a condition thereof, Buyer
agrees to deposit with Escrow Agent cash in an amount sufficient to pay all
closing costs payable by Buyer. Any utility deposits shall be credited to
Seller, if not returned to Seller by the respective utility companies.
(b) Any other closing costs, including recording and filing fees, shall
be paid by Buyer and Seller according to the usual and customary practice in
Maricopa County, Arizona.
16. DEFAULTS AND REMEDIES.
(a) SELLER'S REMEDIES. If Buyer fails to consummate this transaction in
accordance with this Agreement for any reason other than a material default by
Seller, then Seller shall be entitled to seek any and all remedies available to
it, at law or in equity.
(b) BUYER'S REMEDIES. If Seller fails to consummate this transaction in
accordance with this Agreement for any reason other than a default by Buyer or a
termination of this Agreement permitted herein, then Buyer's exclusive remedies
shall be (i) to terminate this Agreement and recover from Escrow Agent, by
written request, the Note or (ii) instead, to waive such failure and seek
specific performance of the conveyance of the Property. Any action for specific
performance under the preceding clause (ii) must be commenced within forty-five
(45) days after the scheduled Close of Escrow hereunder. Except for delay
damages under Paragraph 31 accrued to the date of cancellation, Buyer shall have
no right to bring or maintain any action for monetary damages for any breach of
this Agreement by Seller, and Buyer hereby waives any and all rights to any such
cause of action. Buyer's right to recover the Note is subject to its prior
submission to Escrow Agent of an enforceable release, in recordable form, of any
and all rights that Buyer may have regarding Seller or the Property and this
Agreement, such release to be in form and substance reasonably acceptable to
Seller.
<PAGE>
17. CONDEMNATION. In the event of any condemnation or conveyance in lieu of
condemnation of all or a material part of the Property subsequent to the end of
the Buyer's Contingency Period, Seller shall promptly notify Buyer and either
party shall have the option to terminate this Agreement on written notice to the
other on or before the date and time herein specified for the Close of Escrow.
If this Agreement is not so terminated by either party, Seller shall assign to
Buyer at the Close of Escrow, in lieu of conveyance of the Property, or such
part of the Property as is the subject of such condemnation or conveyance in
lieu of condemnation, Seller's right, title and interest, if any, to receive the
condemnation proceeds or proceeds for sale in lieu of condemnation payable in
connection with such taking or sale. In such event, Seller shall also deliver to
Buyer at the Close of Escrow any condemnation proceeds or proceeds from a sale
in lieu of condemnation which may have been received by Seller prior to the
Close of Escrow.
18. COMMISSIONS. If, and only if, this transaction closes, Seller agrees to
pay a commission (pursuant to separate agreement) to Lee & Associates. Buyer and
Seller each warrant and represent that no other finder's fee, brokerage
commission or other compensation shall be due in connection with this
transaction. If any other person shall assert a claim to a finder's fee,
brokerage commission, or other compensation on account of alleged employment as
a finder or broker in connection with this transaction, the party under whom (or
by whose acts) the finder or broker is claiming shall indemnify and hold the
other party harmless from and against any such claim and all costs, expenses and
liabilities incurred in connection with such claim or any action or proceeding
brought on such claim, including but not limited to, attorneys' fees and court
costs in defending against such claim. This indemnity shall survive the Close of
Escrow or the termination of this Agreement. If this transaction does not close,
no commission or any part of the earnest money shall be due under any
circumstances.
19. RISK OF LOSS. During the pendency of the escrow, the risk of loss or
destruction of the Property shall be Seller's.
20. ASSIGNMENT. Buyer shall have the right to assign its interest in this
Agreement, subject to Seller's prior written consent, and further subject to
Seller's participation in one hundred percent (100%) of the profits derived from
Buyer as a result of the assignment; provided, however, that Seller shall not
participate in any of the profits if Buyer assigns its rights in this Agreement
to Buyer's parent company, if any, to a company which Buyer owns, or to a
company which is a subsidiary of Buyer's parent company, if any.
<PAGE>
21. NOTICES. All notices or other communications required or provided to be
sent by either party or Escrow Agent shall be in writing, shall be delivered by
one or more of the following methods and shall be effective as indicated below:
(a) By hand-delivery, in which event notice is deemed to be effective
on the date that notice is received; or
(b) by United States Postal Service certified or registered mail,
postage prepaid, in which event notice is deemed to be effective on the date
which is three (3) days after the date on which notice is mailed; or
(c) by overnight delivery by a commercial entity which is in the
business of providing overnight delivery service (fees prepaid) or by overnight
United States Postal Service delivery (fees prepaid), in which event notice is
deemed to be effective on the date following the date on which notice is
properly deposited with such commercial entity or with the United States Postal
Service; or
(d) by electronic facsimile process, in which event notice is deemed to
be effective on the date of electronic transmission properly made (if
transmission is made before 12:00 o'clock noon, sender's time), or on the next
day after the date of electronic transmission properly made (if transmission is
made after 12:00 o'clock noon, sender's time).
Notices shall be sent to the addresses shown below or at such other address or
addresses (but neither party may designate a post office box for receipt of
notices) as the parties or Escrow Agent may, from time to time, specify in
writing, such changes to be made in a like manner:
To Buyer: CAPITAL TITLE GROUP, INC.
14555 N. Scottsdale Rd., Suite 320
Scottsdale, AZ85254
Attn: Don R. Head
FAX: 602/483-8968
With a copy to: Dale A. Head
3636 North Central Avenue, Suite 1100
Phoenix, AZ 85012
FAX: 602/265-7372
To Seller: KDC-AZ, LLC
2425 E. Camelback Rd., Suite 1175
Phoenix, AZ 85016
Attn: President
FAX: 602/955-1779
With a copy to: KOLL DEVELOPMENT COMPANY, LLC
4343 Von Karman Avenue
Newport Beach, California 92600
Attn: President
FAX: 714/975-0136
<PAGE>
With a copy to: SACKS TIERNEY P.A.
2929 North Central Avenue
Fourteenth Floor
Phoenix, Arizona85012-2742
Attn: Robert G. Kimball, Esq.
FAX: 602/279-2027
22. MERGER. This Agreement, together with Exhibits A through J, constitutes
the entire agreement between the parties pertaining to the subject matter
contained in this Agreement. All prior and contemporaneous agreements,
representations and understandings, written or oral, are superseded by and
merged into this Agreement. No supplement, modification or amendment of this
Agreement shall be binding unless in writing and executed by Buyer and Seller.
23. TIME OF THE ESSENCE. With regard to all of the provisions contained in
this Agreement, time is of the essence.
24. FURTHER DOCUMENTATION. Each party agrees in good faith to execute such
further or additional documents as may be necessary or appropriate to fully
carry out the intent and purpose of this Agreement.
25. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Arizona.
26. SEVERABILITY. In the event one or more of the provisions contained in
this Agreement shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision herein, and this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein.
27. WAIVERS. The waiver by any party hereto of any right granted to it
hereunder shall not be deemed to be a waiver of any other right granted herein,
nor shall same be deemed to be a waiver of a subsequent right obtained by reason
of the continuation of any matter previously waived.
28. ATTORNEYS' FEES. The prevailing party in any litigation, arbitration or
other proceedings arising out of this Agreement shall be reimbursed by the other
party for all costs and expenses incurred in such proceedings, including
reasonable attorneys' fees.
29. COUNTERPARTS; DUPLICATE ORIGINALS. This Agreement may be executed in
multiple counterparts and when a counterpart has been executed by each of the
parties hereto such counterparts, taken together, shall constitute a single
agreement. Duplicate originals may also be utilized, each of which shall be
deemed an original document.
<PAGE>
30. TIME FOR PERFORMANCE. The time for performance of any obligation or any
other action under this Agreement shall be deemed to expire at 4:00 p.m.,
Mountain Standard Time, on the last day of the applicable time period provided
for herein. However, if the time for the performance of any obligation or other
action under this Agreement expires on a Saturday, Sunday or legal holiday, the
time for performance shall be extended to the next succeeding day which is not a
Saturday, Sunday or legal holiday.
31. CONSTRUCTION AND COMPLETION OF IMPROVEMENTS. Seller shall deliver the
Improvements to Buyer so that Buyer may occupy and utilize the Improvements on
or before August 1, 1999. If Seller fails to so deliver the Improvements to
Buyer on or before August 1, 1999, Seller agrees to be responsible for all
additional costs and expenses which Buyer incurs as a result of Seller's failure
to timely deliver the Improvements, which costs and expenses will not include
Buyer's Rent at the normal charge and rate. Seller agrees that if it is unable
to deliver the Improvements to Buyer on or before December 1, 1999, Buyer shall
have the right to terminate this Agreement. Seller agrees that Buyer may inspect
the Improvements during the course of construction at anytime Buyer requests, on
twenty-four hours prior notice to Seller. Seller agrees to cause all
construction and other warranties it receives from the subcontractors who will
construct the Improvements to be assigned to Buyer. The General Contractor's
Warranty will be in the form attached as Exhibit J. The parties agree that the
dates set forth herein will be extended during any period in which Seller is
unable to continue construction due to "FORCE MAJEURE" items, or to destruction
of the Improvements by fire or otherwise, or delays caused by Buyer. Seller
warrants that Contractor's Warranty will be enforceable by Buyer and not subject
to any defenses at law or equity (unless Buyer, through its action or inaction,
causes the Warranty to be unenforceable or the defenses to be unavailable).
Seller indemnifies and holds Buyer harmless from any loss due to breach of
Seller's Warranty in this Paragraph.
32. CONSTRUCTION CONTRACT. Seller agrees to execute a "not to exceed"
contract for the construction of the Improvements with a general contractor,
subject to the approval of Buyer as set forth in Paragraph 3.(a). Seller agrees
to credit Buyer at the Closing with the amount by which the actual construction
costs are less than the costs set forth in the Construction Contract. No change
orders will be made to the Construction Contract unless agreed to, in writing,
by Seller, Buyer and the general contractor.
<PAGE>
33. LETTER OF CREDIT. Buyer agrees that in order to assume a permanent loan
for the Improvements, a letter of credit has been required by the Lender. Buyer
agrees to provide a letter of credit in favor of Lender in the face amount of
Five Hundred Thousand Dollars ($500,000). The Lender shall be entitled to draw
against such letter of credit to the extent of the Lender's expenses for lease
commissions, tenant improvements and debt service, if the Improvements become
vacant by reason of Buyer's default. The letter of credit shall remain in place
for the ten (10) year term of the loan or earlier payoff of such loan. Buyer
agrees to properly renew such letter of credit as required to keep it in place
for such term.
34. SUBSIDIARY. Buyer agrees that it will assign its interest in this
Agreement to a wholly-owned subsidiary, which subsidiary will be a entity
created for the sole purpose of holding title to the Property.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of this _____ day of _______________________, 1998.
SELLER:
KDC-AZ, LLC, a Delaware limited
liability company
By: KOLL DEVELOPMENT COMPANY, LLC,
a Delaware limited liability company,
its manager
By:
--------------------------------------
Its: --------------------------------------
BUYER:
CAPITAL TITLE GROUP, INC.
By:
--------------------------------------
Its: --------------------------------------
<PAGE>
The provisions of this Agreement
are hereby acknowledged and
agreed to:
CAPITAL TITLE GROUP, INC.
By:
--------------------------------------
Its:
--------------------------------------
"ESCROW AGENT"
GUARANTEE
KOLL DEVELOPMENT COMPANY, LLC, a Delaware limited liability company,
hereby agrees to unconditionally and irrevocably guarantee all of the
obligations of Seller set forth in this agreement.
KOLL DEVELOPMENT COMPANY, LLC, a Delaware
limited liability company
By:
--------------------------------------
Its:
--------------------------------------
Date:
--------------------------------------
ESCROW INSTRUCTIONS
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
<PAGE>
EXHIBIT B
PLANS AND SPECIFICATIONS
<PAGE>
EXHIBIT C
CONTRACTS AND AGREEMENTS
<PAGE>
EXHIBIT D
TANGIBLE PERSONAL PROPERTY
<PAGE>
EXHIBIT E
PROMISSORY NOTE
<PAGE>
EXHIBIT F
ASSIGNMENT OF TENANT'S INTEREST IN GROUND LEASE
<PAGE>
EXHIBIT G
BILL OF SALE
------------
For valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, KDC-AZ, LLC, a Delaware limited liability company (the
"Seller") hereby conveys to CAPITAL TITLE GROUP, INC. (the "Buyer"), all of
Seller's right, title and interest in and to those certain items of personal
property described on Exhibit A attached hereto and made a part hereof (the
"Personal Property").
Seller has not made and does not make any express or implied warranty
or representation of any kind whatsoever with respect to the Personal Property,
including, but not limited to: title, merchantability of the Personal Property
or its fitness for any particular purpose; the design or condition of the
Personal Property ; workmanship or compliance of the Personal Property with the
requirements of any law, rule, specification or contract pertaining thereto;
patent infringement or latent defects, except that Seller warrants that the
Personal Property is free and clear of all liens, claims and encumbrances in
favor of any third party. Purchaser accepts the Personal Property on an "AS IS,
WHERE IS" basis, and "WITH ALL FAULTS."
IN WITNESS WHEREOF, Seller has caused this instrument to be executed
and delivered as of the day of , 1998.
KDC-AZ, LLC, a Delaware
limited liability company
By: KOLL DEVELOPMENT COMPANY, LLC,
a Delaware limited liability
company, its member
By:
---------------------------------------
Its:
---------------------------------------
<PAGE>
EXHIBIT A
PERSONAL PROPERTY
[To Come]
<PAGE>
EXHIBIT H
ASSIGNMENT AND ASSUMPTION OF CONTRACTS
For valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, KDC-AZ, LLC, a Delaware limited liability company (the
"Assignor"), hereby assigns and delegates to CAPITAL TITLE GROUP, INC., an
Arizona corporation (the "Assignee"), with an office and place of business at
14555 N. Scottsdale Rd., Suite 320, Scottsdale, AZ 85254, and Assignee hereby
assumes and accepts the assignment and delegation of all of Assignor's right,
title and interest in, to and under the contracts described on Exhibit A
attached hereto.
Assignor hereby agrees to indemnify Assignee against and hold Assignee
harmless from any and all cost, liability, loss, damage or expense, including,
without limitation, reasonable attorneys' fees and costs, originating prior to
and including the date hereof and arising out of Assignor's obligations under
the Contracts described in Exhibit A. Assignee hereby agrees to hold Assignor
harmless from any and all cost, liability, loss, damage or expense, including,
without limitation, reasonable attorneys' fees, originating after the date
hereof and arising out of the Assignee's obligations under the Contracts
described in Exhibit A.
If any litigation between Assignor and Assignee arises out of the
obligations of the parties under this Assignment or concerning the meaning or
interpretation of any provision contained herein, the losing party shall pay the
prevailing party's costs and expenses of such litigation including, without
limitation, reasonable attorneys' fees.
This Agreement may be executed and delivered in any number of
counterparts, each of which so executed and delivered shall be deemed to be an
original and all of which shall constitute one and the same instrument.
IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment
effective as of the day of , 1998.
ASSIGNOR:
KDC-AZ, LLC, a Delaware limited liability
company
By: KOLL DEVELOPMENT COMPANY, LLC,
a Delaware limited liability
company, its manager
By:
-------------------------------------
Its:
-------------------------------------
ASSIGNEE:
CAPITAL TITLE GROUP, INC.
By:
-------------------------------------
Name:
-------------------------------------
Its:
-------------------------------------
<PAGE>
EXHIBIT A
CONTRACTS
[To Come]
CREDIT AGREEMENT
This Credit Agreement ("Agreement") is made and entered into on February 1,
1999, by and between Capital Title Group, Inc., a Delaware corporation
("Borrower") and Imperial Bank, a California banking corporation, ("Bank").
Subject to the terms and conditions of this Agreement, any security agreements
executed by Borrower in favor of Bank, any notes executed by Borrower in favor
of Bank, or any other agreements executed in conjunction therewith
(collectively, the "Loan Documents"), Bank shall make the loans and or advances
(individually a "Loan" and collectively "Loans") referred to below to Borrower.
In consideration of mutual covenants and conditions hereof, the parties hereto
agree as follows:
1. AMOUNT AND TERMS OF CREDIT
1.01 TERM LOAN COMMITMENT.
(a) TERM LOAN. Subject to the terms and conditions of this Agreement, and so
long as Borrower is not in default nor will it be in default after taking into
consideration the requested advance, Bank shall make available to Borrower term
loans (individually a "Term Loan" and collectively, the "Term Loans") in the
aggregate amount of $3,000,000, the proceeds of which shall be used only for
acquisitions and equipment purchases. Each Term Loan will be in a minimum amount
of $500,000 and will be subject to Bank's approval, at the sole discretion of
Bank, of Borrower's projections showing the impact on Borrower's financial
condition of such acquisition or equipment purchase.
(b) TERM LOAN NOTE. Each Term Loan will be evidenced by a promissory note which
will contain the interest rate, principal and interest payments, maturity date
and other terms of said Term Loan.
1.02 REVOLVING CREDIT COMMITMENT.
(a) REVOLVING LINE OF CREDIT. Subject to the terms and conditions of this
Agreement, provided that no event of default then has occurred and is
continuing, Bank shall, upon Borrower's request make advances ("Revolving
Loans") to Borrower, for general corporate purposes, in an amount not to exceed
$2,000,000 (the "Revolving Line of Credit") until February 1, 2001 (the
"Revolving Line of Credit Maturity Date"). Revolving Loans may be repaid and
reborrowed, subject to the provisions of the LIBOR Addendum attached to the
promissory note evidencing the Revolving Line of Credit, provided that all
outstanding principal and accrued interest on the Revolving Loans shall be
payable in full on the Revolving Credit Maturity Date.
(b) REVOLVING NOTE. The interest rate, principal and interest payments, maturity
date and certain other terms of the Revolving Loan will be contained in a
promissory note dated the date of this agreement, as such may be amended or
replaced from time to time.
1
<PAGE>
1.03 LOAN FEES. In addition to any other amounts due, or to become due,
concurrent with the execution hereof, in connection with the Term Loan, Borrower
shall pay to Bank a loan fee in the amount of Fifteen Thousand Dollars ($15,000)
at boarding and in connection with the Revolving Line of Credit, Borrower shall
pay to Bank a loan fee of Ten Thousand Dollars ($10,000) at boarding,
1.04. DOCUMENTATION FEE, COSTS AND EXPENSES. In addition to any other amounts
due, or to become due, concurrently with the execution hereof, Borrower agrees
to pay to Bank a documentation fee in the amount of $500.00, and all other costs
and expenses incurred by the Bank in the preparation of this Agreement, the
other Loan Documents and the perfection of any security interest granted to Bank
by Borrower.
1.05 COLLATERAL. Borrower shall grant or cause to be granted to Bank a first
priority lien on any and all personal property assets of Borrower which is
assigned or hereafter is assigned to Bank as security or in which Bank now has
or hereafter acquires a security interest or pursuant to the terms of any
security agreement, an intellectual property security agreement or otherwise as
security for all of Borrower's obligations to Bank, all as may be subject to
Section 5.03 herein.
2. REPRESENTATIONS OF BORROWER
Borrower represents and warrants that:
2.01 EXISTENCE AND RIGHTS. Borrower is a corporation duly organized and existing
and in good standing under the laws of the state of Delaware, without limit as
to the duration of its existence. Borrower is authorized and in good standing to
do business in the state of its incorporation; Borrower has the appropriate
powers and adequate authority, rights and franchises to own its property and to
carry on its business as now conducted, and is duly qualified and in good
standing in each state in which the character of the properties owned by it
therein or the conduct of its business makes such qualification necessary; and
Borrower has the power and adequate authority to make and carry out this
Agreement. Borrower has no investment in any other business entity unless
specified in writing to Bank.
2.02 AGREEMENT AUTHORIZED. The execution, delivery and performance of this
Agreement and the Loan Documents are duly authorized and do not require the
consent or approval of any governmental body or other regulatory authority; are
not in contravention of or in conflict with any law or regulation or any term or
provision of Borrower's articles of incorporation, or similar document as the
case may be, and this Agreement is the valid, binding and legally enforceable
obligation of Borrower in accordance with its terms; subject only to bankruptcy,
insolvency or similar laws affecting creditors rights generally.
2.03 NO CONFLICT. The execution, delivery and performance of this Agreement and
the Loan Documents are not in contravention of or in conflict with any
agreement, indenture or undertaking to which Borrower is a party or by which it
or any of its property may be bound or affected, and do not cause any lien,
charge or other encumbrance to be created or imposed upon any such property by
reason thereof.
2.04 LITIGATION. Except as disclosed in writing to bank by Borrower, there is no
litigation or other proceeding pending or threatened against or affecting
2
<PAGE>
Borrower which if determined adversely to Borrower or its interest would have a
material adverse effect on the financial condition of Borrower, and Borrower is
not in default with respect to any order, writ, injunction, decree or demand of
any court or other governmental or regulatory authority.
2.05 FINANCIAL CONDITION. The consolidated balance sheet of Borrower as of
September 30, 1998, and the related profit and loss statement for the nine month
period ended as of that date, a copy of which has heretofore been delivered to
Bank by Borrower, and all other statements and data submitted in writing by
Borrower to Bank in connection with this request for credit are true and
correct, and said balance sheet truly presents the financial condition of
Borrower as of the date thereof, and has been prepared in accordance with
generally accepted accounting principles on a basis consistently maintained.
Since such date there have been no material adverse changes in the financial
condition or business of Borrower. Borrower has no knowledge of any liabilities,
contingent or otherwise, at such date not reflected in said balance sheet, and
Borrower has not entered into any special commitments or substantial contracts
which are not reflected in said balance sheet, other than in the ordinary and
normal course of its business, which may have a materially adverse effect upon
its financial condition, operations or business as now conducted.
2.06 TITLE TO ASSETS. Borrower has good title to its assets, and the same are
not subject to any liens or encumbrances other than those permitted by Section
5.03 hereof.
2.07 TAX STATUS. Borrower has no liability for any delinquent state, local or
federal taxes, and, if Borrower has contracted with any government agency,
Borrower has no liability for renegotiation of profits.
2.08 TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with the valid trademarks, trade names, copyrights, patents and license rights
of others.
2.09 REGULATION U. None of the proceeds of any Loan shall be used to purchase or
carry margin stock (as defined within Regulation U of the Board of Governors of
the Federal Reserve system).
2.10 ERISA. All defined benefit pension plans as defined in the Employees
Retirement Income Security Act of 1974, as amended ("ERISA"), of Borrower meet,
as of the date hereof, the minimum funding standards of Section 302 of ERISA,
and no Reportable Event or Prohibited Transaction as defined in ERISA has
occurred with respect to any such plan.
2.11 YEAR 2000 COMPLIANCE. Borrower and its subsidiaries, as applicable, have
reviewed the areas within their operations and business which could be adversely
affected by, and have developed or are developing a program to address on a
timely basis, the Year 2000 Problem and have made related appropriate inquiry of
material suppliers and vendors, and based on such review and program, the Year
2000 Problem will not have a material adverse effect upon its financial
condition, operations or business as now conducted. "Year 2000 Problem" means
the possibility that any computer applications or equipment used by Borrower may
be unable to recognize and properly perform date sensitive functions involving
certain dates prior to and any dates on or after December 31, 1999.
3
<PAGE>
3. CONDITIONS PRECEDENT TO LOAN.
Prior to Bank being obligated to make any Loan pursuant to this
Agreement, Bank must receive all of the following, each of which must be in form
and substance satisfactory to Bank:
3.01 PROMISSORY NOTE(S). Original, executed promissory note(s).
3.02 SECURITY AGREEMENT. Original, executed security agreements covering the
personal property collateral securing the Loans.
3.03 FINANCING STATEMENT. Financing statements executed by Borrower.
3.04 INSURANCE. Borrower shall have delivered to Bank evidence of insurance
coverage required pursuant to that Agreement to Provide Insurance executed by
Borrower, in form, substance, amounts, covering risks and issued by companies
satisfactory to Bank, and where required by Bank, with loss payable endorsements
in favor of Bank.
3.05 ORGANIZATIONAL DOCUMENTS. Copies of the articles of incorporation, or
similar document as the case may be, of the Borrower.
3.06 AUTHORIZATIONS. Certified copies of all action taken by the Borrower to
authorize the execution, delivery and performance of the Loan Documents.
3.07 GOOD STANDING. Good standing certificates from the appropriate secretary of
state of the state in which the Borrower is organized and in each state in which
it is required to be qualified to do business.
3.08 ADDITIONAL DOCUMENTS. Such other documents as Bank may reasonable deem
necessary.
4. AFFIRMATIVE COVENANTS OF BORROWER
Borrower agrees that so long as it is indebted to Bank, under borrowings, or
other indebtedness, or so long as Bank has any obligation to extend credit to
Borrower it will, unless Bank shall otherwise consent in writing:
4.01 RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises and
other authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in good order and repair; conduct its
business in an orderly manner without voluntary interruption and, if a
corporation or partnership, maintain and preserve its existence.
4.02 USE OF PROCEEDS. Use the proceeds of the Loans only for purposes specified
in Section 1 of this Agreement.
4
<PAGE>
4.03 INSURANCE. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses and/or in the exercise of good business
judgment, and as required by that Agreement to Provide Insurance executed by
Borrower, with the Bank to be shown as Lenders Loss Payee on such policies.
4.04 TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become
delinquent and before penalties accrue thereon, all taxes, assessments and
governmental charges upon or against it or any of its properties, and all its
other liabilities at any time existing, except to the extent and so long as:
(a) The same are being contested in good faith and by appropriate proceedings in
such manner as not to cause any materially adverse effect upon its financial
condition or the loss of any right of redemption from any sale thereunder; and
(b) It shall have set aside on its books reserves (segregated to the extent
required by generally accepted accounting practice) deemed by it to be adequate
with respect thereto.
4.05 RECORDS AND REPORTS. Maintain a standard and modern system of accounting in
accordance with generally accepted accounting principles on a basis consistently
maintained; permit Bank's representatives to have access to, and to examine its
properties, books and records at all reasonable times and upon reasonable notice
during normal business hours; and furnish Bank:
(a) QUARTERLY FINANCIAL STATEMENT. As soon as available, and in any event within
forty-five (45) days after the close of each quarter, a consolidated and
consolidating balance sheet, profit and loss statement and reconciliation of
Borrower's capital balance accounts as of the close of such period and covering
operations for the portion of Borrower's fiscal year ending on the last day of
such period, all in reasonable detail and reasonably acceptable to Bank, in
accordance with generally accepted accounting principles on a basis consistently
maintained by Borrower and certified by an appropriate officer of Borrower.
(b) ANNUAL FINANCIAL STATEMENT. As soon as available, and in any event within
One Hundred Twenty (120) days after and as of the close of each fiscal year of
Borrower, a consolidated and consolidating report of audit of Company, all in
reasonable detail, audited by an independent certified public accountant
selected by Borrower and reasonably acceptable to Bank, in accordance with
generally accepted accounting principles on a basis consistently maintained by
Borrower and certified by an appropriate officer of Borrower;
(c) STOCKHOLDER, SECURITY AND EXCHANGE COMMISSION STATEMENTS AND REPORTS
Promptly after the same are available, copies of all such proxy statements,
financial statements and reports as Borrower or any subsidiary shall send to its
members or stockholders as appropriate, if any, and copies of all reports which
Borrower or any subsidiary may file with the Securities and Exchange Commission.
(d) OTHER INFORMATION. Such other information relating to the affairs of
Borrower as the Bank reasonably may request from time to time.
5
<PAGE>
4.06 CURRENT RATIO. Maintain on a quarterly basis a consolidated minimum ratio
of total current assets (excluding all amounts due from stockholders, officers
and affiliates) divided by total current liabilities (including all amounts due
to stockholders, officers and affiliates but excluding obligation to Bank on
account of Northwestern Title Company of Alameda County) of 1.10:1.00 for
quarters ending March 31, 1999 and June 30, 1999; 1.20:1.00 for quarters ending
September 30, 1999 and December 31, 1999; and 1.25:1.00 thereafter.
4.07 WORKING CAPITAL. Maintain on a quarterly basis consolidated working
capital, meaning total current assets (excluding all amounts due from
stockholders, officers and affiliates) minus total current liabilities
(including all amounts due to stockholders, officers and affiliates but
excluding obligation to Bank on account of Northwestern Title Company of Alameda
County) of not less than Five Hundred Thousand Dollars ($500,000) for quarters
ending March 31, 1999 and June 30, 1999, and One Million Dollars ($1,000,000)
for quarters ending September 30, 1999 and December 31, 1999, and One Million
Five Hundred Thousand Dollars ($1,500,000) thereafter.
4.08 TANGIBLE NET WORTH. Maintain on a quarterly basis a consolidated Tangible
Net Worth (defined as stockholder's equity less any value for goodwill,
trademarks, patents, copyrights, leaseholds, organization expense and other
similar intangible items, and any amounts due from stockholders, officers and
affiliates) of not less than Eight Million Dollars ($8,000,000).
4.09 DEBT TO TANGIBLE NET WORTH. Maintain on a quarterly basis a consolidated
ratio of total liabilities to Tangible Net Worth (defined as stockholder's
equity less any value for goodwill, trademarks, patents, copyrights, leaseholds,
organization expense and other similar intangible items, and any amounts due
from stockholders, officers and affiliates) of not greater than 2.00:1.0.
4.10 OUT OF DEBT: The unpaid balance of the Revolving Loans shall be $0.0 for at
least 30 consecutive days prior to each anniversary date of this Agreement.
4.11 ERISA. Cause all defined benefit pension plans, as defined in ERISA, of
Borrower to, at all times, meet the minimum funding standards of Section 302 of
ERISA, and ensure that no Reportable Event or Prohibited Transaction, as defined
in ERISA, will occur with respect to any such plan.
4.12 LAWS. At all times comply with, or cause to be complied with, all laws,
statues, rules, regulations, orders and directions of any governmental authority
having jurisdiction over Borrower or Borrower's business.
4.13 GAAP. Compliance with all financial covenants shall be calculated based on
generally accepted accounting principles applied on a consistent basis as
maintained by Borrower.
4.14 YEAR 2000 COMPLIANT. Borrower shall perform all acts reasonably necessary
to ensure that (a) Borrower and any business in which Borrower holds a
substantial interest, and (b) all customers, suppliers and vendors whose
compliance is likely to be material to Borrower's business, become Year 2000
Compliant in a timely manner. Such acts shall include, without limitation,
performing a comprehensive review and assessment of all Borrower's systems and
adopting a detailed plan, with itemized budget, for the remediation, monitoring
and testing of such systems. As used in this paragraph, "Year 2000 Compliant"
6
<PAGE>
shall mean, in regard to any entity, that all software, hardware, firmware,
equipment, goods or systems utilized by or material to the business operations
or financial condition of such entity, will properly perform date sensitive
functions before, during and after the year 2000. Borrower shall, immediately
upon request, provide to Agent such certifications or other evidence of
Borrower's compliance with the terms of this paragraph as Bank may from time to
time require.
4.15 OPERATING ACCOUNTS. Maintain all primary accounts and banking relationship
of Borrower's California operations with the Bank. Maintain, or cause to be
maintained, on deposit with Bank, non-interest bearing demand deposit balances
sufficient to compensate Bank for all services provided by Bank. Balances shall
be calculated after reduction for the reserve requirement of the Federal Reserve
Board and uncollected funds. Any deficiencies shall be charged directly to the
Borrower on a monthly basis.
4.16 NOTICES. Promptly notify Bank in writing of (i) the occurrence of any Event
of Default hereunder or any event which upon notice and lapse of time would be
an Event of Default; (ii) all litigation affecting Borrower where the amount is
$100,000 or more; any substantial dispute which may exist between Borrower and
any governmental regulatory body or law enforcement authority; any change in
Borrower's name or principal place of business; or any other matter which has
resulted or might result in a material adverse change in Borrower's financial
condition or operations.
5. NEGATIVE COVENANTS OF BORROWER
Borrower agrees that so long as it is indebted to Bank, or so long as Bank has
any obligation to extend credit to Borrower, it will not, without Bank's written
consent:
5.01 TYPE OF BUSINESS; MANAGEMENT; CHANGE IN CONTROL. Make any substantial
change in the character of its business; make any change in its executive
management, including the replacement of either Chairman and/or President.
5.02 OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any
indebtedness for borrowed moneys other than Loans from the Bank except
obligations now existing as shown in the financial statement dated September 30,
1998, excluding those obligations being refinanced by Bank, the financing of
Borrower's new corporate headquarters, or sell or transfer, either with or
without recourse, any accounts or notes receivable or any moneys due or to
become due.
5.03 LIENS AND ENCUMBRANCES. Create, incur, permit to exist, or assume any
mortgage, pledge, encumbrance, lien or charge of any kind upon any asset now
owned or hereafter acquired by it, other than liens for taxes not delinquent and
liens in Bank's favor and other than liens agreed to in writing by Bank other
than the financing of Borrower's new corporate headquarters.
5.04 LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances to
any person or other entity other than in the ordinary and normal course of its
business as now conducted or make any investment in the securities of any person
or other entity other than the United States Government; or guarantee or
otherwise become liable upon the obligation of any person or other entity,
except by endorsement of negotiable instruments for deposit or collection in the
ordinary and normal course of its business other than the financing of
Borrower's new corporate headquarters.
7
<PAGE>
5.05 ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or
otherwise acquire the assets or business of any person or other entity other
than purchases not funded by Bank debt provided that Borrower is not in default
hereunder prior to and/or subsequent to such acquisition; or liquidate,
dissolve, merge or consolidate, or commence any proceedings therefor; or sell
any assets except in the ordinary and normal course of its business as now
conducted; or sell, lease, assign, or transfer any substantial part of its
business or fixed assets, or any property or other assets necessary for the
continuance of its business as now conducted, including without limitation the
selling of any property or other asset accompanied by the leasing back of the
same.
5.06 CAPITAL EXPENDITURES. Make or incur obligations for fixed or capital
assets, which includes purchase money indebtedness or capital lease obligations,
other than the purchase of Borrower's new corporate headquarters, in excess of
$3,500,000 from the date hereof until December 31, 1999, or $3,500,000 in any
twelve month period thereafter.
5.07 DIVIDENDS. Declare or pay any dividend or make any other distribution on
any of its capital stock now outstanding or hereafter issued or purchase, redeem
or retire any of such stock other than in dividends or distributions payable in
Borrower's capital stock, except for the repurchase of Borrower's capital stock
from officers, directors, employees or consultants of Borrower upon termination
of their employment with or rendering of service to Borrower.
6. EVENTS OF DEFAULT
The occurrence of any of the following events of default ("Events of Default")
shall, at Bank's option, terminate Bank's commitment to lend and make all sums
of principal and interest then remaining unpaid on all Borrower's indebtedness
to Bank immediately due and payable, all without demand, presentment or notice,
all of which are hereby expressly waived:
6.01 FAILURE TO PAY. Failure to pay any installment of principal or of interest
on any indebtedness of Borrower to Bank within, five (5) days of its due date.
6.02 BREACH OF COVENANT. Failure of Borrower to perform any other term or
condition of this Agreement or any Loan Document binding upon Borrower.
6.03 BREACH OF WARRANTY. Any of Borrower's representations or warranties made
herein or any statement or certificate at any time given in writing pursuant
hereto or in connection herewith shall be false or misleading in any respect.
6.04 INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent; or admit
its inability to pay its debts as they mature; or make an assignment for the
benefit of creditors; or apply for or consent to the appointment of a receiver
or trustee for it or for a substantial part of its property or business.
8
<PAGE>
6.05 JUDGMENTS, ATTACHMENTS. Any money judgment in excess of $100,000, writ or
warrant of attachment, or similar process shall be entered or filed against
Borrower or any of its assets and shall remain unvacated, unbonded or unstayed
for a period of ten (10) days or in any event later than five (5) days prior to
the date of any proposed sale thereunder.
6.06 BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against Borrower and, if
instituted against it, shall not be dismissed within thirty (30) days
thereafter.
6.07 CESSATION OF BUSINESS. Borrower shall voluntarily suspend its business.
6.08 ADVERSE CHANGE. Any change which, in the opinion of Bank, is materially
adverse to the financial condition of Borrower or any Guarantor; or should Bank,
for any reason, believe that the prospect of Borrower's payment or performance
hereunder or under any other agreement or instrument with Bank be impaired.
6.09 OTHER DEFAULTS. Borrower, or any Guarantor of Borrower's obligations to
Bank, shall commit or do or fail to commit or do any act or thing which would
constitute an event of default under any of the terms of any other agreement,
document or instrument executed or to be executed by it concerning the
obligation to pay money.
6.10 ADVANCES. Notwithstanding anything to the contrary contained herein, Bank
shall have no duty to make advances while any event of default exists
notwithstanding any cure period provided for herein.
7. MISCELLANEOUS PROVISIONS
7.01 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of Bank
or any holder of notes issued hereunder, in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege. All rights and
remedies existing under this Agreement or any note (s) issued in connection with
a Loan that Bank may make hereunder, are cumulative to, and not exclusive of,
any rights or remedies otherwise available.
7.02 COUNTERPARTS; ENTIRE AGREEMENT. This Agreement may be executed by the
parties hereto in several counterparts, each of which shall be deemed to be an
original and all of which shall constitute together but one and the same
agreement. This Agreement, and the other Loan Documents constitute the entire
understanding among the parties hereto with respect to the subject matter hereof
and amends and restates in full any prior agreements, written or oral, with
respect thereto.
7.03 ATTORNEY'S FEES. Borrower will pay promptly to Bank without demand after
notice, with interest thereon from the date of expenditure at the rate
applicable to the Loan, reasonable attorneys' fees and all costs and expenses
paid or incurred by Bank in collecting or compromising the Loan after the
occurrence of an Event of Default, whether or not suit is filed. If suit is
brought to enforce any provision of this Agreement, the prevailing party shall
be entitled to recover its reasonable attorneys' fees and court costs in
addition to any other remedy or recovery awarded by the court.
9
<PAGE>
7.04 ADDITIONAL REMEDIES. The rights, powers and remedies given to Bank
hereunder shall be cumulative and not alternative and shall be in addition to
all rights, powers and remedies given to Bank by law against Borrower or any
other person, including but not limited to Bank's rights of setoff or banker's
lien.
7.05 INUREMENT. The benefits of this Agreement shall inure to the successors and
assigns of Bank and the permitted successors and assigns of Borrower.
7.06 APPLICABLE LAW. This Agreement and all other agreements and instruments
required by Bank in connection therewith shall be governed by and construed
according to the laws of the state of California, to the jurisdiction of whose
courts the parties hereby agree to submit.
7.07 OFFSET. In addition to and not in limitation of all rights of offset that
Bank or other holder of the Loan may have under applicable law, Bank or other
holder of any note issued hereunder shall, upon the occurrence of any Event of
Default or any event which with the passage of time or notice would constitute
such an Event of Default, have the right to appropriate and apply to the payment
of the Loan any and all balances, credits, deposits, accounts or monies of
Borrower then or thereafter with Bank or other holder, other than deposits held
in a fiduciary capacity by Borrower, within ten (10) days after the Event of
Default, and notice of the occurrence of any Event of Default by Bank to
Borrower.
7.08 SEVERABILITY. Should any one or more provisions of the Agreement be
determined to be illegal or unenforceable, all other provisions nevertheless
shall be effective.
7.09 TIME OF THE ESSENCE. Time is hereby declared to be of the essence of this
Agreement and of every part hereof.
7.10 ACCOUNTING. All accounting terms shall have the meanings applied under
generally accepted accounting principles unless otherwise specified.
7.11 REFERENCE PROVISION.
(a) Other than (i) nonjudicial foreclosure and all matters in connection
therewith regarding security interests in real or personal property; or (ii) the
appointment of a receiver, or the exercise of other provisional remedies (any
and all of which may be initiated pursuant to applicable law), each controversy,
dispute or claim between the parties arising out of or relating to this Credit
Agreement, any security agreement executed by Borrower in favor of Bank or any
note executed by Borrower in favor of Bank or any other agreement or instrument
issued in favor of Bank by Borrower (collectively in this Section, the
"Agreement") which controversy, dispute or claim is not settled in writing
within thirty (30) days after the "CLAIM DATE" (defined as the date on which a
party subject to this Agreement gives written notice to all other parties that a
controversy, dispute or claim exists), will be settled by a reference proceeding
in California in accordance with the provisions of Section 638 ET SEQ. of the
California Code of Civil Procedure, or their successor section ("CCP"), which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Agreement, including whether such controversy,
dispute or claim is subject to the reference proceeding and except as set forth
above, the parties waive their rights to initiate any legal proceedings against
each other in any court or jurisdiction other than the Superior Court in the
10
<PAGE>
County where the Real Property, if any, is located or San Diego County if none
(the "COURT"). The referee shall be a retired Judge of the Court selected by
mutual agreement of the parties, and if they cannot so agree within forty-five
(45) days after the Claim Date, the referee shall be promptly selected by the
Presiding Judge of the Court (or his representative). The referee shall be
appointed to sit as a temporary judge, with all of the powers for a temporary
judge, as authorized by law, and upon selection should take and subscribe to the
oath of office as provided for in Rule 244 of the California Rules of Court (or
any subsequently enacted Rule). Each party shall have one peremptory challenge
pursuant to CCP ss.170.6. The referee shall (a) be requested to set the matter
for hearing within sixty (60) days after the date of selection of the referee
and (b) try any and all issues of law or fact and report a statement of decision
upon them, if possible, within ninety (90) days of the Claim Date. Any decision
rendered by the referee will be final, binding and conclusive and judgment shall
be entered pursuant to CCP ss.644 in any court in the state of California having
jurisdiction. Any party may apply for a reference proceeding at any time after
thirty (30) days following notice to any other party of the nature of the
controversy, dispute or claim, by filing a petition for a hearing and/or trial.
All discovery permitted by this Agreement shall be completed no later than
fifteen (15) days before the first hearing date established by the referee. The
referee may extend such period in the event of a party's refusal to provide
requested discovery for any reason whatsoever, including, without limitation,
legal objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducting
discovery. Depositions may be taken by either party upon seven (7) days written
notice, and request for production or inspection of documents shall be responded
to within ten (10) days after service. All disputes relating to discovery which
cannot be resolved by the parties shall be submitted to the referee whose
decision shall be final and binding upon the parties. Pending appointment of the
referee as provided herein, the Superior Court is empowered to issue temporary
and/or provisional remedies, as appropriate.
(b) Except as expressly set forth in this Agreement, the referee shall determine
the manner in which the reference proceeding is conducted including the time and
place of all hearings, the order of presentation of evidence, and all other
questions that arise with respect to the course of the reference proceeding. All
proceedings and hearings conducted before the referee, except for trial, shall
be conducted without a court reporter except that when any party so requests, a
court reporter will be used at any hearing conducted before the referee. The
party making such a request shall have the obligation to arrange for and pay for
the court reporter. The costs of the court reporter at the trial shall be borne
equally by the parties.
(c) The referee shall be required to determine all issues in accordance with
existing case law and the statutory laws of the state of California. The rules
of evidence applicable to proceedings at law in the state of California will be
applicable to the reference proceeding. The referee shall be empowered to enter
equitable as well as legal relief, to provide all temporary and/or provisional
remedies and to enter equitable orders that will be binding upon the parties.
The referee shall issue a single judgment at the close of the reference
proceeding which shall dispose of all of the claims of the parties that are the
subject of the reference. The parties hereto expressly reserve the right to
contest or appeal from the final judgment or any appealable order or appealable
judgment entered by the referee. The parties hereto expressly reserve the right
to findings of fact, conclusions of laws, a written statement of decision, and
the right to move for a new trial or a different judgment, which new trial, if
granted, is also to be a reference proceeding under this provision.
(d) In the event that the enabling legislation which provides for appointment of
a referee is repealed (and no successor statute is enacted), any dispute between
the parties that would otherwise be determined by the reference procedure herein
described will be resolved and determined by arbitration. The arbitration will
be conducted by a retired judge of the Court, in accordance with the California
Arbitration Act, ss.1280 through ss.1294.2 of the CCP as amended from time to
time. The limitations with respect to discovery as set forth hereinabove shall
apply to any such arbitration proceeding.
7.12 This Agreement may be modified only by a writing signed by all parties
hereto.
This Agreement is executed on behalf of the parties by duly authorized officers
as of the date first above written.
IMPERIAL BANK CAPITAL TITLE GROUP, INC.
- ---------------------------- ----------------------------
("BANK") ("BORROWER")
By: By:
-------------------------------- ------------------------------------
Its: Its:
------------------------------- ----------------------------------
By:
------------------------------------
Its:
----------------------------------
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
1. Capital Title Agency Inc., an Arizona corporation
2. New Century Insurance Services, Inc., an Arizona corporation
3. New Century Title Company, a California corporation
4. New Century Title Company of Northern California, a California corporation
Exhibit 23 -- Consent of Ernst & Young LLP
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-66375) pertaining to the Capital Title Group, Inc. 1996 Stock Option
Plan of our report dated March 5, 1999 with respect to the consolidated
financial statements included in this Annual Report (Form 10-K) of Capital Title
Group, Inc.
Ernst & Young LLP
Phoenix, Arizona
March 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS EXHIBIT SHALL NOT BE DEEMED FILED FOR PURPOSES OF SECTION 11 OF THE
SECURITIES ACT OF 1933 AND SECTION 18 OF THE SECURITIES EXCHANGE ACT OF 1934, OR
OTHERWISE SUBJECT TO THE LIABILITY OF SUCH SECTIONS, NOR SHALL IT BE DEEMED A
PART OF ANY OTHER FILING WHICH INCORPORATES THIS REPORT BY REFERENCE. UNLESS
SUCH OTHER FILING EXPRESSLY INCORPORATES THIS EXHIBIT BY REFERENCE.
</LEGEND>
<CURRENCY> U.S DOLLARS
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,833,826
<SECURITIES> 0
<RECEIVABLES> 392,667
<ALLOWANCES> (27,942)
<INVENTORY> 0
<CURRENT-ASSETS> 6,180,454
<PP&E> 13,433,718
<DEPRECIATION> (4,570,585)
<TOTAL-ASSETS> 16,528,354
<CURRENT-LIABILITIES> 3,853,655
<BONDS> 1,766,815
0
0
<COMMON> 16,927
<OTHER-SE> 10,773,052
<TOTAL-LIABILITY-AND-EQUITY> 16,528,354
<SALES> 0
<TOTAL-REVENUES> 23,206,225
<CGS> 0
<TOTAL-COSTS> 21,271,492
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 99,257
<INCOME-PRETAX> 1,835,476
<INCOME-TAX> 159,449
<INCOME-CONTINUING> 1,676,027
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,676,027
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
